In These New Times

“We are reminded once again that when the pound falls, it falls hard.”

We have been stressing the vulnerability of the pound for some time. Some analogy from a strictly economic point of view could be made with Iceland which is being forced to contemplate joining the Euro as its own currency plummets. Iceland has some similarities as an offshore, largely parasitic, financier economy. but at least its not the hub of a lunatic imperial project which has already failed but  which we persist with, fueling the flames that engulf us. The collapse of the pound will be a historic event symbolising the end of the post-1688 imperial project. On a more practical level we have no choice but to abandon it and join the Euro if we are to avoid a terrifying inflationary crisis.

Julia Kollewe

The Guardian

1st September

The pound hit a record low against the euro and a two-year low against the dollar this morning after a stark warning from Alistair Darling, the chancellor, that the economic downturn would be worse and longer than expected.

With speculation growing of a rift at the top of government, some in the City believe that the pound is likely to continue falling through the next few months.

News that mortgage approvals had fallen to a record low and further contraction in the manufacturing sector also weighed on the currency. Measured against a basket of trade-weighted currencies, the pound is now at a 12-year low. The FTSE 100 index dropped 43.1 points to 5593.5 points by 10.30am, down 0.76%.

“Most people believed that things were probably deteriorating faster in the UK than the government was admitting, but the fact that we’ve seen the chancellor come out and admit that things are far worse have put sterling under pressure,” said Ian Stannard, senior currency strategist at BNP Paribas.

The pound slid to 81.39p against the euro, its lowest point since the single European currency was launched in 1999. Against the dollar, sterling fell more than 1% mid-morning to $1.8005, its lowest level since April 2006. The pound also hit a five-month low against the yen, of ¥195.15. Gilts and short sterling futures rose sharply, pushing down yields.

In an interview with the Guardian, the chancellor said Britain is facing “arguably the worst” economic downturn in 60 years and predicted it would be “more profound and long-lasting” than people had expected.

His language was far more blunt than the tone adopted by Gordon Brown, who always speaks cautiously about the economy, forcing Downing Street and the Treasury today to dismiss speculation of a rift between Brown and Darling.

“Coming at a time when the pound is already under intense pressure as talk grows of when the Bank of England will start cutting interest rates, this apparent sign of division in the political leadership has only served to sour sentiment further,” said Simon Derrick at Bank of New York Mellon.

“With these tensions likely to overhang the much talked about ‘relaunch’ of Gordon Brown’s premiership and the possibility that the autumn will be dogged by political uncertainty, it also seems likely that investors will continue to shun the pound for some time to come. We are reminded once again that when the pound falls, it falls hard.”

Adding to the gloomy picture, a CIPS survey showed today that the manufacturing sector shrank for the fourth month in a row. Mortgage approvals fell to 33,000 in July, the lowest since the data series began in 1993, according to Bank of England figures released this morning.House prices fell in August for the eleventh consecutive month, according to a separate report from property consultants Hometrack.

“The market is clearly worried by what Darling has said,” said David Page, an economist at Investec, adding that Darling’s views “aren’t a million miles away from the Bank of England’s.”

The Bank of England’s deputy governor, Charles Bean, last week warned that the economy is facing a period “at least as challenging” as the 1970s when Britain sank into a deep recession.

Darling said at the weekend that the economic backdrop presents Labour with its toughest challenge since the 1980s. “We’ve got our work cut out. This coming 12 months will be the most difficult 12 months the Labour party has had in a generation.”

His comments came after a Bank of England policymaker, David Blanchflower, warned that two million people could be unemployed by Christmas.

Investec’s Page predicted that worries about the health of the public finances and the economy overall would put the pound under further pressure over the next month, when the political party season gets under way and ahead of the chancellor’s pre-budget report. But looking further out, the City’s view that the Bank will probably hold off cutting interest rates until next year because of soaring inflation “should provide a floor to sterling”, he said.