WHY IS STERLING COLLAPSING?

2 September 2022

It's about inflation, the current account balance, the govt budget, the national debt and prospects for growth in the UK economy. They are all moving in the wrong direction and everytime a forecast is published, it's worse than the previous....could there be still worse to come? 

Result: stirling is hardly a safe haven for people wondering where to invest and as exports fall so does the demand for the pound.

Last time I looked at inflation it was supposed to hit 18% by January '23, but today when I looked, Goldman Sachs are saying 22% if Energy prices hold at current levels.

The standard response to deal with inflation is to put up interest rates, even though for much of the inflation, there's nothing much the bank of England can do about it. Two-year government bonds have just gone up 100 basis points -  1% really is a lot - to almost 3% and the forecast is for 4% by May '23. Yet the theory is that interest rates should rise higher than the inflation rate if the Bank of England is to get on top of inflation.

I don't have the figures to hand for UK debt, but I remember that a quarter is index-linked, so if interest rates go up and inflation goes up, the UK is really skewered - particularly as at the moment Liz Truss is thinking that the only way of dealing with the cost of living crisis is by reducing taxes. This would mean yet more borrowing and at the new higher rates of interest .

So while all the UK indexes were plummeting badly yesterday, the footsie 100 slightly less than the others and because this is where the big int.l companyies with foreign earnings are found.

You'd think gold would do well with this threat that hyper inflation will devalue the currency, but in fact 'No', it has not been  doing so well this year - I guess that is dollar strength.

So once again looks like American indexes will outperform as this is the only safe place to put your money, ie into the dollar. But into short term US bonds is the particular advice.