UK crisis: plunging pound risks economic calamity

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Quantitative easing or money printing has undermined global
confidence in the pound leading to serious economic consequences

UK crisis: plunging pound risks economic calamity

analysis by Jamie Mann

The value of the pound continues to decline in value against the struggling euro and nosediving US dollar, yesterday (Monday) reaching its lowest level in almost 14 months, whilst Euro advocators celebrated a 14 month ‘high’ for the euro as it gained comparative strength against the pound and the dollar.

In the UK, fears that public and private debt are spiralling out of control have increased as the nation continues to add to its deficit while the Bank of England continues to pump money into the financial system in the form of quantitative easing (QE), thus increasing the money supply and decreasing the purchasing power of the citizen’s earnings.

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The devalued pound holds various economic threats to the national economy as a heavy reliance on importing goods, coupled with a diluted pound, leads to rising costs for consumers.

For exporters, the soaring importation costs of components cancel out the benefits of a devalued pound as unit costs are driven up.

The real economic damage done by a lower pound in our current debt-laden import economy is that as more money is printed by the Bank of England so it exits the nation overseas to manufacturing economies such as China and Germany. The result is increased money printing and downward pressure on sterling. Ultimately, as the currency continues to lose value so market support for the pounds melts away.

The UK economy is now undergoing what the government prefers to refer to as another ‘recession’, already having experienced two previous technical recessions or a ‘double dip’ since the 2008 economic crisis. Many observers now believe that were it not for money printing pushing up nominal GDP Britain would never have come out of ‘recession’ and is actually in a depression or giant correction. Should the economy ‘contract’ once more in the first quarter of this year, the UK will officially be in recession number three.

Another dark cloud on the UK economic horizon is that foreign investors increasingly see the UK as uninvestable given its huge combined public and private debt overhang. This is not the first indication of trouble as the Association of British Insurers (ABI) warned that high street banks now present too great a risk and promise too little a return to provide investor confidence.

As France’s Labour Minister Michel Sapin let slip on Monday, euro ally France is apparently “totally bankrupt”. With a larger combined debt load it may only be a matter of time before analysts point to Britain’s bankruptcy - the declining currency is a sure sign that investor confidence is being quickly lost.

The French government vowed to fight austerity and instead charge those who are able to pay, such as the launch of a 75 percent tax on those earning more than €1m as well as 45 percent income tax rate on annual incomes of more than 150,000 euros, alongside fewer exemptions for corporation loan payments.

According to the Telegraph, the French situation is a consequence of investors fleeing to avoid increased taxation and closed tax loop holes. The UK government by contrast has instead welcomed big business with David Cameron promising to “roll out the red carpet”, while inducing austerity and spending cuts.

The question arises as to why both countries, with opposite approaches to surviving an economic depression, are sinking.

If the key to economic success depends on corporation tax, then why are other european countries including Norway, Sweden, Denmark, Switzerland, Luxembourg and Finland thriving, despite each having a higher corporation tax than that of the UK?

Judging by the scores of ratings organisations collected by Euro Money Country Risk (ECR) these countries’ are also considered to be among the ‘safest’ economies in the world.

Meanwhile, Cyprus, the country with the lowest nominal corporation tax in Europe is negotiating a bailout from Russia.

Once we realise that our Euro-wide, or rather worldwide financial woes will not go away after the mere election of a new government and will not be resolved by the adoption of either conventional left or right economic policies, will we then be ready to fresh look at the longevity of the current financial system itself?

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published this page in News 2013-01-29 19:11:01 +0000