Thursday, January 1, 2009

An uplifting article for the new year – not

Perils of sterling's devaluation

A weak currency is only a symptom of capital exodus to more attractive or safer homes overseas. This matters because there is less money available to support economic activity back home. Government ministers lambaste the banks for not lending enough, yet the reason credit is being squeezed is because it is no longer possible to borrow internationally as freely as we used to. In extremis, the flight of capital becomes a self-feeding phenomenon. The lower the pound falls, the more it frightens the money markets and the less inclined they are to lend in sterling. Many international investors regard the outlook for the UK economy as truly dire. Its key strengths, the housing market and financial services, lie in ruins. [WHY WAS the housing market considered a "key strength"??!]

Posted by drewster @ 05:05 PM (1442 views)
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14 thoughts on “An uplifting article for the new year – not

  • Still doesn’t explain £’s fall against the US $ (also borrowed to the hilt but with the reserve currency status) and the € (Germany + basket cases).

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  • japanese uncle says:

    I should like to repost the following:
    —————————————————–

    Unfortunately ‘inflating their way out’ approach would inevitably trigger run on GBP, and in that event this land should be abandoned by foreign investors fairly quickly, to devastate the very basic of this economy which cannot survive a day without the injection of money from overseas. Meanwhile as mentioned earlier, wage-price spiral is least likely to happen in the UK where powerful unions are no more, and people are too scared even to fully take annual leaves they are legally entitled to, for fear they might miss their desks in the office on their return from holidays (which has been the case in Japan since the end of WWII to date: Such quick Japanification or Japanization of European workforce is breathtaking, as this phenomenon is commonly observed even in Italy!). Undoubtedly majority will prefer wage reduction to job losses, now that they are bound by so many financial obligations demanding gapless servicing, not least mortgage repayment and fuel bills. Salaries and wages will keep decreasing for the foreseeable future and in say 20 years time, 1998-2006 would be remembered somewhat fondly as the ‘Roaring Millennium’ .

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  • japanese uncle says:

    Incidentally, GBP/Ruro exchange rate will move dramatically, if or rather when ECB savagely cut Euro IR. Current euro bubble is the product of IR manipulation and time-lag before the full-scale collapse of the Euro zone economies including Germany.

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  • JU – thanks, that’s one of your best posts yet.

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  • @3 JU

    You say “Incidentally, GBP/Ruro exchange rate will move dramatically,if or rather when ECB savagely cut Euro IR”

    When do you or anyone else believe that ECB will start cutting their rates as dramatically as FED or BoE ?

    How much pressure is there on ECB (Germany) from the Eurozone basket case economies to follow UK / US example ?

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  • japanese uncle says:

    Drewster:

    My pleasure.

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  • japanese uncle says:

    tudorian:

    Again, ECB’s IR decision does not necessarily seem to reflect the national interests (or the interest of the general public) of Eurozone economies (anyway things are much more complicated here given dozens of players under the umbrella of Euro, rather than a single decision-making entity eg UK under GBP), but the speculations of the real owners of the central banks. Thus precise timing is most probabaly up to their interests in the financial markets. However the revelation of the truel scale of distress of the major European banks hitherto masked by the ECB’s exorbitant lending operation, seems just the matter of time. Those lenders are not only exposed to the collapse of the bubble in each respective economy, but also to the inevitable financial ruin in the emerging economies not only Eastern Europe, but in other continent as well. In such event catastroph in Euro zone should be no less severe, if not more than those in the US/UK.

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  • voiceofreason says:

    JU, one thing I wonder is why if Japan is such a tough place to earn a living don’t we see more emigration from there to say the EU ?

    I would guess that the UK can’t become as Japanified because a load of us would simply cross the channel and work in France instead.

    Just a thought !

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  • Interest rates in the eurozone are only 50 points above the UK.

    I think far more falls are in store for sterling…..possibly resulting in a run.

    The UK is in a very weak and very vunerable position.

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  • japanese uncle says:

    Voice of reason

    Language and cultural barrier prevent that from happening. The Chinese are much more venturesome and enterprising than my compatriots with strongly insular attitude resulting more or less from their poor knowledge of foreign cultures and languages (Suppose you visited Japan and asked a passer-by the way, you would easily see it. Nine out of ten should smile a polite/mysterious smile and step back or simply ignore you!) I am always amazed to find a Chinese take away shop in the remotest village in Britain. Large-scale Japanese emigration has been achieved only in Brazil and Hawaii, to my knowledge. IMHO, Britons share insularity to a considerable degree, but enjoy the benefit of English being effectively the only international language.

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  • voiceofreason says:

    JU, thanks for the insight. It does indeed sound like the Japanese like to stay at home.
    My experience with UK people is that they are very willing to move around the world. A good friend of mine is a case in point. Last March he said “enough is enough, I can’t afford to live in Tunbridge Wells any more” .. and by June was very happy with his family in Singapore working for the same company. Many other friends and relatives live in France, Holland, USA, Australia, New Zealand, Thailand, Malaysia etc etc… I myself have a residential visa for Australia and have lived there for a few years.
    Luckily we don’t have any debts (unlike a lot of my more footloose friends) so staying here is an OK option for us.

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  • gardeniadotnet says:

    ju said… Suppose you visited Japan and asked a passer-by the way, you would easily see it. Nine out of ten should smile a polite/mysterious smile and step back or simply ignore you!

    I’ve experienced a similar phenomenon in France.

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  • stillthinking says:

    “But more importantly, a weak currency is only a symptom of capital exodus to more attractive or safer homes overseas. This matters because there is less money available to support economic activity back home.”

    Isn’t this a bit misleading? Selling your pounds for dollars means that somebody else owns the pounds you used to, not that they somehow move somewhere. Still the implication that lending comes from deposits. The reason the banks aren’t lending is because their expected default rates don’t fit into the rates they are forced to offer. Bank lending has collapsed for the same reason bread making collapsed in Zimbabwe when the price was fixed. Also during a demand collapse, an import -dependant-(fuel,food,clothes,basics) country will find the import vs export ratio goes against them as such a high portion of their imports are fixed demand, so the currency declines as a consequence of the worsening trading position and the obvious answer that to maintain currency value we would need to raise interest rates.

    On the topic of Japanese emigration, I have always felt that the way work holidays are arranged as three one week periods occurring at the same time for nearly everybody, with a few additional single day holidays, prevent people from making speculative trips abroad because one week isn’t sufficient time to visit the UK/Euro/US, and also because everybody is attempting to travel on the same day airplane fares spike horrifically.
    Additionally JU, perhaps you are being somewhat generous to the UK. I felt, apart from the brutal workplace, that Japan is a much nicer place. Those Chinese you see in random corners are running from poverty in China, they have a much bigger push. Japan has low crime, nicer attitude, much better weather, no vandalism, well ordered schools and so on.
    I very much doubt that such Japanification of the workplace will occur here, for the simple reason that we will accept the 70s collapse as socially preferable.

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  • japanese uncle says:

    stillthinking

    Your point is taken, as the massive emigration to Hawaii and Brazil was quite similar to the Irish emigration triggered by the potato famine, and took place in a rather limited period of time, and mostly from the western poorer regions in Japan. Hunger has driven them. Given the current deterioration of the standard of living, there could be another wave of large-scale emigration to where God knows.

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