The Governor’s sterling collapse.

Tonight sterling hits $1.45 and Yen 138!
Do the authorities in this country intend to demolish our currency, by being too gloomy and borrowing too much?
Don’t they care at all?
A modest devaluation to make our exports more competitive is one thing, but this sterling rout is now out of control and very damaging. We have fallen around 30% against the dollar since the summer.
They will discover that this will make it more difficult to sell all the debt they wish to sell, as foreigners will be wary.

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13 Comments

  1. mikestallard
    Posted November 13, 2008 at 10:01 pm | Permalink

    Can you remember, John, a few months ago saying that the real danger was not inflation, but deflation and that there needed to be a drop in interest rates?
    Well, you were right! Prices are indeed falling and interest rates have (at last) been dropped.
    You discounted inflation as a danger. Well, these figures prove you wrong.
    This government has achieved the impossible – inflation and deflation at the same time!

    Reply: You may remember I said cut interest rates and public borrowing – you had do both to avoid too much pressure on the pound

  2. James Morrison
    Posted November 13, 2008 at 10:11 pm | Permalink

    Please please please tell me that when Liebour use the devalued pound as an excuse to join the Euro, we might actually see some opposition in the House?

    I can't help thinking that's the direction we're heading…..

    • Robbie
      Posted December 6, 2008 at 11:01 pm | Permalink

      I've heard many people talk of the UK joining the Euro recently due to the huge drop in the pound due to Gordon Browns mismanagement of the economy. Can someone please explain to me why we would join the Euro when the fx rate is at an all time low ? How do the British people gain from this ?

      Reply We wouldn't gain. It is a very bad idea. Unless Labour intend to tear up the promise of a referendum it is not going to happen, as the British people will not vote for it.

  3. Acorn
    Posted November 13, 2008 at 10:15 pm | Permalink

    Lowering interest rates by 1.5% in one hit was stupid, it told the world something is badly wrong with our economy; it should not have been dropped in the first place. What rate do you think the IMF would set if they walked into the BoE tomorrow?

    It may increase our exports, assuming we have the capacity to gear up, I doubt it.

    It may reduce our current account balance but, that is not a given.

    The majority of what we import, including food; energy and the primary commodities of production, are priced in US Dollars.

    We need to slash £100 billion out of government spending; reducing central and local government back to "basic life support level" NOW; and make sure the world knows about it.

    My Bank Investment Manager has phoned this evening saying "we need to talk about capital protection asap". Now I know we are f****d.

  4. Adam
    Posted November 13, 2008 at 11:10 pm | Permalink

    What do you expect from a chancellor that's decided the slash interest rates AND increase borrowing at the same time? Fiscal policies used in banana republics where inflation is merely a device used by dictators to fleece the citizens of their hard-earned wealth.

    Thanks for your running commentary on this crisis. I agree with almost everything you suggest.

    John – can you give me some pointers on how to explain to ordinary people (not economics graduates) exactly what's going on, why Gordon Brown's solution is a total non-solution, and he should in fact be doing?

    A lot of people really do not get the relationship between money supply, interest rates and inflation. Why the sterling has slumped in value, and what it means for their quality of life.

    When they hear on news reports about increased borrowing, it's amazing how many people imagine Gordon Brown popping down to Lloyds TSB or Natwest in the same way they'd ask for a mortgage. I have to explain that money is essentially a loan; "increased borrowing" is basically a euphemism for "printing money"; that Gordon Brown can essentially print money like Waddingtons can print Monopoly money; and if he borrows so much that we can't pay that money back, it will have the value of Monopoly money as well.

    With the help of the BBC, most people have swallowed the official goverment propaganda. Britain is an innocent victim of "global economic turbulance eminating from the US", not the innocent victim of Gordon Brown's failure to prepare Britain for said economic turbulance.

    Your commentary is spot on, but I fear it goes over the heads of the man in the street. I'd have a hard time summarizing it all over a pint in the pub.

    Maybe you should consider starting a small website explaining the entire crisis as simply as possible to ordinary people, and most importantly, ordinary journalists. With you as resident expert and media contact, you might get your ideas out to a lot more people.
    Reply: I am trying to help inform the media who have more reach than my site. I will seek to write a shorter version.

  5. oldtimer
    Posted November 13, 2008 at 11:16 pm | Permalink

    The decline in the £ fx rate and the talk of putting the bank of England`s printing press onto 24/7 duty (read Gavin Davis in the Guardian) presages the Brown Banana Republic. It is closer than most people seem to realise.

  6. Lola
    Posted November 13, 2008 at 11:23 pm | Permalink

    Mr Redwood, why don't you compose one of your theoretical letters? From Gordon Brown to the IMF.

    Reply: Timing is everything!

  7. Tony Makara
    Posted November 14, 2008 at 12:50 am | Permalink

    Mervyn King and the government were warned time and again that Sterling was vastly overvalued and they did nothing to avoid the scenario of a massive and sudden correction. They were more interested in masking the inflationary pressures building up in demand, which though transparent in the housing market, were not visible as easy-credit and the strong Pound chased imports in huge volumes.

    The irresponsible talk of zero interest rates means that confidence in Sterling is unlikely to return any time soon. The only question now is how low will Sterling go? The opposition parties now need to make the collapse of Sterling into a major issue. Thirty years ago this sort of devaluation would have dominated news coverage, but now its being reported piecemeal and is slipping under the radar of most people. The public needs to understand just how serious this is, that their Pounds, in their banks, are becoming worth less with each passing day under Labour.

  8. Duncan Crow
    Posted November 14, 2008 at 3:29 am | Permalink

    James, I was thinking exactly the same this evening. Brown always blames somebody or something else for his Mickey Mouse economic policies. I can see him blaming a Sterling crisis on us not having joined the Euro.

    Within the last year the Pound has been 240 Yen. It is now 140 Yen.

  9. IanVisits
    Posted November 14, 2008 at 12:40 pm | Permalink

    While the decline (or more correctly, a return to the correct level based on Purchasing Parity) of the Sterling to Dollar will hurt some industries, there is one which will do very well out of it.

    Those small businesses who operate content websites and generally tend to earn the bulk of their income in US Dollars, thanks to that being where most of the online ad agencies being based are blessing the fall in the Sterling rate.

    The over-valued Sterling rate earlier this year was crippling UK websites – and it is nice to be able to go out on a Friday evening and afford a beer (or three) again.

  10. Adrian Peirson
    Posted November 15, 2008 at 1:45 am | Permalink

    Isn't it a bit misleading comparing two fiat currencies when both are falling off a cliff.
    Why not but Sterling back onto the Gold Standard, it will then have some intrinsic value.

  11. Chang
    Posted December 8, 2008 at 6:19 pm | Permalink

    The Treasury are fools to think they can get away with this. Sterling is no longer a major international reserve currency, foreigners will avoid UK gilts like the plague because the UK's golden goose – the city – is seriously ill and laying rotten eggs, the magnet for foreign money is gone. The Treasury will have to print money to fund borrowing and continue to devalue the pound. Anything imported will soar in price and rates will have to rise sharply again to avoid total sterling collapse (and it would certainly be a condition of any IMF bailout). This is a repeat of the early 90's in slow motion, there is no comparison with Japan and their zero rate policy – they were only able to sustain this as they were (and still are) the world's largest creditor nation with vast foreign exchange reserves. Gordon Brown is maxing out his credit card and making a foolish gamble that won't pay off – but he's only trying to buy time till the next election – and condemning the country to an era of relative poverty.

  12. Alan
    Posted December 9, 2008 at 8:16 pm | Permalink

    Well I have supported labour for the past 30 years and I have never been so dismayed at the economic mess and collaspse of £.

    There needs to be a general election now and the Labour ' poverty trap for UK Plc ' needs to be stopped very soon before its all destroyed.

    Alan

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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