ΥΠΕΡΑΣΠΙΣΗ ΤΗΣ ΙΣΤΟΡΙΑΣ, ΤΗ ΔΙΚΑΙΟΣΥΝΗΣ ΚΑΙ ΤΗΣ ΛΟΓΙΚΗΣ: The slow death of the pound….

Σάββατο 8 Οκτωβρίου 2011

The slow death of the pound….

In 2007 a single pound could buy you $2.10 or €1.50 – not any more. And it’s only getting worse from here on in.

Kathleen Brooks, Director of Research UK, Forex.com, 9:12, Friday 7 October 2011

Watch out Mervyn King. The governor of the Bank of England surprised the markets on Thursday and announced another round of quantitative easing (effectively printing more money) to the tune of £75 billion.

The first thing sterling did after this announcement was plunge against every major currency and, since money printing is usually associated with a falling currency, there may be more weakness to come.

So what can the average person expect from quantitative easing (QE)? While the Bank of England and the wider banking sector deal with the nitty gritty of how to implement QE and when to buy government bonds, the main thing we will notice is rising prices.

Yes, that's right, as if prices hadn't risen enough the Bank now expects inflation to top 5% in the next month or so. If you had thought prices in the supermarket or at the petrol station would go down any time soon, think again.

The trouble with QE is that it depreciates a currency, which makes everything we import — petrol and food for example — more expensive. Added to that, a weaker currency makes foreign trips costly. On the surface then QE only benefits those who prefer staycations and grow their own veggies.

Why do it then?

So why did King embark on something with such sour consequences? The Bank's justification was that in the medium-term (say 2-years) the risk is that inflation may collapse. Lower prices might sound like a good thing, but it's not that good when corporate profits start to fall leading to unemployment at worst or wage cuts at best.

So providing steady, low levels of inflation are vital for the health of the UK, and that is what King is trying to achieve. But don't expect King to get off that lightly in the coming days and weeks. There is a risk that he could have got it catastrophically wrong.

If the eurozone debt crisis subsides and the economic outlook picks up then King and co. at the Bank of England will have pumped the UK economy full of money at exactly the wrong time. If this scenario pans out then we could see inflation reach 6%, maybe even higher in the coming months.

So what about sterling?

There are some positives from a weak pound; for example, it makes UK-produced goods cheaper on the global markets. Calls to reduce our reliance on the financial sector means that we need to fill the growth gap, one way is to boost our exports and a weak pound can help with that process.

But it also opens the UK to criticism. Some people think that a weaker currency manufactured by the Bank of England is also a ploy to try and reduce our huge national debt.

Rising inflation eats away at the value of a debt, which is a good for a debtor like the government and bad for a creditor like many of our pension funds who hold UK Gilts (effectively IOUs from the government) in their investment portfolios.

This is a delicate issue, if the Bank seems to be standing back while inflation rages through the economy then it will be accused of monetising the UK's debt — effectively creating an "inflation tax" that takes money away from savers and hands it to borrowers. This would be a huge blow to the Bank's credibility and could also make it harder for the UK to borrow in future.

Whatever happens the pound loses

Whichever way you look at it, at this juncture it's hard to see a good outcome for the pound. If the Bank is accused of helping to inflate away our national debt this is bad news, if the economy gets worse and QE has little effect this is more bad news for sterling.

Overall, the BOE is playing a high stakes game. It has bet on the worst case scenario panning out and if things don't go according to plan then it is hard to see Mervyn remaining at the helm of the central bank. So while the pound starts to wobble, King will be busy defending himself in the weeks ahead.

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362 comments

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Nibby David 1 minute ago Report Abuse
Can't see Gary Michael's point suggesting Merv is printing more pounds because most of the uk doesn't believe in God? The God industry has more than it's fair share corporate fraudsters all raking in cash & sitting on financial asset's that governments would love to have access. 99% of them do not believe in God either it's an easy way to earn a living. How can people believe that a mythical man invented everything billions of years before any form of life on earth, just one of countless planets throughout the infinity of space. Currencies are simply bartering tools developed by mankind sad fact of life is that people deciding to earn their livings speculating on bartering tools (banks} have easier access/excuses than everyone else in helping themselves to cash in the till. A bit like trade perks such as would a manager of a BMW franchise have to pay £1000 plus servicing costs for his 7 series BMW? of course not, it would be lost within the business no VAT paid, plus of course he would not have paid for his car in the first place it's a perk and he'll have another model next year, it's the other customers that ultimately pay over the odds for the cars & servicing which keeps the manager and his wife in very posh perks of the job.
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GERONIMO 7 minutes ago Report Abuse
Soon the world's aid recipients will complain that the millions we give them are now devalued so "Can we all have some more money please" will be the cry.
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ANGLO INDIAN 10 minutes ago Report Abuse
AS half Indian and half English .... it really hurts me what England has come up to,,,, my Grandfather who served in the Royal commonwealth Army always told us the stories how the english people worked hard weather in steel factories of Sheffield or MIlls of Manchester and Leeds,,, and when the call of duty came for war all were willing to join in,,,, but my plain observation is from 90 s onwards the general british public became lazy and too pampered,,,, today half of the NHS workforce is filled up by Indians and they have come up the hard way by burning the midnight oil,,,,what if they leave ,,wouldnt it be a crisis then,,, it is easy to sit out having a pint and smoke and talk thrash about hard working immigrants but when actual doing matters ,, how many of us make the effort,, on my recent trip to India i found out teenagers more worried about their college classes and which books to refer to get good grades unlike here where the same age lads discuss about rolling thier first spliff or loosing thier virginity... i know the reality but it is the real picture at least in north England. as i religious christian i would think the only way to put GREAT back in Britain is to make family values and Church teachings compulsary to the Young generation.
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Taylor 14 minutes ago Report Abuse
http://www.articlesbase.com/internet-marketing-articles/how-to-earn-money-with-surveys-5273869.html
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Veasorel 17 minutes ago Report Abuse
There is no pounds stirling, we've just messed up our whole economy. The debt, and deficit is the least of our problems our money is becoming worthless!
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Robbie, Manchester 22 minutes ago Report Abuse
The tired old man of the BOE should try to exist on the state pension which he has just devalued again by printing money, IT REALLY IS TIME FOR CHANGE, why dont we vote for a party which has the wellbeing of the British people at heart. This tired old man has no idea what must be done to improve the economy, hes been fiddling about for two years and nobody can see any improvement, in fact its getting worse. When your cash is getting tight you have 2 choices, iether gamble or consolidate. The present government are doing neither, so lets elect someone who will act like a government. I believe that Clegg and his liberal cronies are having a severe curtailing effect on our governments decisions and should be removed from office as early as possible. Their kind of bleeding heart politics along with Browns incompetance are responsible for most of our problems.
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Lee 27 minutes ago Report Abuse
Further borrowing also feeds inflation by increasing the amount of money in circulation. Also, borrowing money to buy Chinese imports does not bode well for a manufacturing renaissance. Further borrowing is therefore even more damaging to the economy as a whole and to the standing of the UK on the international markets than quantitative easing.
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Grumpy1 30 minutes ago Report Abuse
the pound on the rock .the euro dying.other currencies dodgy. lets get back to its origins .flat round stones with holes in.stones will be worth more
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Avenging Angel 31 minutes ago Report Abuse
What they should have said is the slow death of Democratic capitalism. The very thing both Christ and Winston Churchill said would happen if you let greed run the show.
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Bash 34 minutes ago Report Abuse
its time we face the real world, we have been called as an epitome of culture, values & wealth, it was because of undivided hard work of the ancestors, we need to work hard, so hard enough that we come out of this grave situation............ economic problem.we face is, we have more senior citizens compare to young people who want to work, we need to have dynamic & outgoing approach, with constructive immigration and integration ....... GOD helps people who have to guts to help themselves
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