As Expected £Sterling Tumbles

It would be hard to have missed the furore over the recent comments of Alastair Darling. In the original interview he said:

'Britain is facing "arguably the worst" economic downturn in 60 years which will be "more profound and long-lasting" than people had expected'

Regular readers of this blog will know that I will applaud such frankness and recognition of the economic reality that is now confronting the UK. It is not that the loss of confidence that such a statement suggests is a good thing of itself, but rather that the people of the UK need to be prepared for the changes that must be made to the way in which the UK economy is structured. I have already made some suggestions for ways in which the UK might be restructured, for example in health, benefits and education. The big question remains as to whether anyone will grasp the reality of the necessity of change, or whether the politicians will retreat into populist 'head in the sand' measures.

Of particular note in the furore that followed Darling's statemnt was discussion of whether he was making a comparison with the right period of time. A good example of such discussion can be found in the Times. As is usual, what all of these commentators are missing is the profound and unique changes that have occured in the world economy, notably the massive increase in the supply of available labour. As I have discussed before, we can use the past as a starting point in understanding the economy, but we also need to be aware of the particular circumstances that apply in each case. No situation is ever the same, and until the economists and politicians wake up to the real differences this time, then nothing will be done to resolve the problems.

One of the outcomes of Darling's comments has been to accelerate the fall in the £sterling. The £GB is falling against the Euro, the Yen and the $US, and is likely to fall further relative to these currencies. I emphasise the word relative, as both the Euro and $US will also come under pressure, as the inevitable adjustment in the world economy continues (the Yen may be more stable). The £GB will just be in a situation where the weakening will be greater than the weakening of the other currencies. The curious point here is the mindset that the $US, £GB and Euro (and the Yen) are measured largely one against the other, but that it will be how these perform against other currencies that will really matter. The weakening of all of these currencies will not make sense unless they are measured against a wider basket of currencies, in particular the Yen and RMB (the problems of the RMB I have detailed elsewhere).

Meanwhile the UK economy is plunging further into gloom, almost exactly in line with my predictions. As each day passes, the headlines become more and more gloomy. For example, in the Times they report that mortgage approvals have sunk 71% to an all time low. A Guardian columnist has the following to say:

'Adding to the gloomy picture, a CIPS survey showed today that the manufacturing sector shrank for the fourth month in a row. Mortgage approvals fell to 33,000 in July, the lowest since the data series began in 1993, according to Bank of England figures released this morning. House prices fell in August for the eleventh consecutive month, according to a separate report from property consultants Hometrack. '

I have, of late, been making less posts than in the past. This is in part because the progress into economic collapse is very much in line with my previous predictions. I am in a situation where I am now just watching the inevitable collapse of the UK economy. The remaining question marks are when it will be that the UK economy will sink far enough to need the support of the IMF, as I predicted some months ago. The UK is structurally bankrupt, and it is just a question of when, not if, the UK will need support. The other question mark is when the next credit crisis will occur, at which time there will be several bank failures.

It is very likely that the current plunge in confidence in the UK economy is the beginning of the end. As I have discusssed elsewhere, confidence is the magic commodity of economics, and loss of confidence is the precursor to the collapse of the banks and the precursor to a 'cap in hand' visit to the IMF.

There are several outstanding questions that I have not yet covered and the state of the Chinese and Indian economies will need to watched carefully, as there is still a question mark over how these will fare in a situation of falling demand for their export of goods and services. In particular, there is potential for unrest in China if Chinese growth stumbles with the fall in Western demand. China is balanced on a knife edge, but I still feel that the Chinese government is in a position to ameliorate the fallout from the damage being done to the OECD economies. However, regular readers will know that I am very cautious on this issue.

The other question that needs some attention will be the supply and price of commodities. The world economy has metaphorically bounced back from the wall of commodity restraints, such that demand will fall back for a while yet. I have, for example, predicted that oil will continue to fall back in price over the next two years (wars and other potential blocks to supply allowing - I add this in light of Russia's recent behaviour). However, the overall trend in demand is going to increase upwards in the coming years, and the question then is at what point we will next hit the commodity wall. My best guess at the moment is that we will hit the wall again in about 3-4 years time. Key in this will be the growth in supply, so this needs to be watched carefully. However, in the current state of adjustment, the world economic system is going to go through a period that may be described as chaotic, such that any such prediction is dangerous (e.g. if China falls into unrest, then what will happen to the economy in China?)

I have several posts that are still outstanding. One of these is a review of UK government spending, another is the position of Japan. However, I would also like to continue with some solutions to the structural problems within the UK. As such, I will try to address the problems of regulation in the UK economy for the next post, provided that there is no compelling news that deflects me from this aim.