Wednesday, 23 April 2014

Selling England by the Pound

The English are having a bad year, we are on the brink of losing our last meaningful colony and these storm blasted islands have endured the worst weather on record and we are only in April! Despite all this we are still standing and there remain three things that the English can be proud of:

  • Getting drunk and then fighting for their lives 
  • Being polite and stand-offish
  • Having a weak currency
A Spaniard - what you find when you Google an image of a drunk English Gentleman!

The starkly contrasting social habits of the English are well documented but the relatively value of our currency has been brushed under the (garishly patterned) carpet  by the long line of Keynesian and neo-Keynesian economist who believe that  we will eventually take our place on the global top table of exporters if we continuously devalue our currency.

Against this backdrop, commentators and captains of industry have been warning against the inexorable rise of the Pound over the last 12 months. On a trade weighted basis – that is against a basket of currencies weighted accorded to the amount of trade there is with Britain – the pound has appreciated around 10 per cent in a year. Their whining is interesting as the currency was devalued by some 30% in 2009 in the wake of the credit crunch, but before the Euro crisis disabled our main competition. But let us not get too boggle-eyed about our currency’s recent past.  Despite the great devaluations of 2009, 1994 and numerous other sinkings our currency (since 1990) has on average sat on or about $1.60 – okay so there have been some fluctuations but we seem to return quite effortlessly to this level of parity with the dollar.

So like the aggressiveness drunk the Pound quickly returns to its natural pre-disposition of being fair and politely - valued at around $1.60 - once exuberance and pessimism have worn off.  And this is something we should learn rely on.
Sadly our exporters and their bankers have not worked out the derivative market well enough to be able to hedge forward on this likelihood.  As a result they have be somewhat pathetic in building their export markets based on this fairly simple truth, which is that our economy has been one of the best performing economies of the last 200 years and this isn’t going to change anytime soon.
The interesting thing is that while our metal bashers can’t see this this stability foreign investor have no trouble is seeing that the UK is a (relatively) marvelously stable and reliable economy on which to bet their money.  

So while our exports  and manufacturing have been flat in the long-run (see the output chart above) we remain the favorite destination of hot global money! As the recent E&Y attractiveness survey highlights and our low cost of borrowing confirms.  The issue for us is that money we attract is “hot” it doesn’t stay long and if it does it’s the magnetism of our London property market that is the biggest attraction.

Because of these inflows the markets don't seem to care about Britain's problem in paying its way in the world. This apparent ambivalence is explained by the fact that Foreigners are still willing to lend to Britain, and or buy British assets on the scale necessary to bridge the gap.  This “get out of goal free card” has allowed us to squander longer-term export opportunities, whilst making the City of London rich on the in and out-flows of hot-money.

The best thing the government could do would be to offer (through the banks via macro-prudential measures) a long-term low cost hedge against currency fluctuations to domestic and foreign investors so that the real the benefits of our natural creativity and work ethic can be brought to bear – based on an exchange rate of roughly $1.60.

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