Could the Pound Sterling Be the Canary In the Coal Mine?

Further to my last post about the inevitability of inflation in the U.S. because of the massive fiscal and monetary stimulus, CynicusEconomicus points out that the UK suffers from a similar problem:

[I]n the UK (and the same could be said of the US), there had been no real growth in what I considered to be wealth creating assets over the last ten years which could explain GDP growth; manufacturing, commodity extraction, export of services, and tourism (no net growth).

Instead I pointed to the growth in debt, and asset inflation (real estate) as the source of all of the GDP growth of the last ten years. This debt, in conjunction with the multiplier effect, along with upwards levers such as immigration, created an illusion of growth in wealth. It led to the 'post industrial', 'service economy'. My argument was that this was completely unsustainable, and that a collapse in asset prices would signal a self-reinforcing downward spiral in the economy, driven by a collapse in consumer sentiment (a massive belt tightening) leading to the collapse of the service economy, higher unemployment, more belt tightening and so forth into a downward spiral.

Because virtually all governments around the world are pursuing similar fiscal and monetary policies, it is possible that the USD does not fall against other currencies. Instead, inflationary expectations show up in commodity prices, inflation-indexed bonds and the long end of the yield curve.

When does Mr. Market realize that inflation becomes a problem?

I have no idea. One way would be to watch the Pound Sterling. If the UK suffers from the same problems, then one way that these pressures manifest themselves would be a fall in the GBP, which is not a significant reserve currency the same way the USD is.

Comments

[Moon Kil Woong:]

Good point, the US$ is liable to be one of the last currencies to reflect this because it is closely linked to oil, as in if you want to buy it shell out your greenbacks. Thus as oil prices move up so will the dollar retain some of its leverage versus other currencies.

I agree with you summation. Look at countries with no exportable natural resources for currency weakening. Of course, a simpler way to do it is look at commodity spot prices and commodity futures.

Jan 02 05:06 AM

[hedgeman:]

GBPUSD is a strong buy on daily close above 1.4930. We intend to open an agressive position. We are bearish on DX and EURGBP is out of line according to our analisys. Since interest rates between Eurozone and UK converged basically, 2009 could be a year when EUR adoption becomes a topic for UK again. And in our view Eurozone could not "survive" such terms of trade ("fair value" fix - also in political context would be in the 0.83 - 0.87 area for EURGBP).

Disclosure: Long JPY ag EUR and USD, short EURCHF, short DX, long GC.

Jan 02 05:06 AM

[coolsoupy:]

Well said.
A service economy cannot survive because this type of economy depends on the velocity of the money supply. (Which is virtually stalled at this time.)
What the politicians don't tell you is that they tax the velocity of money. Every time it goes around the circle there is less money because of taxation - city, state and federal levels. Plus a vary small amount goes to savings.

The "talking heads" say we have to get the consumer spending again! To get the economy moving.

Duh!

Jan 02 07:41 AM

[auto44:]

What did Ross Perot say about a giant sucking sound? Those trade agreements that caused almost all of our manufacturing base to leave,also caused our money to leave. There are two types of money pumps. Big companies lke GE used to make things here and sell them all over the world and pump money back here. Our highly thought of shopping malls buy crap from all over the world,mostly china, and pump our money there. It took a lot of time, but what you now see is pretty much irreversible. I belive as the author does that commodities are the only real asset. I would also include real estate in that. All these things must however be purchased at the right time and place as always.

Jan 02 10:28 AM

[secmaven:]

The author suggests that "commodities" will increase in value as the programs which create digital money expand in their scope and application. "Commodities" is a generic term. If we are talking about copper with the inventories sitting in London warehouses at record levels and growing with every report, this commodity cannot be a good investment. When the shareholders of commodity producing companies take action to fire management who want to produce more product only to keep the cash flowing into their paychecks only then will the supply/demand equation favor higher prices for commodities.

Jan 02 11:47 AM

[Ricard:]

It seems another good move would be to buy stocks in places that have the means of production - emerging markets, China, etc.

Jan 02 11:52 AM

[snagglesnarf:]

Good observation. No country wants a strong currency any more
because of the China and Japan export model. All of the world's major currencies are being diluted at the same time.

Jan 02 08:16 PM

[Lilliana:]

Dont sell the Pound Sterling Short..The UK Government has salted away Billions in oil revenue dollars over the last 10 Years.
They didnt built a rich Empire on stupidity and arrogance.
This Empire results can be seen in their numerous City Infastructure and impressive city building structure that will last for another 200 years.

Jan 02 08:20 PM