Superficially, the two leading English-speaking financial center countries are pursuing vastly different policies. Yet both the Pound Sterling and the US Dollar are falling fast. This requires an explanation.
To start with our own money, the dollar is off because thanks to the barely credible deal not to engage in competitive devaluations reached by the G20 countries in South Korea over the weekend, foreign currencies manipulators will have to stop buying dollars to push down their currencies. (You cannot devalue your money except against another money, and the dollar is the world’s benchmark money.)
So today’s resumption of price increases for gold and foreign exchange are explained by the Korea deal. It has not much to do with deficit spending, Obamanomics, the forthcoming election, the US recovery or malaise.
Britain’s sinking currency is the obverse of the coin, linked directly to the supposedly virtuous post-election Tory-Liberal coalition government’s decision to cut the state budget sharply despite slow growth to undo years of Labour Party profligacy with benefits financed by taxes. This requires that their central bank (CB), the Bank of England, print money. Monetary policy has to be loose in the current weak British economy because fiscal policy is so tight. Without the printing presses of the Old Lady of Threadneedle Street (where the BoE is HQ’s) Britain will fall into deep recession.
While Britain has (shock, horror) cut family allowance payments for middle-class parents, it has left its National Health Care system budget unscathed. It will start charging students at the UK’s fine but money-losing universities tuition fees (even if they are British; foreigners already have to pay), another shocker. But old-age pensioners will continue to get their Good King Wenceslaus Winter Fuel allowance, no matter how rich they are. The Lord in his damp chilly castle will get it, along with the shivering pensioner in a hovel. Free public transport is also available for those over 60, which my brother-in-law figues is worth about GBP 3000 per year to their household, which also runs a car.
Meanwhile emerging market central bankers face a difficult future as is shown by the premium Israelis are paying to protect themselves against inflation. Israel is a bellwether because it has a full panoply of investments available, with an old capital market.
The strength of the shekel, the Brazilian real, the Thai baht, and other currencies means interest rates cannot be raised because that will produce still more inflows and a still-richer exchange rate. Israelis are paying over 3% for inflation protection over the rate for fixed interest bonds. And indeed inflation is running at about 2.4% annualized in the Jewish state. But the CB, headed by the most experienced CB governor in the world, Stanley Fischer, cannot raise interest rates to fight inflation.
Brazil can’t either, which is why foreign investors are being harrassed by the Lula Administration in its last weeks of power. They are being taxed when they move money into the real market, and then taxed again on profits when they leave. The measures are designed to discourage foreign investors in the Brazilian bond market.
Thailand is also creating disincentives. South Korea, where the IMF held its do, wants to impose a bank tax or a financial transaction tax.
The Israeli dilemma is fed by near-zero interests rates in the USA which encourage inestors to seek higher yields elsewhere.
Globes Israel (website) reports: “Investors think Fischer is in a bind right now due to the appreciation of the shekel, so they are willing to overpay to protect against inflation,” said Assaf Rosenberg, a trader at Excellence Investments Ltd. “It’s going to be hard for him to raise rates rapidly, further strengthening the shekel.”
Such is the confusion in Britain that the sister-in-law of ex-PM Tony Blair, Lauren Booth, has become a Moslem. He converted to Roman Catholicism after leaving office. She now wears a headscarf and has given up drink and bacon, I learn from The Guardian.
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