Tuesday, March 02, 2010

What a hung parliament really means

Today's Metro (p5) has an article titled 'Hung vote' polls spark pound panic - which is only slightly different to the online version.

The pound has fallen from $1.60 to $1.48 in just a month. Two years ago, it was trading at $2.00. The stack of $20 bills on my desk, bought a little under a year ago, is now worth 12% more than I paid for them - even with the foreign ATM fees and the bid-offer spread, that's a healthy profit.

The falls would have been even worse if it weren't for the problems facing the Dollar (Obama's spending, particularly the healthcare issue) and the Euro (Greece...) - the Yen is now trading against Sterling at a rate I'd have expected for Dollars five years ago: 133¥ per!

That is the cost of Labour's fiscal policies and of quantitiative easing. We've lost 20-30% of the value of our money and Sterling-denominated assets.

We're all 20-30% poorer than we were a couple of years ago.

And the markets know that, and fear it continuing. A hung parliament with Labour as largest party is the worst of all possible outcomes: no power to make changes, and no desire to, either. Unless there is a clear Tory victory, we're about to become a third-world country. Yes, it is that bad. Guido has already noted that as has the FT. The bond markets are already pricing us as AA, even without a formal downgrade, and uncertainty could easily drive that to A+ or below. If the government can't borrow £180bn/year, it either has to slash and burn spending by something like 20-30%, or devalue Sterling by printing yet more money: we could have lost half of our wealth in just three years.

I predicted double-digit inflation at the start of the year (well, actually in November 2007), and the last month has added upwards of 7 percentage points to the cost of imported goods. Green beans from Kenya, Egyptian potatoes, Korean plasma/LCD TVs, German or Japanese cars, oil, gas, Brazilian "British" beef, all likely to be several percent more expensive this year than last. Prices are therefore going to be growing a lot faster than the feeble GDP recovery we're seeing: the dreaded stagflation of the 1970s.

The current war on bankers could well destroy 30% of GDP - so, around 60% of private-sector production, given our bloated public-sector - which would be crippling. As much as people might hate the banks, we simply cannot afford to lose them. The riots in Greece could, and probably would, happen here if the necessary public-sector cuts were forced (by market action) to be taken quickly - 2m jobs lost overnight, if a debt auction is refused.

Brown must go, it's that simple.

- KoW

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