The sterling crash has now begun in earnest. The pound has today (today!) fallen 9% against the Yen and is off 4% against the dollar to a lowly $1.56 with forecasts of $1.40 or lower next year. Against any other currency you may mention, it’s now plunging. The proximate cause is news that the UK economy is shrinking far faster than expected, and there's talk about a 0.75-point interest rate cut - sooner rather than later. But on a wider prospective, this is the markets commenting more articulately than the Tories on Gordon Brown’s “scorched earth” economic policy. It is becoming clearer that Britain is perhaps in the worst position of any developed economy in this crisis. Markets are not fooled by Brown’s mendacious claims to have reduced the national debt to 37% of GDP, and will be alarmed to see a Prime Minister use debt concealment methods that would shame the most spivvy merchant bank. Official national debt was 43% before the bank bailouts of two weeks ago, and will be well over 100% if one counts PFI, B&B and the pension liabilities.
Debt is how Brown governed. It was his dope. It’s the key to understanding the UK economy in the last decade and the reckless nature of Brown’s short-termist policies. Debts are steroids to unscrupulous policymakers as debt-fuelled asset bubbles give a fake feeling of prosperity, which usually translates into votes for the ruling party. That’s why Britain started this credit crunch with the largest household debt ever seen in any G7 country. Brown gambled the UK economy on a hunch that interest rates would stay low. It has failed, and now the UK public finances are going to hell in a handcart. We’re being led by a Prime Minister who ran up a 3% deficit in the boom years and we’re now looking a deficit hitting 7% by the 2010 general election – territory not seen since the IMF bailout. There is a serious prospect that Brown will try and inflate his way out of this debt problem, a prospect which terrifies currency dealers. I have heard serious people talking about parity with the dollar.
I would love to hear Brown explain why sterling’s crash is a problem that started in America. It’s a problem that started in 11 Downing Street – when he decided to conceal debt, leverage up the British economy and personally design a banking regulatory structure that allowed UK banks to be literally the most leveraged out of any outside Reykjavik. Britain is, in many ways, becoming the new Iceland. So the fall in the pound will have some time to run yet.
Terrified? You ought to be.