Why I welcome the collapsing pound

As I write, the FTSE 100 is trading up about thirty points. Has somebody forgotten to tell the markets about the UK’s debt downgrade?

Of course not. The fact is, we all knew the UK government isn’t AAA-rated. As with any other debt, the person borrowing is what determines the credit rating…

And in this case, it’s a government. There isn’t any one person to take responsibility. It was Churchill that said “democracy is the worst form of government, except for all those other forms that have been tried from time to time”! And this is a rather frightening proof of democracy’s failings. The fact that a new set of politicians periodically step up to take responsibility – or pseudo-responsibility – for our nation’s debt is crazy.

It should be perfectly clear to anyone that, without a personal guarantee, no one, least of all the government, should be able to borrow money. If there’s no responsibility, then there’s no accountability.  

Now, we can rant and rave about the shortcomings of our democratic system, but when it comes down to it, we need to be pragmatic. When it comes to your finances, stoicism seems the best philosophical approach.

So let’s see where that gets us…

Why did the FTSE go up?

Ultimately, it seems pretty clear that the government won’t be able to pay its debts – at least not in money that’s worth anything like the same as the stuff it borrowed. The national debt ramps up every year. With baby boomers turning to retirement, public finance initiative projects turning to millstones around our collective necks, and of course, a welfare state creating ever-more needy citizens, the national debt will surely escalate.

It’s a dangerous situation. Compared to the size of our economy, Britain is one of the most heavily indebted countries in the Western world. That’s a fact!

To my mind, quantitative easing (QE) is here to stay – it’s the only way to make the sums work. The minutes of the recent Monetary Policy Committee meeting have just been released, showing that Mervyn King was in favour of more QE. And the incoming chief of the Bank of England is known to be of the same persuasion.

You don’t have to be a great conspiracy theorist to see what’s going on. And that’s the thing. More and more people now see what’s going on. If not through economic erudition, they at least see household bills escalating beyond their ability to pay.

Perversely, I think QE is actually good for the UK’s credit rating. Without it, we would have been downgraded a long time ago. Think about it. This is a rating that says whether or not the UK can pay back its debt. The ability to print sterling clearly makes it more likely that the UK government will meet its obligations.

Let’s not get into the debate about whether receiving dumbed-down money is a good thing. Let’s just say that UK creditors stand a pretty good chance of getting their money back. For us stoics, let’s also bear in mind that, as the Bank of England purchases bonds on the market, this money has to go somewhere. And yes, much of it ends up in stocks and commodities.

QE hurts the value of the pound. But perverse as it may sound, that’s actually good for FTSE. Earnings go up (in nominal sterling terms). Exports go up. Not only that, but with a low pound, our multinational companies are cheaper for foreign investors. As are prime residential Mayfair properties!

The falling pound is good for the FTSE

The point is, we’re living with a flawed system. But as Churchill said, it’s better than any other. Or at least it is for the moment!

Recently, I’ve been talking a lot about our nation’s debt… both privately (household borrowings) and publicly (Osborne’s credit card). The way I see it, we’re accelerating into a great, big debt hole.

Ultimately, the financial system will come crashing down under its own weight of paper promises. But not yet.

For the moment, the explosion in UK borrowing is actually good for the FTSE – and no credit downgrade is going to change that. To balance the books, printing money is almost a requirement. As investors, we must be pragmatic. Stay calm and try to think about where the money flows next.

For sure, we need to keep our eye on the exits. Gold is looking like a very good buy just now. If you have the bottle to buy in when everyone else is losing their nerve, there’s a chance you could do very well.

But over the short-run, I don’t have a great concern about the FTSE. The falling pound is good for it. Today’s rise back towards the 6,400 level is a case in point.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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16 Responses

  1. 25/02/2013, roger shallcross wrote

    thankyou bengt for another clear, concise (and not too doom-laden!) analysis… i read only a select few commentary mails but always yours are relevant and to the point… full marks and many thanks

  2. 25/02/2013, Alan wrote

    Personally, I’m happy to see Britain get it’s just desserts as a whole (I even opted with work to start being paid in another currency last year), but I can’t help but feel the real victims will not be the people who deserve it. I have elderly parents who by having savings and a miners pension are hammered by this crap. The fall in the pound is a symptom of the decline of the nation, but what’s worse is all the liabilities have been transferred to the “little people” by QE and the forcing of pension schemes to buy these falsely overpriced govt bonds.

  3. 25/02/2013, Boris MacDonut wrote

    “great big debt hole”. Great big economy full to the brim with assets at home and overseas. The UK is only in trouble if you wish it to be. Bengt, you cannot believe we have a debt problem? The markets do not think so, so we don’t. Interest payments on the Government debt are less than half what they were in 2008.
    Be careful what you wish for.

  4. 25/02/2013, Peter Kellow wrote

    So as I understand it from this article:

    The FTSE has gone up in value because it is now valued in pounds of lower value. That sounds a lot like it has stayed exactly where it was.

    “Compared to the size of our economy, Britain is one of the most heavily indebted countries in the Western world. “

    We are overdosing on QE but keeping on overdosing is better
    than the alternative – for now.

    Rather than Churchill I would quote Burt Bacharach from Three Wheels on My Wagon. I remind you the last verse goes

    No wheels on my wagon,
    So I’m not rolling along
    The Cherokees captured me
    They look mad, things look bad
    But I’m singing a happy song

  5. 26/02/2013, Anon wrote

    I am surprised MoneyWeek. You usually provide reasonable advice and information for the lay person. However this is a DANGEROUS AND MISLEADING ARTICLE. To say that a falling pound is good for anyone who earns and stores their wealth in pounds is at the least misleading, from an “investment advisor” is wantonly disingenuous.

    It won’t be the FT rising and you know it, it will be the £ falling, which the FT is measured in. A weak currency is never good for a country’s residents. Inflation/debasement are stealth taxes. In supporting a weak £ policy, you are supporting the Govt stealth robbing of all savers in and creditors to the country. The weakening of the pound will be done and for one main reason, to debase and shrink the size of the govt and their cronies debts.

    Poor show MoneyWeek.

  6. 26/02/2013, OXORAM wrote

    I STILL MAINTAIN THAT A LOW POUND REDUCES OUR COMPETITIVENESS BECAUSE OF THE COSTS OF RAW MATERIALS THAT ARE LARGELY IMPORTED. SECONDLY, THE ENGINE ROOM OF OUR ECONOMY IS COMPOSED OF PENSIONERS AND RETIREES WHO ARE NO LONGER ABLE TO SPEND BECAUSE THEY ARE RECEIVING NO INTEREST ON THEIR SAVINGS! WE SHOULD BE AT 2 1/2% AT LEAST!

  7. 26/02/2013, Roger wrote

    For a net importing country, a fast falling currency means a high speed rush to the third world. Should have moved your assets elsewhere, but that will accelerate the decline of the currency, no way out.

  8. 26/02/2013, Banker wrote

    Disgraceful article. The authour is clearly in favour of rewarding the irresponsible at the expense of the prudent. He should join the government (though the cronies would not welcome another mouth there !). The way to readjust the economy is to allow house prices to collpase to reasonable levels this will reduce wage rise pressure for quite some time making UK competetive. Overpriced FTSE is another robbery of young working people. It means that they are getting fewer units per every £1 that they invest into pension. We already had overpriced FTSE 15 years ago above 6000 – and what was next? Poor returns for the subsequent 15 years. I sorry but the standard and rigour of this article is no higher than that of a teenager’s blog.

  9. 26/02/2013, bengt wrote

    Gentlepeople

    I fear some misunderstanding of the concept of stoicism is abundant. Taking a stoic’s approach, I’m merely suggesting that we don’t take an opinion as to the ethics of that which we cannot control.

    To make it clear: I don’t think the current debasement of sterling is a good thing. I merely point out that it is good for the FTSE (all other things being equal). But the unfortunate fact of the matter is that most UK investors, mostly invest in UK investment products.

    I have been encouraging readers to get exposure to markets other than the UK for ages – and icidentally, the FTSE 100 isn’t such a bad place to be – most earnings come from abroard.

    My point is really that we shouldn’t get frightened out of equities just because of a measly credit downgrade.

    Leaving emotion to one side is the best way – at least, that’s what the stoics say.

    Bengt

  10. 27/02/2013, Aduffawol wrote

    Guys I think bengt means don’t close your exposure to fste 100 companies just yet and when you do buy a piece of gold
    Along the way and I would
    That as investment advice wouldn’t you

  11. 27/02/2013, chris wrote

    It’s not good for the FTSE if you cash it in GBP.
    In the same way recent Japan’s rally wasn’t good as the YEN fell similar amount. If anything it’s better than cash in the relevant currency.

    Interestingly though USA market grew too while USD kept strong…

  12. 27/02/2013, HL wrote

    Oh, dear. Why does MoneyWeek publish this muddled man ?

    In his short comment above, he manages to say two conflicting things. First, he says that it is an “unfortunate fact” that UK investors mostly invest in UK investment products. Then, in the very next sentence he says “the FTSE 100 isn’t such a bad place to be – most earnings come from abroad”.

    With that quality of thinking, he will no doubt go far in today’s world.

  13. 28/02/2013, bengt wrote

    ost investors highly exposed to the pound. And maybe rightly so – after all, most saver’s expenditure is also likely to be in sterling.

    All I’m saying is that of the average investor’s allocation, the FTSE 100 part is actually quite well diveresified against the pound.

    I don’t see any great conflict there.

    bengt

  14. 01/03/2013, Dyadco wrote

    There are many different discussions that have taken place around this article (interest rates, pensions, debt etc) but getting back to the FTSE, bengt is correct: if a currency drops (like the pound), exports become cheaper for those countries who buy from us. Businesses therefore get increasing orders which equates to increased jobs and increasing profits.

    Yes, there is the question of rising costs of raw materials, yet when one looks at the current situation, we see the majority of raw materials deflating in price.

    Also, added to that, the real value/profit comes from the human aspect of any product, be it a part for an aircraft, processed foods or obviously, services.

    continues……

  15. 01/03/2013, Dyadco wrote

    …..The low interest rates ARE hurting so many, but higher interest rates will hurt many more.

    The debt situation is totally unsustainable. Yet who in government is saying that we must really cut expenditure? Not token cuts, but massive cuts particularly in social welfare payments and government salaries and pensions.

    Its going to be a rough ride….thats for sure, but there is always opportunity.

  16. 01/03/2013, yeoldeagle wrote

    No Government will eradicate the debt it caused during office.
    The Bank of England should be responsible for a) getting into debt and b) getting out of debt. The Treasury should in fact report to the Bank of England.
    UK debt would be cleared in two years if we came out of the European Union. I believe our 2013 contribution is of the order of 95Billion pounds.
    We need to take financial management of the country away from the politician’s.
    Sincerely Yeoldeagle

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