< RETURN TO MAIN MENU



STERLING POUNDED
By John Newsome on 5th February 2009



The American writer Gore Vidal, once remarked that "it was not enough to succeed, others must fail". I suspect recent comments by the German Finance Minister, Peer Steinbrück, confirm Mr Vidal's observation. With typical teutonic efficiency, the German language already had the perfect word to describe the problems affecting the Ango-Saxon economies; schadenfreude.


After years of being on the end of comments trumpeting how flexible the UK economy was and how the rigidities of the continental economies would restrict economic growth, Mr Steinbrück obviously felt his moment had arrived. He accused Gordon Brown of pursuing "crass Keynsianism" and "tossing around billions". Furthermore, he warned that the Prime Minister's current debt splurge will take a whole generation to work off. Talk about being ungrateful; you save the world and are then savaged by a heavyweight European politician who, ironically, is a Social Democrat from the left of German politics. Mr Steinbrück is, of course, absolutely correct.


Meanwhile, sterling continues to evaporate. It's often been said that the value of a country's currency reflects its economic prospects in the same way that a share price reflects those of an individual company. On that basis, it's not difficult to see why the Pound has been testing all time lows against the Euro. During 2008 it has lost approximately 20% of its value and parity is no longer a fanciful notion. With UK interest rates at a 300 year low, there will be precious little support from that quarter. UK rates are now below those of the Eurozone and the Euro has been supported by the belief that the European Central Bank (ECB) will adopt a more hawkish stance over potential inflationary pressures.


The UK runs a persistent trade deficit and has for many years. Whatever politicians say, that is a sign of a structurally weak economy. Even in recession, the UK will still have a trade deficit and the weakness of sterling poses a real danger with regard to imported inflation. While there will be an immediate fall in inflation and we wouldn't rule out the possibility of a short period of outright deflation, we are not anticipating a prolonged bout of the latter.


Such is our almost universal contempt for politicians and bankers that we expect them to do what they usually do; that is, take the easy way out and continue to undermine the real value of cash. During the 20th century, the US Dollar lost 95% of its real value while Sterling did even worse. Taking our customary longer term view, we remain concerned that inflation will be the logical outcome of today's bailouts.


John Newsome can be contacted on:
01423 705123


EMAIL JOHN NEWSOME





BACK TO TOP