Friday, December 19, 2008

Brown Morphs Into Ramsay MacDonald

It comes to something when economist tell you that the Pound has now suffered its biggest drop since the days of Ramsay MacDonald in 1931. But it is true. In the last year the Pound has dropped by 23% against a basket of currencies. The fall is sharper than...
  • After the 1992 devaluation after Black Wednesday
  • When the IMF was forced to shore up the Pound in 1976
  • The 1949 devaluation

In 1931 the Pound plunged by 24% against the dollar when we abandoned the Gold Standard. Edmund Conway in the Telegraph uses this example as a sign that our downturn might not be as bad as in the US. Leaving the Gold Standard, he says, meant that Britain wasn't hit quite so badly as the USA by the Great Depression. But lest we forget what our Prime Minister said in 1992...

"A weak currency is the sign of a weak economy,
which is the sign of a weak government"
Gordon Brown, 1992

As I wrote on Monday, there are indeed some advantages from a currency falling in value during a recession. But not so much, and not so fast. One of the main complaints business has is when there is currency instability. It means that it's difficult to price your products as you never know what the exchange rate is going to be from one week to the next. A stable currency is almost a prerequisite to economic recovery.

But whatever the merits and demerits of a weak currency are, no one has yet been able top satisfactorily explain how a 23% fall in the value of our currency proves what the Prime Minister constantly says - that we our economy is stronger and better placed than our main competitors to withstand the recession. It's patent nonsense and it's about time he was called to account every time he repeats this tired mantra.

7 comments:

Ruth@VS said...

For small businesses that import this is a disaster. I am currently repricing my stock, and am faced with a dilemma - do I raise my prices above the sterling RRP and recoup the 1/3rd of my profit margin which has disappeared over the last year (not to mention the 1/3rd rise in carriage charges) thus making my prices uncompetitive, or do I stick with the RRP and lose more profit?

While the major businesses have been able to absorb the difference to some extent, I'm not sure even they will be able to hold out much longer, and we will see big price rises in the new year.

The answer for me is to take the loss on popular items and stick with the RRP, while upping the price to match the Euro on the more unusual things which people cannot easily find elsewhere. I still lose money overall though...

graybo said...

Of course, Iain, the logical solution to your comment (entirely valid, I might add, from my perspective as a small business owner) that exchange stability is the prerequisite to economic recovery is surely to tie our currency's value to that of our biggest trading partner. Or, perhaps, to join their currency? Hmm?

Ruth is right. Expect inflation soon, driven by rising input costs.

Ben said...

Economic recovery relies most on confidence. Brown would be negligent if he was not consistently as optimistic and reassuring as possible. Regardless of where the blame lies and regardless of what he thinks privately he has to say these things. I think you know that, really.

Using such statements as a stick to constantly beat him is to be either disingenuous or willfully ignorant.

Andrew said...

Re the Brown quote, here is another one from tonight's Edinburgh Evening News:-

"1988: Beware of a Christmas credit binge.That is the warning from a Scots Labour MP and city organisations as stores get set up for the big spenders this week. Labour's finance spokesman Gordon Brown, MP for Dunfermline East, said shoppers should beware of the misery of festive season debt. He said some families would face hardship in 1989 paying off their Christmas debts."

Changed his tune somewhat since then?

Bond007 said...

"A weak currency is the sign of a weak economy,
which is the sign of a weak government"
Gordon Brown, 1992

... perhaps this should be on one of the Conservatives' posters in the next General Election campaign (alongside the actual % the £ has declined in recent months)

Chris Paul said...

Perhaps you can now explain why this has happened and what if anything it means for me and thee? Some small businesses will have issues with it. But in many case - oil, electricals, clothing - this change in relative values will be reflected in huge falls in the dollar price of the stuff we need, or otherwise tumbling prices will level off.

Nice observation from Graybo. Though I'm not a Euro fanatic I am relaxed about losing the pound and suspect that we'll just end up calling euros "pounds" in the day to day.

Jimmy said...

The current dollar rate is pretty much where its averaged for the last 20 years. Sterling has been massively overvalued in recent years and a correction was overdue. And as others have pointed out, if you don't like fluctuations, there really is only one answer, whcich only one party rules out on ideological grounds.