Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21
Bitcoin Halvings Price Forecast and Stock to Flow Analysis - 18th Jul 21
Dell S3220DGF Unboxing and Stand Assembly - 32 Inch 165hz Curved Gaming Monitor Amazon Discount - 18th Jul 21
What Does The Fed Mean By “Transitory Inflation” And Why Is It Important To Understand? - 18th Jul 21
Will the US stock market’s worsening breadth matter? - 18th Jul 21
Bitcoin Halving's Price Projection Forecasts Trend Trajectory - 18th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

What the Sterling Crisis Means for You

Currencies / British Pound Dec 12, 2008 - 07:23 AM GMT

By: MoneyWeek


Best Financial Markets Analysis ArticleIf this isn't a sterling crisis, what is? Not content with plunging 25% against the dollar over the last six months, the pound is now fast heading for parity with the euro.

Our so-called government may think it can solve Britain 's economic problems via borrowing like crazy, and letting sterling collapse into the bargain.

But it's quite wrong. As the Germans are now telling Gordon Brown, his mistaken approach is actually storing up a lot more trouble for the future...

We have a full-blown sterling slide on our hands

If you want to gauge a country's financial wellbeing, the best health check barometer around is the strength of its currency.

And the way the pound is ailing, it looks like Britain is fast heading for the emergency ward. Our economy is collapsing, and the government's rather pathetic response has been to promise to run up the national deficit to more than £1 trillion by 2012. Now we have a full-blown sterling slide on our hands.

On Tuesday this week, my colleague John Stepek wrote about ' Why sterling is set to fall even further '. Within three days, the pound has dropped yet another 3% against the euro, and the headlines are full of stories of 'parity' by Christmas.

Now Peer Steinbruck, the German finance minister, is telling Gordon Brown where he's made such huge mistakes. Describing the UK government's recent actions as "depressing", Mr Steinbruck warned that it will take Britain a generation to pay for the huge financial stimulus introduced by our government: "The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking".

Steinbruck points out how madcap borrowing will result in disaster

Now we could be forgiven for feeling a bit tetchy about being corrected by the Germans. After all, the eurozone economy doesn't look too hot right now either, and anyway, isn't the French president urging European governments to "do everything we can to move the economy forward" with a €200bn EU-wide stimulus package?

But of course, Germany very sensibly doesn't want to join in – it's actually managed to balance its budget for the first time in 39 years in 2008.

And three cheers for Mr Steinbruck. Politicians worldwide are fast developing a taste for splashing out oodles of our, i.e. taxpayers', cash on their own pet projects, led by their cheerleader, US president-elect Barack 'deficit doesn't matter' Obama (although to be fair to Mr Obama, his predecessor was no better at balancing the books).

Now, at last, a national government figure has actually been brave enough to shatter the ghastly Keynesian "spend, spend, spend" consensus that's creeping in, and to point out what a disaster all the resulting madcap borrowing will become.

And sadly for us, he's 100% right. That means that the pound will fall even further.

So what will that all mean for us here in Britain ?

The main beneficiaries will be exporters, as well as those firms who derive most of their income from abroad. With at least 50% of the earnings of FTSE 100 companies coming from outside Britain , the 'translation effect' will see profits at those businesses increased in sterling terms. Though, of course, if losses are being stacked up abroad – quite likely in these days of global recession - that would mean a bigger shortfall measured in pounds.

But for the rest of us, it's bad news. As the pound buys less, everything we purchase from abroad will cost more. So even if local prices are falling in the countries from which we're importing, the cost to someone in Britain , either a retailer or the consumer, is bound to rise.

Just look at fuel. The oil price is down by over 70% but the cost of a litre of petrol has dropped by just 25%.

And as for holidays outside the UK - forget them!

There's a very nasty sting in the sliding sterling tale, too, for British banks. "It's now clear that for years, British banks have been borrowing off foreign banks to lend to UK retail customers", says the Evening Standard's Anthony Hilton , "an economic model pioneered by Argentina and banana republics down the years. It ended in tears for them… just as it now is for us".

Shades of Iceland ? Certainly.

For the government too, there's a big downside to the plunging pound. Much of that £1 trillion of borrowing is going to have to come from outside the UK . The more sterling slides, the less willing overseas investors will be to lend the British government the money it's spending. Already the bond market is getting spooked, with the cost of insuring against a default by UK gilts rising almost six times within the last three months.

Nor would so-called 'quantitative easing' - effectively printing money, with the Bank of England buying up either government or commercial debt to try to kick-start the economy – do anything other than cause yet more problems. The Americans may be able to get away with doing this – for a while at least - because they operate the world's reserve currency. But for the UK , more pounds in circulation would make matters even worse for sterling.

In short, our currency is now in crisis. Apart from those shareholders in those overseas earners, there's no silver lining for investors – or indeed for any of us.

Sadly, that's very unlikely to stop Gordon Brown digging us into an even worse hole than we're in already. How long will it be before Alistair Darling is forced to turn the clock back to 1976, and has to phone the IMF for an emergency loan?

By David Stevenson for Money Morning , the free daily investment email from MoneyWeek Magazine .

© 2008 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Money Week Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in