Nothing to cheer about for sterling

A colleague sent me a chart this week that would warm the heart of anyone with even a tiny holding in gold. It shows the extent to which all of the world’s major currencies have fallen against the gold price since 2001. Pretty much everyone comes out badly. Take a look at it here.

The currencies we all think of as being the strongest out there – the Singapore dollar and the Norwegian krone, for example – are all down over 70% and even the Australian dollar is down 69%. And knocking around the bottom of the chart, just as you might expect, is sterling – down 83% against gold in a mere 12 years.

Some of you will say this is a point devoid of information because gold isn’t a currency. But nothing is a currency unless it is accepted by a critical mass of people as one. And gold is. If it wasn’t, why would there have been such a fuss in the press this week about Germany insisting on moving the gold it holds in France back to Germany?

Why would Germany hold gold as part of its currency reserves at all – why not some other relatively easy to transport and valuable thing? Diamonds, perhaps. Tradition, you will say. Nothing but tradition. I’d say that’s the point. All money is an odd mixture of tradition and faith. We have convinced ourselves that little seven-sided coins made out of a copper and nickel alloy (20p pieces) are money; that bits of paper are money; and that numbers on a computer screen are money. But their value, just like that of gold, is simply a function of our faith in them. I’ve got a pile of bank notes on my desk that aren’t money any more. They look much the same as the ones in my wallet. It is just that being in a variety of defunct African and European currencies, I can’t get anyone to treat them in the same way.

This brings me back to sterling and the 83%. The dollar has done a little worse than us. So has the Mexican peso. But overall there is no escaping our dismal performance. Sadly, I have a feeling we are going to have to get used to it. Markets only have faith in currencies to the extent that they have faith in the countries backing those currencies. Keep that in mind and take a look at the UK. We have a vast national debt we have no good way of paying down. We have a huge deficit (the amount by which the debt rises every year) too. So we are adding £600bn to our debt in five years (2010-15). We should have lost our triple-A credit rating years ago – and this year we probably will.

The truth is that in the UK we have kept ourselves going for decades now by doing little more than expanding our banking system and welfare state beyond reason and selling houses to each other on the side. But now the tide is out, to adapt one of Warren Buffett’s favourite phrases, we can see who is swimming naked. And it is almost all of us.

You can see this most clearly in our nasty current account deficit (the extent to which we import more goods than we export). It is now about 3.5% of gross domestic product. That’s one of the worst in the world. Finally, in the roll call of our inadequacies, we must not forget the quantitative easing we are using to cover for our failing economy – clearly the more new money we create, the less, over the long term each unit of that money will be worth. That doesn’t exactly encourage people to want to hold it.

You might be wondering why sterling hasn’t already completely collapsed. You can put it down to the fact that currencies are what economists like to call a zero sum game – they move relative to each other so they can’t all go down at once. When all countries are in trouble the ones that look worst fall against the ones that look less bad. Sterling fell 20% at the start of the crisis. But before slide turned to crash, Europe took up its position as the worst of the bad and the UK began to look like a port in a storm.

Sterling, says Halkin Services’ Peter Warburton “was the beneficiary of massive cash inflows last year”. That made up for the money we had to pay out for our imports, plus a bit. But if the European crisis is – as it seems to be – “on ice” for the time being; if our new Bank of England governor Mark Carney abandons our inflation target and keeps going with the quantitative easing (which he probably will); and if it is clear interest rates are not going to rise as inflation does, it is, says Warburton, hard to see what can keep this “hot money happy.”

An awful lot of analysts have started this year feeling bearish on the pound. They might not be right immediately – most other countries are having a go at devaluing their currencies too (in the hope that this will make their exports cheaper and boost their economies) so who can know who will win the race to the bottom in the short term? However in the relative world of currencies, sterling – if you think of it as simply a paper representative of the UK economy – looks more likely than most to win in the medium term.

What do you do? Insure yourself by holding gold and a spread of shares in companies that operate outside the UK. And perhaps also do what I am doing this weekend: if you are planning on going on holiday anywhere with an even vaguely decent economy relative to ours this year, book it sooner rather than later.

• This article was first published in the Financial Times

13 Responses

  1. 22/01/2013, MichaelL wrote

    What about other currencies, e.g. NZD, you can reasonable rates on term deposits from the Aussie/Kiwi banks and if anything GBP is likely to drift (slightly downward) against the Kiwi still further??

  2. 22/01/2013, GFL wrote

    I believe governments are trying to tackles today’s problems with yesterday’s solutions, by devaluing their currency to make their produce cheaper. But the real value is in innovation and intellectual property as cutting edge technology can demand an enormous premium. It’s a silly game trying to produce cheap goods cheaper; it just becomes a race to the bottom.

    USA pretty much dominated the IT revolution of the past 30 years; in my opinion the next (even bigger) revolution will be in bio, nano or agri technology – if the UK has no part in this, we will slowly become the Kodak of the western world.

    Government should be doing all it can to make money spend on R&D by UK companies as lucrative as possible!!

  3. 22/01/2013, SuecoBoy wrote

    @GFL, agree indeed.
    and young people in the UK are rushing to become scientists… (NOT).
    UK is the Kodak of Europe. The only difference is that there are enough wealthy people that dont worry about it.
    The Swedish stockmarket will be interesting this year…

  4. 23/01/2013, joeking wrote

    UKs governments idea of innovation is TV license, higer fuel taxes, parking fines, higher taxes. lol Worse is yet to come.

  5. 23/01/2013, Robin wrote

    There is a fallacy in technological innovation in that it replaces labour costs with capital investment. This feeds more money to the capitalist while the workers end up unemployed and can no longer consume what the capitalist provides. The consumer ends up broke and the producer/capitalists income suffers since there is less market out there to purchase the output.

    I’m all for technological innovation as it improves the real quality of life for everyone. But it doesn’t get us out of this ‘cash-flow’ paradox?

    If we find a way to give money to consumers without requiring their labour, they can then choose to reward innovation by spending. This should speed up innovation and economic activity. In other words; rebalance the difference between the rich and poor, this is in everyone’s interest.

    Simply put; the very nature of wealth imbalance is the reason we are in this mess.

  6. 23/01/2013, Dr Dan H. wrote

    There’s a very good reason why gold is chosen as a store of wealth, and not diamond. Gold has a limited supply which will not expand much, and there is also no major sink for gold other than peoples’ bank vaults and gold jewelery.

    Diamond is different. Diamond is crystalised carbon, and carbon is incredibly common stuff; coal mines are full of it. Furthermore diamond has a lot of very useful properties; it is very hard, very strong and is a wonderful conductor of heat. There is therefore a lot of research going on to try to work out how to synthesise diamond in bulk; some Russian inventors are in fact already able to do so on a small scale, and carbon nanotube synthesis is getting better and better.

    At some point in the near future, cheap diamond synthesis will be developed, at which point the de Beer’s cartel will collapse completely, and anyone hoarding diamonds as wealth will looks as silly as tulip bulb hoarders.

  7. 23/01/2013, GFL wrote

    I can’t believe diamonds and other precious stones are still sold at a premium, there are quite a few lab diamonds companies springing up – apparently even most jewellers cannot distinguish between earth and lab diamonds. The impurities are created exactly as nature would, since they are just basically copying what happens to diamonds over thousands of years but in a lab. I’m really surprised these diamonds have not god more attention.

  8. 23/01/2013, GFL wrote

    Anyway back on topic, Robin … you cannot suppress innovation in some futile attempt to keep people in jobs, the reason I used the example of Kodak, is because they were market leaders in digital photography – they tried to suppress the technology eventually went bankrupt as soon as the industry caught up.

    People’s quality of life as improved vastly almost solely due to technological advancement. Most people live in heated homes, with the internet and a fridge full of food. Compare that to only 100 years ago, when 70% of USA (I assume a similar percentage of the UK) used to work in agriculture just to feed themselves.

    People are paying to do manual labour these days, when they go to the gym :)

  9. 24/01/2013, john of Newsham wrote

    Yawn, same old stuff. Can you not think of something new to write. You have been saying this in different order of words for at least five years to my certain knowledge.

  10. 24/01/2013, ardup wrote

    Re Robin 23.01
    I follow your logic but the prospect of sharing any wealth with a population that has already been anaesthetised by its own and state debt don’t seem real world to me.
    The collective debt hanging over all our heads worldwide will bring the house down, its just a matter of time.
    For my money it beggars belief that universally the governments of the world cant practice the the simple maxim of keeping your expenditure in line with your income.
    Simples

  11. 24/01/2013, Banker wrote

    There is a major flaw in your ill thought theory. As production is automated workers need not go unemployed. Have you tried to hire someone to cut a hedge recently? These cowboys demand £500-£1000 for a day’s work while 100 years ago you would have no problem finding someone to do it for the equivalent of £50 today – in fact you would have a queu. As technology advances there will still be a demand for manual labour even with minimal skills. The sort of outcome you are forcasting would only apply if Artificial Intelligence comparable to that of humans could be developed. Should this happen capital rich will not be concerned about falling demand from the not-haves. There machines will be able to produce eveything they need and they will not need to sell anything to have-nots.

  12. 24/01/2013, Little Mo wrote

    The problem we have are the artificially low interest rates, which is pushing cash into the stock market and property driving these up to artifically high values like back in the days when Greenspan cut rates and created the US property bubble – how long before the stock markets crash – its now like a feeding frenzy as persons dive out of cash due to low rates – the elderly reliant on interest suffer and those who should be saving for retirement gambe instead – the stinulus should be at industries creating jobs and exports, but its not, its throwing cash into the market and believing reports drafted to drive currencies up and down to help the money traders win on the way up and on the way down . Just wait there will soon be news released to drive down the Euro so traders can make money – then news to drive it up – just as the GBP is driven up and down – who do we believe ?

  13. 25/01/2013, Joshua Lee wrote

    The GBP will have to remain weak as long as the EURO is weaker. Thank you Merryn for your comments. The markets will turn on the pound once Europe gets its act together. The USA will lead once again. The UK will follow closely behind. Its time to get our hands dirty and get extra work to save plus pay down debt.

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