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Thar She Blows.

That's a whale-hunting expression, when you've been at sea for weeks or months in a leaky wooden ship and suddenly you spot the sign you've been seeking - a whale's spout. Result! You're in the money. (Obviously we don't hunt whales anymore - that would be bad!)

Well, we've been waiting for the UK government to crack and start printing new sterling banknotes, and today it happened. The Bank of England has in the last few minutes announced that it is reducing the base rate to 0.5% and is starting a print run of £75 billion. They will use the new money, as soon as the ink is dry, to buy UK gilts on the secondary market and commercial paper. (BoE link)

Given that the pound in your pocket derives its value from its scarcity and pounds are now slightly less rare, the pound in your pocket has shrunk slightly in value. The UK money supply (M4, broad money) is approximately £2 trillion - so today's printing amounts to a devaluation of around 3.75%. The pound in your pocket is now worth 96.25p. Of course, everyone else's pounds have also shrunk so you may not notice too serious an effect on your spending power, at least not for a few months anyway.

Anyway, the ink isn't dry on these new notes yet, the BoE will be bleeding them into the system over the next 3 months.

So what will happen to these new pounds?

Well the government would like the retail banks to lend them to members of the public so that they can trot along to their local retail outlets and start doing some spending. Also the government would like people to borrow the money and buy houses with it. Unfortunately house prices are falling so fast that the average house has now reverted to its 2004 value, and the usual spring bounce has just flopped, according to today's Halifax numbers (though they're called HBOS now.)

So in fact these new pounds will go chasing some higher rate of interest somewhere. How about Norway? They have a base rate of 4.75% at the moment. Why not borrow some "new" sterling at 0.5%, sell to buy kroner and deposit in Norway? If enough people do this the kroner will soar (currently £1 buys you about 10 "NOK") and sterling will crash, so there will be money to be made on the margin and on the forex rates. I haven't heard the term sterling carry trade yet - but it might be coming.

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