In today’s issue:
- Chancellor the last to know about the country’s finances
- Labour is inheriting comparative optimism
- How to navigate the uncertainty ahead
The new Chancellor of the Exchequer seems surprised by the state of the country’s finances. The rest of the country is surprised she didn’t know.
Not only is it her job to know, but the rest of us were perfectly aware. Why do you think we elected her? They call it a hospital pass in rugby…
In classic style, the Chancellor has outsourced the issue to someone else. No, not fixing the problem. Just figuring out how big it is.
Treasury officials are now tasked with conducting a review of the public finances. So that the Chancellor “can understand the full scale of the challenge”.
Good time for it, too. Post election, I mean…
But it must be a bit odd for those Treasury officials. Isn’t it their day-to-day job to report on the country’s finances already? Isn’t all the information already public knowledge? What exactly is the Chancellor hoping to find out?
Perhaps the Chancellor labours under the assumption that nobody actually does their job unless a politician tells them to?
What actually happens when the Treasury presents their brand new revelatory “findings” to the Chancellor should be interesting though. How will Labour fund all its spending promises now that it must take into account the ability to spend money in the first place?
The Chancellor could be in for a nasty surprise.
Tony Blair reckons it’s all just a ploy to justify raising taxes after all. So cynical of him…
It’s easy to despair. Or panic and follow the non-doms out of here.
But not everything is looking so gloomy for Britain.
A promising future to ruin
The political chaos of the last few years masked some rather important economic outperformance. Despite Brexit, of course.
The value of UK exports leapfrogged France, Netherlands and Japan to become the fifth largest in the world.
Our stock market is now the biggest in Europe again.
GDP per capita growth projections from the International Monetary Fund (IMF) are remarkably high for the UK. Comparatively speaking, anyway. We’re set to surpass Germany and Canada in the next five years.
We had two years atop the G7’s economic growth table in 2021 and 2022, and are back to equal first more recently.
The pound has stood strong against currencies other than the US dollar too.
What explains all this secret success? Back in March 2020, we predicted it in The Fleet Street Letter. And explained why it would occur:
Britain is the only large economy with its own exchange rate.
That sounds like an absurd statement. But this month we reveal that, not only is it true, but it should guide your investment decisions too.
The basic idea was that other major currencies like the US dollar, yen and euro all suffer from unusual influences. And this causes trouble for the economies stuck using them.
Whenever there is financial, economic or geopolitical instability, the US dollar and yen tend to rally. This knee-jerk reaction even applied to 2008. Despite the US being the epicentre of the sub-prime crisis and Lehman Brothers failure, the US dollar soared. That’s because it’s considered a safe-haven currency.
There’s nothing worse for an economy in crisis than a soaring exchange rate. The currency is supposed to plunge to support export competitiveness. But in the US, the opposite happens.
The euro is a bit of a strange basket case. The idea that one exchange rate should apply to all of the eurozone is madness. The Italians have relied on devaluing their currency to keep their economy growing for generations. The Germans relied on the Deutschmark to fund their holidays in Italy. Now they’re stuck sharing the same exchange rate instead.
The same applies to the interest rate. The European Central Bank has to set monetary policy for widely divergent economic conditions across different countries. Which is not healthy for anyone. That’s why some countries are perpetually stuck in the doldrums, while others experience housing booms and busts.
Margaret Thatcher explained why fixed exchange rates are such a bad idea when the UK last escaped such a system:
“The stability which fixed [exchange] rates offered was a false one. It prevented currencies for adjusting gradually to market realities, and in the end it produced wild swings of instability. There’s nothing new about fixed exchange rates collapsing. What might be new is to finally learn the lesson that fixed rates don’t – and can’t – work in free markets.”
That instability was so evident in the 90s that the UK escaped the euro.
And so the pound has moved up and down on markets ever since. And this movement acts like a pressure valve on the economy. Or the keel of a boat, keeping the ship stable.
Here’s how we explained it in 2020:
Our currency is constantly trying to rebalance our economy. It is the keel and ballast that is constantly righting our ship. While other economies capsize during crises as their currencies surge, ours is a self-correcting force.
How? When Brexit looked like it posed a danger, the pound plunged. This attracted the record amount of foreign investment and sent the FTSE100 soaring. The pound took the hit for the UK economy. Few Britons noticed – the reason currency devaluations are preferable.
Since then, as Britain’s economy performed well, the pound has rallied. This supported a rebalancing of the economy, with house prices outside of London and British focused businesses outperforming. The pound once again rebalanced the economic conditions we faced by reigning in the boom.
What’s more, Britain is the largest economy in the world with a free floating currency.
We made several optimistic predictions on the back of this idea. These headlines have since confirmed some of them.
UK Becomes Safe Haven for Investors Spooked by France Chaos
U.K. Set for Fastest Growth in G-7 for Second Year, IMF Says
GDP: UK overtakes France and Germany as economic growth bigger than expected after COVID
Paris loses spot as Europe’s largest equity market to London
Brexit Britain becomes the world’s fourth BIGGEST exporter – overtaking France, Netherlands and Japan
The pound has performed well against many currencies like the yen, euro, and Australian dollar because of these good results. Just as it supported the country during rough times by falling, it can also reign in the boom. Overall, you get stability.
The IMF is now forecasting for UK GDP per capita to grow fast enough to surpass Germany and Canada by 2029.
So, perhaps Britain is the place to be after all. For your money, anyway. And the investment director of The Fleet Street Letter is a specialist at figuring out where in the UK market to be.
Of course, it could all come undone. A few years of Labour budgets might well ruin things. In which case the value of the pound would be sacrificed for our economic wellbeing.
That’s less painful than the recessions southern Europe had instead of currency devaluation. Or the lacklustre recovery of the US economy after 2008. But a falling currency over time does impoverish the people using it.
In come years, the pound will be a barometer of Labour’s economic management skills. And its complete lack of awareness about the pickle it’s in is not encouraging.
Until next time,
Nick Hubble
Editor, Fortune & Freedom
