The good and bad of $1.70

 
Pounds and dollars

On Monday 20 October 2008, there was a fair old chance that the UK was bust.

The country's enormous banks were in deep deep trouble, and were in the process of being bailed out to the tune of around £1.3tn - not far off the value of UK GDP or national output - by the government.

Most of the rescue funds was in the form of loans and guarantees. But there was no certainty how much of that public money would eventually have to be written off - and whether the state could afford the eventual losses.

With banks too weak to lend, the economy was shrinking frighteningly fast. Which meant that tax revenues were plummeting, forcing the government to borrow unprecedented amounts, to keep the public sector running.

We were on the brink of catastrophe.

Unsurprisingly, sterling no longer seemed quite so attractive to the plutocrats who control the world's squillions. They dumped the pound.

On that day, the UK's currency fell through $1.70, and kept on falling - till it hit a low of $1.3668 on 23 January 2009.

All of which means there is quite powerful symbolic value in the pound's return today - Monday 16 June 2014 - to $1.70.

It shows - in case anyone still had a residual worry - that the UK isn't bust.

Indeed, if you rate the rating agencies (as it were), you would conclude that the reverse is true - since on Friday S&P removed the red flag over the UK's AAA or platinum-quality credit rating, and said it was now stable

More than that, $1.70 is a manifestation of the strength of the UK's recovery compared to what's going on in other developed economies.

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Those who run important UK trading businesses tell me they can cope with sterling where it is today - though they are a bit anxious about the direction of travel”

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It is the strength of the British recovery - and the risk that it will spark renewed inflation - that prompted the Governor of the Bank of England to signal last week that it will be the first of the major central banks to lift its bank rate or "policy" interest rate above near zero - where it has been since March 5 2009.

If you are an investor therefore you conclude that you will get a marginally improved rate of return by investing in the UK.

By contrast in the eurozone the European Central Bank is still trying to cut the cost of money, to less than zero (the measure of just how mullered that region is).

And in the US, extreme low interest rates are likely to persist a bit longer than in the UK, partly because there has recently been a hiatus in its economic revival.

So sterling looks attractive compared with dollars and euros.

That said, not everyone loves a strong pound. Exporters have to improve the quality of their goods and services, or cut prices and squeeze their profits, to remain competitive when the currency is strong.

If the surge in sterling were not to abate, there would come a moment when exporters would start to howl and complain that they were being priced out of important overseas markets - and that would be very bad news for our economic prospects.

Fortunately, those who run important UK trading businesses tell me they can cope with sterling where it is today - though they are a bit anxious about the direction of travel.

On the other hand, the rise should temper the cost-of-living squeeze that would result from the current surge in the dollar price of oil - caused by the mess in Iraq.

To put it another way, although the rise of sterling has a mixed impact on our lives and livelihoods, it says broadly positive things about the health of the British economy.

Unlike what happened to the England football team on Saturday night, it shows we are winning again.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

This column...

This column may be a bit quiet for a bit, because I am away from the office.

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  • rate this
    0

    Comment number 559.

    Shouldn't there be a point to the Boe such as funding research by the billion?
    A BIT LIKE THE NATIONAL LOTTERY.
    A NATIONAL WE GOT THE LOOTERY?
    IS THAT NOT A GREAT IDEA TO ADD TO ITS REMIT?
    To print money for research!
    A measly 0.1% OF GDP WOULD ADD 15 BILLION TO RESEARCH.

  • rate this
    0

    Comment number 558.

    Well there is £375bln which is soon to be squeezed out of the economy when the BoE sells its QE bonds, and it will end up pointlessly paying higher rates of interest for its own printed cash.
    Just think of all the good they could do with that!
    We could cure MS, AUTISM, CANCER, RHEUMATOID ARTHRITIS , DIABETES,Education problems etc, with all the research it could fund.

  • rate this
    0

    Comment number 557.

    Despite the stronger pound, a quick knee-jerk reaction by grubby city boys to the chance of a miniscule drop in oil supply from Iraq, means petrol prices have risen on the forecourts today.

    I didn't notice them drop when oil supply was more assured. around New Year or Easter.

  • rate this
    0

    Comment number 556.

    Back to the root of the problem. It's money supply.

    Increasing population means we need more money to go around. Money supply is controlled, via fractional banking, in the form of loans.

    This is where the crunch gets a vice grip on us. It's almost like trying to make yourself better by putting your hands round your neck and squeezing.

    Supply has to increase and we need a new way. Parachute it

  • rate this
    0

    Comment number 555.

    553.onward-ho
    "Be nice to bankers"

    No. Consorting with Beelzebub just encourages the beast to rob you blind. They need to be expunged from the country and all society.

    Never suck up to a leech it will drain your lifeblood.

  • rate this
    0

    Comment number 554.

    549.Boro Jonesy

    1. Currency movements are NOTHING to do with fundamentals and EVERYTHING to do with gambling bankers robbing people/the economy.

    2. There are no examples in economic history where printing money has every fixed anything. All it does is delay and further this delay makes things worse.

    The belief you express to the contrary is fallacious - as there are no examples of it working.

  • rate this
    0

    Comment number 553.

    I wish I was my banker's friend!
    I do like them when they have cash.
    When they don't there's not a lot of point to them.
    But they have a hard job to do.
    Be nice to bankers, they are usually decent chaps and chapesses.

  • rate this
    +1

    Comment number 552.

    551.onward-ho "Good old jfh always gives me a minus. "

    No I didn't. If I get annoyed I tell you why!

    Only banker's friends hide.

  • rate this
    0

    Comment number 551.

    Good old jfh always gives me a minus.
    It's nice to know someone cares.

  • rate this
    0

    Comment number 550.

    So how do we stop the doomsters causing Crunch2?
    How do ensure bundles of loans are not deemed worthless, projects not abandoned and surveyors not blackmailed into downrating everything pointlessly?
    How do we stop interest-onlys being turned into repayment loans? How do we protect us from the Pestons?
    Of course banks are TBTF.
    Too wee is too stupid to be true.

  • rate this
    0

    Comment number 549.

    @546

    In what way is my argument for printing more money fallacious? What exactly is behind the rise in Sterling's strength other than the relative weakness of other currencies it is often measured against?

    We're not producing much, we're not exporting that much, we're still running in deficit but others are spotting the end game quicker than us

    That always has and always will be inflation

  • rate this
    -1

    Comment number 548.

    When Britain nearly went bust as you say, it was the fourth largest economy in the world and it's GDP per person was 15% higher than Germany's. We fell a lot because we were so high up. We were so rich we could borrow enough to get back into shape. If we had expanded less in the boom we would never have weathered the crunch.

  • rate this
    -1

    Comment number 547.

    Let's wake up and smell the roses! Make hay while the sun shines!
    Because we sure do need a helluva boom before the next downturn.
    Brown wasn't so stupid,he made the boom last 15 years.He was even starting to get us out of the crunch .Tories put us back in doomland again for four years, Now they want to put us back in it after we have had six months of sunshine yet not a single payrise!

  • rate this
    -1

    Comment number 546.

    541.Boro Jonesy "Print more dosh NOW"

    You have stopped taking your medication again.

    Your arguments are fallacious in every way.

  • rate this
    -1

    Comment number 545.

    Funny how the rest of the world wants to live here and yet we all keep talking about how rotten we are, though , and how we shouldn't or should let'em in.
    We are very good at finding fault and it tends to make us decent, then we get the feeling we are taken for a ride and get all strict and then the wind changes and it is summer again and we think ah what the heck.

  • Comment number 544.

    All this user's posts have been removed.Why?

  • rate this
    0

    Comment number 543.

    When my son was 5 he was asked to asses his learning needs .
    I would rather they taught him to read and write.
    That is why China is doing well ...... it does not have all this rubbish to deal with.
    And it doesn't matter how strong or weak the pound is if we are being brainwashed into learning module automotons.

  • rate this
    0

    Comment number 542.

    Some people will make money when a Pound Sterling increases in value.
    Some people will make money when a Pound Sterling decreases in value.
    Some people can make money by playing Bingo or Poker.
    If all else fails...buy a Lottery Ticket..

  • rate this
    0

    Comment number 541.

    In my opinion, the recent strength of the £ against USD/EUR simply proves we did not nearly far enough with QE. We could have debased much more without ruining our competitiveness.

    That in turn would have contributed somewhere down the line to the inevitable wage inflation that HAS to happen to shrink the ratio of debt to wages and make the UK viable once more.

    Print more dosh NOW

  • rate this
    -1

    Comment number 540.

    I was thinking about UK productivity and competitiveness,and it is interesting that nobody asks why it has fallen.
    Look at what a palaver everything is now, with audit, and reflection and appraisal ( 2 hours a week per person, I reckon) and learning modules and meetings and more meetings.
    Surprised we manage to export anything at all.
    SO FOR EVERY PALAVER IN WE NEED A PALAVER OUT!

 

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