We should embrace the “fall” of the pound

THE MEDIA has gone from the election to the Tory leadership and royal funeral and has now started to worry about the fall of the pound – but should we?

The Pound is weak against the US Dollar, but so are most currencies right now, with the interesting exception of the Russian Ruble. Although before you got too excited the ruble only fell from 0.014 US a year ago to 0.017 US now it was as high as 0.042 in 2008 and as low as 0.0076 in March this year.

The dollar is high because the US Federal Reserve began raising US rates in June in big moves of 75 basis points. This seemed to catch most other central banks off guard or on vacation. The Bank of England raised its key rate in June, but only by 25 basis points. The Bank of England doesn’t meet in July so we had to wait until August for another hike, this time 50bps, but by then the US had hiked rates 75bps additional base and declared that they would be at 3% before the end of the year. It was this difference between the Central Bank’s base rates, the UK at 1.75% versus the US at 2.5%, that caused the divergence between the US and UK currency. . In June, the UK and US base rates were 1%. The US Federal Reserve is expected to raise key rates again today, with many economists expecting another 75 basis point move, pushing US rates to 3.25%.

The United States raises rates to fight inflation by withdrawing money from the market to depress consumer spending. In theory, people with variable mortgages or credit card charges as well as businesses with working capital loans all have to pay more money in interest payments and therefore have less money to spend on consumer goods, while a higher rate encourages more savings.

The E. The United States is the world’s largest importer of almost everything.

Luckily for Biden, the United States is still the world’s reserve currency, so the United States can get away with printing trillions of dollars and borrowing even more without international investors fleeing the currency. After all, what is alternative investing? Gold earns no interest, and 2.5% to 3.25% is better than nothing, especially if your capital is going up in value against your local currency.

The UK is not in the same boat. Neither does the euro zone. Both must balance the importance of money with the ability of consumers and businesses to pay higher interest rates and, unlike in the United States, massively higher energy bills.

If the UK had raised interest rates over the summer at the same rate as the US, our currency would be stronger, but a sudden and large increase in rates (corporate loans are mostly variable rates at a premium to the base rate), as well as our huge energy bills, could have put small businesses in receivership or caused them to default on their loans, which would fall on the banks and then the Bank of England.

Moreover, a sharp rise in UK rates would probably not have reduced consumer spending. According to the FCA, the number of mortgages in the UK has fallen from over 15 million in 2007 to just 13.4 million at the end of 2021. While the proportion of new fixed interest rate mortgages has fallen from just under 65% in 2007 to 94% at the end of 2021. Consumer spending would be hurt by rising credit card rates but price increases appear to have been just as effective: Retail sales fell by 1.6% in August, with non-food sales volume down 1.9% and department store sales volumes down 2.7%.

We should consider a relatively weaker pound as a gift from the United States

Many net exporting countries have tried to keep their currencies low against their major export markets. China is a master in this area, as is Turkey. It was formerly called the beg your neighbor policy as a relatively weak currency made imports more expensive relative to local products and made exports cheaper in other markets. Deliberately lowering your currency was generally considered bad form in the 1980s, but if the US offers the UK a relatively cheaper currency, why should we complain? The United States is already our biggest export market, but if a weaker pound increases exports of British goods to the United States, we should seize this opportunity with both hands.

Many economists, and in particular pro-Brexit businessman John Mills, tried to convince anyone who would listen that the UK pound was too high for manufacturing to survive in the UK and that a higher pound low would help the UK redevelop its industrial base. But even our service industries such as fund management, legal, advisory and accounting services have their costs in pounds and will therefore become relatively cheaper for US customers. An increase in UK exports from a weaker pound could save us from a recession.

And although the UK is currently a net importer, in some cases this is due to our strong currency. It is often cheaper to import goods than to manufacture them ourselves solely because of the exchange rate differential. However, to move from being a net importer to a net exporter, we should find products on which we can be competitive. It will not be against countries with very low wages or countries with relaxed employment regulations. The UK’s best bet would be to use its intellectual advantage and focus on new technologies and highly technical manufacturing industries that won’t be easily imitated by low-cost countries.

But what about our imports?

Many of the countries that supply the UK’s imports also have currencies falling against the dollar. China is our main import supplier, followed by Germany, then the United States, the Netherlands and Norway.

The Chinese yuan is at its lowest point against the US dollar since July 2020, but it has strengthened the pound again and is now at just under 8 yuan to the pound after being at just under 9 yuan a year ago. A strong yuan will make Chinese imports more expensive and help British industries relocate production. This will help the UK diversify its suppliers. If Covid has taught us anything, it should be to not depend on a single supplier. Security of supply requires multiple sources.

Other Asian Currencies – The Japanese Yen and South Korean Won have been in a similar trading range against the British Pound since last year. The Indian Rupee is off its 2020 lows but still below its 2019 level. These countries could possibly provide alternatives to Chinese manufacturing. Just like Indonesia, Vietnam, Malaysia and the Philippines.

However, the euro is at its lowest point against the US dollar since 2002, and at 1.15 for the pound it is in the middle of its most recent trading range against the pound sterling, of 1, 09 at 1.19. So the cost of our imports from Germany, the Netherlands, Belgium, France, Italy, Spain or Ireland will not change much. This covers a large part of our food and drink imports as well as many cars, clothing and shoes. If these prices rise, it would be because of their increased production costs – higher gas or fertilizer prices, not currency.

But the US is our third largest supplier of imports, supplying the UK with, in order: machinery and parts; precious metals and precious stones; mineral fuels and oils; electrical machinery and equipment; precision and optical equipment; aircraft and spacecraft; plastics; wood and charcoal; chemicals, etc these will be more expensive. Although most homogeneous commodities are priced in US dollars internationally, such as: oil and gas; gold and silver; sugar and coffee; corn and soy; most saw their prices fall as the US dollar rose. The international price of commodities is often determined by the willingness to sell of major exporting countries – usually not the United States.

The biggest source of inflation imported from the UK was natural gas, but even its price is now falling with the price of oil. West Texas Intermediate (WTI) peaked at $122/bl in early June before the first US rate hike, but is now down to $85. Brent Crude, a heavy North Sea crude, is also traded in US dollars and has also fallen from $121/bl in early June to $92 now. By the way, contrary to what many experts say, there is not one price for oil, there are many different oils being traded, with different characteristics – I will name just two but if you want know the price of MURBAN Crude or Louisiana Light you can look them up yourself. Similarly, there are several natural gas prices. European TTF gas fell from a peak of €345 per megawatt hour in August to 193 last night, while UK gas fell from £6.43 per Therm in August to £3.15 last night. US natural gas costs $7.72 per MMBtu. Yes, that means the UK gas price is 5 times the US gas price and the European gas price is almost 8 times the US price.

But it’s hard for Brits or Europeans to worry about the price of gas when both have untapped reserves of natural gas which they’ve chosen to leave in the ground – what did they expect what happens to prices when they have reduced supply?

With falling commodity prices, the UK is closer to recession than inflation. It may take a few months for lower input prices to lower consumer prices, and employment is a lagging indicator during a recession. So hopefully the Bank of England doesn’t chase US interest rates and the Moaning Myrtles in the mainstream media stop worrying about the cost of their ski vacation in Aspen and start thinking about the British economy. A lower pound may be just what we need right now.

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About George Dailey

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