Sterling this week dipped below $1.40 and one of my US clients who I bill in pounds actually paid his bill BEFORE it was due in case it rallied before he got his invoice. I also have a client who I bill in Euros and that has helped too. But when I tot up all those foreign expenses I have clocked up, I get very depressed - when will the pounding on our pound end?
Just How Bad Is It?
"By jove, you know old boy," said a source close to The Bank of England. "If anyone asks, I wasn't here, ok? No name, no pack drill, eh what? Now this crisis is bad, old boy, very bad voodoo. The Boss is very jumpy about it, says that the joystick is stuck and he can't pull her up, you understand?"
I clarified and he meant that the Governor of The Bank of England was trying to make things happen by lowering Interest Rates and pumping money into the banking system but it was not responding, more plummeting downward like a Flaming Spitfire.
"At first it was just a touch of the old Screaming Habdabs but now the whole thing has progressed to the Financial equivalent of the Ebola virus, old boy," continued my source. "It's eating up the system from within and chewing on it's own organs. How's your liver, by the way? It's an awfully good sauce they do here, you know. Anyway, it's chomping away merrily at dear old Sterling - I mean it was two greenbacks to the pound last Summer and now it's less than 1.40. And it doesn't show a great deal of sign of getting better, old chap. Very bad voodoo."
I pointed out that the Ebola virus is incurable.
"Oh well, His Highness can cure anything, you know," said my Source with a smile and a dismissive wave of the hand. "Old Dumbledore, as we like to call him here, is the best Wizard in the land and when he isn't wearing his Superman pants and flying around saving us, he is locked in his inner chambers with his banking friends and 'Advisers' and working out every new bail out. I think they are already working on version 49, you know. They use a simulator for the economy based on some Sim City program on one of their child's PCs. It's very realistic, you know. Anyway, Dumbledore reckons it works just like Keynesian economics and so he keeps changing the variables to see what happens and that's how he works out each bail out. Clever, what?"
I told the source that I had read recently that when measured against a 'basket' of currencies, Sterling had fallen around a quarter in the last year. This is the largest devaluation in the last century - greater than 1931 when Ramsay MacDonald abandoned the Gold Standard, greater than Black Wednesday and the abandoning of the Exchange Rate Mechanism (the event that all Labour Ministers use as the nadir of Tory economic policies) and worse than 1967 when Harold Wilson went on TV to reassure the nation that 'The pound in your pocket' would not be worth less after that devaluation - which was asking for trouble.
Words Can Come Back To Haunt You
Prophetically, Gordon Brown, had mocked the Tories in 1992 that 'A weak currency arises from a weak economy which in turn is the result of a weak Government.'
"Oh God, don't print that for Heaven's sake," warned my source, dropping a new potato into his beef and ale pie with a gravy splash. "Dumbledore will go nuts and don't put my name anywhere near it or I will get the Alistair Darling treatment after he talked of all that gloom. Dumbledore locked him a dark room and had him thrashed with a wet newspaper containing the article for a day and then did not talk to him for an hour. I couldn't stand that. At least use a riding crop, you know."
"Look here, the strength of Sterling does reflect the wider economic picture, old boy, yes but only sort of. You have to remember that this recession is not of Dumbledore's making - if it hadn't been for that ghastly problem in the United States, sub-prime, you know, then our economy would have ticked along like a Rolex watch, old boy. There was absolutely nothing wrong with it. And this recession is being handled by us much better as our economy is strong, relatively. Now the currency is wilting because of the global downturn not because the economy is weak - you understand that don't you?"
I pointed out that was rubbish - we had an economic boom on the back of inflated house prices and that households had used Mortgage Equity Withdrawal to bolster spending as their disposable income was decreasing - now that equity has collapsed as house prices plummet, the financial system and economy which depended on the upward spiral is imploding. My source dropped his fork and yelped.
I continued that investors were pulling money out of the UK as house prices plummet and unemployment goes over 2m and toward 3m, interest rates are now just 1,5%, the stock market is whirling like a ballroom dancer, we have just reported negative growth in the last quarter officially, and the bank bail outs are having little effect on the economy.
Should We Be Worried?
"Now steady on, old chum," said my source nervously. "You don't want to be repeating any of that, old boy. Heap big voodoo and Dumbledore won't like it, you know. He's very sensitive to criticism, always said that He Whose Name We Cannot Mention used to get all the credit for Dumbledore's work and never got criticised - now he's in the hot seat he's taken all the flak. He likes the Superman thing though, very apt he says."
"The fact is, old boy, the floating pound is our safety valve in a recession. It boosts exports, you know, and that covers invisibles too like financial and professional services - I bet you do better with a low Sterling. Granted manufacturing is only 13% of GDP now and exports well less than that, still it has an effect to help us, old boy. Tourism too, lots of jolly check-pantsed Americans and smiling Japanese folk with expensive cameras coming to London and Frenchies going to Bicester Village, you know - Eurostar couldn't be doing better, old boy. Good old Sterling, they say."
That's all very well, I explained. But it doesn't do much good having a weak currency in a global recession - after all, if no one has the money to buy, they won't no matter what the price. My source looked deflated.
"Look, after the 90s, Dumbledore reckoned that Financial Services was where it was at," said my source in a hushed voice. "Don't say I said it, but billions are being withdrawn from Britain as we speak and the Current Account Deficit has widened big time. Fact is, we have most of our bloody eggs in one basket and by goodness we are finding that out. Dumbledore won't have it that it was his decision to do that but all those nice tax cuts to Private Equity and non-domiciles to keep those big spending types investing in our Financial Markets has blown up in our faces. Secretly, we are all worried about whether The City will be the same again if can't get the confidence back. Somewhere like Frankfurt could really trounce us."
Crisis? What Crisis?
So is this a full blown run on the pound or just a benign devaluation like in 1992?
"Well, old boy, that's hard to say," said my source. "Dumbledore would not let us admit it but it's got very bad, you know. It's the outside world putting two fingers up at our economic policy - you know those wittering oafs at the IMF who say we have been borrowing far too much as a nation for the last 6 years. They are now wading in and saying all this increase in spending and borrowing is not the right plan and they are even rumouring about agencies changing our credit rating like they did 'Singeing the beard of the King of Spain' recently, if they still had one. The second bail out package got everyone spooked, if I'm honest. Until then we could have got away with this being a slight adjustment in Sterling to account for the recession. The second bail out really spooked the markets and made them think Dumbledore was just guessing and didn't know what he was doing - he doesn't like that at all even though it's true. There is even talk amongst some investors of Britain going insolvent - and that's caused more runs on the markets and loads starting selling Government debt - Dumbledore was furious, he took it very personally, you know."
What About Our Credit Ratings?
"Well, by jingo, credit is what it's all about, old boy," cried out my source. "That's what Dumbledore says. OK so the Current Account Deficit is £7.7bn but just because a credit agency says our rating is going down doesn't mean we can't pay. It just means no one will want to lend to us and that's what the problem may be, you know. And Dumbledore doesn't like that sort of talk - so he made Standard & Poor deny the rumours which is almost a sure fire confirmation in my book."
"None of this would have happened if the banks had kept their nerve, you know. Freddy Goodwin is up in front of the Beaks next week and I hope he gets a good caning because he let the lads down. We have almost totally nationalised the whole thing and still we have a nightmare. We pumped £30bn into RBS just a week ago to own 70% and damn me if the thing is worth only £5bn. I mean that was money straight down a drain and there's rumours of some crypt within with the most stinking mess of secrets locked up in it. "
"The issue for us is we can't afford to default on debts and now the Government is responsible for all debts and that's scared the markets. With unemployment going bananas, banks failing and tax revenues falling, our steady line of payments don't look so steady. It looks as if we are going to have to pinch Joe Public for a few extra notes, you know, and God knows we don't have the cash to cover it ourselves. But Dumbledore doesn't like that idea, not with a run up to an election he doesn't want to lose, so the tactic is to park everything for as long as he can and keep the banks going long enough."
The Way The Financial World Really Works
I pointed out to my source that all Brown's Advisers were Investment Bankers - isn't that a conflict of interest? He hunched his shoulder, leaned in and spoke in hushed tomes.
"Let me tell you how the world works, sonny Jim. Dumbledore is advised by bankers because they get the bigger picture - they care about jobs and people as well as Finance. But there is no harm in looking after their own, is there? Just as you would look after your family in a crisis? So Dumbeldore is told by the Advisers a second bail out is needed and part of that is a £30bn equity for debt swap with RBS to increase public shareholding to 70%. It doesn't take a genius to work out it is all but nationalised and the remaining shares are pretty worthless given the form at Northern Rock. So a run on RBS is a fully anticipated outcome. By sheer happenstance, just a few days before the bail out is announced, the ban on shorting shares is lifted. Hey ho, on the day the bail out is announced, sure enough RBS shares take a bath wiping out 67% of their value. And so the City is back in business doing what it does best - making money. You may cynically think that the Advisers are linked to the shorters - don't even think about it. Certainly there is no link that you can find. That's all behind closed doors and muffled conversations, old chum. You may even think highly placed watchdog people who have Non Executive Directorships of Banks and Funds and are paid over the odds for part time work is suspicious. You want a story? There's no story here, my son. Just smoke and mirrors."
Any Glimmer of Hope On The Horizon?
"Remember the old song, old chum," said my source. "There's always a silver lining. If Dumbledore can get the confidence back in the system and lending going like an out-house door in the wind again then we'll soon be on the road back to recovery, mark my words. Then you'll see who is the best Wizard in the land, old boy."
This week, Standard & Poor denied rumours it was going to downgrade its rating on Britain's sovereign debt. After the last bail out, markets reacted badly as Britain lurched toward a nationalisation of banks. So bad was the run on the bank shares that RBS shares fell 67% in a single day valuing the company at just £5bn after a £30bn bail out, the second of its type in less than a few months.
The above interview and the supposed source at the Bank of England is a work of pure fiction. The figures used, however, are all in the public domain as was the news of the lifting of the ban on shorting of shares just days before the announcement of a second bail out. Draw your own conclusions, these are just ones hard to make up.
No comments:
Post a Comment