Number crunching worthy of depression

Jan 22 2009 by Peter Jackson, The Journal

I'M not able to predict exchange rate movements and I don’t think many other people are either. If I was, I’d be sitting with a long cool drink somewhere hot; somewhere Gordon Brown’s not prime minister of.

But I can see that at the moment, it’s not looking too good for sterling.

As I write, the pound has fallen below US$1.40, its lowest level since 2001, and bear in mind that only last summer you got US$2 to the pound.

There is also growing speculation that the UK’s credit rating will be downgraded because the Government cannot afford its latest bank bail-out plans. Ominously, markets now rate the debt from some blue-chip companies as being safer than UK Government debt.

Add to that – if you’re not depressed enough – the fact that the US$4 trillion of foreign liabilities accumulated by British banks is twice the size of the British economy.

Certainly George Soros’s co-founder of the Quantum fund, Jim Rogers, has little doubt what it all means. “I would urge you to sell any sterling you might have. It’s finished. I hate to say it, but I would not put any money in the UK,” he said. Gulp. Apart from that, everything’s all right though, is it, Jim?

I can’t help feeling, though, that we – and sterling – are caught in the backwash of the Obama effect. The US and the rest of the world are so euphoric about the election of the first black President that they have forgotten what a basket case of an economy he is going to preside over.

Ben Bernanke, chairman of the Federal Reserve, is a world authority on the Great Depression. He is “determined” not to repeat the same mistakes; he is committed to huge currency creation to head off deflation and, my goodness me, has he been creating dollars.

The markets have also yet to appreciate fully the problems of some eurozone countries such as Ireland, Spain, Italy and Greece. Once they do, the euro could also head south.

The problem is, exchange rates are a zero sum game and somebody has to be weakest. At the moment, it looks like us. Let’s hope it doesn’t stay that way.

Peter Jackson is a freelance writer and former business editor of The Journal – p.jackson77@btinternet.com