Tuesday 17 April 2007

$2 = £1 - so why is this?



I saw the post at Iain Dale's earlier and the comments , many of which suggested he does not know what he is talking about. All Iain said was that it seemed odd to have such a high exchange rate. He is right to say this. There are many factors which influence a floating currency.

Now that we do have a floating currency, although it cannot be 'controlled' as the Left would like, it becomes instead a good bell weather. Our currency is strong because the Dollar is so weak and our interest rates are relatively high. Our high interest rates are caused in part by government over-expenditure.

Also as the graph above shows, we would do well to remember that the Pound is a petro-currency. In fact it is at the peak of this cycle as the graph shows. Having a petro- currency will always be bad for inflation and. This will force high interest rates and so 'humble' manufacturing.

People who accuse Thatcher of destroying our manufacturing base would do well to examine the chart above and see how closely it matches the de-industrialisation.

I think overall that this is no bad thing, it is just part of our economic development. Perhaps as our Petro-Pound fades in the next 2 decades our manufacturing base will grow again?

P.S. On the other big story of the day, I have said rates will hit 6% this year, can't see anything that makes me change my mind.

18 comments:

Anonymous said...

I commented to day that it woyuldn't surprise me to say a half or even three quarter percent rise next month, though the latter is unlikely.

Newmania said...

Having a petro- currency will always be bad for inflation

Why?

and. This will force high interest rates and so 'humble' manufacturing.

Why manufacturing especially ?


My ignorance is bottomless although I suspect I know a vast deal more about economics than dale

Anonymous said...

I remember having a mortgage with 11% interest rates.

Anonymous said...

Eddie came out the other day with the admission that rates were subordinate to house price growth under his watch, and that Mervyn was left with the task of sorting it out.
The fact is the MPC baulked at the challenge last year and now they're playing catchup.
I Expect between 6.5% and 7% by Dec.

CityUnslicker said...

Shotgun - A 1/2% is not out of the question right now. Would be very extreme by Bank standards.

James Higham said...

When I come over here, I start to make some sense of economics. These posts help. Please continue them.

CityUnslicker said...

Newmania -

Having petroleum as a large part of national income means that a chunk of your earnings are linked to a commodity price (which historically rises with time). This nice income will allow a government to run with a higher money supply; what government could resist being able to print money rather than raise it through taxes. Hence most petro(and other resources too sometimes) countries struggle with inflationary spending. This in turn causes high interest rates to control the inflation (compare long-term Euro rates to ours, the continent's is much lower), which in turn supports the currency.

Why manufacturing? Because they tend to export products to grow. They have to cope with the exchange rate which is not governed by their actions. The USA apart, which the giant economy, I can't think of a country that manages to maintain a high manufacturing base along with high levels of oil/resources exports.

this affects ervices less as they do not have to pay the import prices for production and also many services are internally focused. The Financial services indsutry overcomes the hurdle by being innately good at FX hedging and management. Manufacturing companies have to pay Financial services companies to do this for them and this adds to their cost base as well.

Good enough answer for you?

CityUnslicker said...

Ellee - I don't being too young, but what is worse now is the average borrower is 30% more in the hole than they were 15 years ago. So interest rates of 7% would have the same overall impact.

CityUnslicker said...

Anon - quite agree.

CityUnslicker said...

JH many thanks for your words.

Newmania said...

Thanks CU - Some of the links you make do not seem causal to me ( by which I mean I do not really understand the process of causation .) the first para chiefly . I am happy to take your word for it that it hangs together though and in general way I get the point.

I see James Higham is in the same boat huffing and puffing after you as you leap from promomtory to ledge like a mountain goat

Anonymous said...

You should remember that orange and yellow do not go together unless you are aiming for a 70s fashions type effect - oh yes we are heading back to the 70s.

Anonymous said...

Thanks for the futher clarification cityunslicker, thanks for keeping us on track,

Newmania said...

Where have you gone then ?

CityUnslicker said...

thanks for all the comments. back now

Raedwald said...

UK 'Peak Oil' is roughly in line with US Treasury predictions for world Peak Oil as far as I can see - won't that mean that as production starts to drop, prices will rise? Won't that feed into inflation?

And I thought real interest rates didn't rise, just nominal rates? (e.g. a Bank base rate of 4% when inflation is 2% means a real interest rate of 2%; a base rate of 6% when inflation is 4% still means a real interest rate of 2%)

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