The value of the Pound against other currencies fell dramatically on news of the Brexit vote. And although the Pound has rallied a little, it is still trading at around ten percent less than it had been last Thursday.
This has been presented as a universally bad thing in the mainstream media because it will raise the cost of living for many ordinary families. This is because Britain imports large volumes of energy, food and clothing from less prosperous parts of the global economy. Since these have to be traded in Dollars, Euros, Yen or Yuan, they will now be more expensive to British consumers paying in Pounds.
However, a cheap currency is not necessarily a bad thing. Just as it drives up the cost of imports, so it also lowers the cost of exports, making them more competitive. A pressurised UK steel industry, for example, may find it easier to sell some of its steel if the pound remains low against other currencies. At the same time, consumers may switch from imported goods to previously more expensive domestically produced goods.
Unfortunately, time is a headache in this outlook. According to Joseph Adinolfi at Market Watch:
“These benefits take time to materialize—companies can’t ramp up exports overnight. And the U.K.’s overreliance on foreign money means that the drop in the pound could drag its economy into a recession in the coming quarters, long before the benefits can be seen.”
This could plunge the UK economy into a vicious downward spiral as investors flee the Pound in search of a safer currency. This presents a particular threat to the UK because George Osborne has quietly run up the biggest current account deficit in our history:
“A current account measures the value of all goods and services, as well as capital and investment, flowing into, and out of, an economy. If a country runs a current-account deficit, that means its economy relies on foreign capital to expand. So, if those funds dry up, the economy could face a sharp contraction.”
Basically, a falling Pound could leave Britain with insufficient funds to pay our bills. In those circumstances the government would be obliged either to print money (which would accelerate capital flight), attempt to borrow more (at much higher interest) or follow the example of states like Argentina and Zimbabwe and simply default. Either way, the next British Prime Minister – whoever she or he might be – faces an immediate financial crisis at least as dangerous as the one in 2008.