November 28, 2022

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Why does the British pound continue to sink?

Why does the British pound continue to sink?

Over the centuries, British leaders often made extraordinary efforts to protect the value of the pound, viewing its strength as a sign of the country’s economic strength and influence. King Henry I issued a file decree In 1125 he orders those who produce substandard coins to “lose their right hand and be castrated.”

In the 1960s, the Labor government led by Harold Wilson resisted a devaluation of the pound – then set a fixed rate of $2.80, high enough to cripple the British economy – and ordered Cabinet papers discussing the idea to be burnt. In 1967, the government finally devalue by 14 percent to $2.40.

Other economic crises hit the pound. In the 1970s, when oil prices soared and Britain’s inflation rate exceeded 25 percent, the government was forced to demand a $3.9 billion loan from the International Monetary Fund. In the mid-1980s, when high interest rates in the United States and a rush of spending by the Reagan administration raised the value of the dollar, the pound fell to a then-record low.

The pound’s dominance has been waning since the end of World War II. Today, the global economy is going through a particularly turbulent time as it recovers from the fallout from the coronavirus pandemic, supply chain collapses, Russia’s invasion of Ukraine, energy shortages and rising inflation.

As Richard Ports, Professor of Economics at London Business School said, currency exchanges fluctuate enormously over time. He remembers that the euro was worth 82 cents in its early days, and people referred to it as the “toilet wipes” currency. But by 2008, its value had doubled to $1.60.

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What might cause the pound to rebound isn’t clear.

The Truss government’s economic program has sharply accelerated the pound’s slide – the latest in a series of what many economists consider egregious economic errors that culminated with Brexit.

Much depends on the Truss government.

“The drop in sterling is the result of policy choices, not some historical determinism,” said Ian Shepherdson, chief US economist at Pantheon Macroeconomics. “Whether this is a bleak new era or just an unfortunate interlude depends on whether they reverse course or are thrown out in the next election.”