Why is the pound so weak?

In yesterday’s article, the pound recorded its worst performance against the dollar in 200 years over the past week.

So we’re not just asking:

Now the British economy, why is so bad?

Why is the pound so miserable now?

In fact, there are two reasons:

1) Government fiscal deficit;

2) Import and export trade deficit.

As for Mr. Truss’s tax cuts and the Fed’s rate rises, they are just two stones thrown into the well while the pound fell.

Since the US subprime mortgage crisis of 2007-2008 and the global financial crisis, the UK economy has actually never slowed down.

Since the 2008 financial crisis, in order to rescue financial institutions, coupled with the popular concept of big government, the British government’s fiscal expenditure has increased at a rapid pace, far exceeding the growth rate of income, and running a high deficit year after year, resulting in the continuous accumulation of government debt.

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Data source: Wealth Choice East

The government does not have enough money to spend. It keeps borrowing money and borrowing money.

Britain, on the other hand, has run a trade deficit in imports and exports most of the time since 1999, importing more and exporting less and more recently.

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Data source: Wealth Choice East

In particular, since the end of 2021, as overseas energy and commodity prices have raised, things imported to the UK have become more expensive in general, and the trade deficit has hit a new high. All this is doing is stabbing the British economy.

To put it in popular terms, we earn less and spend more. If the currency is not devalued, then there is no natural reason.

One might say, hasn’t America always been like this?

Every year the government spends far more than it takes in, borrowing and borrowing and borrowing and borrowing and borrowing and borrowing;

Trade has been running a deficit in imports and exports, spending more than it earns every year, and more and more.

Why is the dollar not depreciating, but is still rising?

The answer is simple, the US dollar is the world currency, people want their dollars, there is always buying. More importantly, the US has the largest, deepest and most extensive financial market in the world, 50 trillion US dollars of US stocks, 50 trillion US dollars of US bonds, and a large number of commodities and derivatives transactions, countless people (including many British people) need to change their money into dollars. To gain access to U.S. financial markets On the other hand, the United States is one of the world’s energy exporters, despite soaring energy prices in Europe.

Simply put, the balance of payments consists of two accounts:

Current account: including import and export of goods, labor services, investment income and unilateral transfer of companies;

Capital and finance projects: include capital transfers (investment donations and debt write-offs), purchases and sales of land and intangible assets, direct investment, portfolio investment, international credit, advances, etc.

Although the US runs a huge deficit in goods trade every year, it runs a huge surplus in services, capital and financial items every year. Most of the dollars earned by foreigners are returned to the US financial market. This continued strong buying ensures that the dollar does not depreciate too much.

Britain, can you have such big financial markets?

Can there be such a strong bid for sterling?

In short, the problem with the British economy is that —

No prince princess’s life, but a prince princess’s disease.

The UK economy had not recovered from the financial crisis in 2008, but the pandemic crisis hit again in 2020. The US federal government, however, tried to give money to its people without any courage. Other developed countries had to catch up, and the UK followed suit.

In 2022, the global inflation has started and the outbreak of the Russia-Ukraine war has added fuel to the fire. The prices of various commodities that Britain needs to import have skyrocketed. In order to maintain the appearance of a developed country, British people still insist on buying and buying and buying. Continued to maintain the highest level in history

A castle in the sand all we need is a push.

Data source: Wealth Choice East

Since April 2022, due to rising inflation, the Federal Reserve has started to raise interest rates violently, especially the last three times, all of which were 75 basis points, and the dot plot after the latest Fed rate-setting meeting shows that the benchmark dollar rate will be raised to 4.25% by the end of 2022…

By contrast, on September 22nd the Bank of England made a show of keeping inflation under control but raised interest rates by a stingy 50 basis points. The gap between American and British interest rates was wider than anyone had expected, just as the Truss government unveiled its big tax cuts.

From Treasury bonds to stocks, selling surged.

The value of the pound, of course, suddenly collapsed!

However, if you look at the value of the pound in terms of the spread of government bond yields, it seems to me that the current exchange rate between the pound and the US is way out of line.

At last check, the 10-year UK gilt yield was 3.83% and the 10-year US Treasury yield was 3.69%. The difference between the two is -0.24%. Based on historical data over the past few decades, the gap between the UK and US yields, corresponding to the pound-US exchange rate, should be around 1.3 at its lowest.

Now the pound is at 1.08, which is a bit crazy.

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Data source: Wealth Choice East

What, you ask, is deeply troubling the British economy?

In fact, one word can sum it up:

This is not just a problem in Britain. So is the yen’s recent fall, and because Japan’s government has higher debt, it is less likely to raise interest rates.

Whether it’s Britain or Japan, where government debt is so high, it doesn’t look like much of a problem in an era of zero interest rates until 2022, because everyone has near-zero interest rates. But once the US starts to raise interest rates, the dollar’s interest rates suddenly go up, while your sterling and yen interest rates are still so low, how can you do without devaluation?

Of course, this is not the first time for Britain to face such a problem. Since the end of the Second World War, Britain has been having such a problem. Government spending is too high, debt is too high, and the economy is too weak.

From the end of 1943 to the end of 1947, for example, Britain’s gross debt-to-GDP ratio rose from 250% to 400%, a leverage ratio so high that it would not have been possible to become prime minister if the currency had not been devalued.

 

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