Is there an even bigger fall in the pound coming?

Interesting blog here on a mechanism whereby the pound could be forced even lower:

    The fall in global reserve growth will cut into central bank demand for pounds no matter what. Countries like India that have long had a higher pound share are no longer adding to their reserves. Russia also liked the pound and its reserves are falling. If other central banks don’t buy pounds (and sell other currencies) as the pound falls to maintain the pound share of their portfolios, one big source of support for the pound will wither away.

Furthermore the consequences may not be good:

    And while low policy rates have, so far, been good for the dollar, they haven’t been good for the pound. Specializing in finance no longer seems like the sure path to national riches. Private demand for pounds has fallen even more rapidly than central bank demand. Equilibrium in the market will only be restored when the pound falls enough to make pound-denominated assets a bargain — and when the current account deficit contracts enough to reduce the UK’s borrowing need.

    Neither is pleasant.

How low could the pound go, and what are the consequences? The question on whether it moves the UK closer to the Euro has been asked before, but I’ll put it slightly differently — is there a point whereby the collapse of the value of the pound effectively forces the decision? Any guesses on what that point might be?

  • Oilifear

    Jim Rogers says the “UK is finished” and has “nothing to sell“. He would “urge you to sell any sterling you might have.

  • Modernist

    I personally think allowing bankrupt countries enter the euro would be a big mistake. Fair enough if they want to peg their currency or the general population adopts the euro but giving them the right to mint and print euro would be a big mistake. Its bad enough inside the eurozone as it is without adding anymore possible basket cases. One idea I dont hear mentioned alot but I have heard David McWilliams mention (see )is countries printing money. Printing excessive amounts of say dollars would devalue the currency. If the euro and dollar adopted a similar strategy at the same time it might be a way of devalueing the value of global debt through massive inflation. I think Japan tried and failed to do something similar in the 90s. If it was done at the same time not only could it possibly help all those individuals with massive loans but it could also be a way of the US giving the two fingers to the Chinese and their massive reserves of US dollars . Just an idea I had. Its probably completely flawed . Has anyone else got any other good ideas?

  • Dave

    The UK won’t join the Euro. It has seen its currency rise and fall many times before and knows that is what currencies are supposed to do. It won’t be panicked by the hysterical cries of nervous Nellies whose nerves can’t stand the strain of monetary rollercoaster rides or by the high-pitched squeals from Euro-Federalists that are motivated by political agendas that masquerade as economic rationales.

    Joining the Eurozone would not have prevented the problems in the UK banks from occurring. In fact, those problems would have been worse since interest rates were set at lower rates by the ECB than they were set at by the Bank of England. In addition, the EU was in recession before the UK. As Ireland and Spain discovered to their considerable cost, economies that are growing fast need higher interest rates to control inflationary pressures. Because neither could control their interest rates, neither could stop their economies from overheating. Bubbles, boom, and bust. Regarding UK exporters and manufacturers, a devalued pound is very welcome indeed. Irish exporters are being wiped out by an overvalued Euro.

    The UK has been here before as Daniel Hannan aptly observed:

    [i]It gives me no pleasure to say this, but the sterling crisis is a market comment on eleven-and-a-half years of Labour profligacy. The Broon, to borrow John Smith’s phrase after Black Wednesday, is “the devalued prime minister of a devalued government”.

    If the ERM taught us anything, it is that there is no such thing as a permanently correct exchange rate. After Black Wednesday (or, rather, White Wednesday), Europhiles toured the studios telling anyone who would listen that “we joined at the wrong rate”. But the idea that 3 DM to the pound was too high a rate is hard to reconcile with it having been too low a rate two years before; and, sure enough, we had reached that rate again within five years.

    The Hutton/Rudd arguments for joining the euro are terrifyingly similar to the arguments for joining the ERM. Then, as now, Europhiles claimed that membership would boost business. In fact, more than 100,000 firms went bankrupt during our 23 months inside the system. Then, as now, they promised that membership would create jobs. In fact, unemployment doubled to just under three million. Then, as now, they claimed that it would bring lower interest rates. But interest rates were in double figures for most of our time in the ERM – despite inflation at barely three per cent – and 1.75 million homes were overtaken by negative equity. Then, as now, they assured us that participation would bring stability. In the event, our trade-weighted exchange rate was less stable during membership than before or since.

    Is there any circumstance in which these zealots would not advocate euro membership? If the pound bounces back in 2010 on the basis of a recovery, will they still be whistling the same old tune? How many times do they need to be proved wrong before we stop listening?[/i]

  • USA

    The British pound is totally exposed. It’s going down the tubes, enjoy the ride.

  • Barnshee

    Devaluation is the british way out –has been for more years than I care to remember. (I recall a rate of $5 to the pound.)

    Devaluation beggars foreign investors. Foreign investors in UK assets have suffered a double whammy with the collapse of asset prices the decline in sterling reducing values by 50% or more -and this is just the beginning.

    Perfidious albion. As Harold Wilson nearly said – “the pound in you pocket has not been devalued just don`t go abroad for a holiday and don`t import anything”

  • Glencoppagagh

    Eventually the falling pound will cause inflation to accelerate — the dreaded deflation avoided — at which point the BoE starts raising rates and sterling starts to recover if it has not already done so in anticipation.
    “I recall a rate of $5 to the pound”
    Are you joining us from the beyond, Barnshee?

  • Brian Walker

    Some people of course relish the fall of the pound out of bigotry but leaving them aside…
    With the UK recession now official, the indicators aren’t good., see e.g the Guardian story..

    “The UK economy contracted by a worse-than-expected 1.5% between October and December from the previous quarter, beating the quarterly declines seen during the 1990s recession, figures from the Office for National Statistics showed today. This followed a 0.6% slump in the third quarter. Nick Kounis at Fortis said: “This report confirms that the economy is in deep recession and adds to the case for further aggressive Bank of England policy easing. The probability that the central bank will need to turn to a quantitative easing policy is rising.”

    The City had expected the economy to shrink by 1.2% in the fourth quarter. Over the whole of last year, the economy expanded by just 0.7% – the weakest since 1992.

    The pound hit a 23-year low of $1.3595 after the figures were released.”

    For me, here’s the simple upside from an FT story..

    “…. at the heart of Sir Andrew’s confidence is the fall in sterling. “The most important benefit is that our exports are more competitive and we are continuing to attract inward investment as [UK] assets are cheaper to buy.”

    But a cheap pound has so far failed to make an impact on exports because other countries can’t afford to buy..

    The heavily qualified upside is well put by Camilla Cavendish in the Times – that the government have undersold the second rescue package and urgently need to disclose the extent of the liabilities.

    “The result is that instead of welcoming the Treasury’s huge new “asset protection” insurance scheme, which will insure banks against the worst losses, the market fears that this insurance will be made prohibitively expensive by politicians bent on revenge. The Government’s refusal to announce the details of the scheme until the end of February – five whole weeks away – has created a dangerous vacuum filled by fear. The insurance scheme is the right answer to restore stability. The details are genuinely tricky to work out. But they need to be made clear next week, not next month.”

    There’s something in this, I think. Gordon Brown tried to boost confidence on the Today programme this morning, dismissing the notorious Jim Rogers “sterling is finished “ comments as the self-interest of speculators” and insisting that they key to a solution lay in the international response at the G20 meeting in London an April 2. In this atmosphere, that means quite a long wait for an uncertain outcome.

    On that Big Picture, Will Hutton put the key issues in a seminal article in the New Statesman.

    “Who, after a generation in which the only thinking permitted has been that which promotes markets, has even a semi-workable scheme to propose on currencies and banks?”

    Hutton argues for a publicly owned “reconstruction bank” rather than full nationalisation.

    And the black downside? The IMF haven’t got enough money to cover a UK loan, so looming are swingeing pubic spending cuts including pay along mooted Irish lines and higher interest rates, all meaning much higher unemployment. But somehow, given the plus side of plenty of real assets,low interest rates and the benefit side of a low pound, panic should be contained.

    I’m no expert, but haven’t we learned the hard lesson, not to take our cue from the money markets?

  • kensei


    “…. at the heart of Sir Andrew’s confidence is the fall in sterling. “The most important benefit is that our exports are more competitive and we are continuing to attract inward investment as [UK] assets are cheaper to buy.”

    It simultaneously makes any debts in foreign currency more expense. I’m not sure how much the UK has, but I’d guess it might hurt. And if we end up with a run which is not entirely outside the bounds of imagination I can’t imagine the consequences will be good.

    Hutton argues for a publicly owned “reconstruction bank” rather than full nationalisation.

    Do not buy this for a second. If the government is buying all those assets for a bad bank, there are two options:

    1. It pays the banks the true value of the assets, in which case the banks are possibly insolvent, definitely in trouble and the system remains screwed.
    2. It pays above market value, in which case the banks are fine but the taxpayer takes a huge risk.

    No, we should nationalise the banks, give all the shareholders and huge haircut, then move the toxic assets somewhere to be managed at market value. Then we can sell off the clean banks and recoup some of our outlay.

  • Greenflag

    kensei ,

    ‘Any guesses on what that point might be? ‘

    When the pound sterling buys one US dollar I’d guess. Devaluing the pound to hope to make an impact on exports may have made some short term sense back in the 1970’s . In a world wide recession with all major consumer countries cutting their ‘expenditure all that devaluation will mean is that ‘foreigners’ will be able to buy more of Britain than ever before 😉

    The ‘ Offshore island for sale ‘ notices have not yet gone up .

  • Greenflag

    Brian walker ,

    ‘Some people of course relish the fall of the pound out of bigotry’

    I don’t think so . The pound is piece of paper not a religion . Football is a religion . At least if you’re British 😉

    In these days of common hardship and uncertain times across these islands and the rest of the Anglosphere and the developed world we remember the ‘paraphrased words’ of Irish poet Louis MacNiece .

    ‘The pound is falling hour by hour
    The pound will fall forever
    But if you break the bloody pound
    It won’t hold up the weather ‘

    Stiff uppers lads what what and even tighter you know whats . A rough ride ahead in stormy waters .

    But when the storms recede yes those dreary grey steeples of Fermanagh will still be there!

  • Glencoppagagh

    Do you actually know what the ‘toxic’ assets are?
    Do they include bog standard mortgages at risk of default or just more complex securitised instruments that the banks are holding?
    “move the toxic assets somewhere to be managed at market value”
    The problem is that there is no market value for many of these assets. It would be more a case of holding them to maturity and hoping for the best.

  • Glencoppagagh

    You’re back Greenflag.
    You’ve obviously recovered from the depression induced by that little rally in sterling up to €1.12.
    Above or below partiy in a year’s time? How much would you put on it?

  • David

    It is depressing to see the standard unionist vs nationalist divide being repackaged and refought in a contest over whether the British or Irish economy is more f****k and over the sterling vs euro issue in the UK.

    The world economy is collapsing and the main issue that most commentators here seem to be concerned about is whether it the’muns more than us….

  • Harry Flashman

    Why do we only ever talk about “devaluation” of a currency? Currencies rise and fall all the time, it’s a bit like when the news reports breathlessly that “Five billion pounds was wiped off the value of the stock market today”, yet curiously never tell us when billions are added on to the value of the stock market.

    If the pound is a bad buy today it will go down in value, equally when investors think it is a good buy it will go up again, that’s how the market works. Right now the UK economy is in a mess so understandably the UK currency is valued very low, if and when the UK gets its act together the value of the pound will rise again. Only last year it was $2 to the pound, why is everyone so certain that the pound will not recover again?

    The pound has gone up and down against the dollar for decades, just as has the price of oil, gold, jet aircraft, chick peas and pork bellies, that’s how the market works. For those of you who bemoan the days when a pound bought you four dollars could I kindly point out that in those days the average British worker lived in a hovel and spent fourteen hours a day digging out coal a mile under the ground, if that’s what people want to return to then by all means tell us now.

    You cannot fix the price of anything, the price of something is what someone else will pay for it, the Euro does not signify stability it constitutes a fixed market.

    Fixed markets ultimately fail.

  • PaddyReilly

    When a government devalues its currency by 20%, it commits its people to selling their products abroad for 80% of what they sold for before. If we lived in a 3rd World country and sold only bananas, this might be possible. However in our society, the cost of the product may derive partially or wholly from fuel costs and resold elements which originate in other countries which have not devalued.

    Thus such an action will cause bankruptcy among businesses, and ultimately have no effect, because everyone will put their prices back up to what they were before, sometimes out of necessity, sometimes merely from greed.

    What needs to be done is to force prices downwards by other mechanisms than devaluation, principally by attacking the housing bubble, a scam by which people pay themselves ever huger amounts of money for assets, which in a rational world, can be seen to be depreciating in value in the same way as cars and computers do.

  • Mack


    “Printing” excess money is generally a very bad idea (the money supply does need to increase every year in fractional reserve system though). The one time it is acceptable is when deflation threatens the system.

    We operate in a fractional reserve world. This allows banks to lend out a proportion of the money they have on deposit – this money then gets spent, and deposited again in someone elses account, while the original deposit still exists, and then lent out again. Effectively money gets multiplied as debt and deposits. As long as everyone can meet the repayments on their loans the system works. If debtors can’t repay creditors, under this system, money is destroyed. The creditors deposits along the chain become worthless. Less money in the system increases the burden of repaying debts for other debtors (generally less money = less nominal profits, lower nominal wages, lower nominal prices. more money the opposite.) – increasing the likelihood that they will default creating a deflationary spiral. You end up with a situation where ever smaller debts are threatened, each debt becoming an ever tightening noose around the neck of it’s owner.

    When threatened with debt deflation, governments will try printing money – using the new money to purchase assets such as their own bonds. In normal times this could lead to hyper inflation. In a deflationary environment, even printing is not guaranteed to work. In Japan, once the excess money ended up in bank deposits it was hoarded rather than leant out. With deflationary expectations few wanted to kit themselves out with their own ever tightening noose.

    The Central Banks across the world are likely to be printing money (Quantitive Easing) at a ferocious rate at the minute. The UK recently changed the law so that the government does not have to inform the public of any QE measures taken.

    Also see Ben Bernanke – “Deflation Making Sure It Doesn’t Happen Here”

    There is a reason he got the job I think…

  • kensei


    Normally the assets discussed are CDO, typically based on the subprime mortgages though I am unsure what eactly we’ve widened to at this point.

    Holding to maturity is possible but not necesarily the course taht will be followed. In the short term these are illuquid and have unknown value. Over time, we may move to a situation where mor eis known, people are better off and willing to take on some more risks whereby they become tradable again.


    There is not a perfect market in currency. Governments can and do intervene to prop them up, sometimes successfully, sometimes not so. More to their point, their policy choces can have a big impact. I think when discussing devaluation here, we mean the government is pursuing policies it knows will have significant downward pressure on Sterling.

    Yes, the markets fluctuate, sometimes largely. We are still within historical norms. Further pressure might push the currency outside that. That might causeserious short term damage, and in the long term where Sterling might recover we are all dead. Furthermore, there is a possibility of a run and tipping points being reached. currency markets fluctatue, but currencies can and do die too.

  • Mack

    This article from Stephen King managing director of economics at HSBC in 2004 – is relevant

    In it he argues that North Sea Oil strengthened Sterling at the expense of finishing of the UKs manufacturing base. Now the Oil is running out he predicts a weaker currency. He suggests the weaker currency may benefit what remains of UK manufacturing. I am completely unaware of any British made manufactured products in my possession.


    Jim Rogers debating on Bloomberg. Rogers, Choudhry, Abberley Discuss U.K. Debt, Pound&clipSRC=mms://

    Thought he was quite good.

    Mr Choudhry suggests that exporting Pop music and Rolls Royce manufacturing could replace the decimated City and falling North Sea Oil Reserves. Jim doesn’t it buy – and after googling for some figures, neither do I.

  • Mack

    Harry Flashman

    Blue line jumps 11%, everyone excited

    Seriously though it’s a matter of debate whether or not this is just a question of market volatility. Successful stocks do well, and as an investor you want to invest in the winners at the right price. The share price of failed companies trend towards zero.

    Gordon Brown is piling up a mamoth debt mountain. British economists I’ve seen talking about this are blasse.
    “We won’t default, we can always run the printing press” – I heard one say today. Well, they are running the printing press – but that might be a cure for deflation, but is not a cure for systemic insolvency.. If the markets catch wind of that the UK is only able to pay it’s debts by printing – appetite for UK bonds will evapourate.

    Or to put it another way (in extremis) , I hear Zimbabwe’s currency isn’t doing too well.

  • Harry Flashman

    “I hear Zimbabwe’s currency isn’t doing too well.”

    Indeed and if the long term policy of British governments for the next forty years was simply to keep devaluing the currency then that would certainly be a cause for huge alarm.

    However that is not what is being done here, the UK economy has got itself into some pretty serious trouble, we can argue about why and how until the cows come home but that is not what is important now. What is important is how we get out of this mess and if this involves some short term inflationary measures which result in a period of low value for the currency then so be it, unless anybody else has any better ideas. When the crisis is past then that is the time to rebuild and hopefully revalue the currency back up again, in much the same way as a business in lean times sometimes has to call a big sale and offer discounts to get cash flowing again with the full intention of reestablishing higher prices again a few months down the road.

    My main contention is this automatic assumption that because sterling is cheap today that it will forever and ever amen be cheap in the future, that’s not how markets work. At the end of the day we’re talking about the United Kingdom, not Burkino Faso, there is inherent value in the bloody place, it might be looking a bit cheap now but for heaven’s sake do you think that that’s the end? From here until death do us part the UK will be a wet, grey version of Zimbabwe?

    Come on folks catch a grip, we’re going through a rough patch undoubtedly but any idea that the UK is some sort of third world basket case is well wide of the mark and anyone who believes otherwise is free to contact me and I will be happy to take over all their sterling assets at a generous 40% of current valuation, just to get it off your hands as it were, it’s killing me offering so much but I’m feeling generous today, know what I mean?

  • Greenflag

    Glencoppagh ,

    ‘You’ve obviously recovered from the depression induced by that little rally in sterling up to €1.12.’

    True I make some money when the pound sinks 🙂
    And btw I told yiz several weeks back to sell your pounds 😉 Nothing wrong with being ‘patriotic ‘ and all that, but not at the cost of losing money ?

    ‘Above or below parity in a year’s time? How much would you put on it? ‘

    Alas my crystal ball has clouded up to such an extent that all I can see is a dark hued new american president throwing billions of dollars at the american economy beneath the clouds in the hope that some of this ‘paper ‘ will catch fire and ignite a world recovery . In all of this Britain and Ireland are mere ‘bit ‘ players and await like others the fall out from the return of Mr Con F Dense to the world economy.

    A week is a long time in politics they say . In this ‘economy’ you might want to reduce that to an ‘hour ‘. Parity would not surprise me in a year neither would 1.20 .

    Could a decline in the pounds value reach a tipping point beyond which all bets are off ?
    I hope not . As Harry says above there has always been volatility which is true but as Kensei says currencies do ‘die ‘ when they no longer can be relied on to hold ‘value ‘ or are inappropriate for world trading conditions . Best for a country to make that decision on it’s currency ‘future ‘ when there is less ‘upheaval’ than at present .

  • Kensei


    My main contention is this automatic assumption that because sterling is cheap today that it will forever and ever amen be cheap in the future, that’s not how markets work.

    That isn’t the assumption, except by you. the worry is that it drops so low that it causes somethign irrevesible or severely damaging to happen.

    At the end of the day we’re talking about the United Kingdom, not Burkino Faso, there is inherent value in the bloody place, it might be looking a bit cheap now but for heaven’s sake do you think that that’s the end? From here until death do us part the UK will be a wet, grey version of Zimbabwe?

    I mean, this Lehman Brothers / Bear Stearns / HBOS etc. They still have huge assets and good people! They have to recover before they die!

  • Mack

    Good article on this in the English Telegraph

    What’s really wrong with Sterling?

  • Brian Walker

    As far as I understand it, I think the idea of a “bad bank” is to acquire the toxic assets for zero, park them, then sell them as they begin to accrue value, hopefully allowing the banks which have divested them to get with doing banking business, thus beginning the process of easing the pressure on the currency. That fits I think with the Telegraph article above.

  • Greenflag

    mack ,

    Excellent article by Conway . It’s all there including the longer term hope for ‘revival’ based on the need for trust .

    In the period 1932 through 1939 German economic policy was based on massive public spending and borrowing and they achieved full employment by 1939 (46,000 ) as opposed to 4 million in 1930 by the ‘printing of money’ process . They avoided hyper inflation in fact they both increased productivity and real incomes . When Hitler was asked by people how could he keep prices down his reply was of the order ‘stormtroopers with bricks and bats ‘ . It worked but by 1939 the international value of the mark was faltering and the only way Germany could get or purchase the essential raw materials to keep it’s economy going and maintain it’s rearmament drive was by ‘war ‘

    Now just who can Britain or for that matter the USA go to war against in 2009 ;)That route has already been tried since 2003 with less than expected benefits ;(?

  • Neil

    This is all fascinating, and I’ve only really started paying attention to this kind of thing due to recent events, so am probably flawed in my thinking but here goes.

    This article suggests that the Euro zone isn’t going to do too well in the medium term now either. Now surely sterling’s strength (mostly) has to be measured against the Euro and the US dollar, primarily at least.

    Now the Americans and Eurozone countries are doing better than ourselves at the minute, but the pound seems to be undervalued. That coupled with eurozone pain, further ECB interest cuts, and their own recession is likely to drive the Euro down against sterling, and (due to undervaluation) sterling should be pushed up against the euro.

    The other point that seems pertinent is that this recession has been sparked by unprecedented factors, and as a recession is the first of it’s kind. The general consensus seems to be that a further four quarters should see signs of recovery, and I feel that many news outlets know bad news sells papers and as such the most negative possible interpretation is generally used.

    Finally, northern Ireland is becoming a more attractive place to do business. I work for an American software firm in Belfast here, and at the minute we’re placed well for further business coming in from the states. Our wages are dropping in dollar terms all the time, while our workforce is generally skilled, and increasingly there is a large pool of people looking for work. Our exports should also be much more attractive to the eurozone and the US. So in summary I would say that things are nowhere near as dire as certain media outlets would like us to believe.

  • Kensei


    As far as I understand it, I think the idea of a “bad bank” is to acquire the toxic assets for zero,

    For 0? See scenario 1 — if the second bailout is really a bailout, then in that case the banks are still under water. If the banks are not insolvent in this instance, then why don’t banks simply value the investments as 0? Why would they hand them over to the governemnt, who would then get any money if they turn out to be worth less than 0?

    This has horrendus idea all over it. I suspect we are heading to the point where the only reason not to short term nationalise are political.

  • Kensei


    The Dollar and to some extent the Euro are reserve currencies; they can take more pain. The pound isn’t and maybe can’t.

  • Mack


    The general consensus seems to be that a further four quarters should see signs of recovery

    Beware the general consensus and the average economist / politician’s crystal ball. 18 months ago the general consensus was “The boom is getting boomer”, to steal a quote from our ex-esteemed ex-leader in the south (yes, both ex-es).

    You are probably more likely to keep your job now, than you were a few months ago. The recent rise of the Dollar against the Euro has probably spared the hatchet from falling on many jobs south of the border too.

    The other point that seems pertinent is that this recession has been sparked by unprecedented factors, and as a recession is the first of it’s kind

    hmmm… Unrestrained lending leading to credit bubble and a bubble in asset prices which when burst revealed large numbers of large banks to be insolvent? The circumstances probably weren’t even unprecendented in 1929. We don’t learn from history 🙁
    (On that point it is so depressing to hear the property market shills on the tv talk of recovery then house prices booming again in a few years, have these gombeen men and women learnt nothing??).

    Our exports should also be much more attractive to the eurozone and the US

    Not if they’ve no money to buy, or other countries are selling similar products and services for even lower prices (huge excess capacity in Asia right now, huge demand destruction in the West). Depends what you are selling, what does Northern Ireland export?

  • Mack


    That article is significantly out of date (desite being less than 10 days old). Sterling is now at 94p per €1 (or £1 is €1.06).

    Up to date FX rates at a glance..

  • George

    on the toxic bank, there is talk of Anglo-Irish being used for just that. It would become a dumping ground for all the toxic debt in the other Irish banks and yes, it would simply be written over to Anglo-Irish for zero and left to fester there.

    As for the UK, I would be worried about the external debt issue. I have heard varying figures being thrown around, each scarier than the other.
    One is 400% of the the country’s GDP, another is 800 trillion dollars.

    Either way, all of the figures show the UK with far more external debt as a percentage of GDP than any other industrialised country. Big problem with a tanking currency.

    Also, when it comes to devaluation in these times, there seems to be a very thin line between ordered reduction and panic selling.

    When an sloppy editorial comment on RTE about the IMF causes the euro to drop by a cent almost immediately, you know fear is everywhere.

  • George

    Oops, 8 trillion, now 800 trillion would be scary…

  • Modernist

    Most people dont have a clue how the fractional reserve system works. I know I don’t fully understand it and how it relates to government bonds and printing money. I also know every graduate from university who studied business, marketing, accountancy etc. I have asked doesnt understand how the system works. How the hell is the business system meant to work if those educated in business to degree level don’t have the foggiest as to how it all works.

  • Greenflag

    modernist ,

    ‘How the hell is the business system meant to work if those educated in business to degree level don’t have the foggiest as to how it all works. ‘

    Don’t go looking in the USA Senate or House of Representatives or the House of Commons or the Dail either 🙁

    The former two have been ‘singing’ in the rain since the 1980’s and playing ostrich whereas the latter two have assumed that the former two knew what they were doing .

    Cows, bulls and calves but lemmings one and all 🙁

    Rumour has it that one distinguished US Senator who was quoted as saying the ‘economy ‘ is fundamentally sound a couple of months before his name appeared on the Presidential ballot was asked after the Lehman’s debacle what a CDO (collectivised debt obligation) was and his reply was

    ‘Is’nt that a kinda dyslexic fish ‘ ;(

  • Modernist

    I agree Greenflag. But in my experience I have yet to come across someone qualified with a business/ marketing degree or indeed an accountant….Ive even asked an actuary to explain how money works. None of them know. Nevermind the mindless politicians as David McWilliams recently pointed out who don’t even understand basic economics. Until the people Ive mentioned actually know the basics of what is going on theres no real hope of this financial crisis being sorted anytime soon. Can people imagine a doctor or a pharmacist not knowing how the medicines they prescribe and dispense work. Thats the situation we’re in now I believe

  • Greenflag

    modernist ,

    ‘Thats the situation we’re now in I believe ‘

    That’s the situation we’ve always been in 😉 It’s just that present worldwide circumstances are concentrating the minds of every economist and finance minister around the world in the same manner as the mind of a convicted murderer who has a rope tightened around his neck 😉

    Economics is not a science despite all pretensions . There are of course the fundamentals of supply and demand -interest rates -inflation -currency stability -comparative growth rates -gdp gnp etc etc etc . But at the end of the day it’s also about human psychology , greed in some cases , profligate governments and politicians and the understandable desire for all those aboard the happy ship Titanic to carry on partying despite the sighting of a possible iceberg .

    The whole economic edifice is built upon trust which of course comes down to trust in the value of the medium of exchange be it dollars , euros, pounds or sea shells 🙂 When Mr Con F Dense leaves the market place all of the above human and psychological factors come into play and can wreak even more havoc ;( And there are also the dynamics of the societal backdrop which can impact hugely .Somebody made the point that Britain is not exactly Burkina Fasso which is true but then the Weimar era hyperinflation lasted a couple of months whereas Zimbabwe’s has gone on now for several years 🙁

    ‘I’ve even asked an actuary to explain how money works. ‘

    It works like an elephant . You’ll notice it when it’s there and you’ll notice it when it’s absent 😉 I’ll post a youtube short summary later or tomorrow when I get the time 😉

  • Mack

    Modernist, Greenflag –

    Chris Martenson’s Crash Course gives a good accessible overview of the process –

    What is money?

    Money creation

    Though I’m not a fan of some chapters (his understanding of scale in relation to the exponential function seemed a bit ropey to me – he’s updated this chapter so maybe it is better, haven’t watched it. This series of lectures covers the implications of exponential growth much better – The Most Important Video You’ll Ever See).

  • Modernist

    Thanks Mack. My point is that the people we have in charge of the money and society at large don’t have a clue of the even bare basics of how the hell money functions. If they dont know whats going on then how are they meant to sort this mess out. As far as Ive heard alot of the incompetents who were running the banks were equally ignorant. Why aren’t kids taught this stuff in school?

  • Greenflag

    Thanks Mack -you’ve saved me the bother 🙂


    ‘Why aren’t kids taught this stuff in school?’

    Some do but once they leave school and enter ‘life ‘ they forget and have to learn the hard way . But when the central bankers and finance ministers are scratching their heads and looking for answers it may be an indication that at least the ‘advanced ‘ lessons in finance may not be an age appropriate subject for school children ?

    Mind you I do believe a lot more could be done with educating particularly the 13 to 18 age group in matters financial as they will affect most people’s daily lives – credit cards -savings -interest rates etc etc .

  • Comrade Stalin


    You read the rates the wrong way around. GBP1 = EUR1.06 (on Friday) and USD1.35. We haven’t reached parity with the Euro yet.

  • Mack

    Comrade Stalin,

    Nope, just presented it slightly different. Said exactly the same thing as you!

    Sterling is now at 94p per €1 (or £1 is €1.06).