Comments on: The Sterling crisis – again

By: Aatif Ahmad

Aatif Ahmad — Wed, 19 Nov 2008 02:07:03 +0000

Furthermore, the City could have maintained its international reputation as a financial centre without the rest of the UK having to borrow up to the hilt.

A wise government would have regulated finance in the rest of the UK, whilst treating the City as a 'special economic zone' where light regulation applied.

Instead, the government has applied the same, light regulatory approach to everything: from the eurobond market to the consumer mortgages market.

By: Aatif Ahmad

Aatif Ahmad — Wed, 19 Nov 2008 02:02:18 +0000

The reason why investors are nervous about putting money in sterling assets is the parlous state of the UK economy and the fact that it is one of the most overindebted economies among the industrialised countries.

When investors put money in sterling assets, they are not relying upon the City's status as the largest financial market in the world or its financial genius. The backing for sterling assets (be in equities, corporate bonds or government stock) does not arise from the City only, but from the entire UK economy, Flushing and Loo included.

Investors must surely see the UK's housing bubble, which is worse than America's, its excessive leverage and its stretched-out consumers. They know that there has to be an adjustment in consumption, an increase in saving and a develeraging to sustainable levels. That is why there is investor flight from sterling assets.

By: Tony Makara

Tony Makara — Thu, 23 Oct 2008 14:25:48 +0000

What can we do to encourage domestic production? In the long-term this can be achieved through a package of initiatives from government to support farming, including special-tax-status, so that those who produce in certain key areas of the economy such as agriculture and manufacturing are allowed to make huge profits so that they are able to compete against cheap imports. In the short-term we should try to maintain price stability so that we don't end up with inflation, to ensure that our economy is in shape to make the shift away from services. Once the newly developed agricultural and manufacturing infrastructure is in place, then we will be in a position to lower rates, shutting the door on imports and boosting our exports. There is already a problem with food inflation of around 15% in the UK and sustained rate cutting at this time will create severe problems because we are importing 40% of our food, much of which is basic foodstuffs such as milk and meat. We have to rebalance the economy, but we have to do so at a pace that maintains price stability. Adding to food inflation now will lead to much higher interest rates later on. The balance has to be right.

By: Tim Worstall

Tim Worstall — Thu, 23 Oct 2008 10:02:39 +0000

Of course we can't switch overnight. Food does take time to grow you know.
But what is it that we would want to do to encourage domestic production? We'd want to make imported food more expensive than domestically produced, wouldn't we?
And Sterling falling does exactly that. So we've already solved the problem by cutting interest rates. Nothing else needs to be done.

By: Stuart Fairney

Stuart Fairney — Thu, 23 Oct 2008 08:39:00 +0000

All other things being equal, you are entirely correct and it is very likely story of the next few years. My only hope is that I don't get a Wiemar republic style letter from the bank in a couple of years time saying that my savings of 10,000 marks can no longer be guaranteed, with the stamp on the letter worth a million marks.

Much as I dislike Mr Brown and his crew, I dislike Mr Griffin and his associates very much more, (as I am sure you do). And it's not like such a scenario, albeit unlikely, is without historical precedent.

By: Stuart Fairney

Stuart Fairney — Thu, 23 Oct 2008 08:29:40 +0000

I don't honestly see the vested interests changing the BBC anytime soon, and in truth, I'm not sure Mr Cameron has the stomach for the fight, but actually, technology will blow away the BBC licence fee, not politicians. When my current TV goes pop and I buy the inevitable plasma screen, I shall connect it to the internet and take a SKY 'on-demand' subscription. As I read TV licence legislation, you can't watch any TV as it is broadcast without a licence, but you can watch i-player etc without one. Now on demand SKY (which will surely increase exponentially in the coming years) means you can simply select a program at the time you want, so there is no broadcast time per se. Combine that with a blu-ray DVD and youtube and I don't think I will ever need terrestial TV again. As more people do that, they won't want BBC subscription TV as people might actually question the partisan dross they are served up. We will of course hear nonsense about 'great' BBC shows like costume dramas (how much more Jane Austen can anyone want?) and David Attenborough type programs (Discovery does it better) and how the Beeb must be funded from general taxation, best in the world etc.

Note: SF does not give legal advice, make your own mind up etc.

By: Tony Makara

Tony Makara — Thu, 23 Oct 2008 07:26:56 +0000

Tim, what you say is very true. However the fact that we now import 40% of our food, most of that being staple foods, means that we don't currently have the productive capacity that allows consumers to switch from imported to domestic food overnight. For this reason we need to ensure that we don't get hit by imported food inflation when cutting rates leads to a weaker Pound. A trip around any supermarket will demonstrate just how dependent we have become on imported food.

The question of food security is one that senior Politicians like John Redwood must address, our agricultural sector must be encouraged to grow and supply our domestic market. Cutting rates is certainly going to make most imports cost more and the danger is that because our economy is now 76% service based we are not now producing the wares needed to offer consumers an alternative. David Cameron has talked about the need to re-balance the economy and he raises a very important point, one that is often overlooked. There can be no consumer choice without import substitues.

By: Tapestry

Tapestry — Thu, 23 Oct 2008 00:50:18 +0000

I don't agree. Sterling in a slump is ideal right now. It gets British business back into the competitive zone. Imports will not rise as Oil is tumbling, as are all commodities, far faster than sterling is falling.

Manufactured goods might rise somewhat but pricing in Britain has been outrageous for a decade. Hopefully now imported goods will find they have to be sold at lower margin to compete with local and keep people buying. Price rises will be muted to say the least.

Thank God we are not in the Euro which is stuck at too high a rate. Sterling is doing exactly what it's meant to do at times of economic crisis – bomb and get us back into business.

This is the correction of the overvalued economy Britain has been suffering from for a decade with excess borrowing holding it up. Thank God it's now over.

By: Tim Skinner

Tim Skinner — Wed, 22 Oct 2008 23:35:28 +0000

Let us have honest money – money which holds its value and is not manipulated by governments hoping to "boost growth", or spend without taxing.

Money is the means of exchange and the means of financial calculation in a free market. It is time governments stopped interfering with and corrupting it. Inflation introduces uncertainty, miscalculation, dishonesty, and a lack of integrity.

So abandon the 2% inflation target (which is anyway a joke).

Come on – 0% inflation: it is not rocket science.

By: Lola

Lola — Wed, 22 Oct 2008 19:37:00 +0000

If you expand the supply of Sterling at 10% p.a. greater than we grow UK GDP Sterling will devalue. End of story.