The inevitable drop in the UK pound has taken a while. This is a crash-and-burn scenario, to some extent. Some pundits are amazed it’s taken so long after Brexit for the wheels to fall off. The UK economy is in tatters. This used to be the financial heart of Europe. Now, it’s the financial black hole of Europe.
The pound is near parity with the US dollar, which used to be worth less than half a pound 50 years ago. That is definitely NOT good news for the UK.
There are a lot of economics involved, as follows:
- The UK imports a lot of goods and food. Those imports will become more expensive, hitting a struggling, not to say drowning, UK domestic economy.
- The Johnson government borrowed a lot of money in the last few years causing a lot of capital outflow. Interest on those loans will go up, and the pound is now worth much less against the USD. That’s a loss on top of other losses, and it’s in the billions.
- One of the reasons for the drop in the pound was the new government’s proposed tax cuts. This tax policy is seen as a very bad move, in the light of a shrinking economy and difficult revenue environment. To raise money to fund spending, the UK government would have to issue bonds. Add the existing debt, and it’s a pretty iffy move at best.
- The Bank of England will have to raise its interest rates anyway. This would be a good defensive move in most cases, but not against a background of rising rates worldwide. The net result would be to minimize the benefits of the rate rise.
Much less impressively – Some people might well have been short-selling the pound prior to the policy announcement. This means entering into a contract to buy the pound at a given lower price at a future date. So if you contracted to buy pounds at $0.90, and the price is higher, you make X cents per dollar, with the dollar buying more UK pounds.
This “selling England by the pound” approach is pretty common, perfectly legal, and probably unethical at best. Never mind trashing the entire nation, you made 3 cents, you daredevil, you.
The trouble is that the markets have got the economic picture right. Funding public spending for anything could become quite chaotic. It could also become impossible.
Leaving the single market was the dumbest thing ever done in the history of Britain. I’ve been calling it “Dunkirk in reverse” ever since and so far that’s the whole story. There are no upsides to this mess.
Austerity, Scotland, and a cheap and nasty-looking future
I think it’s fair to say that “austerity” is the most genuinely loathed economic term in modern British social history. Even the medieval poll tax, which caused a rebellion, wasn’t an institutionalized synonym for total failure of revenue, but this expression covers all bases.
Austerity could also be literally the last word that splits Scotland from the UK. Things are quite bad enough without more poverty in the mix. This cunningly planned move could also remove other revenue from the playing field, if Scottish assets aren’t included.
In short, another way to go broke has now been perfected. England and Wales will have a merry time trying to fund things. Their people will return to their rustic ways. One day, Britain shall aspire to have its very own freehold Dorito. Walking upright will no longer be an issue. Plantain will be the staple food, gathered from the smiling sunlit marshlands around Westminster.
Meanwhile, I’ll stick to my view that “conservative economics” is a contradiction in terms, for some reason.
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Disclaimer
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