This does not mean dismissing Bank of America’s analysis, which raises major concerns about the continued credibility of the pound sterling as a reserve currency. The obvious flaws in the Bank of England’s inflation targeting regime have left policymakers in the odious position of having to raise interest rates in a rapidly slowing economy, never a fantastic one. and often symptomatic of a downward spiral of the currency.
As Sharma of Bank of America points out, this makes the Bank’s position markedly different from that of the US Federal Reserve, which raises interest rates in the context of a still strong economy. Rightly or wrongly, there have also been questions about the independence of the Bank of England. Too often it seems a creature of the Government’s need for deficit funding.
But the Bank’s credibility is only half. Since Britain left the European single market, there has been a marked deterioration in the country’s foreign trade position, which reminds us of previous balance of payments crises.
Even a growing trade deficit doesn’t really matter, as long as there are enough capital inflows to finance it. But if these begin to decline, then the currency will have some difficulties.
For much of last year, when there was a general perception that UK assets were undervalued compared to their peers, this was not a big deal. The money came in as needed, and the exchange rate really appreciated a bit.
But this underestimation may have disappeared, and with rising interest rates more or less everywhere, UK assets may have lost some of their comparative appeal.
Global liquidity conditions are deteriorating and, with the normalization of interest rates, net cross-border flows have slowed. With such a large current account deficit, Britain is especially dependent on the “kindness of strangers” and therefore vulnerable to any loss of international confidence.
All of this is true, no doubt. Brexit has made trade with Europe, still the largest foreign market in the UK, more difficult and costly, while the UK government has so far been unable to demonstrate significant economic gains to offset.
The government’s refusal, moreover, to acknowledge that Brexit has played a role in the deterioration of trade only further inflames the situation, making it appear that ministers have their heads buried in the sand.
But this is where it is reasonable to oppose Bank of America’s analysis. It’s all about foreign exchange markets, and looking at the world today, it would be hard for you to find a jurisdiction where things look noticeably better.
Led by an undecided geriatrician, paralyzed by an increasingly dysfunctional political system and shattered by the poison of its cultural wars, the U.S. seems less and less attractive beyond its traditional reserve currency attributes.
The EU? Slowly moving and severely compromised by its 27 moving parts, it is more exposed than to the debilitating effect on the energy prices of the Ukrainian war. In addition, with rising interest rates, the eurozone debt crisis will return sooner than we realize. Spreads are already widening in a worrying way.
As for China, what the hell is the regime doing? Anti-Western rhetoric alone would be enough to deter all but the bravest investors. Add to that the zero-Covid debacle, the crackdown on technology, the education sector, Hong Kong and the Uyghurs, and you will come to the reasonable conclusion that China’s economic miracle is over.
In any case, when it comes to alternatives, the UK does not seem like such a bad place for your money. Witnessing the great overflow of affection for the monarchy, its institutions still seem relatively robust, and while the fiscal position seems precarious, it is by no means out of redemption.
It is true that there is no discernible strategy behind the current chaos of intellectual bankruptcy policy-making, but it seems to be the case more or less everywhere. Can it really be that difficult for a Conservative government to provide the predictable, pragmatically driven political framework that is required for business to thrive? He fixes that, and he would do the same with sterling.