The scaremongers selling us short

Anthony Hilton
21 Jan 2009

When one hedge fund manager, Crispin Odey, tells you “the country is bankrupt” and another, the American Jim Rogers, says Britain is finished, you can be sure of one thing — they probably both have a massive short position in sterling, and will profit mightily if they can engineer its fall. It tells you nothing about the true state of the economy or the realistic value of the pound.

There was no fundamental reason for sterling's six-cent plunge against the dollar yesterday, as opposed to any other day in the past month, except that it was a good day to start a panic.

The injection of more money into the banking system and the authorisation given to the Bank of England to engage in quantitative easing — also known as printing money — have been on the cards for weeks, and widely called for by many of those same hedge funds.

But it was on Monday that the news came out, so what better day to try to whip up some hysteria, and see what they might loot from the bodies of those trampled in the panic? This has always been the way in financial markets, in that speculators always fill their boots first, then tell everyone else. But there are two major differences between now and the past.

First, the sums involved are so much greater that the hedge funds know they have the power to overwhelm the resources of a central bank trying to defend the currency, or some normal sensible individual who had a good business reason for being in the markets but has got caught up in the rout. So they have a bit of a one-way bet. Heads they win; tails they don't lose.

Second, a 24-hour media that is much better at producing panicky headlines than reasoned analysis makes it much easier than it used to be for them to whip up a storm. The suggestion that the UK is bankrupt is absurd, other than in the sense that we would all be bankrupt if we were called upon to repay everything we owe tomorrow.

The fact is the UK Government's debt as a proportion of GDP is a lot lower than that of Germany and many other Western countries.

The respected economists at Lombard Street Research argue further that our economic prospects in the short term, while clearly nothing to cheer about, are probably better than those of the big exporters — Germany, China and Japan — who will suffer more than we will from the collapse of world trade. There is even a view that one day before too long the Government risks being accused of profiteering, having bought control of the banks only to find that those toxic assets are not toxic at all — though I am not sure that is a view I subscribe to myself.

Nor is there anything unprecedented in the fall in sterling. In 1981, it stood at $2.45 as North Sea oil began to flow. But in 1985, after four years of Margaret Thatcher's “sado-monetarism” and the recession this caused, the pound touched $1.03. That is a significantly bigger fall than we have seen this time, and we survived. So it may fall further in the next few days under the onslaught of self-interested selling, but in purchasing-parity terms the pound should be around $1.60.

If you want to know where it is likely to be in two to three years, when the speculators have made their profits and gone home, that provides a
benchmark.

What Obama can do for us

It was only to be expected that the more astute of our business leaders would seize the opportunity of President Obama's inauguration to deliver a call for a new phase of co-operation between the US and Europe.

This indeed is what has happened, with 25 industry heavy-hitters as diverse as Andrew Moss at insurance giant Aviva and Sir Martin Sorrell at marketing group WPP joining under the umbrella of Business for New Europe to highlight three themes where the new regime could bring urgently needed new hope.

The first of these is closer economic co-operation between the US and the EU, not just in managing the current crisis but in designing new regulatory structures for the financial system.

Second is trade, and in particular seeking to revive and bring to a successful conclusion the stalled Doha round. The world badly needs a global trade deal, not only to combat the 400 narrowly based bilateral deals but also to provide impetus to help get the global economy moving again.

The third challenge is climate change. Efforts to tackle carbon emissions on a global basis have been thwarted by the dogged resistance of the Bush administration. The contrast with Obama could not be greater. The requirement now is to translate his awareness of the need for such curbs into a coherent global initiative that will deliver tangible reductions within a reasonable time horizon.

Despite the growth of Brazil, Russia, India and China plus the power of the other economies in Asia, the US and the EU still account for 58% of global GDP and 37% of world trade. As Business for New Europe says: “It is a relationship which matters.”