Magazine article The Spectator

Thank Goodness We Can Have a Run on the Pound When We Need One

Magazine article The Spectator

Thank Goodness We Can Have a Run on the Pound When We Need One

Article excerpt

On Monday afternoon I rang a distinguished City economist and asked him a rather technical question about the relationship between issuance of gilt-edged stock and movements in the dollar-sterling exchange rate. 'Not really my specialist field, ' he replied suavely. 'But I'll give you my overview: George Osborne is a prat.' And that, I'm afraid -- expressed with varying degrees of bluntness or circumlocution -- was pretty much the consensus of all the experts I spoke to this week about the shadow chancellor's much-quoted remarks to the Times at the weekend: 'We are in danger, if the government is not careful, of having a proper sterling collapse, a run on the pound... The more you borrow as a government, the more you have to sell the debt and the less attractive your currency seems.' Sterling has in fact already lost a quarter of its value -- from $2 to $1.48 -- since July, and has reached a 13-year low against a basket of currencies. Whatever the underlying cause (urgent liquidation of hedge-fund positions by all available means probably had as much to do with it as any general wave of negative sentiment about the UK economy), you might think this already constitutes a 'run on the pound' which we should be worried about. In that sense Osborne is right to highlight it, as Cameron was perhaps right on Tuesday to abandon his pledge to match government spending plans. After all, the so-called convention that senior politicians should not mention the exchange rate for fear of 'talking down the pound' is no more valid, at a time of crisis, than that other convention, breached at Glenrothes by Gordon Brown as soon as he scented victory, that prime ministers do not campaign in by-elections.

So why has Osborne walked into such a hail of flak? Partly because Lord Mandelson, despite the serpentine smile and silken wit with which he received his Spectator Parliamentarian award from the hand of Osborne last week, is plainly on a mission to do as much damage to the shadow chancellor's career as he can, in revenge for Corfugate and to remind us what a political ninja he really is. Thus, according to the Business Secretary talking on the Today programme, Osborne was not so much trying to draw attention to the risks attached to unfettered government borrowing as 'trying to undermine the confidence of the markets, undermine the confidence of traders.

It was reckless and irresponsible.' That was a vicious accusation, but it stuck. And the fact that the pound rallied slightly against the dollar on Monday did not let Osborne off the hook. Indeed, it added insult in the form of 'Markets ignore Osborne' headlines, while leaving ministers the option of blaming the Tories if the pound takes another dive any time in the next few weeks. And if it does not take a dive, or happens to rise because of a change in sentiment towards the dollar, they will claim 'a vote of confidence' from the markets. So Osborne loses whatever happens.

All of which obscures the fundamental point, made to me by my distinguished City economist friend who must remain nameless, after venting his feelings about Osborne but in similarly plain language: 'Sterling has been overvalued. The UK needs a weak currency. That's all there is to it.' Likewise, a senior economist I can name -- George Magnus, adviser to UBS Investment Bank -- told me: 'I don't agree with the shadow chancellor. At a time when the private sector is in a funk and we're seeing a wave of destructive deleveraging, I think the government can borrow as much as it likes; effectively it is substituting for the contraction of private-sector credit. I really don't think there's an imminent danger of a drop in the pound in response to the government's borrowing plans -- and even if there were, it wouldn't be a bad thing.'

So let me try to unpack this story in more detail. First, let us consider whether there are specific points on the sterling-dollar exchange rate graph at which we should feel relatively optimistic -- and other points at which we should resort, as I advised here recently, to the Scotch and the shotgun. …

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