Business

The good and bad of $1.70

  • 16 June 2014
  • From the section Business
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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.

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.