Wednesday, 31 December 2008

Sterling Values

The collapse of sterling by 30% has little to do with trade imbalances, but is the result of capital outflows. New Labour is not just unwilling to stop what is happening, it is unable to do so because they do not have the foreign reserves to anchor sterling in their famous global environment. They are lucky that hedge funds are short of liquidity or making a killing on sterling (again) would have become a favourite pass time.

English manufacturing is not benefiting in the slightest from this, as there is no spare capacity. The balance of payments ought to benefit from devaluation if Marshall-Lerner conditions apply, but it is doubtful whether import and export elasticities of demand and supply are high enough (cf Economics 101) .

What devaluation on this scale and in these circumstances will do is vamp-up inflation, with a lag, possibly towards double digits.

Euro parity is neither a necessary nor sufficient condition for entry to euro salvation. Until recently relative exchange rate stability could have been used for making a case for reducing the two year qualifying period of membership of ERM 2. But now sterling will have to demonstrate its ability to stay within a 15% band of a basic exchange rate, to be negotiated with the European monetary authorities. The theoretical possibility of printing money, but friendless, may be preferred, though the forcible removal of choice out of blatant weakness is hardly an objective or achievement of competent government.

2009 will be the year of the inflationary throughput of 2008's devaluation.

Happy New Year!


Old BE said...

I am readying myself to get rid of my remaining pieces of paper in the new year, and preparing myself for Soviet-style queueing when the bread and loo paper start to run out.

Happy new year!

Tuscan Tony said...

€0.80 to the £ by YE 2009 is the Tuscan prediction.

Anonymous said...

Like you, I suspect, I contribute regularly to the sterling outflow - the only problem being that for the past six months every time I do so I get less each time for the equivalent in local notes. Nonetheless I shall persevere; aftewr all, a chap has to eat!


hatfield girl said...

Hello, TT. You must be pretty close in your expectation that parity won't stop the sterling slide. At least this will prevent a dash for the euro by New Labour. In any case, they've got to keep hold of their ability to print money. It's very odd that everything feels more expensive in Florence now, even though it isn't. I hadn't realised how much I still think in pounds and things.

I did contribute to the sterling outflow, Nomad, but not recently. What is there stays there now in the faint hope that it can be spent there before inflation hits like a train, as City U. described what's coming.

Anonymous said...

Not sure I follow the comment about capacity. I work for a large car maker and we have bags of capacity - the problem is falling demand due to 1) Retail customers walking away 2) Credit shortages (retail customers simply can't get the funding to make the purchase). The cars we are selling abroad are getting much more sterling, it's just that we can't sell enough.

Anonymous said...

"The collapse of sterling by 30% has little to do with trade imbalances, but is the result of capital outflows"

Just not true - it has to do with short term speculative trading. The capital outflow figures per the National Statistics have been pretty steady.

Anonymous said...

You are also sadly wrong in thinking that hedge funds are not currently involved. Very easy to start new hedge funds.

Perhaps you should read the market trading reports a little more closely.