Do we have a sterling crisis?
Given the movements in the currency since Theresa May's unfortunate Tory party conference speeches that endorsed Hard Brexit it could be argued that we have. As yet I do not agree. We have a sharp lesson for a government in pursuit of a policy that makes little economic, social or political sense, but not as yet a crisis.
Might we have a crisis?
The answer is very clearly that we could.
What would trigger it?
It will happen when it is clear that the government hasn't got an obvious Commons majority for its policies. Then we are in melt down.
Will that happen?
I think so.
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If the marker for a crisis is a destabilised government majority then I agree with your conclusion, because I am coming to suspect that the PM is deliberately provoking dissent by promoting an excessively hostile stance on brexit. I suspect that she wants an early election and accepts that cannot do so without losing a confidence vote, and she knows that the electorate could take a dim view of a contrived fight, whereas if she was portrayed as the ‘defender of Brexit’ from the ‘Liberal elite’ then the press will support her in an already one-sided election, and at a stroke she will be more successful (and more powerful) than Cameron.
Massive gamble
People may not agree
In my view the Tories have always gambled in politics so you are right (probably). Getting into power makes means worth it to them and always has.
Machiavellian but entirely believable
People that have substantial (e.g. £90k+) sterling deposits are moving them to Euros (& moving them to acounts outside of the UK) – there is going to be a bleed of money – which has the potential to drive down the exchange rate further. The companies I work with have all changed their contracts to Euros – wouldn’t touch the £ with a barge pole.
Interesting
And really? Given the euro has all its own problems?
I see the Euro as a faux deutchmark – for it to survive they will – at some point – have to recycle German surpluses. Just a matter of time. I could be wrong, time will tell. But with May & the 3 nut jobs at the helm the £ will only go in one direction (I still have some Uk assets – so would be happy to see it go the other way = up).
An early GE as you say would be a massive gamble. Some people are beginning to see that Brexit is venturing into the unknown. Yesterday I had a brief conversation with a checkout operator at Tesco and she said the prospect was scary and that ordinary people will become poorer. Brexit chaos will be the undoing of this Govt.
The UK government’s apparent persuit of “hard brexit” may make more sense than you think – but only as a negotiating tactic. Commentators are expecting the negotiation to be determined by which side has more to loose. However, the important point is that the EU will loose whatever happens, and the harder the Brexit, the greater the net loss to EU countries will be.
By showing that the UK is willing to accept a hard exit and fall back on WTO rules they may hope to change the base for negotiations. After all, if the pound falls further to reach parity with the Euro, which seems increasingly possible, this will largely offset any likely tarriffs on UK exports to the Euro-zone. However, EU Imports into the UK would take a double whammy from tarriffs and currency devaluation. Using this scenario as a base it is clear that Euro-zone countries should be highly motivated to negotiate the softest possible Brexit deal.
This negotiation is shaping up to be an adolescent battle of “chicken”, and the UK government has already pushed their accelerator right to the floor. Of course I could be wrong and the UK government may actually be completely insane, but we must all hope that the government is smarter than we think they are, and that it is the EU who blinks first !
It’s the old “WTO rule” herring again:
“In the light of its co-existence with the EU in the WTO, the rights, commitments and concessions of the UK under WTO rules are currently tied in with those of the EU. Following Brexit, the UK will no longer be covered by the common schedules which the EU submitted for all its Member States. The application, therefore, of WTO law on the UK following Brexit will depend on resetting the terms of the British membership in the Organisation. This would be the case across a wide range of economic activities covered by the WTO agreements. The schedules of concessions and commitments on market access, for instance, as well as the UK’s list of exemptions from the MFN treatment obligation would have to be reset and resubmitted. They would also have to be accepted by the other WTO parties”
https://www.monckton.com/brexit-mean-uk-wto/
Not only have we to “negotiate” new trading scams/schemes with the EU, but also with the WTO. Same problem: other parties/spanners/works.
I don’t know why we keep banging on about the devaluation of the pound as if it is all disaster. Roger Bootle and John Mills, in a recent book point out POSITIVE aspects of this:
“Ideally, the world should move towards a new
international policy regime that puts exchange
rates centre stage and seeks to maintain exchange
rates at a reasonable level in relation to the economic
fundamentals.”
They also maintain:
“There has been a deep-seated tendency for sterling
to settle at too high a level for the health of the
UK economy.
No one was more aware of the importance of
exchange rates than John Maynard Keynes. In the
1930s, a series of devaluations and the imposition of
protectionist trade policies were major contributors
to the Great Depression. Following that experience,
Keynes was determined to establish for the post-war
world a global exchange rate regime that placed
equal obligations on deficit and surplus countries to
adjust, thereby ensuring that the new system did not
have a deflationary bias. ”
They also say:
“The exchange rate of the pound is vital to the success
and health of the UK economy and the fact that it has
long been stuck at much too high a level bears much
of the responsibility for the economy’s current ills. ”
As the Chinese say: ‘Crisis =Opportunity’ a devalued pound is an opportunity for real growth in manufacturing which could more compensate for inflation (which we need anyway 0.6 is too low).
Simon
The lowest paid usually lose
That’s why it matters
Richard
But not necessarily, Richard -which is why Government policy is important here.
The lowest paid losing has been the case with a strong pound!
if manufacturing jobs increase and there is some substitution as import prices increase then, as I referenced above, there is more than adequate compensation and environmental issues are lessened as less is imported.
Of course, the devaluation also hits the wealthy (BMW’s/foreign holidays/yachts!) but sod them, let them spend their wealth at home!
There are more angles to this.
This stuff is always a two sided coin. What concerns me is the absurdity of psychologically linking a strong currency with national strength which is what Wilson seems to have obsessed about all those years ago.
Simon
I enjoyed your long silence here
Sorry, but I have to say so
I haven’t the energy to engage in another red herring
Richard
I should add that the authors of the above book make a mistake saying this:
“On the face of it, the British economy does not look
too bad. But we are not paying our way in the world.
Every year, we are borrowing and selling assets to the
tune of about 5% of GDP. This is rapidly increasing the
amount of our economy that is owned by foreigners”
That isn’t right-it’s a question of sectoral balances and their economic effect NOT ability to pay> As Randall Wray puts it:
“Our deficit hysterians love to raise the specter of China. Supposedly Uncle Sam is at the mercy of the Chinese, who have a stranglehold on the supply of dollars necessary to keep the US government above water. If the Chinese suddenly decided to stop lending those scare dollars, Uncle Sam would be forced to default.
Can anyone, please, explain to me how the sovereign issuer of the US dollar–Uncle Sam–could ever run out of his supply of dollars? Please, give me one coherent explanation of how that could happen.
And please explain to me how China got those dollars in the first place. So far as I know, every single dollar the Chinese have comes from the USA. There are two sources: US lending and US spending. China loves the second: Chinese work hard to produce stuff to sell to America so they can get dollars.
Folks, all the dollars the Chinese have came from the US. There is no net supply of dollars from China.”
The whole book is bizarrely if I can be candid
I can’t be bothered to engage with the bizarre
Surely part of the problem is that the UK economy no longer bears any resemblance to what it was during keynes’ era. The UK manufactures less and less, and what it does do often requires imported components- so a drop in the value of the pound will increase the cost of far more goods than it would have done in the past.
The cost of oil / fuel increasing also impacts on the cost of everything – somehow always much more substantially than any drop in oil price.