tag:theconversation.com,2011:/ca/topics/pound-sterling-8984/articlesPound sterling – The Conversation2022-10-12T12:17:04Ztag:theconversation.com,2011:article/1914872022-10-12T12:17:04Z2022-10-12T12:17:04ZPutting King Charles III on British currency bucks a global trend to honor diverse national heroes on coins and bills<figure><img src="https://images.theconversation.com/files/488152/original/file-20221004-18-mpog09.jpg?ixlib=rb-1.1.0&rect=0%2C4%2C2991%2C1985&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">About 4.5 billion bank notes and more than 27 billion coins featuring the queen's image are now circulating in the U.K.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/photo-illustration-of-the-new-polymer-british-ten-pound-news-photo/866501926?phrase=British%20Pound%20Note&adppopup=true">Daniel Harvey Gonzalez/In Pictures via Getty Images</a></span></figcaption></figure><p>For more than 60 years, the image of Queen Elizabeth II <a href="https://www.bankofengland.co.uk/museum/noteworthy-women/the-queen-on-bank-of-england-notes">graced the currencies of the United Kingdom</a> as well as some of the <a href="https://www.royal.uk/commonwealth-and-overseas">Commonwealth nations</a>. During her historic reign she appeared on at least 33 different currencies globally, <a href="https://www.guinnessworldrecords.com/world-records/most-currencies-featuring-the-same-individual">a Guinness World Record</a>. This includes not only money in the U.K., but also currency in Australia, Belize and some Eastern Caribbean countries, as well as the $20 bill in Canada. </p>
<p>Placing a portrait of a monarch on its money is <a href="https://www.royalmint.com/our-coins/events/british-monarchs/">a long tradition</a> in the U.K. For more than a millennium, beginning with the reign of Alfred the Great, the Royal Mint has been putting kings and queens on coinage. </p>
<p><a href="https://www.bbc.com/news/uk-61585886">With the passing of Queen Elizabeth II</a>, that tradition will not change. Nor will the tradition of replacing the image of the deceased leader with the royalty ascending to the throne – in this case, the queen’s son, King Charles III – now the face of the monarchy, who will soon appear on new British money. </p>
<p><a href="https://cas.gsu.edu/profile/harcourt-fuller/">I’m a history professor</a> and founder of the <a href="https://www.blackmoneyexhibit.com/">Black Money Exhibit</a>. I’m also a member of the <a href="https://www.ccac.gov/">Citizens Coinage Advisory Committee</a> at the <a href="https://www.usmint.gov/">United States Mint</a>, which advises the secretary of the Treasury on the themes and designs of all U.S. coins and medals. For years I have closely monitored the evolving perspectives worldwide regarding the look of coinage and paper money. Those perspectives focus on the need to present more diverse historical figures on currency. The changing attitudes are affecting not only the U.K. but the United States as well.</p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/AZwrMrCCglw?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The new image of King Charles III is the latest in a long line of monarchs depicted on British money.</span></figcaption>
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<h2>Rolling out the King Charles money</h2>
<p>Beginning in December 2022, the Royal Mint will <a href="https://www.royalmint.com/">issue the first set of Charles III coins</a>. This includes commemorative coins, which will also bear Queen Elizabeth II’s image on the reverse side. </p>
<p>The new King Charles money will mix in with the old money featuring the queen; more than 27 billion coins bearing her head <a href="https://www.marca.com/en/lifestyle/uk-news/2022/09/28/6334350546163fe82c8b4598.html">still circulate in the U.K.</a>, along with 4.5 billion pound sterling bank notes worth approximately 80 billion pounds – roughly US$90 billion. The full process of issuing the Charles III money will take at least two years. </p>
<p>The first step toward issuing that money has already happened. An independent sculptor commissioned by the Royal Mint has <a href="https://www.royalmint.com/stories/collect/his-majesty-the-kings-official-coinage-portrait/">created the coinage portrait of Charles III</a>, who personally approved it. The portrait, depicting the king in his senior years, will face left, in opposition to the pose of his mother. </p>
<p>This tradition of alternating the direction British monarch’s face on coinage dates to the reign of King Charles II during the 17th century. The reason this is done is shrouded in historical mystery; perhaps because Charles II wanted to figuratively turn his back on Oliver Cromwell, the military leader and statesman <a href="https://www.historic-uk.com/HistoryUK/HistoryofEngland/Oliver-Cromwell/">who signed the death warrant to execute Charles I</a> during the English Civil War.</p>
<h2>The changing look of currency worldwide</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/488185/original/file-20221004-18-vbovtb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Swathed in purple tones, a photo of the Canadian $10 bill features the image of a Black woman." src="https://images.theconversation.com/files/488185/original/file-20221004-18-vbovtb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/488185/original/file-20221004-18-vbovtb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1308&fit=crop&dpr=1 600w, https://images.theconversation.com/files/488185/original/file-20221004-18-vbovtb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1308&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/488185/original/file-20221004-18-vbovtb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1308&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/488185/original/file-20221004-18-vbovtb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1644&fit=crop&dpr=1 754w, https://images.theconversation.com/files/488185/original/file-20221004-18-vbovtb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1644&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/488185/original/file-20221004-18-vbovtb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1644&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Viola Desmond, a civil rights and women’s rights advocate, is now on the Canadian $10 bill.</span>
<span class="attribution"><a class="source" href="https://www.bankofcanada.ca/banknotes/vertical10/">Bank of Canada</a></span>
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<p>Until recently, the U.S. has predominantly depicted <a href="https://www.usmint.gov/news/inside-the-mint/history-of-women-on-coins#:%7E:">a white male founding father on money</a>. But a major diversification of U.S. currency has been underway since 2017, when the U.S. Mint issued a collectible commemorative gold coin depicting <a href="https://www.usmint.gov/coins/coin-medal-programs/american-liberty/2017-225th-anniversary-gold-coin">Lady Liberty as an African American woman</a>. Today, the proposed Harriet Tubman $20 bill still seems to be on track, although Americans might not see it in their pockets <a href="https://thegrio.com/2022/02/13/us-treasury-harriet-tubman-20-bill/">for almost another decade</a>. These changes, along with the depiction of writer Maya Angelou and other diverse women through the mint’s <a href="https://www.usmint.gov/learn/coin-and-medal-programs/american-women-quarters">American Women Quarters Program</a>, is a welcome break from the past. </p>
<p>With that in mind, and with a new British monarch in town, what might Commonwealth countries do? Will they go along and mint the likeness of Charles III on their money? Or will they be mindful of the burgeoning sociopolitical movements calling for the dismantling of what many see as <a href="https://time.com/6212772/queen-elizabeth-ii-colonialism-legacy/">long-standing symbols of colonialism and oppression</a>? </p>
<p>Many marginalized groups, such as American women, African Americans, Black people in Canada and Black and Asian groups in Britain, <a href="https://www.theartnewspaper.com/2020/07/27/uk-government-approves-banknote-designs-featuring-ethnic-minority-pioneers">want predominantly white male symbols replaced</a> with a more diverse repertoire of people, places, events and movements that pay homage to addressing past injustices. </p>
<p>That is already happening, albeit slowly. Queen Elizabeth II is depicted on one side of the current Eastern Caribbean $100 banknote. The reverse side, however, depicts <a href="https://www.nobelprize.org/prizes/economic-sciences/1979/lewis/biographical/">Sir Arthur Lewis, the noted 20th-century economist</a>, the first Black person to earn the title of full professor at Princeton University and a Nobel Prize winner.</p>
<p>In 2018, social justice icon Viola Desmond became the first Canadian woman <a href="https://www.bankofcanada.ca/banknotes/vertical10/banknoteable-woman/">to appear on a bank note</a>, the $10 bill. In August 2022, the Royal Canadian Mint <a href="https://jazztimes.com/blog/royal-canadian-mint-issues-a-new-1-oscar-peterson-coin/">began circulating a $1 coin</a> featuring the iconic Black jazz pianist Oscar Peterson.</p>
<p>In Australia, where the queen is depicted on the $5 bill, <a href="https://www.news.com.au/finance/money/big-hint-5-note-could-change-after-queen-elizabeth-iis-death/news-story/ddb15b3eed5966c6e3159d88da40bce6">spirited debate continues</a> about whether or not to keep her image, replace it with King Charles or break with tradition and use an image of an indigenous Australian instead. </p>
<p>But what about the U.K.? Already, the country has begun to deal with the lack of ethnic diversity on its currency. </p>
<p>In June 2020, during the height of the Black Lives Matter movement, which also affected Britain, the <a href="https://www.bankofengland.co.uk/news/2020/june/statement-in-relation-to-the-banks-historical-links-to-the-slave-trade">Bank of England acknowledged its role</a> in the <a href="https://slaveryandremembrance.org/articles/article/?id=A0002">trans-Atlantic slave trade</a> and pledged to develop more inclusive policies and practices, particularly with Black, Asian and other minority staff. What’s more, the bank has promised to include <a href="https://www.theartnewspaper.com/2020/07/27/uk-government-approves-banknote-designs-featuring-ethnic-minority-pioneers">more Black people, Asians and other minorities</a> on their bank notes and coins. </p>
<p>Now, with the death of the queen and inauguration of a new king, will the Bank of England honor that commitment? The wind of change – a phrase coined by the British – seems to be blowing in that direction.</p><img src="https://counter.theconversation.com/content/191487/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Harcourt Fuller received funding from the Fulbright Global Scholar Award and the Whiting Public Engagement Grant Award. He is affiliated with the Citizens Coinage Advisory Committee at the US Mint. He is the founder and director of the Black Money Exhibit. </span></em></p>The new money – featuring the visage of King Charles III – will start rolling out by December 2022.Harcourt Fuller, Associate Professor of History, Georgia State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1919032022-10-04T23:20:57Z2022-10-04T23:20:57ZPlunging pound and crumbling confidence: How the new UK government stumbled into a political and financial crisis of its own making<figure><img src="https://images.theconversation.com/files/488163/original/file-20221004-12-5ntxa5.jpg?ixlib=rb-1.1.0&rect=104%2C31%2C3300%2C2294&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The hard hats likely came in handy recently for Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BritainPolitics/51db2d3989614ce8906531345dc17d5a/photo?Query=truss%20kwasi&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=27&currentItemNo=0">Stefan Rousseau/Pool Photo via AP</a></span></figcaption></figure><p>The new British government is off to a very rocky start – after stumbling through an economic and financial crisis of its own making.</p>
<p>Just a few weeks into its term on Sept. 23, 2022, Prime Minister Liz Truss’ government released a so-called mini-budget that <a href="https://www.bloomberg.com/news/articles/2022-09-23/uk-sets-out-biggest-tax-cuts-since-1988-to-boost-economic-growth?sref=Hjm5biAW">proposed £161 billion</a> – about US$184 billion at today’s rate – in new spending and the <a href="https://finance.yahoo.com/news/uk-tax-cut-package-largest-091729654.html">biggest tax cuts in half a century</a>, with the benefits <a href="https://fullfact.org/economy/kwasi-kwarteng-mini-budget/">mainly going to Britain’s top earners</a>. The aim was to jump-start growth in an economy on the <a href="https://www.bankofengland.co.uk/monetary-policy-report/2022/august-2022">verge of recession</a>, but the government didn’t indicate how it would pay for it – or provide evidence that the spending and tax cuts would actually work.</p>
<p>Financial markets reacted badly, prompting <a href="https://theconversation.com/how-bonds-work-and-why-everyone-is-talking-about-them-right-now-a-finance-expert-explains-191550">interest rates to soar</a> and the pound to plunge to the lowest level against the dollar since 1985. The Bank of England <a href="https://theconversation.com/bank-of-england-bonds-rescue-has-two-ugly-implications-more-inflation-and-an-even-weaker-pound-191653">was forced to gobble up government bonds</a> to avoid a financial crisis. </p>
<p>After days of defending the plan, the government <a href="https://www.washingtonpost.com/world/2022/10/03/uk-kwarteng-45p-tax-cut-reverse/">did a U-turn</a> of sorts on Oct. 3 by scrapping the most controversial component of the budget – elimination of its top 45% tax rate on high earners. This calmed markets, leading to a rally in the pound and government bonds. </p>
<p>As a <a href="https://scholar.google.com/citations?user=RDJhf7wAAAAJ&hl=en&oi=ao">finance professor</a> who tracks markets closely, I believe at the heart of this mini-crisis over the mini-budget was a lack of confidence – and now a lack of credibility. </p>
<h2>A looming recession</h2>
<p>Truss’ government <a href="https://theconversation.com/is-the-uk-in-a-recession-how-central-banks-decide-and-why-its-so-hard-to-call-it-191237">inherited a troubled economy</a>. </p>
<p>Growth has been sluggish, with the latest quarterly figure at 0.2%. The <a href="https://www.bankofengland.co.uk/monetary-policy-report/2022/august-2022">Bank of England predicts</a> the U.K. will soon enter a recession that could last until 2024. The latest data on U.K. manufacturing shows <a href="https://tradingeconomics.com/united-kingdom/manufacturing-pmi">the sector is contracting</a>.</p>
<p>Consumer confidence is at its lowest level ever as soaring inflation – <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/august2022">currently at an annualized pace of 9.9%</a> – drives up the cost of living, especially for food and fuel. At the same time, real, inflation-adjusted <a href="https://www.cnbc.com/2022/08/16/uk-real-wages-decline-at-record-rate-as-inflation-soars.html">wages are falling by a record amount</a>, or around 3%. </p>
<p>It’s important to note that many countries in the world, including the U.S. and in mainland Europe, are experiencing the same problems of low growth and high inflation. But rumblings in the background in the U.K. are also other weaknesses.</p>
<p>Since the financial crisis of 2008, the U.K. <a href="https://www.economist.com/britain/2022/06/09/britains-productivity-problem-is-long-standing-and-getting-worse">has suffered from lower productivity</a> compared with other major economies. Business investment plateaued after Brexit in 2016 – when a <a href="https://www.bbc.com/news/politics/eu_referendum/results">slim majority of voters chose to leave</a> the European Union – and remains significantly below pre-COVID-19 levels. And the U.K. also consistently runs a <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/balanceofpayments/januarytomarch2022">balance of payments deficit</a>, which means the country imports a lot more goods and services than it exports, with a trade deficit of over 5% of gross domestic product.</p>
<p>In other words, investors were already predisposed to view the long-term trajectory of the U.K. economy and the British pound in a negative light.</p>
<h2>An ambitious agenda</h2>
<p>Truss, who became prime minister on Sept. 6, 2022, also didn’t have a strong start politically.</p>
<p>The government of Boris Johnson lost the confidence of his party and the electorate after a series of scandals, including <a href="https://www.yahoo.com/news/boris-johnson-resigns-amid-mps-191802565.html">accusations he mishandled sexual abuse allegations</a> and revelations about <a href="https://theconversation.com/boris-johnson-four-ways-this-controversial-prime-minister-tested-the-british-parliament-to-its-limits-189010">parties being held in government offices</a> while the country was in lockdown. </p>
<p>Truss was <a href="https://www.theguardian.com/politics/ng-interactive/2022/sep/05/tory-leadership-election-full-results-liz-truss-rishi-sunak">not the preferred candidate</a> of lawmakers in her own Conservative Party, who had the task of submitting two choices for the wider party membership to vote on. The rest of the party – dues-paying members of the general public – chose Truss. The lack of support from Conservative members of Parliament meant she wasn’t in a position of strength coming into the job. </p>
<p>Nonetheless, the new cabinet <a href="https://apnews.com/article/russia-ukraine-boris-johnson-london-economy-bcc84e2cd22a42f1a1268234f4908c6e">had an ambitious agenda</a> of cutting taxes and deregulating energy and business. </p>
<p>Some of the decisions, <a href="https://www.bbc.com/news/business-62920969">laid out in the mini-budget</a>, were expected, such as subsidies limiting higher energy prices, reversing an increase in social security taxes and a planned increase in the corporate tax rate. </p>
<p>But others, notably a plan to abolish the 45% tax rate on incomes over £150,000, were not anticipated by markets. Since there were no explicit spending cuts cited, funding for the £161 billion package was expected to come from selling more debt. <a href="https://www.bbc.com/news/uk-scotland-scotland-politics-63108499">There was also the threat</a> that this would be paid for, in part, by lower welfare payments at a time when poorer Britons are suffering from the soaring cost of living. The fear of welfare cuts is <a href="https://www.bbc.co.uk/news/uk-politics-63130852">putting more pressure</a> on the Truss government. </p>
<figure class="align-center ">
<img alt="a man in a brown stocking hat inspects souvenirs near a bunch of UK flags and other trinkets" src="https://images.theconversation.com/files/488167/original/file-20221004-14-35yefd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/488167/original/file-20221004-14-35yefd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/488167/original/file-20221004-14-35yefd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/488167/original/file-20221004-14-35yefd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/488167/original/file-20221004-14-35yefd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/488167/original/file-20221004-14-35yefd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/488167/original/file-20221004-14-35yefd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The cost of living crisis in the U.K. has everyone looking for deals where they can.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BritainEconomy/c61b09ad158f4674b7d0e5e780a67c92/photo?Query=truss%20pound&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=30&currentItemNo=12">AP Photo/Kirsty Wigglesworth</a></span>
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<h2>A collapse in confidence</h2>
<p>Even as the new U.K. Chancellor of the Exchequer Kwasi Kwarteng was presenting the mini-budget on Sept. 23, the British pound was already getting hammered. It sank from $1.13 the day before the proposal to <a href="https://www.npr.org/2022/09/26/1125080014/british-pound-record-low-dollar">as low as $1.03 in intraday trading on Sept. 26</a>. Yields on 10-year government bonds, known as gilts, <a href="https://www.marketwatch.com/investing/bond/tmbmkgb-10y?countrycode=bx">jumped from about 3.5% to 4.5%</a> – the highest level since 2008 – in the same period. </p>
<p>The jump in rates <a href="https://www.nytimes.com/2022/09/30/business/uk-mortgage-markets.html">prompted mortgage lenders to suspend deals</a> with new customers, eventually offering them again at significantly higher borrowing costs. <a href="https://www.thetimes.co.uk/article/how-likely-is-a-house-price-crash-in-2022-0sj237kzc">There were fears that this would lead to a crash</a> in the housing market. </p>
<p>In addition, the drop in gilt prices <a href="https://www.ft.com/content/756e81d1-b2a6-4580-9054-206386353c4e">led to a crisis in pension funds</a>, putting them at risk of insolvency.</p>
<p>Many members of Truss’ party <a href="https://www.theguardian.com/uk-news/2022/sep/23/tory-backbenchers-despair-at-toxic-mini-budget">voiced opposition</a> to the high levels of borrowing likely necessary to finance the tax cuts and spending and <a href="https://www.bbc.co.uk/news/uk-politics-63108234">said they would vote against the package</a>. </p>
<p>The International Monetary Fund, which <a href="https://theconversation.com/mini-budget-lessons-from-the-uks-long-history-of-economic-crises-191696">bailed out the U.K. in 1976</a>, even <a href="https://www.imf.org/en/Countries/GBR">offered its figurative two cents</a> on the tax cuts, urging the government to “<a href="https://www.imf.org/en/Countries/GBR">reevaluate</a>” the plan. The comments <a href="https://theconversation.com/why-imf-comments-on-the-uk-economy-spooked-traders-and-investors-191619">further spooked investors</a>. </p>
<p>To prevent a broader crisis in financial markets, the Bank of England <a href="https://theconversation.com/bank-of-england-bonds-rescue-has-two-ugly-implications-more-inflation-and-an-even-weaker-pound-191653">stepped in and pledged to purchase up to £65 billion</a> in government bonds. </p>
<p>Besides causing investors to lose faith, the crisis also severely dented the public’s confidence in the U.K. government. The latest polls showed the opposition Labour Party <a href="https://theconversation.com/liz-truss-how-to-understand-polls-that-give-labour-an-enormous-lead-and-why-the-tories-are-right-to-fear-a-major-election-loss-191703">enjoying a 24-point lead</a>, on average, over the Conservatives. </p>
<p>So the government likely had little choice but to <a href="https://www.nytimes.com/2022/10/03/world/europe/uk-tax-rate-cut.html">reverse course and drop the most controversial part</a> of the plan, the abolition of the 45% tax rate. The pound recovered its losses. The recovery in gilts was more modest, with bonds still trading at elevated levels. </p>
<p>Putting this all together, less than a month into the job, Truss has lost confidence – and credibility – with international investors, voters and her own party. And all this over a “mini-budget” – the full budget isn’t due until November 2022. It suggests the U.K.’s troubles are far from over, a <a href="https://www.ft.com/content/ac967983-2f4f-4b0b-8714-4b7d356b2530">view echoed by credit rating agencies</a>.</p><img src="https://counter.theconversation.com/content/191903/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David McMillan does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Liz Truss took over as prime minister with an ambitious plan to cut taxes by the most since 1972 – investors balked after it wasn’t clear how she would pay for itDavid McMillan, Professor in Finance, University of StirlingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1915482022-10-03T15:00:36Z2022-10-03T15:00:36ZPound recovers but remains at low levels – how to assess the long-term value of sterling<figure><img src="https://images.theconversation.com/files/487769/original/file-20221003-22-xg7pmc.jpg?ixlib=rb-1.1.0&rect=13%2C20%2C4479%2C2977&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The value of the British pound has taken a battering in recent months.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/hands-holding-british-pound-coin-small-369962102">Yulia Grigoryeva / Shutterstock</a></span></figcaption></figure><p>The pound has <a href="https://www.reuters.com/markets/europe/antipodean-currencies-advance-ahead-rate-decisions-dollar-edges-lower-2022-10-03/">recovered from a recent record dip</a> after <a href="https://www.reuters.com/markets/europe/sterling-plunges-all-time-low-scathing-appraisal-fiscal-plan-2022-09-26/">the chancellor’s mini-budget</a> announcement. But it is <a href="https://inews.co.uk/news/pound-dollar-sterling-how-gbp-measured-against-usd-past-40-years-1878057">still at low levels</a> versus many other currencies. </p>
<p>The recent decline can be mostly attributed to the tax cuts announced during Chancellor Kwasi Kwarteng’s recent mini-budget. The £45 billion package caused concern among investors by considerably <a href="https://ifs.org.uk/articles/mini-budget-response">increasing future government debt</a>, although Kwarteng has since <a href="https://www.bbc.co.uk/news/live/uk-politics-63114183">announced a U-turn</a> on the £2 billion plans to abolish cuts for the highest earners. More generally, escalating inflation expectations from this increased fiscal expansion, coupled with ongoing <a href="https://www.bbc.co.uk/news/uk-northern-ireland-63112289">rising energy costs</a>, have had a negative impact on the UK economy and therefore the value of sterling.</p>
<p>The weakening of the pound is also part of a global phenomenon. The US dollar has <a href="https://www.ft.com/content/daf5c774-fb7f-4ef3-a4ba-c92e3b373066">appreciated by 12%</a> since the end of 2021 against a broad index of currencies, and by more than 20% against the pound. This broad appreciation is attributed to a tightening of US monetary policy and a shift in the risk appetite of investors towards US dollar assets, currently viewed as more of a safe haven.</p>
<p>Given these underlying pressures, questions about the long-term valuation of pound sterling abound, including whether it will settle at parity with the US dollar. An analysis by Bloomberg has shown financial markets believe there is a <a href="https://www.bloomberg.com/news/articles/2022-09-26/probability-of-pound-sliding-to-parity-this-year-jumps-to-60#xj4y7vzkg">60% probability</a> that sterling will reach dollar parity by the end of 2022. A long-term decline in the valuation of the pound increases the price of imported goods, which can feed into consumer price inflation.</p>
<p>If policy makers want to shore up the currency’s strength, several economic theories suggest they must address high inflation expectations, the impacts of Brexit and the various supply chain issues plaguing the economy at present.</p>
<h2>Comparing burgers with burgers</h2>
<p>Ever heard of the Big Mac Index? Research about <a href="https://www.jstor.org/stable/1991014">long-term movements</a> in exchange rates shows they tend to change in line with relative inflation rates in many countries. This theory, known as purchasing power parity (PPP), uses the price of specific products or baskets of goods to compare currencies and standards of living in different countries.</p>
<p>As such, we can examine the value of the pound compared to other currencies by looking at a single good such as a McDonald’s Big Mac burger. Since this product is the same across countries, the Big Mac can be used to calculate a PPP-implied exchange rate by comparing its price in the UK and the US. In July 2022, the Big Mac Index showed the pound was <a href="https://www.economist.com/big-mac-index">undervalued by around 14%</a>, based on the exchange rate implied by Big Mac prices in the US versus the UK.</p>
<p>Forecasts by the Bank of England put inflation at 14% by the fourth quarter of 2022, however it is <a href="https://www.britishchambers.org.uk/news/2022/09/bcc-economic-forecast-new-pm-must-act-as-uk-economy-set-for-recession-before-year-end">expected to decline to 5% by the end of 2023</a>. The relative fall in UK inflation in 2023 should strengthen the pound, reducing the undervaluation predicted by the Big Mac Index.</p>
<figure class="align-center ">
<img alt="McDonald's Big Mac, fries and coke pictured in a McDonald's outlet." src="https://images.theconversation.com/files/487770/original/file-20221003-22-qm218l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/487770/original/file-20221003-22-qm218l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/487770/original/file-20221003-22-qm218l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/487770/original/file-20221003-22-qm218l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/487770/original/file-20221003-22-qm218l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/487770/original/file-20221003-22-qm218l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/487770/original/file-20221003-22-qm218l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Comparing the price of the same product in different countries can help explain currency values.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bangkok-thailand-july-26-2020-tasty-1785057680">KULLAPONG PARCHERAT / Shutterstock</a></span>
</figcaption>
</figure>
<p>Another theory that can help us understand the long-term value of the pound is the link between the sustainability of public debt, sovereign risk and exchange rates. A large increase in the ratio of government debt to gross domestic product (GDP) can trigger a weakening of the currency as <a href="https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2021.4115">financial markets expect more risk</a>, that is, concerns increase about the government being able to repay this debt. </p>
<p>Before the second world war, when sterling was the world’s reserve currency, the government could borrow at low cost. Present-day sterling no longer has the same privileges, however, particularly in recent weeks when <a href="https://www.ft.com/content/ab59b572-acc2-4ad8-989d-a6e5a4ca4c1a">sterling has even been compared to emerging market currencies</a>. This theory would dictate that the debt-to-GDP ratio and corresponding sovereign risk must decrease for sterling to recover its value.</p>
<p>Long-term exchange rate movements can also be assessed by comparing productivity differences across countries. Known as the <a href="https://www.nber.org/reporter/2014number4/real-exchange-rates-and-balassa-samuelson-effect-revisited">Balassa-Samuelson hypothesis</a>, this theory links productivity slowdowns in a country’s tradeable sector – the industries that produce items that are traded internationally – to a weakening in its real exchange rate (that is, after accounting for differences in inflation). </p>
<p>This theory would therefore link supply chain disruptions resulting from Brexit and the war in Ukraine with fundamental declines in the UK’s productivity, causing the long-term value of the pound to depreciate. </p>
<h2>Protecting the pound</h2>
<p>Rescuing the pound from long-term parity with the dollar will require action from policy makers. The Bank of England oversees monetary policy – using interest rates, among other tools to control the supply of money to the economy – and has a mandate from the government to tackle price stability by using interest rate increases to bring down inflation. Futures markets forecast an interest rate <a href="https://www.ft.com/content/3a78f11d-eb99-473b-9169-2685048f8d2b">increase of 4% to 6.25% by May 2023 </a>, showing an expectation that the Bank will continue to hike rates to tackle inflation.</p>
<p>The government takes care of fiscal policy – spending and taxation decisions – and recommendations from markets and organisations such as the <a href="https://www.ft.com/content/06962055-6b3d-4712-814f-acea3cb9e082">International Monetary Fund point towards a need for more prudence and fiscal restraint</a> in light of current inflationary pressures. The UK government will announce a <a href="https://www.gov.uk/government/news/update-on-growth-plan-implementation">medium-term fiscal plan on November 23 </a> that should aim to address the government debt to GDP ratio and shore up investor confidence in the economy. </p>
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Read more:
<a href="https://theconversation.com/why-imf-comments-on-the-uk-economy-spooked-traders-and-investors-191619">Why IMF comments on the UK economy spooked traders and investors</a>
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<p>Perhaps the most difficult challenge, however, will be tackling structural change as a result of the recent productivity slowdown due to Brexit and pandemic-related supply chain disruptions. Facilitating post-Brexit trade relations with the European Union could provide the necessary support to the UK’s tradeable sector to help boost the pound.</p>
<p>Without firm plans on these issues, the outlook for the long-term valuation of the pound remains uncertain. While global factors like the risk appetite of investors may continue to keep the dollar strong, domestic factors could mitigate these effects. Monetary tightening, fiscal consolidation and structural reform of the tradeable sector will all contribute to a revaluation of the pound, providing a route for policy makers to shore up its value on the international stage.</p><img src="https://counter.theconversation.com/content/191548/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ganesh Viswanath-Natraj does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>What’s the long-term outlook for pound sterling?Ganesh Viswanath-Natraj, Assistant professor, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1916532022-09-30T16:24:51Z2022-09-30T16:24:51ZBank of England bonds rescue has two ugly implications: more inflation and an even weaker pound<p>With UK government bonds and sterling both falling hard in recent days, the Bank of England has been forced to step in. Only a few months after it started tightening monetary policy to fight inflation by raising benchmark interest rates and ending its programme to “create” money through quantitative easing (QE), it has made a U-turn. </p>
<p>It plans to create perhaps £65 billion over a two-week period to buy long-dated government bonds to shore up that market, as well as temporarily putting on hold plans to start unwinding its £838 billion of QE money. So will this work?</p>
<p>The <a href="https://www.telegraph.co.uk/business/2022/09/28/how-chaos-pension-funds-forced-bailey-step/">specific reason</a> for the intervention appears to be UK pension funds, which suddenly became very vulnerable because of the bonds plunge. This was because pension funds rely on financial schemes known as liability-driven investment strategies or LDIs. </p>
<p>LDIs are essentially an insurance policy to ensure that funds have enough money to pay people’s pensions, even when bonds are paying very low returns. But when bond prices plunged after the government’s mini-budget, funds were forced to find extra money to cover their LDIs. This forced them to sell more bonds and threatened a domino effect where bond prices would keep falling and some funds could have collapsed. </p>
<p>The bank’s intervention has important implications for the wider economy. It comes when people are under increased financial stress because of higher interest rates, climbing energy bills, wages not keeping up with inflation and volatility in the financial markets. </p>
<p>The <a href="https://www.theguardian.com/business/2022/sep/30/uk-is-only-g7-country-with-smaller-economy-than-before-covid-19">economy is growing</a> only weakly and may well tip into recession. According to my recent <a href="https://doi.org/10.1080/1351847X.2022.2083978">co-authored work</a>, a recession could depress the UK economy for as many as 20 months – longer than the <a href="https://www.ftadviser.com/investments/2022/08/04/bank-of-england-predicts-15-month-recession/">15 months predicted</a> by the Bank of England. </p>
<p><strong>Stress in the UK markets</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/487522/original/file-20220930-24-rpdge0.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart measuring UK financial stress" src="https://images.theconversation.com/files/487522/original/file-20220930-24-rpdge0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/487522/original/file-20220930-24-rpdge0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=283&fit=crop&dpr=1 600w, https://images.theconversation.com/files/487522/original/file-20220930-24-rpdge0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=283&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/487522/original/file-20220930-24-rpdge0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=283&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/487522/original/file-20220930-24-rpdge0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=356&fit=crop&dpr=1 754w, https://images.theconversation.com/files/487522/original/file-20220930-24-rpdge0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=356&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/487522/original/file-20220930-24-rpdge0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=356&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This chart measures the volatility in the shares, bond and currency markets.</span>
<span class="attribution"><a class="source" href="https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=290.CISS.D.GB.Z0Z.4F.EC.SS_CIN.IDX">ECB</a></span>
</figcaption>
</figure>
<p>These conditions are likely to be an additional reason for the bank’s intervention – despite contradicting its efforts at tightening. Since the interest rates (or yields) on bonds rise as their prices fall, stepping into the market to buy bonds aims to push down these rates. </p>
<p>So far it has worked: yields on UK 20-year and 30-year bonds were both north of 5% before the intervention and are now respectively 4.1% and 3.9%. Since the level of these yields sets the tone for borrowing costs in the rest of the economy, this should encourage more consumer spending and business investment. </p>
<p><strong>Yields on 20-year and 30-year UK bonds</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/487509/original/file-20220930-14-vmcmbv.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart showing yields on long-dated uk gilts" src="https://images.theconversation.com/files/487509/original/file-20220930-14-vmcmbv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/487509/original/file-20220930-14-vmcmbv.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/487509/original/file-20220930-14-vmcmbv.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/487509/original/file-20220930-14-vmcmbv.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/487509/original/file-20220930-14-vmcmbv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/487509/original/file-20220930-14-vmcmbv.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/487509/original/file-20220930-14-vmcmbv.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Yellow = 30-year and blue = 20-year.</span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">TradingView</a></span>
</figcaption>
</figure>
<h2>The downsides</h2>
<p>The bank’s intervention, without even consulting its Monetary Policy Committee (MPC), is a form of what is known as yield curve control. This is a variety of QE in which, instead of just creating a certain amount of money with which to buy bonds, the central bank wants to achieve a specific yield. Such a policy is <a href="https://www.sipa.columbia.edu/academics/capstone-projects/bank-japan-japan-yield-curve-control-regime#:%7E:text=In%20September%202016%2C%20the%20BOJ,inflation%20overshooting%20target%20of%202%25.">mainly associated with Japan</a>, where the central bank has been buying bonds to keep yields at very low levels since 2016. </p>
<p>So far the Bank of Japan has achieved its objective, but the yen has lost a lot of value because the bank is having to create more and more money via QE: it now owns <a href="https://www.japantimes.co.jp/news/2022/07/04/business/financial-markets/boj-owns-half-jgbs/">some US$3.8 trillion</a> (£3.4 trillion) of Japanese government bonds, over half the total market. Meanwhile, the yen has virtually halved since 2010, and in recent weeks the <a href="https://www.ft.com/content/3e039392-a302-440d-9ad6-47ddecd44567">Bank of Japan had to</a> act to prop it up. </p>
<p>While Japan and the UK’s moves to control bond yields are somewhat different, the Bank of England intervention is also likely to put <a href="https://www.bankofengland.co.uk/quarterly-bulletin/2022/2022-q1/qe-at-the-bank-of-england-a-perspective-on-its-functioning-and-effectiveness">additional downward pressure</a> on sterling. It is also going to be inflationary. This shows how unappealing the policy options are at present. </p>
<h2>The implications</h2>
<p>Will the intervention work? The impact of QE on interest rates is the subject of voluminous research. It is difficult to estimate because it depends on the level of the interest rate, as well as the economic conditions. Things are <a href="https://doi.org/10.1016/j.jmoneco.2021.04.001">complicated further</a> because central bank studies find QE to be more effective than academic papers do. </p>
<p>But going roughly by the findings in this <a href="https://academic.oup.com/oxrep/article-abstract/28/4/750/343730">co-authored paper</a> of mine, an additional £50 billion of QE purchases in the UK might lower bond yields by 12 basis points (0.12 percentage points). That suggests that unless the bank continues with this new scheme far beyond the current October 14 end date, it is unlikely to have much effect. </p>
<p>Moreover, QE partly works by signalling to the markets that it will keep interest rates low for a protracted period. By setting a time limit and also saying that it plans to return to QT in due course, the bank is undermining its new policy. </p>
<p>Also, the <a href="https://www.bbc.co.uk/news/business-36629099">credit ratings agencies</a> may well downgrade UK sovereign debt. They <a href="https://doi.org/10.1016/j.jimonfin.2017.08.007">usually reduce</a> a country’s credit score when economic policy uncertainty rises significantly, or debt rises to unsustainable levels, or the quality of governance is on the slide. </p>
<p>We’re certainly seeing a big rise in uncertainty. At the same time, the <a href="https://info.worldbank.org/governance/wgi/">latest World Bank data</a> reveals that in terms of government effectiveness, the UK is down from the top 7% of countries to the top 13% over five years. What remains to be seen is how UK debt will rise, since <a href="https://www.ft.com/content/f443cfab-1d17-4d18-b274-01042270abb8">we currently</a> don’t have official forecasts following the mini-budget. </p>
<p>With no such estimates due to be published until November 23, not to mention the Bank of England’s failure to consult the MPC, the credit ratings agencies will be seriously tempted to downgrade. Such a move would push UK bond yields upwards again, therefore undermining the bank’s intervention. </p>
<p>It’s worth bearing in mind that the main source of the current instability remains the government’s mini-budget and unfunded tax cuts. This is what undermined investor confidence and caused the sell-offs of UK bonds and sterling in the first place, so the best way to reverse this is to tackle the problem at source by the government modifying its plans. </p>
<p>Having said that, such a U-turn would also leave investors very uneasy about economic management. One way or the other, a rocky economic road looks likely until at least the next general election.</p><img src="https://counter.theconversation.com/content/191653/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Costas Milas has received in the past funding by the Bank of England to work, as the principal investigator, on the project “Liquidity and output growth in the UK”. Costas Milas has received in the past ESRC funding as the principal organiser of an ESRC Seminar Series on Nonlinearities in Economics and Finance.</span></em></p>And don’t be surprised if a sovereign downgrade makes the problem even worse.Costas Milas, Professor of Finance, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1890762022-08-19T14:52:48Z2022-08-19T14:52:48ZInflation: why it’s very unlikely to get back below 2% for years to come<figure><img src="https://images.theconversation.com/files/480113/original/file-20220819-3561-aayy38.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Only going up. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/red-balloons-on-sky-111102284">Oleg Golovnev</a></span></figcaption></figure><p>Inflation in the UK and eurozone is still getting worse. <a href="https://www.telegraph.co.uk/business/2022/08/17/bank-england-expected-double-interest-rates-inflation-soars/">UK prices</a> rose a whopping 10.1% in July compared to a year earlier, while those <a href="https://www.reuters.com/markets/rates-bonds/euro-zone-july-inflation-confirmed-89-yy-core-measure-sharply-up-2022-08-18/">in the eurozone</a> went up 8.9% – breaking longstanding records in both places. Contrast this with the equivalent data from the US a few days earlier, where the 8.5% rate was lower than the previous month and below market expectations. </p>
<p>While <a href="https://www.kiplinger.com/personal-finance/inflation/605064/has-inflation-peaked-heres-what-the-experts-are-saying">some analysts believe</a> that <a href="https://www.aljazeera.com/economy/2022/8/10/is-global-inflation-nearing-a-peak">US prices</a> have now peaked, most think that the UK and eurozone, which are <a href="https://theconversation.com/why-are-gas-prices-still-high-despite-oil-getting-cheaper-and-what-will-happen-next-energy-expert-qanda-188767">much more exposed</a> to the effects of the Ukraine war, have a way to go yet. Even the Bank of England <a href="https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2022/august/monetary-policy-report-august-2022.pdf">is saying that</a> UK inflation will peak at over 13% later in 2022, before gradually returning to the 2% target level within two years. </p>
<p><strong>UK inflation vs US and Europe</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph comparing UK, US and eurozone inflation" src="https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=296&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=296&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=296&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=372&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=372&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=372&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Trading Economics</span></span>
</figcaption>
</figure>
<p>The prospect of more inflation is very bad news, since it reduces people’s real incomes and might also reduce investment, trade and economic growth. On top of that, the “cure” of raising interest rates can be harmful in its own right by making borrowing less attractive and driving down the value of everything from houses to shares. </p>
<p>But we also think it’s too optimistic to expect inflation to drop to 2% any time soon. More likely, we have entered a phase where various structural factors will keep it elevated for years to come. </p>
<h2>Transitory inflation?</h2>
<p>Until recently, central banks and the majority of economists and commentators <a href="https://www.ft.com/content/144460b0-887a-408f-89b6-e629cadd617f">attributed rising prices</a> to temporary factors and claimed this would stop without much intervention. They mainly blamed logistic bottlenecks and production constraints due to the COVID-19 lockdowns. They also argued that as the cost of many products had been abnormally subdued during the lockdowns, it was inevitable that inflation would temporarily spike when prices returned to previous levels. </p>
<p>When prices started rising more widely and violently – which <a href="https://theconversation.com/rising-inflation-unless-we-act-now-it-will-not-be-temporary-168106">we predicted</a> in a previous article a year ago – central banks and many economists <a href="https://obr.uk/box/how-does-the-russian-invasion-of-ukraine-affect-the-uk-economy/">started blaming</a> the war in Ukraine and the elevated energy and food prices that came with it. But while all these factors have helped to drive inflation, they are not the whole story. </p>
<p><strong>UK inflation 1997-2022</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing UK inflation since 1997" src="https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=262&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=262&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=262&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=329&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=329&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=329&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/united-kingdom/inflation-cpi">Trading Economics</a></span>
</figcaption>
</figure>
<p>There is one clear cause of inflation that central bankers are not eager to advertise, namely the record low interest rates and expansion of the money supply through quantitative easing that they have been implementing since the 2008 financial crisis. In centuries of capitalism, we’ve never seen such low interest rates before.</p>
<p><strong>UK benchmark interest rate 1997-2022</strong> </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing UK base rate since 1997" src="https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=255&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=255&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=255&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=321&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=321&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=321&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/united-kingdom/interest-rate">Trading Economics/Bank of England</a></span>
</figcaption>
</figure>
<p>This ultra-loose monetary policy has created a backdrop of high demand at a time when production capabilities and the supply of cheap energy and imports have been disrupted. It has also pushed all asset classes – property, shares, precious metals, cryptocurrencies and so on – into bubble territory. </p>
<p>This has created <a href="https://positivemoney.org/2018/04/bank-england-working-paper-considers-monetary-policys-effect-inequality/">record levels</a> of inequality across our societies, while also further inflating demand by making people who hold these assets feel <a href="https://www.investopedia.com/terms/w/wealtheffect.asp">they can afford</a> to spend more. Households as well as businesses have taken on cheap debt to finance properties and investments, or just to stay afloat. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/tinkering-with-the-mortgage-market-wont-solve-the-uk-housing-affordability-crisis-186146">Tinkering with the mortgage market won't solve the UK housing affordability crisis</a>
</strong>
</em>
</p>
<hr>
<p>Thanks to these high debt levels and high asset prices, central banks will need to tread very carefully when it comes to raising interest rates to combat inflation. Yet if they only hike interest rates a little, inflation will stay higher for longer. </p>
<h2>Currencies, Brexit and globalisation</h2>
<p>As far as the UK is concerned, the pound sterling is another factor likely to stoke inflation for years to come. It has already been weakening in comparison to other international currencies for a number of years, causing imports such as food, energy, cars and clothes to become more expensive. </p>
<p>There are numerous reasons to assume that this trend continues. <a href="https://www.weforum.org/agenda/2022/06/rates-inflation-federal-reserve-united-states/">Very aggressive</a> interest rate rises in the US are making the <a href="https://www.bloomberg.com/news/articles/2022-06-22/uk-should-worry-about-sterling-s-10-decline-senior-mp-says">dollar more appealing</a>, which lowers the value of other international currencies. The chronic under-investment and consequent <a href="https://theconversation.com/inflation-theres-a-vital-way-to-reduce-it-that-everyone-overlooks-raise-productivity-183938">productivity gap</a> in the UK compared to other G7 countries is another issue. </p>
<p>The pound also faces growing separatist sentiment in Northern Ireland and a looming second independence referendum in Scotland. Then there is Brexit. It is <a href="https://obr.uk/box/the-latest-evidence-on-the-impact-of-brexit-on-uk-trade/">weakening trade</a> with the EU and <a href="https://www.investmentmonitor.ai/analysis/two-years-brexit-uk-eu">reducing business investment</a>, <a href="https://economy2030.resolutionfoundation.org/wp-content/uploads/2022/06/The_Big-Brexit.pdf">both of which</a> weigh on the currency. </p>
<p>There is also the looming prospect of a trade war with the EU. And incidentally, the loss of hundreds of thousands of EU professionals from the UK workforce is aggravating the nation’s <a href="https://www.ft.com/content/96e43c16-f592-11e9-bbe1-4db3476c5ff0">longstanding skills gap</a>. This is helping to make <a href="https://www.theweek.co.uk/business/economy/956951/labour-shortages-urgent-problem-economy">wages more expensive</a> and <a href="https://www.resolutionfoundation.org/press-releases/brexit-has-damaged-britains-competitiveness-and-will-make-us-poorer-in-the-decade-ahead/">reducing production</a>, which will also lead to higher prices. </p>
<p>It should be said that the eurozone is also suffering from a weak currency. Alongside the Federal Reserve’s interest rate policy in the US, the EU also has to bear the brunt of the Russian gas crisis and structural economic problems in countries such as Italy and Spain that have never been resolved. Although the pound’s weakness is worse overall, the euro is nudging US dollar parity for the first time in two decades. </p>
<p><strong>Pound and euro values 2008-2022</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing the value of the pound and euro since 2008" src="https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This chart shows the value of the euro and pound against a basket of international currencies. The pound is in orange and the euro in blue.</span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">TradingView</a></span>
</figcaption>
</figure>
<p>Across the world, a final critical factor is the <a href="https://theconversation.com/china-us-tensions-how-global-trade-began-splitting-into-two-blocs-188380">partial reversal of globalisation</a>. <a href="https://www.ft.com/content/e17f3abf-b0c0-4855-8b0f-8d0fa5a26872">According to</a> Agustín Carstens, the head of the Bank for International Settlements (often described as the central bank of the central banks), <a href="https://www.ft.com/content/e17f3abf-b0c0-4855-8b0f-8d0fa5a26872">this will</a> increase product prices and keep inflation higher than it would have been for years to come. </p>
<p>There will be other factors that will counteract inflation. One is the retiral of the baby boomers, the largest generation ever seen, who will consume less as they stop working. Another is that technological advances continually increase productivity, which makes it cheaper to produce each unit. But with so many pressures driving prices up in the coming years, the overall likelihood is that inflation will remain stubbornly above central banks’ mandates of about 2%. This will have repercussions for consumption, profits, insolvencies and the stock market – not to mention economic growth overall.</p><img src="https://counter.theconversation.com/content/189076/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Many central bankers and economists are forecasting a return to low inflation within a couple of years, but that’s wishful thinking.Alexander Tziamalis, Senior Lecturer in Economics, Sheffield Hallam UniversityYuan Wang, Seinor Lecturer in Economics, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1866102022-07-08T14:51:18Z2022-07-08T14:51:18ZUK political resignations: the current uncertainty could affect the economy for nearly two years<figure><img src="https://images.theconversation.com/files/473031/original/file-20220707-26-1vup09.jpg?ixlib=rb-1.1.0&rect=23%2C11%2C3835%2C2531&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Recent political upheaval is impacting UK economic indicators.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/blue-stock-exchange-market-trading-graph-1683103366">GH Studio / Shutterstock</a></span></figcaption></figure><p>The recent <a href="https://news.sky.com/story/boris-johnson-to-resign-as-prime-minister-12646836">dramatic events</a> that led to the resignation of UK prime minister, Boris Johnson, on July 7 2022 raise the issue of how politics – and economic policy uncertainty more specifically – affects the UK economy. The answer, of course, is that it does, and sometimes for as much as two years.</p>
<p>News of Johnson’s resignation produced a small <a href="https://www.reuters.com/markets/currencies/sterling-gains-days-high-after-reports-pm-johnson-will-step-down-2022-07-07/">rally in sterling</a>, which was limited by expectations of his exit after a flood of ministerial resignations in the preceding days. The likelihood of a <a href="https://www.thisismoney.co.uk/money/markets/article-10985493/Sterling-euro-crash-dollar-soars.html">UK recession</a> has probably had more of an impact on the pound recently, but an upward tick in political certainty following days of speculation over whether Johnson would resign seems to have boosted sterling. This certainty will, of course, be short-lived as we now must wait for the outcome of a Conservative Party leadership contest.</p>
<p>Any major political change such as this will also create uncertainty around economic policy. This can be measured by tracking discussion of such uncertainty in newspapers, as well as surveys of economic forecasters, for example. Recent <a href="https://www.tandfonline.com/doi/full/10.1080/1351847X.2022.2083978">research</a> I conducted with Michael Ellington and Marcin Michalski, also from the University of Liverpool, uses such data from research project <a href="https://www.policyuncertainty.com/index.html">Economic Policy Uncertainty</a> to show that rising uncertainty about UK economic policy can damage GDP growth for up to 12 months. This can also spill over into UK financial markets – in the form of higher long-term borrowing costs and increased volatility in the UK bond, foreign exchange and stock markets – for as many as 20 months.</p>
<p>Such unwelcome developments will continue to cause the UK economy to contract – unless, of course, economic policy uncertainty recedes. At the moment, the hope is that the resignation of Johnson, followed by a fairly quick appointment of a new prime minister, will go some way towards providing political and economic stability.</p>
<p>But since a speedy new appointment is <a href="https://www.bbc.com/news/uk-politics-62068930">unlikely</a>, it’s worth looking at exactly how – and how much – continued uncertainty could affect economic indicators such as the value of the pound.</p>
<p>Here are three charts that provide some insights:</p>
<p><strong>1. The impact of uncertainty on sterling</strong></p>
<p>Sterling reflects investors’ confidence in the UK economy. Rising economic uncertainty should push the pound down. The recent rise in economic policy uncertainty following the chaotic events related to the end of Johnson’s premiership is actually very mild compared to events like the 2016 Brexit referendum or the beginning of the COVID pandemic in March 2020.</p>
<p>The chart below compares economic policy uncertainty (in red) with the value of sterling versus the US dollar, showing that the correlation is limited. Correlation is measured as a range from 1.0 to -1.0 (with zero, the middle point, meaning no correlation). This lack of strong correlation holds over both the 12-month growth rate of sterling versus the dollar (shown in blue at a correlation of -0.18), as well as the two-year moving average (shown in grey at a correlation of -0.22). In other words, economic policy uncertainty does affect sterling, but it only accounts for a small part of any change in its value.</p>
<figure class="align-center ">
<img alt="Line graph" src="https://images.theconversation.com/files/473095/original/file-20220707-24-8ot4l4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/473095/original/file-20220707-24-8ot4l4.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=346&fit=crop&dpr=1 600w, https://images.theconversation.com/files/473095/original/file-20220707-24-8ot4l4.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=346&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/473095/original/file-20220707-24-8ot4l4.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=346&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/473095/original/file-20220707-24-8ot4l4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=435&fit=crop&dpr=1 754w, https://images.theconversation.com/files/473095/original/file-20220707-24-8ot4l4.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=435&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/473095/original/file-20220707-24-8ot4l4.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=435&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Sterling to US dollar versus economic policy uncertainty.</span>
<span class="attribution"><a class="source" href="https://edu.bankofengland.co.uk/boeapps/database/fromshowcolumns.asp?Travel=NIxAZxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=2010&TD=11&TM=May&TY=2025&FNY=Y&CSVF=TT&html.x=66&html.y=26&SeriesCodes=XUMAUSS&UsingCodes=Y&Filter=N&title=XUMAUSS&VPD=Y">Bank of England, www.policyuncertainty.com/uk_monthly.html</a></span>
</figcaption>
</figure>
<p>Indeed, the most recent fall in the value of sterling (which was 13% weaker against the dollar in July 2022 versus 12 months ago, and 10.5% lower than the two-year average) is more probably linked to worries about the weakness of the UK economy. According to the OECD, <a href="https://www.ft.com/content/ee2ce542-eb19-48c1-9a1d-57a8200a47ae">UK growth</a> is set to be the worst in the G20 in 2023, apart from Russia. The prospect of the UK entering into a recession, as <a href="https://www.itv.com/news/2022-05-05/bank-of-england-forecasts-a-recession-in-the-uk-as-inflation-tops-10">forecast</a> recently by the Bank of England’s policymakers, has been a much more potent force on sterling than uncertainty.</p>
<p><strong>2. The impact of some certainty on UK business investment</strong></p>
<p>Economic policy uncertainty also affects UK business investments – or the amount of money investors are prepared to put into the UK economy. Unsurprisingly, greater economic policy uncertainty makes UK business less willing to invest (see chart 3) until the fog of uncertainty is lifted.</p>
<p>But even when some indication of future plans is given by the government, it doesn’t always tip the balance. For example, the newly appointed chancellor of the exchequer, Nadhim Zahawi, wants to kick-start the UK economy with a <a href="https://www.theguardian.com/politics/2022/jul/06/new-uk-chancellor-nadhim-zahawi-to-review-corporation-tax-rises">review</a> of the planned corporation tax increase from 19% to 25%. The theory is that scrapping the planned increase will encourage UK business investment, which will ultimately lift UK GDP growth.</p>
<p>At 19%, however, the UK corporation tax rate is already four percentage points lower than the corporation tax rate in other OECD countries. The chart below shows that business investment growth is not very connected to the average rate of corporation tax among OECD countries (shown as the difference with the UK rate in the chart, correlated at -0.15). The prospect of reversing the planned increase of the UK corporation tax rate won’t have a major impact on UK business investments, therefore. In addition to the UK corporation tax rate already being lower, this shows business investment decisions are only weakly related to tax policy.</p>
<figure class="align-center ">
<img alt="Line chart" src="https://images.theconversation.com/files/473038/original/file-20220707-20-pu1vdl.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/473038/original/file-20220707-20-pu1vdl.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/473038/original/file-20220707-20-pu1vdl.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/473038/original/file-20220707-20-pu1vdl.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/473038/original/file-20220707-20-pu1vdl.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=452&fit=crop&dpr=1 754w, https://images.theconversation.com/files/473038/original/file-20220707-20-pu1vdl.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=452&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/473038/original/file-20220707-20-pu1vdl.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=452&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">UK business investment growth and corporation tax rate (UK minus average OECD rate)</span>
<span class="attribution"><a class="source" href="https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/gan8/qna">Office of National Statistics, OECD</a></span>
</figcaption>
</figure>
<p><strong>3. The impact of economic policy uncertainty versus potential UK tax changes</strong></p>
<p>The following chart, however, shows business investment growth and economic policy uncertainty are more likely to move in line with each other (at a correlation of -0.36). In other words, economic policy uncertainty actually has a more powerful effect on business investments than the proposed changes in UK corporation tax policy.</p>
<p>It’s also worth noting that the UK Office for Budgetary Responsibility has <a href="https://www.ft.com/content/ae63f4fb-184e-42b0-8d46-7a8a9be89cf4">warned</a> of a worsening outlook in UK public finances, which undermines the new chancellor’s hopes for tax cuts since that would add to deteriorating public finances.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/473219/original/file-20220708-25-tn4hko.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/473219/original/file-20220708-25-tn4hko.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/473219/original/file-20220708-25-tn4hko.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/473219/original/file-20220708-25-tn4hko.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/473219/original/file-20220708-25-tn4hko.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/473219/original/file-20220708-25-tn4hko.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=453&fit=crop&dpr=1 754w, https://images.theconversation.com/files/473219/original/file-20220708-25-tn4hko.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=453&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/473219/original/file-20220708-25-tn4hko.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=453&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">UK business investment growth versus economic policy uncertainty.</span>
<span class="attribution"><span class="source">Office of National Statistics, www.policyuncertainty.com/uk_monthly.html</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The resignation of Johnson should lead to more normal functioning of the government in the UK, paving the way for less economic policy uncertainty. This is clearly a good thing. As my research in this area shows, uncertainty can have an economic effect for up to two years. Given the current outlook for the UK economy, we need all the certainty we can get.</p><img src="https://counter.theconversation.com/content/186610/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Costas Milas has received in the past funding by the Bank of England to work, as the principal investigator, on the project “Liquidity and output growth in the UK”. Costas Milas has received in the past ESRC funding as the principal organiser of an ESRC Seminar Series on Nonlinearities in Economics and Finance.</span></em></p>Uncertain economic policy can have lasting effects on financial marketsCostas Milas, Professor of Finance, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1699542021-10-15T14:56:44Z2021-10-15T14:56:44ZBrexit fears started hitting UK trade as early as 2015 – new research<p>After the UK formally left the EU at the end of 2020, it experienced a dramatic fall in trade. The media was <a href="https://www.euronews.com/2021/01/29/post-brexit-trade-is-red-tape-chaos-just-teething-trouble-as-the-uk-government-argues">full of stories</a> about lengthy hold-ups at customs and empty shelves in supermarkets. This has included cliff-edge falls in exports of <a href="https://www.theguardian.com/business/2021/sep/02/brexit-uk-food-drink-exports-eu-disastrous-decline">agricultural produce</a> like beef, milk and cheese, for example, after the UK and EU <a href="https://www.euractiv.com/section/uk-europe/news/eu-uk-trade-dropped-by-a-quarter-following-brexit-new-data-shows/">failed to agree</a> an alignment in standards that would have enabled free trade to continue. </p>
<p>There has since been some improvement, with the <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/august2021#:%7E:text=Imports%20increased%20by%20%C2%A33.7,increased%20by%20%C2%A31.6%20billion.">latest figures</a> showing that exports and imports with the EU in the three months to August 2021 were better than the three months before. Equally, however, there is <a href="https://www.theguardian.com/business/2021/sep/10/uk-trade-with-eu-falls-as-brexit-and-covid-drive-down-exports">evidence that</a> the UK has lost market share in Europe due to Brexit, as the EU’s imports from other countries <a href="https://www.bbc.co.uk/news/business-58484454">have picked up</a> following the COVID crisis. </p>
<p>Yet the raw export and import figures alone can only tell you so much about what has happened to British trade. You need to disentangle the effects of Brexit from from a myriad of other variables that can skew the numbers – not least COVID. This is a complicated problem that will take some time to resolve, even though the large relative fall in UK exports to Europe suggests that Brexit is the main culprit. </p>
<p>At the same time, however, it would be wrong to focus too much on 2021 when looking at the effects of Brexit on UK trade. We have just published a <a href="https://onlinelibrary.wiley.com/doi/abs/10.1002/jae.2878">new paper</a> looking at how it affected UK trade between 2015 and 2018. It shows for the first time that fears about Brexit weakened the UK’s trading position long before the vote to leave the EU even took place. It also points to a long-term adjustment in trading relationships that will continue for many years to come.</p>
<h2>Our approach</h2>
<p>We originally started examining the effects of the Brexit vote back in 2017. Using the <a href="https://theconversation.com/nobel-economics-prize-winners-showed-economists-how-to-turn-the-real-world-into-their-laboratory-169697">same method</a> that has in fact just won the Nobel prize for economics, we sought to screen out other effects on the data by comparing the UK’s exports to particular EU countries before and after the June 2016 referendum with other pairs of comparable trading nations. We chose pairs of nations to compare from a large pool of possibilities, for example using trading between Japan and South Korea to compare France and the UK. </p>
<p>When we first published results in late 2018, <a href="https://theconversation.com/brexit-has-already-hurt-eu-and-non-eu-exports-by-up-to-13-new-research-105334">we reported that</a> even <a href="https://www.researchgate.net/publication/328562558_Brexit_has_already_hurt_EU_and_non-EU_exports_by_up_to_13_-_new_research">shortly before</a> the vote in 2016, worries about Brexit were already reducing Britain’s trade with the EU and elsewhere. This was consistent with an <a href="https://ideas.repec.org/a/oup/econjl/v129y2019i623p2722-2744..html">earlier study</a> by another team of researchers into the effects of the vote on British GDP, as well as subsequent studies looking at <a href="https://ideas.repec.org/a/eee/eecrev/v124y2020ics0014292120300325.html">foreign direct investment</a> and <a href="https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2020/twerp_1280_-_fetzer.pdf">productivity</a>. </p>
<p>Since then, we have <a href="https://onlinelibrary.wiley.com/doi/abs/10.1002/jae.2878">extended and revised</a> our study considerably. Unlike almost all other studies, we now take account of the likelihood that Brexit worries started have an economic effect even further back in time – around the time of the surprise Conservative general election win in <a href="https://www.bbc.co.uk/news/election/2015/results">May 2015</a>. Indeed, Britain’s goods exports to non-EU countries started falling as well. </p>
<p>The likeliest explanation for these results is that UK goods exporters are highly dependent on EU countries as part of their supply chain. Even a modest increase in uncertainty surrounding such chains seems to have persuaded customers to look elsewhere – irrespective of whether they are in the EU. Notably, Britain’s imports of goods from the EU and elsewhere only began declining after the referendum. </p>
<p>By the time we get to March 2018 in our new paper, Britain’s goods exports to the EU were already 20% to 25% below trend, while its goods exports to non-EU countries were 15% below trend. We also extended our analysis to services, <a href="https://www.sciencedirect.com/science/article/abs/pii/S0167268120304844?dgcid=rss_sd_all">which account</a> for about half of Britain’s exports. Here we only have data on aggregate exports, rather than on trade with specific partners, but again we find that British exports started falling in 2015, albeit more after the referendum, and were about 8% below trend by early 2018. </p>
<h2>What this means</h2>
<p>The falls in exports to the EU since January are part of a longer, larger decline dating back to 2015. Changing trading patterns takes time for firms to find new partners or renew or terminate contracts. That means that much of the effect of Brexit on trade started with importers in other countries anticipating difficulties and making changes to their suppliers far in advance of the UK formally leaving the EU.</p>
<p>Because these are such slow processes, it is likely that there will continue to be adjustment over many years to come. So despite the UK’s deals with non-EU countries (which, before the <a href="https://www.gov.uk/government/news/uk-agrees-historic-trade-deal-with-australia">Australia trade deal</a>, were basically rollovers of existing deals), its competitiveness worldwide has been hit by the effects of Brexit on UK supply chains. </p>
<p>A caveat should be that some of the fall in demand for Britain’s produce might be offset by a cheaper pound. Sterling <a href="https://www.ifcm.co.uk/market-data/personal-instrument-pci-prices/gbp-index">fell sharply</a> in the run-up to the referendum, and although it has stayed around the same level since 2016, many believe it will <a href="https://theconversation.com/brexit-uk-pound-has-not-crashed-yet-but-heres-why-it-will-probably-suffer-in-years-to-come-152646">fall further</a> in future as a result of Brexit. If so, that could mean more demand for British exports, but it would also mean imports will be more expensive. So while, say, Australian wine might no longer bear tariffs, its price could still increase overall. At a time when there are already concerns about inflation, this is another factor that could drive prices higher.</p><img src="https://counter.theconversation.com/content/169954/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Any notion that trade only started being affected on January 1 2021 is completely wrong.Terence Huw Edwards, Senior Lecturer in Economics, Loughborough UniversityMustapha Douch, Lecturer in Economics, The University of EdinburghLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1681062021-09-16T14:59:28Z2021-09-16T14:59:28ZRising inflation: unless we act now, it will not be temporary<figure><img src="https://images.theconversation.com/files/421585/original/file-20210916-21-1h8nn56.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Up she goes. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/food-price-increase-grocery-bill-rise-1250958577">Lightspring</a></span></figcaption></figure><p>Consumer price inflation in the UK <a href="https://www.theguardian.com/business/2021/sep/15/uk-inflation-in-record-august-jump-as-food-and-drink-prices-rise">rose by 3.2%</a> year on year in August, the highest annual rise in nearly a decade. This was 1.2 percentage points above the July number, making it the biggest month-on-month rise since records began in 1997. Inflation is also an issue far beyond the UK: <a href="https://tradingeconomics.com/united-states/inflation-cpi">in the US</a>, it is currently running at 5.3%, for instance. </p>
<p>Bank of England economists <a href="https://www.ft.com/content/144460b0-887a-408f-89b6-e629cadd617f">conveniently attribute</a> these hefty rises to temporary factors and claim that inflation will soon stop rising in the UK without much intervention. They point out that prices a year ago were artificially subdued and as they returned to more “normal” levels, we were destined to get high measures of inflation. </p>
<p>One example would be <a href="https://www.racfoundation.org/data/uk-pump-prices-over-time">petrol prices</a>. Subdued demand for commuting helped to lower them to about 113p per gallon at the pump in 2020, yet as travel returned to pre-pandemic levels, increased demand for petrol has pushed prices to around 135p. Or you could look at the <a href="https://theconversation.com/eat-out-to-help-out-crowded-restaurants-may-have-driven-uk-coronavirus-spike-new-findings-145945">Eat Out to Help Out</a> scheme, which lowered the prices people paid in restaurants in summer 2020. As the scheme ended, prices hiked suddenly, which increased inflation. </p>
<p>The argument from the optimists is that these one-off shifts will wash through the system and prices will stabilise at their current levels. Yet not all price hikes can be attributed to temporary factors. There are also deeper, structural factors at play.</p>
<h2>What causes inflation</h2>
<p>Inflation is measured by the Office for National Statistics, which records the prices of thousands of products. These prices are defined by a never-ending interplay between supply and demand in the economy (assuming the government doesn’t intervene to fix prices in some way). </p>
<p>An abundance of excess produce or services means that prices are likely to fall, as we saw with petrol prices. On the other hand, demand for products that can’t be fully satisfied by the supply usually pushes prices higher. This happened with <a href="https://www.chargedretail.co.uk/2020/07/06/hand-sanitiser-prices-400-on-average-during-height-of-pandemic-as-cma-warns-price-gougers/">hand sanitisers</a> in 2020, for instance, and more recently with <a href="https://www.ft.com/content/f32ea2ee-bc7b-44ff-b276-0a68275d01ae">second-hand cars</a>.</p>
<p><strong>Ten years of UK inflation</strong></p>
<p>Besides COVID, Brexit has certainly affected prices. It has <a href="https://www.theguardian.com/business/2021/jun/26/recipe-for-inflation-how-brexit-and-covid-made-tinned-tomatoes-a-lot-dearer">rendered trade</a> with the UK’s neighbouring countries more difficult and expensive. This is contributing to shortages of products, pushing prices up. </p>
<p>Brexit has also hindered production in the UK by alienating a percentage of EU nationals working in the country. <a href="https://theconversation.com/three-things-that-could-help-save-christmas-2021-from-shortages-167072">Shortages of</a> fruit pickers, lorry drivers and NHS nurses have been pushing wages higher and making UK production more expensive. And there is the potential for more political and trade disruptions between the UK and EU, not least over <a href="https://theconversation.com/irish-sea-border-trust-is-the-biggest-problem-for-the-northern-ireland-protocol-164355">Northern Ireland</a>, which could make products and production even more expensive.</p>
<p>Another structural factor relevant to inflation is the British pound. The UK imports hundreds of billions of pounds worth of consumer products and raw materials. A lower pound sees the country paying more of its currency to purchase products from abroad, making these products more expensive in pounds. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Woman holding an open purse in one hand and a pound coin in the other." src="https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/421588/original/file-20210916-23-1tatcm6.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Doesn’t buy you much these days.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/hands-holding-british-pound-coin-small-369962102">Yulia Grigoryeva</a></span>
</figcaption>
</figure>
<p><a href="https://theconversation.com/brexit-uk-pound-has-not-crashed-yet-but-heres-why-it-will-probably-suffer-in-years-to-come-152646">The pound</a> has already been weakening against its rivals for several years due to economic factors like weaker productivity. This falling trajectory is also likely to continue due to political factors such as the looming second Scottish independence referendum and civil unrest in Northern Ireland. </p>
<p>Also, as the Bank of England keeps turbocharging the economy with vast amounts of money through <a href="https://www.ft.com/content/da550a79-5284-4bc1-96f9-f0eb8b6fed33">quantitative easing (QE)</a>, there should be downwards pressure on the value of the pound. The only thing that spares the pound from big falls is the fact that central banks of other major currencies are doing the same – for the time being. </p>
<p>Loose monetary policy also potentially contributes to higher inflation for another reason. Record low interest rates encourage consumers to borrow, while <a href="https://www.economicsonline.co.uk/Global_economics/Quantitative_easing.html#:%7E:text=QE%20can%20work%20in%20a,wealth%20effect%20for%20asset%20holders.">QE encourages banks</a> to lend more, since it boosts the value of the assets on their balance sheets. This can fuel demand for products such as cars, electronics and white goods (such as washing machines, dishwashers and fridges). Indicatively, though house prices are (wrongly) not counted in consumer price inflation, low interest rates <a href="https://www.bbc.co.uk/news/business-15198789">have contributed</a> to substantially higher prices in that market, as well as in <a href="https://tradingeconomics.com/united-kingdom/stock-market">stock market shares</a>.</p>
<h2>Where we go from here</h2>
<p>A little inflation in an economy can be positive, to the extent that it spurs consumers to buy things before the price rises. It is also a way of lowering the government’s debts in real terms, which is attractive after the <a href="https://tradingeconomics.com/united-kingdom/government-debt-to-gdp">massive borrowing</a> to pay for the COVID stimulus package. </p>
<p>High inflation is a problem, though, as it erodes people’s real incomes, meaning they consume less and businesses make less money. This is why the Bank of England was granted independence from the UK government in the 1990s, with a mandate to keep inflation around 2%. </p>
<p>The UK government and Bank of England should therefore work to address some of the longer term, structural factors which can pin inflation consistently high –particularly when “supply shocks” like a new COVID variant or trade sanctions on China could further imbalance supply and demand in the short to medium term. </p>
<p>Shortages of people and skills in the labour market must be addressed before the production capacity of the UK <a href="https://www.theguardian.com/politics/2021/jan/30/uk-firms-plan-to-shift-across-channel-after-brexit-chaos">is scarred</a> by more businesses relocating and outsourcing production. Through Brexit, the UK public voted to take control of migration, not shut it down when it’s needed. </p>
<p>Free trade in products and services with UK’s neighbouring continent is also paramount for the country’s long-term competitiveness, but here things are admittedly difficult. The EU will never accept the existential danger of a country benefiting from its massive free market without fully subscribing to its policies and regulations. Damage control seems to be the only way forward here, which underlines the importance of reaching a lasting agreement with the EU over Northern Ireland. </p>
<p>Finally, the Bank of England should consider taking its foot off the QE accelerator sooner rather than later, before inflation expectations <a href="https://www.theguardian.com/business/2021/may/13/top-bank-of-england-economist-warns-of-1970s-style-price-inflation">are crystallised</a> into further price increases. Money that is too abundant and ultra-low interest rates not only inflate asset prices but also boost corporate borrowing and provide a temporary lifeline to <a href="https://theconversation.com/concern-is-mounting-about-zombie-companies-why-that-matters-for-the-economic-recovery-158554">zombie companies</a>, laying the groundwork for the next crisis.</p><img src="https://counter.theconversation.com/content/168106/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Tziamalis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Inflation in the UK in August rose at the highest rate in a decade.Alexander Tziamalis, Senior Lecturer in Economics, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1551632021-02-12T15:33:15Z2021-02-12T15:33:15Z50 years since decimalisation: the UK’s currency change was not driven by ‘Europeanisation’<figure><img src="https://images.theconversation.com/files/383823/original/file-20210211-23-1lco9cv.jpg?ixlib=rb-1.1.0&rect=24%2C30%2C4065%2C2691&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Children marvel at the new decimal 50 pence coin, the world's first seven sided coin.</span> <span class="attribution"><span class="source">PA</span></span></figcaption></figure><p>It’s 50 years since the UK replaced its centuries-old £sd coinage with a new, streamlined decimal currency. The shift away from a currency that divided the pound into 20 shillings, each of which was further subdivided into 12 pence, directly affected everyone in the country – from school children to pensioners. </p>
<p>Over the years, many people in Britain have sought to paint the move to decimal currency as an early sign of the UK’s identity being subsumed by Europe. The UK’s non-decimal system was virtually unique, so abandoning it in favour of the type of currency prevalent in Europe and the rest of the world was a dramatic change. </p>
<p>On the 40th anniversary of decimalisation in 2011, historian Dominic Sandbrook argued in the <a href="https://www.dailymail.co.uk/debate/article-1351563/The-day-Britain-lost-soul-How-decimalisation-signalled-demise-proudly-independent-nation.html">Daily Mail</a> that the switch to a decimal system similar to that already in place in most of the world signalled:</p>
<blockquote>
<p>the end of a proud history of defiant insularity and the beginning of the creeping Europeanisation of Britain’s institutions.</p>
</blockquote>
<p>In similar vein, author Stephen Bayley, writing in the <a href="https://www.telegraph.co.uk/comment/personal-view/8317759/Decimalisation-Day-Forty-years-ag%20o-we-lost-the-rich-and-beautiful-poetry-in-our-pockets.html">Daily Telegraph</a>, referred to:</p>
<blockquote>
<p>a politically mandated purge of the old order… richly symbolic of a yearning to be modern… drawn by the compelling gravitational force of Euro-normality.</p>
</blockquote>
<p>But picturing decimalisation as part of a wider European project and a departure from British exceptionalism is wide of the mark.</p>
<p>As a modernising measure it was decidedly traditional. Some of the benefits of decimalisation were diluted by retaining the pound at its existing value for reasons of tradition and prestige. Because the pound was now divided into 100 pence, rather than 240 in the pre-decimal currency, this meant that an inconvenient halfpenny coin would be needed. </p>
<h2>Changes in the Commonwealth</h2>
<p>A key stimulus for the UK’s decision to abandon decades of splendid isolation as the last major economy with non-decimal coinage was the decision by other Commonwealth countries to abandon £sd for decimalised systems. By the beginning of the 1960s, South Africa had already decided to replace the £sd system with a decimalised rand. Australia and New Zealand were actively considering following suit.</p>
<p>Following consultation with his opposite numbers in Australia and New Zealand, the Conservative chancellor Selwyn Lloyd, in December 1961, set up a committee of enquiry, chaired by the eminent scientist Tony Halsbury, tasked not with recommending whether to decimalise, but to set out how it should be done.</p>
<p>The committee quickly concluded that the choice lay between retaining and decimalising the existing pound or following the antipodean example of replacing it with a major unit of half the value (the so called ten-shilling system), divided into 100 cents. In the event, reporting in late 1963, Halsbury’s committee decided in favour of the former option. </p>
<p>Jim Callaghan, the Labour chancellor who had since replaced Lloyd, eventually accepted this recommendation. He announced in March 1966 that the new currency, retaining the pound but divided into 100 new pence, <a href="http://news.bbc.co.uk/onthisday/hi/d%20%20%20%20%20%20%20%20%20ates/stories/march/1/newsid_2513000/2513943.stm">would be introduced in 1971</a>.</p>
<p>What is striking about both the Halsbury committee’s conclusions, and the government’s subsequent adoption of its recommendation, is how little consideration was given to harmonising with Europe. In the mid-1960s the major currencies of Europe such as the deutschmark and the French franc had values approximately equivalent to one-tenth of a pound or two shillings, known colloquially as a “florin”. It might have been expected that Halsbury would give serious consideration to a major unit of similar value, by using the existing florin as the basis for the currency. But the committee’s report dismissed this European option as having “no great significance”.</p>
<p>By way of contrast, in the Irish Republic there was a significant body of opinion arguing for a florin-based currency. This was supported both within government, and by the Federation of Irish Industry, which resulted in the government delaying its decision by two years to follow the UK’s lead and keep the pound.</p>
<h2>Halfpennies and compromises</h2>
<p>So why did the UK follow neither the examples of its Commonwealth partners or European neighbours in its choice of the pound as the major unit? Despite not ultimately recommending it, Halsbury acknowledged that the Australian/New Zealand system was more relatable to the previous coinage and avoided the need for an inconvenient halfpenny coin. The ten-shilling option, as implemented in Australia and New Zealand, was overwhelmingly supported by retail and consumer interests. </p>
<p>But the committee was swayed by the arguments of the City of London which thought it necessary to maintain a high value, “heavy” currency for reasons of prestige, and to negate any international perception that the currency was being devalued. </p>
<p>In current parlance a “world-beating” currency unit was required. For this reason the committee opted to retain the pound, and, with it, the problematic halfpenny coin.</p>
<p>This prestige argument chimed with Callaghan’s traditionalist instincts, as illustrated by this exchange with the BBC’s Graham Turner on the day the decision to decimalise was announced:</p>
<blockquote>
<p>Callaghan: Speaking for myself I think there’s a lot to be said for the pound. Every one of us in Britain is familiar with it, we know what it stands for, abroad they know what it stands for.</p>
<p>Turner: Why have you decided not to use the word ‘cent’?</p>
<p>Callaghan: Oh, I much prefer ‘penny’, why should we go American – penny is a good, it is indeed the oldest coin in Britain, it was originally a silver coin. I see no reason why we should adopt ‘cent’, it’s a miserable-sounding word by comparison with penny.</p>
</blockquote>
<p>The result was a very British modernisation. It sacrificed the potential benefits of having a fully decimalised system (such as being able to avoid the fiddly halfpenny) in the name of tradition and prestige. Creeping Europeanisation played no part at all.</p><img src="https://counter.theconversation.com/content/155163/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew John Cook does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The idea that Britain was giving up ‘glorious individualism’ to fit in with European neighboursAndrew John Cook, Visiting Research Fellow, History Department, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1526462021-01-13T14:21:20Z2021-01-13T14:21:20ZBrexit: UK pound has not crashed yet, but here’s why it will probably suffer in years to come<figure><img src="https://images.theconversation.com/files/378065/original/file-20210111-13-e87xsw.jpg?ixlib=rb-1.1.0&rect=0%2C33%2C5568%2C3667&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The UK pound could face harder times ahead. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/british-pound-exchange-rate-coin-placed-1281475084">Parlanteste/Shutterstock</a></span></figcaption></figure><p>The Brexit deal has failed to have any major effect on the <a href="https://www.bankofengland.co.uk/statistics/exchange-rates">exchange rate</a> of the pound since January 1. The pound has held steady against the US dollar at US$1.36 and has strengthened slightly against the euro to €1.12. This was very much consistent with the <a href="https://www.reuters.com/article/uk-britain-sterling-eu/pound-rises-above-1-35-on-brexit-trade-deal-expectations-idUSKBN28X1QQ">modest expectations</a> of the markets. But what about the longer term?</p>
<p>According to the research centre UK in a Changing Europe, the <a href="https://ukandeu.ac.uk/the-uk-economy-brexit-vs-covid-19/">effect of Brexit</a> on the economy is expected to emerge slowly, but to be permanent. The centre estimates that UK’s economy will shrink by a total 4.9% over 15 years. </p>
<p>This is likely to add extra pressure on the pound, which has <a href="https://uk.tradingview.com/symbols/TVC-BXY/">generally been weakening</a> in recent years. The question is how quickly the effects of Brexit are likely to feed through.</p>
<p>At the same time, Brexit has played a role <a href="https://www.instituteforgovernment.org.uk/blog/breaking-international-law-peace-northern-ireland">in undermining</a> international investors’ belief in the UK as a beacon of stability and trustworthiness and hence in a prosperous future for the British economy. This too is likely to affect the currency over time. </p>
<h2>The Brexit effect</h2>
<p>Sterling was already in an obvious downward trend against both the dollar and euro over the past couple of decades, as you can see from the chart below. Since the global financial crisis of 2008-09, this trend has accelerated because of the UK economy’s <a href="https://data.oecd.org/chart/6ekS">relatively slower productivity growth</a>, despite the fact that it was running a <a href="https://data.oecd.org/chart/6ekT">very loose monetary policy</a>. Incidentally, the pound has been falling faster against the euro than the dollar. </p>
<p><strong>Sterling/USD and sterling/euro rates Jan 2000-Dec 2020</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/378042/original/file-20210111-13-15ps699.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph comparing exchange rates of sterling against dollar and euro" src="https://images.theconversation.com/files/378042/original/file-20210111-13-15ps699.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/378042/original/file-20210111-13-15ps699.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/378042/original/file-20210111-13-15ps699.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/378042/original/file-20210111-13-15ps699.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/378042/original/file-20210111-13-15ps699.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=377&fit=crop&dpr=1 754w, https://images.theconversation.com/files/378042/original/file-20210111-13-15ps699.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=377&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/378042/original/file-20210111-13-15ps699.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=377&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://uk.tradingview.com/chart/?symbol=FX%3AGBPUSD">TradingView</a></span>
</figcaption>
</figure>
<p>So where does Brexit fit in? Although the Brexit trade deal guarantees that goods such as food, clothes, white goods and machines will continue to trade without tariffs, there are caveats that are likely to undermine trade between the EU and UK – with potential consequences for the currency. </p>
<p>To qualify for zero tariffs, goods need to satisfy the relevant <a href="https://www.wto.org/english/tratop_e/roi_e/roi_info_e.htm">rules of origin</a>, which relate to where the items came from. For example, a car assembled in the UK will qualify to be sold free of tariffs to the EU as long as 60% or more of its value was produced either in the UK or the EU.</p>
<p>The tweet, from Peter Foster, the public policy editor at the Financial Times, explains this concept, adding that companies are now realising what “rules of origin does to <a href="https://theconversation.com/brexit-deal-or-no-deal-food-bills-are-about-to-get-a-lot-more-expensive-152327">supply chains</a>”. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1346746239874953217"}"></div></p>
<p>In addition to the rules of origin, trade in goods covered by the deal is only tariff free as long as there is no significant divergence in terms of rules and regulations (<a href="https://www.bbc.co.uk/news/51180282">the famous level playing field clause</a>). This means that neither side is allowed to lower their standards if they want free trade to continue. If this led to divergence in UK standards over time, this could reduce the number of products that could be freely traded. However, it seems more likely that the UK will avoid diverging from EU standards and that as a result, more tariffs will not be added here. </p>
<p>Overall, however, all trade models predict that international trade in goods between the UK and EU will be reduced, given that Brexit creates new obstacles for the two trading partners and this is costly. As a consequence, some import prices will increase and some export jobs will be lost. </p>
<p>Less trade with the EU, the biggest single market for the UK, will imply reduced demand for its currency and hence a lower value for the pound. This could also mean that UK firms face less competition domestically from EU exporters, which could cause productivity in Britain to further flatten. Reduced productivity for the UK could also cause sterling to drop in value as devaluation is then the only alternative to maintain international competitiveness. </p>
<p>Services are even more important from the UK’s perspective. Led by areas like finance and law, they make up a <a href="https://commonslibrary.parliament.uk/research-briefings/sn06193/">significant part of UK GDP</a>, and the EU is again the biggest single export market.</p>
<p>The Brexit deal does not include trade in services. The UK and EU are still aiming to negotiate an agreement that will involve them. But with <a href="https://www.bloomberg.com/opinion/articles/2020-10-05/brexit-the-race-to-replace-the-city-of-london-begins">Paris and Frankfurt</a> seeking a share of the UK’s financial services business,
a reduction in EU-UK services trade seems unavoidable. </p>
<p>Maintaining the same level of activity in the UK therefore looks <a href="https://www.ft.com/content/a434b756-afe0-454d-9d70-ef2d42ea8d55">uncertain</a> in the short term, and not without its problems in the long term – depending on whether there is an agreement on services in the next year or so. Because services is the biggest part of the UK economy, a failure to reach such an agreement could reduce demand for sterling in European markets more than anything else.</p>
<p>In sum, the <a href="https://www.bbc.co.uk/news/explainers-55180293">Brexit deal</a> is likely to mean that sterling will continue its downwards trend against the dollar and euro. This will affect everything from the price that people pay in British supermarkets to the cost of holidaying abroad. It will not come as a surprise if the euro equals a pound sterling over the next two years and the dollar rate strengthens to US$1.20 to the pound.</p><img src="https://counter.theconversation.com/content/152646/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>British shoppers won’t have seen any difference to the value of their pounds yet, but everything from baked beans to bargain holidays could be affected down the line.Agelos Delis, Lecturer in Economics, Aston UniversityChristos Ioannidis, Professor of Finance, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1341712020-03-19T16:08:56Z2020-03-19T16:08:56ZWhy sterling has fallen off a cliff – and will probably keep going down<figure><img src="https://images.theconversation.com/files/321629/original/file-20200319-22602-1utl26f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Pounded. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/3d-rendered-illustration-portraying-credit-crunch-30249352">www.3drenderedlogos.com</a></span></figcaption></figure><p>The British pound’s slide in value against the US dollar to less than US$1.15 on March 18, from over US$1.30 at the start of the month, partly reflects a <a href="https://www.americanexpress.com/us/foreign-exchange/articles/safe-haven-currencies-during-recession/">familiar retreat</a> into US assets as the global economy stalls due to the coronavirus panic. America’s currency and government bonds are traditionally viewed <a href="https://theconversation.com/why-japanese-yen-is-still-one-of-the-safest-places-to-park-your-money-in-a-market-crash-133642">as the safest</a> place to park spare wealth, however erratic the country’s leadership. </p>
<p>But the pound’s unusually swift descent against the dollar, <a href="https://www.poundsterlinglive.com/usd/12971-pound-to-dollar-rate-crashes-to-1985-lows-and-has-further-to-fall">down more than</a> 10% in the past two weeks compared to the euro’s 4% decline against the American currency, highlights particular vulnerabilities that may also delay any sterling recovery. </p>
<p>The UK’s large financial sector means a lot of wealth could flow out of it – from pounds into dollars. The London stock market, home to a concentration of oil, gas and mining companies hit hard by commodity price falls, was always liable to sell off. While the flight from riskier equities is currently benefiting the UK government’s bonds, its <a href="https://www.ft.com/content/1be083a6-3149-11ea-9703-eea0cae3f0de">current near-zero borrowing cost</a> depends on foreign buyers keeping faith that the pound will rebound once current upheavals subside.</p>
<p><strong>Pound vs US dollar</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/321633/original/file-20200319-22614-1nf40z8.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/321633/original/file-20200319-22614-1nf40z8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/321633/original/file-20200319-22614-1nf40z8.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=382&fit=crop&dpr=1 600w, https://images.theconversation.com/files/321633/original/file-20200319-22614-1nf40z8.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=382&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/321633/original/file-20200319-22614-1nf40z8.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=382&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/321633/original/file-20200319-22614-1nf40z8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=480&fit=crop&dpr=1 754w, https://images.theconversation.com/files/321633/original/file-20200319-22614-1nf40z8.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=480&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/321633/original/file-20200319-22614-1nf40z8.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=480&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Going down.</span>
<span class="attribution"><a class="source" href="https://www.bbc.co.uk/news/topics/cx250jmk4e7t/pound-sterling-gbp">BBC</a></span>
</figcaption>
</figure>
<p>The UK’s <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments">chronic deficits</a> with other countries – on trade <a href="https://www.investopedia.com/ask/answers/010715/what-difference-between-current-account-deficit-and-trade-deficit.asp">and the wider</a> current account – are also pushing the pound down, since current conditions are likely to worsen them. The problem is that many UK exports – including finance, business services, transport services and high-value products that travel by air – depend on movements of people that simply can’t happen during a coronavirus lockdown. </p>
<p>Normally there is a healthy surplus in insurance, meaning that the UK exports much more of this service than it buys from overseas. But this is also at risk as the cost of production stoppage mounts and insurance companies pay out much more than usual. In contrast, the UK is a net importer of food, manufactured goods and other items it must continue to buy, and can’t quickly switch to producing more at home. </p>
<h2>That blank cheque</h2>
<p>Investors have also been digesting the financial implications of the <a href="https://theconversation.com/coronavirus-and-the-nhs-a-big-dose-of-cash-is-welcome-but-not-enough-on-its-own-133550">pledge by the chancellor</a>, Rishi Sunak, to do “whatever it takes” to support the economy through the extended health emergency. The chancellor was able to show in his <a href="https://theconversation.com/budget-2020-new-uk-chancellor-unveils-30-billion-coronavirus-fightback-but-debt-forecasts-look-optimistic-133461">March 11 budget</a> that the already substantial commitment to coronavirus relief and Brexit adjustment, which added £125 billion to the public debt projected in his predecessor Philip Hammond’s <a href="https://www.theguardian.com/uk-news/2020/mar/14/rishi-sunak-budget-2020-spending-spree-investment-productivity">last budget</a>, could still fit within the medium-term target of borrowing only for investment. </p>
<p>But that was before the Office for Budget Responsibility <a href="https://www.ft.com/content/72938c66-638f-11ea-a6cd-df28cc3c6a68">revised down</a> its already subdued growth forecasts for the full pandemic impact, which means tax revenues will dive and the extra government spending will lead to increased borrowing instead. On top of this came the <a href="https://www.theguardian.com/world/2020/mar/17/coronavirus-rishi-sunak-promises-to-guarantee-330bn-loans-to-business">government’s more recent commitment</a> on March 17 to underwrite the whole of the private sector for the indefinite period in which many people can’t go to work or shop for more than essentials. </p>
<p>The UK government’s fiscal deficit – the difference between public spending and income – is now set to go higher even than during the global financial crisis and world recession of 2007-09. Compared to that crisis, the government is starting with a high level of peacetime public debt, 84% of GDP according to the <a href="https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicspending/bulletins/ukgovernmentdebtanddeficitforeurostatmaast/september2019">latest data</a>, and an unusually relaxed monetary policy vital to keeping government and household debts affordable. </p>
<p><strong>UK fiscal deficit</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/321631/original/file-20200319-22632-1rg2fw0.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/321631/original/file-20200319-22632-1rg2fw0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/321631/original/file-20200319-22632-1rg2fw0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=343&fit=crop&dpr=1 600w, https://images.theconversation.com/files/321631/original/file-20200319-22632-1rg2fw0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=343&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/321631/original/file-20200319-22632-1rg2fw0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=343&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/321631/original/file-20200319-22632-1rg2fw0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=431&fit=crop&dpr=1 754w, https://images.theconversation.com/files/321631/original/file-20200319-22632-1rg2fw0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=431&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/321631/original/file-20200319-22632-1rg2fw0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=431&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Reference value = 3% level set out in the Maastricht Protocol on excessive deficit procedure.</span>
<span class="attribution"><a class="source" href="https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicspending/bulletins/ukgovernmentdebtanddeficitforeurostatmaast/march2019">ONS</a></span>
</figcaption>
</figure>
<p><strong>UK public debt</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/321630/original/file-20200319-22627-f7epq2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/321630/original/file-20200319-22627-f7epq2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/321630/original/file-20200319-22627-f7epq2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=356&fit=crop&dpr=1 600w, https://images.theconversation.com/files/321630/original/file-20200319-22627-f7epq2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=356&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/321630/original/file-20200319-22627-f7epq2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=356&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/321630/original/file-20200319-22627-f7epq2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=448&fit=crop&dpr=1 754w, https://images.theconversation.com/files/321630/original/file-20200319-22627-f7epq2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=448&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/321630/original/file-20200319-22627-f7epq2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=448&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Reference value = 60% level set out in the Maastricht Protocol on excessive deficit procedure.</span>
<span class="attribution"><a class="source" href="https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicspending/bulletins/ukgovernmentdebtanddeficitforeurostatmaast/march2019">ONS</a></span>
</figcaption>
</figure>
<h2>Gambling with modern money</h2>
<p><a href="https://www.theguardian.com/business/2020/mar/19/bank-of-england-cuts-interest-rates-to-all-time-low-of-01">Having cut</a> the base rate as far as it can, the Bank of England <a href="https://think.ing.com/articles/uk-government-ramps-up-virus-support-and-signals-more-to-come/">has turned again</a> to quantitative easing (QE), under which it effectively creates new money to buy old public debt so that new issues can be made by the government without pushing up the private sector’s borrowing costs. </p>
<p>Former Conservative government adviser Lord O’Neill has <a href="https://www.chathamhouse.org/expert/comment/coronavirus-all-citizens-need-income-support">recently revived</a> calls for a “people’s QE”, which would enable the government to use new money from the Bank of England to keep funding the ambitious infrastructure projects announced in the budget, as well as footing the coronavirus bill. Ironically, when people’s QE was proposed by Labour leader Jeremy Corbyn and his advisers several years ago, it was <a href="https://www.taxresearch.org.uk/HBlog/2018/04/11/why-isnt-labour-still-talking-peoples-quantitative-easing/">widely criticised</a> as redirecting new money that was only safe if kept within the financial sector. </p>
<p>This shift in the debate reflects a growing belief in the “<a href="http://bilbo.economicoutlook.neHhht/blog/?nbhnp=23673">modern money theory</a>” (MMT) argument that governments with their own currencies can spend any amount they like without raising equivalent amounts in tax. They only need to “finance” the resulting deficit with public debt if they’re worried about inflation, which <a href="https://www.ons.gov.uk/economy/inflationandpriceindices">at present</a> is low. </p>
<p>The current sell-off of the pound reflects financial markets’ recognition that MMT ideas are gaining influence – as well as their concerns about inflation. Whereas <a href="https://www.ft.com/content/bd8686f8-6919-11ea-bha3c9-1fe6fedcca75">2008 was</a> a crisis of falling demand caused by squeezed financial liquidity, today’s problem is equally a shock to the supply side, after a worldwide interruption to production of goods and services. If the UK goes too far with its fiscal deficit and QE, it will revive aggregate demand much faster than supply. The consequent excess could end in price inflation or an even wider trade deficit – both of which will tend to weaken the pound against other major currencies. </p>
<p>During the previous financial crisis, the massive UK fiscal deficit was purposefully designed to offset an equally large gap in private sector spending, as businesses cut their investment plans and households ramped up saving to pay down debts that had become too big. This time, the government is reopening a large public deficit at a time when the private sector is likely to run down savings and spend money it can’t currently earn. This may only work, without driving up inflation, if there’s a sharp rise in the UK’s <a href="https://www.thehguardian.com/business/2020/feb/b0h3/uk-productivity-slowdown-worst-since-industrial-revolution-hstudy">currently stalled productivity</a> in order to achieve more output from existing resources – and if trade partners revive fast enough to buy more British exports. </p>
<p>The US, eurozone, China and Japan <a href="https://www.bloombergquint.com/global-economics/u-s-rescue-plan-qe-down-under-ecb-emergency-call-eco-day">are also</a> relaxing fiscal policy and stepping up QE. These are significantly larger economic blocs, with a deeper market for the sovereign debt that they are issuing. If they can coordinate a swift revival of their own economies, the UK can ride on the resurging tide of trade and capital flows. Investors might then buy into the UK’s post-viral and post-Brexit growth story, with only a small premium on the government’s borrowing cost to cover currency and default risk. But until that escape route becomes more palpable, speculators are likely to keep betting against the pound.</p><img src="https://counter.theconversation.com/content/134171/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman has previously received funding from the British Academy and Leverhulme Trust.</span></em></p>The British currency is showing the strain of the government’s rescue plan.Alan Shipman, Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1229872019-09-05T10:55:52Z2019-09-05T10:55:52ZHow Brexit uncertainty is hurting the UK economy – in four charts<p>Each day brings with it new drama in UK politics and the course of Brexit – and it’s playing havoc with the UK economy. The following four graphs show the extent that the UK is at risk of a recession – and I conclude that the only way to put an end to all the uncertainty that is plaguing investment and markets is to have another referendum.</p>
<h2>1. Uncertainty</h2>
<p>Boris Johnson wants to deliver Brexit, with or without a deal. Of this he is certain. But Brexit-related policy uncertainty is on the rise and this is already harming the UK economy. The following graph shows how UK policy uncertainty spiked in 2016 around the time of the Brexit referendum and is on the rise again now. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/291094/original/file-20190905-175663-12fzl8t.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/291094/original/file-20190905-175663-12fzl8t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291094/original/file-20190905-175663-12fzl8t.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=413&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291094/original/file-20190905-175663-12fzl8t.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=413&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291094/original/file-20190905-175663-12fzl8t.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=413&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291094/original/file-20190905-175663-12fzl8t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=518&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291094/original/file-20190905-175663-12fzl8t.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=518&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291094/original/file-20190905-175663-12fzl8t.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=518&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
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<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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</figure>
<p>Uncertainty is measured by the discussion of policy uncertainty across 650 UK newspapers, reflecting business and consumer confidence in the economy. When uncertainty rises, this knocks the pound sterling currency down as investor confidence in the UK falls. </p>
<h2>2. Fall in the pound</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/291095/original/file-20190905-175705-b6jeqk.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/291095/original/file-20190905-175705-b6jeqk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291095/original/file-20190905-175705-b6jeqk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=386&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291095/original/file-20190905-175705-b6jeqk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=386&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291095/original/file-20190905-175705-b6jeqk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=386&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291095/original/file-20190905-175705-b6jeqk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=485&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291095/original/file-20190905-175705-b6jeqk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=485&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291095/original/file-20190905-175705-b6jeqk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=485&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>The weaker pound makes imports more expensive, which pushes up the prices of a number of consumer goods, causing inflation. In its <a href="https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2019/july-2019.pdf">July report</a>, the Bank of England had predicted inflation to drop from 2.1% in July 2019 to 1.56% by the end of the year and remain below the 2% inflation target until the third quarter of 2020. But, following recent events, the bank’s governor, Mark Carney, has revised his inflation estimates, saying it could <a href="https://www.theguardian.com/business/live/2019/sep/04/pound-sterling-markets-rally-no-deal-brexit-bank-of-england-business-live?page=with:block-5d6fbc618f0891025b447b8a#block-5d6fbc618f0891025b447b8a">more than double to 5.5%</a>. </p>
<p>This puts the Bank of England in a tricky situation. It will have to decide whether to raise interest rates to tackle inflation or cut them to stimulate economic growth.</p>
<h2>3. Risk of recession</h2>
<p>Government data suggests that the UK economy contracted by <a href="https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/ihyq/pn2">0.2% in the second quarter of 2019</a>. A recession occurs when there are two successive quarters of negative GDP growth. Early evidence suggests that the economy might already be heading this way because money growth, a reliable predictor of UK GDP growth, has weakened significantly. </p>
<p>The next chart plots together real money growth, using the Divisia money index, and GDP growth. The Divisia index weighs different forms of money according to their likelihood of being spent – notes and coins have a higher weight than money held in mutual funds, for example. My <a href="https://www.sciencedirect.com/science/article/pii/S026156061400031X?via%3Dihub">research shows</a> this measure of money has strong predictive power for the UK economy, and the latest growth rates of money are at a seven-year low. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/290990/original/file-20190904-175700-17l3jeb.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/290990/original/file-20190904-175700-17l3jeb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/290990/original/file-20190904-175700-17l3jeb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/290990/original/file-20190904-175700-17l3jeb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/290990/original/file-20190904-175700-17l3jeb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/290990/original/file-20190904-175700-17l3jeb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/290990/original/file-20190904-175700-17l3jeb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/290990/original/file-20190904-175700-17l3jeb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
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<span class="attribution"><span class="source">Costas Milas</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>This indicates that GDP growth in the third quarter of 2019 might be as bad as in the second quarter of 2019. In other words, there is evidence of a looming recession whether or not the UK leaves the EU on October 31. The <a href="https://www.theguardian.com/business/2019/sep/04/uk-slips-closer-to-recession-as-service-sector-slows-brexit">latest UK output surveys</a> also point to a looming recession.</p>
<h2>4. Financial stress</h2>
<p>A Brexit-related UK recession is far from certain, however, and it might not be too late to change course. Another reliable predictor of UK growth developments is the <a href="https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1426.pdf">UK financial stress indicator</a>. This pools information from the volatility of the exchange rate, the volatility of the equity market, the volatility of the bond market and the risk premium that investors demand to hold UK corporate bonds rather than the less risky UK government bonds.</p>
<p>The fourth chart plots together the <a href="https://sdw.ecb.europa.eu/quickview.do;jsessionid=244C179E1D35ED03C386D97A5CE499B0?SERIES_KEY=383.CLIFS.M.GB._Z.4F.EC.CLIFS_CI.IDX">UK financial stress indicator</a> and <a href="https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/ihyr/pn2?referrer=search&searchTerm=ihyr">UK growth</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/290994/original/file-20190904-175663-1cfxg4a.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/290994/original/file-20190904-175663-1cfxg4a.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/290994/original/file-20190904-175663-1cfxg4a.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=420&fit=crop&dpr=1 600w, https://images.theconversation.com/files/290994/original/file-20190904-175663-1cfxg4a.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=420&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/290994/original/file-20190904-175663-1cfxg4a.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=420&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/290994/original/file-20190904-175663-1cfxg4a.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=528&fit=crop&dpr=1 754w, https://images.theconversation.com/files/290994/original/file-20190904-175663-1cfxg4a.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=528&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/290994/original/file-20190904-175663-1cfxg4a.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=528&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Costas Milas</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>From a historical point of view, a rise in financial stress signals a slowdown in UK growth between one and three quarters prior to UK growth turning negative. Notice, however, that the latest financial stress data is pretty subdued – which does not point to a forthcoming UK recession. This is largely because market participants expect the Bank of England to step in by cutting interest rates and authorising additional quantitative easing to counteract the rise in financial stress caused by a possible no-deal Brexit.</p>
<h2>What the UK needs</h2>
<p>If there is a snap election, policy uncertainty will remain high. The <a href="https://www.huffingtonpost.co.uk/entry/tories-would-lose-6-seats-in-a-snap-election-new-focal-data-poll-analysis-shows_uk_5d6d8e61e4b0cdfe05745b9f">latest polls</a> suggest another hung parliament and this will solve nothing.</p>
<p>What the UK really needs is another referendum. There have been suggestions of a <a href="https://theconversation.com/brexit-deadlock-this-three-way-referendum-design-could-break-it-108217">three-way referendum</a> where people vote to remain in the EU or leave with the deal that Theresa May negotiated or a no-deal Brexit. Financial Times journalist James Blitz <a href="https://www.ft.com/content/0a4487ae-cf0c-11e9-b018-ca4456540ea6">suggests</a> a remain versus no-deal Brexit referendum to end the deadlock.</p>
<p>But I think the referendum should be solely between Theresa May’s deal (which is still on offer) versus a no-deal Brexit. Though I am myself a committed “Remainer”, I believe this is the only way to respect the previous referendum vote. It is also the best way to end the uncertainty that is plaguing business and investor confidence in the UK economy.</p>
<p>The best outcome will be to accept May’s withdrawal agreement (or a last minute slightly “tweaked” version of it) and move on. The Bank of England, and rightly in my view, forecasts that a no-deal Brexit will be <a href="https://www.bankofengland.co.uk/-/media/boe/files/letter/2019/governor-letter-to-chair-of-tsc-re-updated-brexit-scenarios.pdf">very damaging</a>.</p>
<p>I have <a href="https://www.ft.com/content/b99aead4-ad5d-11e9-8030-530adfa879c2">argued further</a> that the UK’s banking sector might struggle to absorb a potentially huge drop in bank deposits as customers will be looking for alternative returns outside a sinking (at least in the short-term) UK economy. So those in favour of no-deal should be brave and detailed enough to tell the rest of us why no-deal will not be damaging.</p><img src="https://counter.theconversation.com/content/122987/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>In 2012, I received funding from the Bank of England's Research Donations Committee to work on the project: “Liquidity and output growth in the UK”. One of the findings of the project was that divisia money predicts GDP growth quite well. I refer to this finding in the current piece.</span></em></p>It’s time to break the deadlock with a referendum on no-deal Brexit or Theresa May’s withdrawal agreement.Costas Milas, Professor of Finance, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1179342019-05-29T09:52:22Z2019-05-29T09:52:22ZTory leadership race could undermine confidence in UK economy<p>In the wake of the European elections, the bookies’ favourite to be the next Conservative Party leader, Boris Johnson was <a href="https://twitter.com/BorisJohnson/status/1132932982191382528">quick to tweet</a> “It is time for us to deliver Brexit”. This followed an <a href="https://www.theguardian.com/business/live/2019/may/24/trade-war-trump-huawei-us-china-deal-retail-sales-business-live?page=with:block-5ce7ea188f08ad67f1a805fe#block-5ce7ea188f08ad67f1a805fe">earlier statement</a> of his that Britain “will leave the EU on October 31, deal or no deal”. </p>
<p>Johnson’s strong language appeared to put traders on high alert, with the pound <a href="https://www.theguardian.com/business/live/2019/may/24/trade-war-trump-huawei-us-china-deal-retail-sales-business-live?page=with:block-5ce7e79b8f0807b455f878ef#block-5ce7e79b8f0807b455f878ef">dropping as a result</a>. But it’s not just the risk of the pound dropping during the leadership race that could hurt the UK economy, it’s the volatility that comments from leaders like Johnson produce and the general uncertainty over who will be the UK’s next prime minister that is harmful.</p>
<p>As the Tory leadership race progresses, it is more likely than not that the pound will face a very bumpy ride, with adverse effects on the British economy. This is because currency movements provide a measure of the vote of confidence of international investors in the strength of an economy. </p>
<h2>Movements in the pound</h2>
<p>Since the referendum vote, Brexit-related worries have pushed the pound down against the US dollar <a href="https://www.bankofengland.co.uk/boeapps/database/fromshowcolumns.asp?Travel=NIxAZxRSxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=20&FM=Jun&FY=2016&TD=23&TM=May&TY=2019&FNY=&CSVF=TT&html.x=97&html.y=38&C=C8P&Filter=N">by around 14%</a>. On a trade-weighted basis – that is against the currencies the UK trades most with – sterling has <a href="https://www.bankofengland.co.uk/boeapps/database/fromshowcolumns.asp?Travel=NIxAZxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=2016&TD=31&TM=Dec&TY=2025&FNY=Y&CSVF=TT&html.x=66&html.y=26&SeriesCodes=XUDLBK67&UsingCodes=Y&Filter=N&title=XUDLBK67&VPD=Y">dropped by around 10.4%</a>. </p>
<p>All this has implications for the British economy. A weaker exchange rate makes Britain’s cost of living higher – imports cost more, causing prices to go up. This makes the Bank of England more likely to consider interest rate hikes. </p>
<p>The fact that the Consumer Price Index (CPI) of inflation is on the rise (from 0.3% just before the referendum vote in May 2016 <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23?referrer=search&searchTerm=d7g7">to 2.1% in April 2019</a>) puts the Bank of England’s policymakers under pressure to hike. They may defer a little longer, however. Research <a href="https://www.sciencedirect.com/science/article/pii/S1572308919303171">recently published by my colleague Michael Ellington and me</a> shows that combating inflation through interest rate hikes is more effective when inflation is high (around 3% or more). Inflation in the UK remains well below this and so we can expect the Bank of England to keep interest rates as they are <a href="https://www.bankofengland.co.uk/-/media/boe/files/inflation-report/2019/may/inflation-report-may-2019.pdf?la=en&hash=D4985F6D513BF04EB81A28C53F6DB0CFB8CC09FB">for the time being</a>.</p>
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Read more:
<a href="https://theconversation.com/brexit-why-uncertainty-is-bad-for-economies-64334">Brexit: why uncertainty is bad for economies</a>
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<p>Meanwhile, Brexit-related policy uncertainty is <a href="https://www.bankofengland.co.uk/speech/2019/ben-broadbent-imperial-college-business-school-london">undermining business investments and economic activity</a>. British companies face the <a href="https://www.ft.com/content/061ab340-4ed0-11e9-9c76-bf4a0ce37d49">constant struggle</a> of hedging against a highly volatile sterling rate. </p>
<p>This also stops businesses from thinking about investments that would enhance their productivity. No wonder, then, that business investment is <a href="https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/kg7s/pn2?referrer=search&searchTerm=kg7s">currently contracting</a> as UK productivity is <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/timeseries/lzvd/prdy">hardly growing at all</a>. A leadership contest does little to boost confidence or certainty – especially when it is laden with threats to pull the UK out of the EU without a deal.</p>
<h2>The Johnson effect?</h2>
<p>In today’s fragile economic environment, Boris Johnson, in particular, has the potential of triggering large movements in the sterling exchange rate. Consider the popularity of Johnson <a href="https://trends.google.com/trends/explore?date=all&geo=GB&q=%2Fm%2F0h508">by Google searches alone</a> and how this relates to the ups and downs of the sterling currency. </p>
<p>Recent academic research has shown that Google search activity <a href="https://academic.oup.com/oep/article-abstract/67/2/406/2362293">causes movements in financial assets</a>. For instance, search activity related to Grexit (Greece’s possible from the Euro area in 2012-13) increased the cost of borrowing in the eurozone’s periphery over and above the impact of economic fundamentals and search activity for real estate <a href="https://aresjournals.org/doi/abs/10.5555/rees.35.3.c0ru080q45n34064">increased residential real estate prices</a>. </p>
<p>Similarly, Johnson appears to be having an effect on financial markets. He <a href="https://www.theguardian.com/politics/2016/feb/21/boris-johnson-joins-campaign-to-leave-eu">joined the Leave campaign in February 2016</a> and, as the following graph shows, there is a notable movement of his popularity (measured by the one-year rolling average of Google searches on Boris Johnson) in tandem with sterling’s volatility. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/276826/original/file-20190528-42593-1ll4sbx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/276826/original/file-20190528-42593-1ll4sbx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/276826/original/file-20190528-42593-1ll4sbx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/276826/original/file-20190528-42593-1ll4sbx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/276826/original/file-20190528-42593-1ll4sbx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=513&fit=crop&dpr=1 754w, https://images.theconversation.com/files/276826/original/file-20190528-42593-1ll4sbx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=513&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/276826/original/file-20190528-42593-1ll4sbx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=513&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Boris Johnson Google searches plotted alongside pound sterling to US dollar volatility.</span>
<span class="attribution"><span class="source">Costas Milas</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>What Johnson says during the Conservative Party leadership race is instantly and extensively discussed on the internet and this has an effect in moving the value of the pound. Boris therefore has a further role to play in the future volatility of the pound – especially since he is the <a href="https://www.telegraph.co.uk/politics/0/next-prime-minister-uk-odds-candidates-boris-johnson/">bookies’ favourite</a> to succeed Theresa May as prime minister and, one way or another, push Brexit negotiations over the line. </p>
<p>Given the considerable likelihood of him becoming the next UK prime minister, it would definitely be wise for Boris Johnson to think carefully before making statements that have the potential to move financial assets. The last thing the UK needs is a prime minister who has the potential to trigger considerable instability in its currency and therefore undermine the willingness of international investors to cast a vote of confidence in its already Brexit-battered economy.</p><img src="https://counter.theconversation.com/content/117934/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Costas Milas does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Boris Johnson’s attitude to Brexit and business has traders on high alert.Costas Milas, Professor of Finance, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1085772018-12-12T15:15:18Z2018-12-12T15:15:18ZWhy Brexit is causing turmoil for the pound and other markets<figure><img src="https://images.theconversation.com/files/250222/original/file-20181212-76980-1kpxkd3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/new-british-one-pound-sterling-coin-640959796?src=9hz69JgEwmb_6lspusdKGw-1-8">shutterstock</a></span></figcaption></figure><p>Uncertainty over what is happening with Brexit caused the pound to take another <a href="https://www.bbc.co.uk/news/business-46510636">significant dive</a> on December 10. It was the day before MPs were due to vote on the proposed Brexit deal agreed between the UK and the EU. The deal had <a href="https://www.independent.co.uk/news/uk/politics/brexit-latest-theresa-may-chequers-cabinet-deal-business-leaders-a8435776.html">backing from business leaders</a> because of the certainty it brought and the fact that it kept the UK in the free trade area for goods. </p>
<p>But the prime minister’s decision on December 10 to call off the vote means investors – like everyone else – were left with little idea of what will happen next. Interestingly, the internal Conservative party challenge to Theresa May’s leadership that <a href="https://theconversation.com/theresa-mays-handling-of-brexit-is-a-classic-case-of-bad-leadership-108646">took place</a> this week has had little impact on the financial markets – probably because the challenge does not change the fundamental uncertainty that surrounds the UK’s future relationship with the EU. Market turbulence, no matter how unpleasant, is both to be expected and to be somewhat welcomed, as it provides an unbiased verdict on political events.</p>
<p>The impact of Brexit on financial markets began in earnest in June 2016 when the British public voted to leave the EU. Given that many opinion polls suggested the Remain campaign would win, this came as a big shock to markets. The day after the referendum, June 24, the pound sterling fell to its lowest level against the US dollar <a href="https://theconversation.com/brexit-shock-has-caused-a-sterling-crash-of-historic-proportions-heres-just-how-bad-it-is-for-the-pound-62191">since 1985</a>, marking the pound down 10% against the US dollar and 7% against the euro. The FTSE 100 index lost nearly £85 billion and had fallen more than 500 points, while the FTSE 250 was down nearly 14%. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/250026/original/file-20181211-76989-1gc81yt.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/250026/original/file-20181211-76989-1gc81yt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/250026/original/file-20181211-76989-1gc81yt.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/250026/original/file-20181211-76989-1gc81yt.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/250026/original/file-20181211-76989-1gc81yt.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/250026/original/file-20181211-76989-1gc81yt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/250026/original/file-20181211-76989-1gc81yt.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/250026/original/file-20181211-76989-1gc81yt.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Pound sterling against the US dollar.</span>
<span class="attribution"><a class="source" href="https://www.xe.com/currencycharts/?from=GBP&to=USD&view=5Y">xe.com</a></span>
</figcaption>
</figure>
<p>The impact of the vote was not just contained in the UK. The euro was down almost 4% against the US dollar on June 24, and the French and German markets both fell by more than 10% upon opening. The Chinese yuan also fell dramatically, as did markets in the US, Canada and Brazil.</p>
<p>This sudden fall in equity and currency markets was mostly down to the uncertainty associated with the outcome of the vote. Financial markets traditionally <a href="https://theconversation.com/brexit-why-uncertainty-is-bad-for-economies-64334">react negatively to uncertainty</a> as investors aim to hedge the risk of the outcome and invest in so called “safe-haven” assets such as gold. Uncertainty here should not be confused with risk – risk can be quantified and its magnitude fed into pricing and value models, but this is not the case with uncertainty.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/when-gold-prices-go-up-so-does-the-cost-of-a-dowry-and-baby-girl-survival-rates-in-india-fall-96061">When gold prices go up, so does the cost of a dowry – and baby girl survival rates in India fall</a>
</strong>
</em>
</p>
<hr>
<p>This was seen after the Brexit vote itself when the price of gold increased quite considerably. Financial markets and sterling have both recovered somewhat from June 2016, with sterling rising whenever some positive news or certainty over future relations has come to the fore.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/250007/original/file-20181211-76986-f6ypio.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/250007/original/file-20181211-76986-f6ypio.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=240&fit=crop&dpr=1 600w, https://images.theconversation.com/files/250007/original/file-20181211-76986-f6ypio.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=240&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/250007/original/file-20181211-76986-f6ypio.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=240&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/250007/original/file-20181211-76986-f6ypio.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=301&fit=crop&dpr=1 754w, https://images.theconversation.com/files/250007/original/file-20181211-76986-f6ypio.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=301&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/250007/original/file-20181211-76986-f6ypio.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=301&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Price of gold (US$ per gram), 2016-18.</span>
<span class="attribution"><a class="source" href="https://www.moneymetals.com/precious-metals-charts/gold-price">Money Metals Exchange</a></span>
</figcaption>
</figure>
<h2>Endless uncertainty?</h2>
<p>If the Brexit deal had gone ahead and been passed by MPs, this would have brought certainty over what the future looks like. Sterling would have stabilised and increased in value. But it would not necessarily have meant an increase for the FTSE 100. </p>
<p>There is usually a negative correlation between markets and their own currency, since a fall in sterling generates higher revenues from UK firms that sell their goods abroad. Therefore the reaction of the stock market may be quite different to that of sterling in the long run. But in the short term, a deal would bring certainty and therefore we would expect an initial appreciation of sterling and possible rise in the FTSE 100 as investors have more confidence in the UK market.</p>
<p>As it is, there are a number of scenarios that could play out:<br>
1. A vote on a revised deal<br>
2. No deal<br>
3. A second referendum<br>
4. A no confidence vote<br>
5. General election </p>
<p>Any of these five outcomes brings huge uncertainty – not to mention the uncertainty over which of these paths will be taken – that could go on for weeks. Therefore we would expect sterling to depreciate considerably and an initial sell off in the FTSE100.</p>
<p>Investors are moving their assets from UK stocks to safer assets, such as gold, government bonds and to other currencies such as the Japanese yen and Australian dollar that may actually benefit from the ongoing uncertainty in the UK. There was <a href="https://www.ft.com/content/702e5dbc-ed8d-11e8-89c8-d36339d835c0">suggestion</a> that some MPs would have voted for May’s Brexit deal just to avoid the potentially huge negative impact of a no deal on financial markets, even if they were not entirely happy with the deal.</p>
<p>Many investors may have already hedged their portfolio so that whatever the outcome is, they will be unaffected. Nevertheless, Brexit – and the uncertainty that surrounds it – will continue to have a dramatic effect on the financial markets of the UK, Europe and beyond. Investors with skin in the game will take a cold hard look at the chaotic state of UK politics and deliver their unsentimental judgement.</p><img src="https://counter.theconversation.com/content/108577/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Investors – like everyone else – have little idea of what’s going to happen next and are reacting accordingly.Andrew Urquhart, Associate Professor of Finance, ICMA Centre, Henley Business School, University of ReadingBrian Lucey, Professor of International Finance and Commodities, Trinity College DublinLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1002982018-11-01T08:27:55Z2018-11-01T08:27:55ZTen things you didn’t know about the 20p coin<figure><img src="https://images.theconversation.com/files/242056/original/file-20181024-71026-tvx9wn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/mosaic-british-20p-coins-718811536?src=9e72lr_a6FA9_MOTwueGKg-1-10">Cristian Storto / Shutterstock</a></span></figcaption></figure><p>Ten years ago, in November 2008, the Royal Mint issued an <a href="https://www.royalmint.com/discover/uk-coins/undated-20p-coin/">undated 20p coin</a>. Instead of featuring the date that they were minted, as all coins are meant to, a mix up meant that the year of issue did not feature. This was the first time an <a href="https://www.moneywise.co.uk/news/2009-06-29/could-your-20p-be-worth-50">undated coin entered circulation</a> in more than 300 years; the last occasion being in 1672 during the reign of Charles II.</p>
<p>The problem arose when an old heads design was used with a new tails design. The date was not present on either side of these designs. The date was meant to move from the reverse (tails) side to the obverse (heads) side, but some coins were produced using the tooling for the obverse of an old design and the reverse of the new design. The date was missing from as many as 200,000 coins before the problem was noticed.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/242045/original/file-20181024-48697-1ud0h3d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/242045/original/file-20181024-48697-1ud0h3d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/242045/original/file-20181024-48697-1ud0h3d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1148&fit=crop&dpr=1 600w, https://images.theconversation.com/files/242045/original/file-20181024-48697-1ud0h3d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1148&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/242045/original/file-20181024-48697-1ud0h3d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1148&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/242045/original/file-20181024-48697-1ud0h3d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1443&fit=crop&dpr=1 754w, https://images.theconversation.com/files/242045/original/file-20181024-48697-1ud0h3d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1443&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/242045/original/file-20181024-48697-1ud0h3d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1443&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">20p coins from 2008.</span>
<span class="attribution"><a class="source" href="https://www.royalmint.com/discover/uk-coins/undated-20p-coin">Royal Mint</a></span>
</figcaption>
</figure>
<p>Here are ten things you may not know about the 20p coin, in commemoration of the ten-year anniversary.</p>
<h2>Little coin, big history</h2>
<p>1) The 20p coin was introduced on June 9, 1982. At the end of the 1970s, there was a view that the decimal currency was too heavy. The introduction of a 20p coin substantially reduced the weight of coins in circulation by decreasing the number of 10p coins in use.</p>
<p>2) The coin was introduced more than ten years after the UK and Ireland changed to a decimal system of currency, which was on <a href="https://www.historic-uk.com/HistoryUK/HistoryofBritain/Decimalisation-in-Britain/">February 15,, 1971</a>. Before decimalisation, the currency was based on pounds (240 pence), shillings (12 pence) and pence, so 20 shillings made up a pound. The move to decimal currency ensured that all the currency used base 10, rather than the previous system, which used both base 12 and base 20.</p>
<p>3) In 1982, at the same time the 20p was introduced, the word “new” in “new penny” or “new pence” was removed from coins and replaced by the number of pence. From its introduction, the 20p coin only ever said “twenty pence”.</p>
<p>4) In 2008-09, 136m 20p coins were minted, worth £27.2m pounds. In March 2016, the <a href="https://www.royalmint.com/discover/uk-coins/circulation-coin-mintage-figures/">Royal Mint reported</a> that there were more than three billion 20p coins in circulation, which are are worth more than £600m.</p>
<p>5) The undated 20p is legal tender and should you find one it has a face value of 20p. Of course, they are sought by collectors and some stories have said they were <a href="https://www.telegraph.co.uk/foodanddrink/pubs/5736314/Customer-handed-20p-worth-7000-in-change-for-pint.html">worth thousands of pounds</a>, although a cursory <a href="https://www.ebay.co.uk/bhp/undated-20p-coin">search on eBay</a> suggests you’re more likely to get around £50 for one.</p>
<p>6) A coin which has the incorrect combination of obverse (heads) and reverse (tails) is called a “mule”. A mule could be made up of two obverse sides, or an incorrect combination of obverse and reverse, which is the case with the 2008 undated 20p coin.</p>
<p>7) The shape of a 20p coin is an <a href="http://matheminutes.blogspot.com/2011/12/what-shape-is-20-pence-piece.html">equilateral curve heptagon</a>. This means it has seven edges, which are all the same length. However, the edges are not straight. As the name of the shape suggests, the edges are curved. The 50p is also an equilateral curve heptagon. </p>
<p>8) All circular coins have the same width (diameter) no matter how you measure it. It might seem strange, but an equilateral curve heptagon also shares this property. No matter how you try and measure across its surface, you will find that the measurement is the same. This is important for coins as it makes life a lot easier for vending machine manufacturers as you know what the width of the coin should be, no matter its orientation. But from a user’s point of view, a 20p will feel different to other coins so is easy to differentiate, especially for those with visual impairments.</p>
<p>9) The 20p coin is legal tender up to £10 (which is 50 20p coins). You cannot legally pay for anything <a href="https://www.royalmint.com/help/trm-faqs/legal-tender-amounts/">with more than this many 20p coins</a>.</p>
<p>10) Since its introduction in 1982, the 20p coin has featured <a href="https://www.royalmint.com/discover/uk-coins/coin-design-and-specifications/twenty-pence-coin/">four different portraits of the Queen</a>. They were designed by Arnold Machin (1982-1984), Raphael Maklouf (1985-1997), Ian Rank-Broadley FRBS (1998-2015) and Jody Clark (2015 to date).</p><img src="https://counter.theconversation.com/content/100298/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Graham Kendall does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In 2008, the first undated coin was introduced in the UK for more than 300 years.Graham Kendall, Professor of Computer Science and Provost/CEO/PVC, University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1053342018-10-23T11:50:08Z2018-10-23T11:50:08ZBrexit has already hurt EU and non-EU exports by up to 13% – new research<figure><img src="https://images.theconversation.com/files/241812/original/file-20181023-169828-1f9iiph.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Exports have slowed since Brexit.</span> <span class="attribution"><span class="source">Ian_Stewart / Shutterstock.com</span></span></figcaption></figure><p>Over the past few months, we have been investigating how the vote of June 23 2016 has since affected the values and patterns of Britain’s trade with major trading partners inside and outside the European Union. By comparing trade flows with a model of what UK trade flows would have looked like had the UK voted to stay in the EU, we can clearly see that British exports to both EU and non-EU countries have taken a hit.</p>
<p>The very fact that Brexit hasn’t actually happened yet makes this question even more interesting to us as trade economists. No tariffs or trade barriers have been placed between the UK and EU, and yet companies are already aware that, depending upon the final deal, there may be substantial barriers within months. Several <a href="https://ideas.repec.org/s/nbr/nberwo.html">academic studies</a> have emphasised that policy uncertainty is a major deterrent to trade, and the current Brexit negotiation period has been a good opportunity to test this.</p>
<p>It is a particularly good test because the Brexit vote came as such a shock: even on the day of the referendum, odds on Remain winning <a href="https://www.independent.co.uk/news/uk/politics/eu-referendum-bookies-have-always-made-a-remain-vote-favourite-and-the-odds-continue-to-shorten-a7093971.html#commentsDiv">were about 9:2</a>. A classic sign of surprise is the plunge of 10% to 15% in value of sterling against the dollar and euro <a href="https://theconversation.com/brexit-shock-has-caused-a-sterling-crash-of-historic-proportions-heres-just-how-bad-it-is-for-the-pound-62191">within hours of the result</a>.</p>
<p>In order to investigate the effects of the policy uncertainty and anticipation upon Britain’s exports and imports, we turned to the published monthly statistics for bilateral trade between the UK and 28 other countries (14 in the EU, 14 outside). These are currently available from 1999 to the first three months of 2018. We used these to predict what might have been expected to happen to the UK’s trade with each country in a counterfactual world where the Brexit vote had gone the other way. </p>
<p>A key assumption in our model is that the Brexit vote had a very strong shock upon trade flows involving the UK, but relatively little shock on flows which do not involve the UK. This allows us to compare how British trade levels have changed based on trade flows between other pairs of countries and, in doing so, we built a “synthetic doppelganger” for Britain’s trade in the months after the Brexit vote, using patterns of trade between other countries for unobservable shocks across countries such as changes in tastes and global business confidence. We also accounted for specific observable factors such as GDP and exchange rate changes.</p>
<h2>Clear and consistent findings</h2>
<p>We compared UK exports to and imports from each of the other 28 countries with a synthetic doppelganger. In all cases, the doppelganger and actual trade track each other closely up to the point of the referendum, after which there is a clear divergence.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/241597/original/file-20181022-105779-1h5u79v.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/241597/original/file-20181022-105779-1h5u79v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/241597/original/file-20181022-105779-1h5u79v.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=380&fit=crop&dpr=1 600w, https://images.theconversation.com/files/241597/original/file-20181022-105779-1h5u79v.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=380&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/241597/original/file-20181022-105779-1h5u79v.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=380&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/241597/original/file-20181022-105779-1h5u79v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=477&fit=crop&dpr=1 754w, https://images.theconversation.com/files/241597/original/file-20181022-105779-1h5u79v.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=477&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/241597/original/file-20181022-105779-1h5u79v.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=477&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://ukandeu.ac.uk/estimating-the-trade-effects-of-the-brexit-announcement-shock/">Mustapha Douch, T Huw Edwards, Christian Soegaard</a></span>
</figcaption>
</figure>
<p>For both UK exports to the EU and those to non-EU countries, we found a clear and consistent story: from the moment of the vote, British exports fall strongly behind the projected growth had there been no Brexit vote. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/241598/original/file-20181022-105776-1w8f2b.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/241598/original/file-20181022-105776-1w8f2b.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/241598/original/file-20181022-105776-1w8f2b.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/241598/original/file-20181022-105776-1w8f2b.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/241598/original/file-20181022-105776-1w8f2b.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/241598/original/file-20181022-105776-1w8f2b.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/241598/original/file-20181022-105776-1w8f2b.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/241598/original/file-20181022-105776-1w8f2b.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=468&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://ukandeu.ac.uk/estimating-the-trade-effects-of-the-brexit-announcement-shock/">Mustapha Douch, T Huw Edwards, Christian Soegaard</a></span>
</figcaption>
</figure>
<p>In both cases, the divergence is of a similar order of magnitude (8-13% before taking account of lagged exchange rate effects, or 13-16% without doing so). Interestingly, this is similar to the fall in sterling that followed the Brexit vote. This suggests that, through the fall in the pound, the UK started pricing its exports much more cheaply (in terms of dollars), but found few extra buyers, other than those we would have already expected, so the volume of exports moved in line with trade between our neighbours, but they were worth less due to the fall in sterling.</p>
<p>We also found commercial services exports – things like travel and tourism, transportation services, education, and banking, which are priced in US dollars – also stagnated for 18 months after the Brexit vote. This is at a time when world demand was growing. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/241604/original/file-20181022-105754-1cez4sk.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/241604/original/file-20181022-105754-1cez4sk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/241604/original/file-20181022-105754-1cez4sk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=381&fit=crop&dpr=1 600w, https://images.theconversation.com/files/241604/original/file-20181022-105754-1cez4sk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=381&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/241604/original/file-20181022-105754-1cez4sk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=381&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/241604/original/file-20181022-105754-1cez4sk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=479&fit=crop&dpr=1 754w, https://images.theconversation.com/files/241604/original/file-20181022-105754-1cez4sk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=479&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/241604/original/file-20181022-105754-1cez4sk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=479&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://ukandeu.ac.uk/estimating-the-trade-effects-of-the-brexit-announcement-shock/">Mustapha Douch, T Huw Edwards, Christian Soegaard</a></span>
</figcaption>
</figure>
<p>In interpreting these poor export results, it is worth noting that there have been many <a href="https://ideas.repec.org/s/nbr/nberwo.html">reports of high export figures</a>. But it’s important to recognise that these export numbers are measured in pound sterling and do not take into account the weakness of Britain’s currency. While there’s the appearance of a rise in exports, this is in large part due to the growth there’s been in global markets over the last couple of years.</p>
<p>Further, we argue that, since a significant amount of Britain’s exports are used to buy imports, what really matters is the value in terms of the currencies of our trading partners. If British exports sold can buy fewer imports, that translates to falling living standards at home, as imported goods rise faster in price than wages. Hence, Britain has lost a significant share in global markets (in terms of value) due to the uncertainties around Brexit, and is already poorer as a result.</p>
<p><em>Correction: an earlier version of this article referred to “volumes of Britain’s trade” instead of “values” in the opening sentence.</em></p><img src="https://counter.theconversation.com/content/105334/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Brexit has not happened yet but the uncertainty unleashed by the vote to leave the EU is already taking its toll.Terence Huw Edwards, Senior Lecturer in Economics, Loughborough UniversityChristian Soegaard, Lecturer in Economics, University of WarwickMustapha Douch, Research Fellow in Economics, Lloyds Banking Group Centre for Business Prosperity (LBGCBP), Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/859332017-10-19T13:14:54Z2017-10-19T13:14:54ZBritain’s ‘missing billions’ put UK on the back foot for Brexit<figure><img src="https://images.theconversation.com/files/191034/original/file-20171019-1066-1g0z72c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Numbers crunched.</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>Britain has £490 billion less in its coffers than previously thought, according to <a href="https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/articles/nationalaccountsarticles/impactofmethodchangestothenationalaccountsandsectoraccountsquarter11997toquarter22017#balance-of-payments">revised estimates</a> of Britain’s balance of payments from the UK’s official statistics body, the ONS. Whereas previous estimates indicated that in 2016 Britain’s assets overseas exceeded its liabilities to the tune of £469 billion, this has now been revised downwards to a net deficit of £22 billion. In the context of the potential disruption to trade and foreign investment from Brexit, this is a worrying development.</p>
<p>It is important to note that this does not mean that the country has suddenly become nearly half a trillion pounds poorer. The ONS has now collected more detailed data on Britain’s financial transactions with the rest of the world to build up a more accurate picture of its net stock of external wealth. Nevertheless, the figures do indicate that the UK’s external wealth position is much weaker than previously thought. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/190853/original/file-20171018-32355-hsplas.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/190853/original/file-20171018-32355-hsplas.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/190853/original/file-20171018-32355-hsplas.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=356&fit=crop&dpr=1 600w, https://images.theconversation.com/files/190853/original/file-20171018-32355-hsplas.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=356&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/190853/original/file-20171018-32355-hsplas.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=356&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/190853/original/file-20171018-32355-hsplas.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=448&fit=crop&dpr=1 754w, https://images.theconversation.com/files/190853/original/file-20171018-32355-hsplas.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=448&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/190853/original/file-20171018-32355-hsplas.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=448&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Primary income balance revision, UK, 1997 to 2016 (£ billion).</span>
<span class="attribution"><a class="source" href="https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/articles/nationalaccountsarticles/impactofmethodchangestothenationalaccountsandsectoraccountsquarter11997toquarter22017#balance-of-payments">Office for National Statistics (ONS)</a></span>
</figcaption>
</figure>
<p>The country’s net international investment position represents the difference between UK residents’ holdings of assets overseas and foreigners’ holdings of assets in the UK. Although the ONS revision appears dramatic, it should be borne in mind that both British assets held overseas and foreign holdings of British assets are large, each totalling upwards of £10 trillion. Relative to these totals, the difference between these two figures is small. </p>
<p>Plus, this data comprises a range of assets, including British companies investing overseas and foreign companies investing in the UK, as well as cross-border holdings of company bonds, shares and other financial assets. Collecting data on this range of assets is a complex task and the ONS has widened and improved its data collection here. As a result, it has revised downwards its earlier estimates of Britons’ holdings of a range of foreign assets.</p>
<h2>Cause for concern</h2>
<p>The <a href="https://theconversation.com/explainer-what-a-weaker-pound-means-for-the-british-economy-61872">fall in the pound</a> since the Brexit referendum result increases the sterling value of British assets held overseas. This has improved the external net asset position of the UK, but by substantially less than earlier estimates. </p>
<p>The UK has run a current account deficit <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/timeseries/hbop/pnbp">continuously since the mid-1990s</a>, reaching a peacetime record deficit relative to GDP in 2014. The longstanding deficit on trade in goods is partially offset by a surplus on trade in services; in most years before 2007, a net inflow of receipts from foreign investments also made a positive contribution. </p>
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<p>If a country is running a deficit with the rest of the world on its current account then it must borrow from the rest of the world to finance this. Britain therefore has to attract funds from overseas. As Bank of England governor Mark Carney <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech983.pdf">put it</a> (channelling Blanche DuBois) the UK is reliant on the “kindness of strangers” to fund its external deficit. But borrowing from abroad weakens a country’s net international investment position over time, as external liabilities rise. </p>
<p>The detail of these figures raises several areas of concern. The fall in the pound since the referendum has only had a limited impact on improving the trade balance. Exports have risen, <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/mar2017">but only modestly</a>. Flows of returns to foreigners’ investments in the UK have risen relative to returns received in Britain on British investments overseas. </p>
<p>Crucially, in terms of attracting investment in the future, the <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/balanceofpayments/apriltojune2017">most recent figures</a> indicate a decline in foreign direct investment inflows. More multinational companies are investing overseas relative to foreign companies investing in the UK. The figures also point to a sharp movement away from UK equities (company shares) by foreign investors.</p>
<h2>Brexit challenge</h2>
<p>It is best to not to leap to conclusions about the long term from the most recent statistics, but they do point to a weakening of the UK’s external position and the economy becoming less attractive to foreign investors. These figures point to major challenges in the context of Brexit. </p>
<p>Leaving the European Union is likely to hit Britain’s trading position, including in business and financial services where the UK runs a surplus with the rest of the EU. If Britain had a positive net international investment position, as previous estimates indicated, that would have provided some cushion as those investments would provide returns in the future. Instead the small negative position indicates that the total investments Britain has overseas are less than the value of foreign investments in the UK, such that returns on British investments overseas will be offset by the outflows from returns to foreign investments in the UK.</p>
<p>Further, Brexit may well make Britain appear a riskier, less attractive place to invest. Especially if it leaves the single market, it will be harder to attract companies to invest in the UK. Foreign investors may also require a higher rate of return when lending to UK companies to compensate for greater risks after Brexit. These developments would cause a further fall in the pound – which would squeeze living standards in Britain still further.</p><img src="https://counter.theconversation.com/content/85933/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Perraton does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New statistics show the UK has half a trillion pounds less in its account than previously thought.Jonathan Perraton, Senior Lecturer in Economics, University of SheffieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/838312017-09-11T13:54:52Z2017-09-11T13:54:52ZBritannia, Jane Austen and the surprising tale of why money has long had a female face<p>Jane Austen <a href="http://www.thenewten.co.uk/?gclid=EAIaIQobChMIs8GPhv2c1gIVrbvtCh2BqwjwEAAYASAAEgKuvfD_BwE">enters circulation</a> this month as the new face of the Bank of England £10 note. It is a fitting choice – as Austen increasingly passes through hands and wallets, the nation will be helped to remember that 2017 marks the <a href="https://www.janeausten.co.uk">200th anniversary of the celebrated author’s death</a>. </p>
<p>Yet Austen was not the first choice to grace the banknote. Four years ago, the Bank of England invited a <a href="https://www.theguardian.com/lifeandstyle/2013/may/11/bank-of-england-women-notes">storm of protest</a> when it announced it was replacing the only woman on a British banknote – Elizabeth Fry – with a portrait of Winston Churchill. A petition was launched, accusing the bank of infringing the <a href="http://www.legislation.gov.uk/ukpga/2010/15/contents?">Equality Act</a> and encouraging it to find a suitable female replacement. </p>
<p>The bank’s initial decision to efface women from its banknotes was not just potentially discriminatory, it also showed a lack of interest in the heritage of Britain’s currency. From the turn of the 18th century, when the British relationship with money began to take its modern shape, finance was gendered as female.</p>
<p>The most enduring face of British money over the centuries has been that of a woman: <a href="http://www.bankofengland.co.uk/archive/Documents/history/britannia.pdf">Britannia</a>. In 1694, the newly-founded <a href="http://www.bankofengland.co.uk/archive/Documents/history/britannia.pdf">Bank of England decided</a> that the image used as its common seal should be that of “Britannia sitting and looking on a bank of mon[e]y”. </p>
<h2>Rule Britannia</h2>
<p>Britannia had a living model in the form of the famed court beauty, <a href="http://www.westminster-abbey.org/our-history/people/frances-teresa-stuart">Frances Teresa Stuart</a>. King Charles II was madly in love with Frances, yet she spurned his amorous advances and refused to become his mistress. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/185479/original/file-20170911-1327-16sfzhu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/185479/original/file-20170911-1327-16sfzhu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/185479/original/file-20170911-1327-16sfzhu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=733&fit=crop&dpr=1 600w, https://images.theconversation.com/files/185479/original/file-20170911-1327-16sfzhu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=733&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/185479/original/file-20170911-1327-16sfzhu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=733&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/185479/original/file-20170911-1327-16sfzhu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=921&fit=crop&dpr=1 754w, https://images.theconversation.com/files/185479/original/file-20170911-1327-16sfzhu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=921&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/185479/original/file-20170911-1327-16sfzhu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=921&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Frances Teresa Stuart by Peter Lely – Royal Collection.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/w/index.php?search=Frances+Teresa+Stuart&title=Special:Search&profile=default&fulltext=1&searchToken=ezwz4g1n8cihml4samk7kp0id#/media/File:Frances_Teresa_Stuart_by_Lely.jpg">Wikimedia Commons</a></span>
</figcaption>
</figure>
<p>It was Charles who instructed the engraver, John Roettier, to use Frances as a model for Britannia, initially for a gold medal of 1667 to commemorate a <a href="http://www.britishmuseum.org/research/collection_online/collection_object_details.aspx?objectId=951898&partId=1&searchText=roettier+1667&page=1">military peace with the Dutch</a>.</p>
<p>The honour did not elicit the reward the king likely intended: within months, Frances ran away with the Duke of Richmond and married him, and in this way escaped Charles’s bed for good.</p>
<p>But Britannia wasn’t the only way finance was gendered as female. Writing in his celebrated work of early journalism, The Spectator, Joseph Addison dedicated an entire issue to the subject of the Bank of England. In this issue from March 1711, Mr Spectator finds himself walking past the bank and looking into its great hall. He <a href="http://www2.scc.rutgers.edu/spectator/text/march1711/no3.html">reflects on</a>:</p>
<blockquote>
<p>The many Discourses which I had both read and heard concerning the Decay of Publick Credit, with the Methods of restoring it, and which, in my Opinion, have always been defective, because they have always been made with an Eye to separate Interests, and Party Principles.</p>
</blockquote>
<p>Standing on the brink of Brexit, his words resonate clearly with current concerns over the handling of Britain’s economy. </p>
<p>That night, Mr Spectator dreams of the bank in an instructive fable warning against the financial dangers that would arise under rival political interests. And at the heart of his vision, sits a woman: </p>
<blockquote>
<p>I saw towards the Upper end of the Hall, a beautiful Virgin seated on a Throne of Gold. Her Name (as they told me) was Publick Credit.</p>
</blockquote>
<p>Mr Spectator writes that the walls of the hall were adorned with the symbols and documents of government: the Magna Carta; the Act of Uniformity, Toleration and Settlement that enshrined constitutional government under a Protestant monarchy; and further acts “made for the Establishment of Publick Funds”. And he comments upon the pleasure, and protective air, the lady takes when looking upon these important writings. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/185480/original/file-20170911-1312-1m9jlb7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/185480/original/file-20170911-1312-1m9jlb7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/185480/original/file-20170911-1312-1m9jlb7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/185480/original/file-20170911-1312-1m9jlb7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/185480/original/file-20170911-1312-1m9jlb7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/185480/original/file-20170911-1312-1m9jlb7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/185480/original/file-20170911-1312-1m9jlb7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">‘The Old Lady of Threadneedle Street.’</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bank-england-your-travel-concept-704695771?src=6wNySphJ6fO5-OFqDQmSEw-1-67">Shutterstock</a></span>
</figcaption>
</figure>
<p>Before long, however, phantasmal creatures representing rival political interests approach, and Publick Credit’s appearance and health is transformed. “She would fall away from the most florid Complexion and the most healthful State of Body, and wither into a Skeleton.” Thankfully, the figures of Liberty, Monarchy, Religious Toleration and Genius save the day, entering the bank and reviving Publick Credit, who lies dying on the floor. </p>
<p>The meaning of the vision is clear. Addison’s beautiful virgin embodies the economy, and she looks after the state, its laws and prosperity. Despite this power, she can fall victim to political machinations which threaten her very survival. The economy’s health is dependent upon good government, and at the centre of that economy beats a female heart.</p>
<h2>Lady Credit</h2>
<p>A decade later, the artist William Hogarth took inspiration from Addison’s writing, translating Mr Spectator’s vision into an <a href="http://www.metmuseum.org/art/collection/search/396045">engraved image</a> that satirised the government’s use of public lotteries to reduce the national debt. His work, The Lottery, shows us a female National Credit sitting on a throne, while figures representing Misfortune, Grief, Sloth, Despair and others argue on the floor below. Hogarth here endorsed the idea, yet again, that credit was a female entity.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/185478/original/file-20170911-1317-1xobesd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/185478/original/file-20170911-1317-1xobesd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=474&fit=crop&dpr=1 600w, https://images.theconversation.com/files/185478/original/file-20170911-1317-1xobesd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=474&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/185478/original/file-20170911-1317-1xobesd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=474&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/185478/original/file-20170911-1317-1xobesd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=595&fit=crop&dpr=1 754w, https://images.theconversation.com/files/185478/original/file-20170911-1317-1xobesd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=595&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/185478/original/file-20170911-1317-1xobesd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=595&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Lottery by William Hogarth – National Portrait Gallery.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/w/index.php?search=the+lottery+william+hogarth&title=Special:Search&go=Go&searchToken=bzfljo1q9ua5uo52nuc2h3npb#/media/File:The_Lottery_by_William_Hogarth.jpg">Wikimedia Commons</a></span>
</figcaption>
</figure>
<p>In these early days of public banking, Britain’s economy needed to be understood as a beautiful virgin if it was to be properly protected: it needed to be kept pure, free from party politics and other forms of financial corruption. Men controlled money, and it was their responsibility to secure its safety and health, just as it was their legal responsibility to secure that of their wives and daughters.</p>
<p>The satirical cartoonist, James Gillray, sought to make the same point at the close of the century. In 1797, he produced his famous image Political Ravishment or <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130205.pdf">The Old Lady of Threadneedle Street in Danger</a>, showing a female Bank of England. Dressed in newly issued bank notes, she recoils from the sexual advances of the prime minister, William Pitt the Younger. It is, of course, the bank’s money and not her ageing looks that drives Pitt on as he jangles gold coins from the pocket of her skirt.</p>
<p>The gendering of finance as female in the early days of banks doesn’t reveal, as we might first think, the empowerment of women. But it does remind us that early commentators like Addison, Hogarth and Gillray used gender to draw their public’s attention to a certain air of caution – a type of ethical and moral code – that should be applied to what William Wordsworth would, a century later, <a href="https://www.poetryfoundation.org/poems/45564/the-world-is-too-much-with-us">describe</a> as our obsession with “getting and spending”.</p>
<p>So each time we encounter Jane Austen, in her beribboned cap, staring out at us from the £10 note, we should remember that in the cultural imagination women have long been represented as the face of credit. And early writers and artists gendered finance as female in order to remind us of the diligence and care we should take in protecting it.</p><img src="https://counter.theconversation.com/content/83831/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Claudine van Hensbergen has received funding from: Arts Council England; Arts and Humanities Research Council; British Academy; Chawton House Library; School of Advanced Study, University of London; University of Oxford.
She is an Associate Fellow of the Higher Education Academy and a member of the University and College Union.</span></em></p>Jane Austen is on the Bank of England’s new £10 note. About time, too.Claudine van Hensbergen, Senior Lecturer in Eighteenth-Century English Literature, Northumbria University, NewcastleLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/826192017-08-18T11:15:35Z2017-08-18T11:15:35ZShould the UK be worried about inflation? No – looming deflation is the real concern<figure><img src="https://images.theconversation.com/files/182467/original/file-20170817-28171-1bazj1b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>Fifty years ago then-prime minister Harold Wilson made the decision to devalue the pound in a bid to tackle the UK’s flagging economy. Overnight the government changed the value of the pound from US$2.80 to US$2.40 – a 14% drop.</p>
<p>Today, the UK government is beset with a similar issue. Although, this time the fall in the pound is not entirely of its own making – it is a consequence of the Brexit vote. Nonetheless, since the UK’s decision to leave the EU, sterling has <a href="http://www.bbc.co.uk/news/business-40935732">dropped 14%</a> against the currencies that the UK trades the most with.</p>
<p>This is having some serious knock-on effects on the UK economy. So far, attention has focused on the <a href="http://www.bbc.co.uk/news/business-40935732">big uptick in inflation</a> that it has caused. The key measure, CPI (the consumer prices index), has been rising since the Brexit vote (although it remained unchanged in July thanks to falling fuel prices offsetting a rise in food, clothing and other household goods). </p>
<p>A much bigger issue is how the fall in sterling will affect household and private sector spending in the longer-term. And central to this lies the uncertainty that a confused government bestows upon the UK economy. </p>
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<p>Inflation is a cause of <a href="http://www.businessdictionary.com/definition/inflation-uncertainty.html">harmful uncertainty in the economy</a> and it even acts as a hidden tax if HMRC tax brackets <a href="http://www.investopedia.com/terms/b/bracketcreep.asp">are not updated regularly</a>. It also <a href="https://www.theguardian.com/business/2017/jul/12/uk-pay-squeeze-real-wages-tuc-unemployment-ons-figures">reduces the real disposable income of households</a>, making the pound in your pocket feel less valuable.</p>
<p>But the level of inflation the UK is experiencing is far from catastrophic. If seen historically, it is still rather <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23">on the low side</a>. Average inflation in the last 60 years has been around 5.5%. In the last 20 years, when fighting inflation became a priority for the UK government, the figure has been around 2.6%. </p>
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<p>In fact, the official mission of the Bank of England is not to eliminate inflation but <a href="http://www.bankofengland.co.uk/monetarypolicy/Pages/framework/framework.aspx">to keep it around 2%</a>. A reason for this is that a low level of inflation is thought <a href="http://www.bbc.co.uk/news/business-30778491">to stimulate the economy</a>. It means consumers are buying things, businesses investing and there’s a healthy supply of affordable credit from the banking sector – all important contributors to economic growth.</p>
<p>This is not the case in the UK, however. The reason behind the recent rise in inflation is the fall of the pound in relation <a href="http://www.bankofengland.co.uk/publications/Documents/inflationreport/2017/irspnote030817.pdf">to other major currencies</a>. </p>
<p>As the exchange rate of the pound falls, UK firms pay more pounds to purchase the same goods from abroad. And the UK imports <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/june2017">a lot</a>. This increase in wholesale import prices takes months to find its way into high street retail prices as businesses slowly renegotiate contracts with their suppliers and customers. In a recent report, the Bank of England highlights the falling pound as the reason for inflation and estimates that it <a href="http://www.bankofengland.co.uk/publications/Documents/inflationreport/2017/irspnote030817.pdf">will peak at 3%, in October 2017</a>. </p>
<h2>Cliff edge?</h2>
<p>Once the process of passing import costs onto customers is complete, the main driver of inflation will have been eliminated – prices will be higher but stable. My estimate is that at that point inflation will start a long and dangerous downward spiral, propelled by the underlying weakness of the UK economy. </p>
<p>Deflation means that prices in an economy fall and, although this may at first sound appealing, it poses a grave economic danger. When prices fall, households and businesses postpone investment and spending, <a href="http://www.bbc.co.uk/news/business-30778491">hoping to buy these cheaper later</a>. Yet, an economy that shies away from consumption and investment will soon fall into recession, triggering further price falls. With this comes unemployment, reduced revenues for businesses and fewer taxes for the government. This is what happened to Japan in the 1990s and resulted in one of the <a href="http://www.bbc.co.uk/news/business-11867257">highest government debts in the world</a>. </p>
<p>The potential for deflation is evident in the UK. Despite record employment, wage growth <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/labourmarketeconomiccommentary/august2017">has been anaemic</a>, and even the government’s optimistic officials warn that Brexit will have a negative long-term impact on disposable income <a href="http://www.bankofengland.co.uk/publications/Documents/inflationreport/2017/irspnote030817.pdf">and business opportunities</a>. This will hit consumer spending, one of the three pillars of the UK economy. The other two are <a href="https://www.theguardian.com/business/2017/jun/21/house-sales-uk-lloyds-housing-market-crash">real estate</a> and <a href="http://uk.businessinsider.com/thecityuk-financial-services-sector-threatened-by-brexit-is-britains-most-important-2017-4">financial services</a> – both of which have looked dicey since the Brexit vote. </p>
<p>What’s worse, inflation follows not just the real data but our expectations for the data to come. For example, if you believe that London real estate prices will fall, you will refrain from buying and wait. If this belief is widespread then demand for properties will collapse, actually turning into reality what was initially only a speculation. This process aggravates the lack of expenditure that the data indicates. </p>
<p>Brexit is casting a spell of negative expectations on the UK economy. The future of the financial services industry, real-estate worries, losing millions of <a href="https://www.ft.com/content/a37c2aee-565f-11e7-80b6-9bfa4c1f83d2">EU workers</a> and concerns for more expensive trade are all suppressing our confidence – which then further dampens the economy. </p>
<p>At this stage the actions of the UK government are critical. Yet, Theresa May has thus far <a href="https://yougov.co.uk/news/2016/11/17/brexit-briefing/">failed to make a convincing argument</a> that the impact of Brexit on the economy will be minimal.</p><img src="https://counter.theconversation.com/content/82619/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Tziamalis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Inflation has been on the rise since the Brexit vote but, before long, deflation might be a greater concern.Alexander Tziamalis, Senior Lecturer (Associate Professor) in Economics and Consultant, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/795982017-06-22T09:53:13Z2017-06-22T09:53:13ZSix graphs showing the state of the UK economy a year after Brexit referendum<figure><img src="https://images.theconversation.com/files/174924/original/file-20170621-4662-1uzsrcw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What's happened a year on?</span> <span class="attribution"><span class="source">via shutterstock.com</span></span></figcaption></figure><p>It has been a year since British voters went to the polls and <a href="https://theconversation.com/brexit-is-on-britain-votes-to-leave-the-eu-experts-respond-61576?sr=1">voted</a> by a narrow margin to leave the European Union. The Brexit referendum triggered a heated debate about the potential economic effects of Brexit. But what has actually happened to the UK economy in the year since the Brexit vote? These six graphs help explain. </p>
<h2>GDP growth</h2>
<p>Overall, the UK economy performed relatively well in terms of GDP growth during the second half of 2016 following the referendum. However, more recently there have been <a href="http://www.oecd.org/economy/g20-gdp-growth-first-quarter-2017-oecd.htm">indications</a> of a slowdown in economic activity in the UK.</p>
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<h2>The pound</h2>
<p>The British currency was one of the economic variables that was <a href="https://theconversation.com/brexit-shock-has-caused-a-sterling-crash-of-historic-proportions-heres-just-how-bad-it-is-for-the-pound-62191?sr=1">most affected</a> by the decision of the British electorate to leave the EU. Sterling has depreciated by a significant amount, around 15%, since last year as international markets reacted to the announcement of Brexit. A standard explanation is that markets expect lower volumes for future UK-EU international trade and also that longer term projections for future UK growth could be revised downwards.</p>
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<h2>Inflation</h2>
<p>The depreciation of the pound has contributed to a significant rise in the price of imports into the UK. British consumers are now having to pay a much higher price for foreign products. As a result, inflation increased from 0.5% in June 2016 to 1% in September and 2.9% in May 2017, the highest in four years. This is likely to affect both businesses that import products, and consumers. </p>
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<p>The rise in inflation also raises challenging questions for members of the Bank of England’s Monetary Policy Committee (MPC), which sets UK interest rates, and has a <a href="http://www.bankofengland.co.uk/monetarypolicy/Pages/framework/framework.aspx">target</a> to keep inflation below 2%. The MPC could tighten monetary policy by raising interest rates in order to reduce inflation, but this will probably hurt households and potentially GDP growth. Alternatively, it could decide to ignore inflation for the moment and lower interest rates even further. Or do nothing. In June 2017, members of the MPC remained <a href="http://www.bbc.co.uk/news/business-40354879">divided</a> over whether it is the right time to raise interest rates. </p>
<h2>Average earnings</h2>
<p>In the labour market, the most notable change has been a drop in real weekly earnings since the end of 2016. Average weekly wages (excluding bonuses) fell from £461 in June 2016 to £459 in December 2016 and £458 in April 2017. This is the result of weak nominal wage growth (closely related to the UK’s <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech968.pdf">productivity puzzle</a>), combined with the steady rise of inflation. Real wages have fallen in the UK and people are beginning to feel the pinch.</p>
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<h2>Household savings</h2>
<p>The drop in average earnings could have serious consequences for future UK GDP growth. This is both because household savings have steadily depleted in recent years, and recent UK GDP growth was <a href="https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/secondestimateofgdp/quarter1jantomar2017">driven by consumer spending</a>. If consumers have less in their pay packet each month, the economy could slow further. </p>
<p>The households savings ratio attempts to present a picture of how much money households save as part of their income. When the savings ratio is very small, it implies that households have fewer savings relative to their disposable income. In 2016, the ratio was at 5.2%, its lowest level since records began in 1963.</p>
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<h2>Trade balance</h2>
<p>One potential positive effect of the pound’s devaluation could have been an improvement in the UK’s trade balance – but that has not yet materialised. Standard <a href="http://www.economicsonline.co.uk/Global_economics/Marshall_Lerner.html">economic theory</a> predicts that currency devaluation will reduce a country’s imports (which become relatively more expensive), increase exports (relatively cheaper) and so improve the trade balance. </p>
<p>The UK’s trade deficit <a href="https://www.uktradeinfo.com/Statistics/BuildYourOwnTables/Pages/Table.aspx">was around</a> £30 billion at the time of the referendum in June 2016. Since then, although exports have risen by 12%, imports have risen at the slightly faster pace of 12.7%. As a result, the UK’s <a href="http://budgetresponsibility.org.uk/docs/dlm_uploads/Final_Model_Documentation.pdf">trade deficit</a> had worsened to £35 billion by the end of March 2017. </p>
<p>A trade deficit is not a problem per se, but a devaluation could have brought a sizeable increase in the export sector and helped to boost employment and wages. There are a number of reasons for why this did not happen, with one being that UK exporters <a href="https://marktomarket.org/2017/01/30/uktradeinflation/">have not</a> reduced the prices of goods sold abroad in foreign currency, and so just increased their profits per unit sold. </p>
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<p>The UK economy performed relatively well until the end of 2016, but there are signs that 2017 is going to be a challenging year. There is some <a href="https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/secondestimateofgdp/quarter1jantomar2017">evidence</a> – although early – that the economy is slowing down. Bloomberg’s Brexit Barometer, an <a href="https://www.bloomberg.com/graphics/2017-brexit-barometer/">index tracking</a> the impact of Brexit on the economy, has fallen in recent months, but does not put the economy in a “worse state” than before the referendum. </p>
<p>Of particular interest is going to be how households will react to the rise of inflation and the erosion of their real income given that their savings are at historically low levels. And don’t forget the increasing <a href="https://theconversation.com/brexit-why-uncertainty-is-bad-for-economies-64334?sr=1">uncertainty</a> that Brexit negotiations and tactics will bring to the economies of both the UK and EU. </p>
<hr>
<p><em>Correction: The graph regarding trade balance has been updated with corrected figures. The accompanying text originally stated that the UK trade deficit was around £175 billion at the time of the referendum, and had worsened to £197 billion at the end of March 2017. This has been corrected to £30 billion and £35 billion respectively.</em></p><img src="https://counter.theconversation.com/content/79598/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Agelos Delis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It was going pretty well until 2017 began.Agelos Delis, Lecturer in Economics, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/750272017-03-27T13:52:24Z2017-03-27T13:52:24ZIs this the most secure coin in the world?<figure><img src="https://images.theconversation.com/files/162424/original/image-20170324-12152-lwxci.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Royal Mint</span></span></figcaption></figure><p>Although people are becoming increasingly reliant on <a href="https://theconversation.com/from-your-wallet-to-google-wallet-your-digital-payment-options-14540">electronic forms of financial transaction</a>, the introduction of a new coin still feels like an important occasion. The new £1 coin, which enters circulation on March 28, is <a href="https://www.thenewpoundcoin.com/">described by the Royal Mint as</a> “the most secure coin in the world”. It is likely to be controversial.</p>
<p>The coin it replaces, introduced in 1983, had become prone to counterfeiting, with <a href="http://www.royalmint.com/discover/uk-coins/counterfeit-one-pound-coins">about 3% of £1 coins estimated to be forgeries</a>. To stymie the counterfeiters, the new coin incorporates a range of security measures, including micro-lettering, a bimetallic design, a hologram-like “latent image”, and a mysterious hidden feature intended to future-proof the coin against as yet unspecified threats.</p>
<p>It will also have 12 sides, and so harks back to one of the most fondly remembered coins of the 20th century, the dodecagonal threepenny bit. This threepenny coin was first introduced in March 1937 and was withdrawn after <a href="http://www.royalmint.com/discover/decimalisation">decimalisation in 1971</a>. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/162391/original/image-20170324-12152-drzvpz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162391/original/image-20170324-12152-drzvpz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/162391/original/image-20170324-12152-drzvpz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=595&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162391/original/image-20170324-12152-drzvpz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=595&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162391/original/image-20170324-12152-drzvpz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=595&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162391/original/image-20170324-12152-drzvpz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=747&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162391/original/image-20170324-12152-drzvpz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=747&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162391/original/image-20170324-12152-drzvpz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=747&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The old threepenny coin.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:1942_threepence_reverse_2.jpg">Slashme via Wikimedia Commons</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>Yet for all the nostalgia associated with the reintroduction of a 12-sided coin, it should be remembered that the 1937 threepenny was not widely feted when initially introduced. It was the first non-circular coin to be struck in Britain, and was so unusual when it entered circulation that the Nottingham Evening Post <a href="https://academic.oup.com/hwj/article-abstract/doi/10.1093/hwj/dbw016/2669842/That-Alien-New-fangled-Thick-Intractable-Dodecagon?redirectedFrom=fulltext">wryly observed</a> that “we shall know that the British public is past being surprised at anything” if “nobody jibs at receiving … a strange [polygonal] coin”.</p>
<p>The physical feeling of cash encourages us to develop emotional feelings about it. The new £1 coin is thinner, lighter and slightly broader than its predecessor, and it seems likely that the shock of the new will ensure that it generates debate. As was the case with <a href="https://www.thenewfiver.co.uk/">the new five pound note</a> introduced in September 2016, some will welcome it, others abhor it. Opinions will abound. But we shall have to see whether novelties in the British coinage are still capable of inspiring hostile verses, as they were in the 1930s when <a href="https://academic.oup.com/hwj/article-abstract/doi/10.1093/hwj/dbw016/2669842/That-Alien-New-fangled-Thick-Intractable-Dodecagon?redirectedFrom=fulltext">a disgruntled poet wrote to the Manchester Guardian</a> to insist that:</p>
<blockquote>
<p>I would not fritter breath<br>
Upon that alien, new-fangled, thick<br>
Intractable dodecagon. </p>
</blockquote>
<p>Feelings run high because people do not think about cash money in purely economic terms – they judge and relate to coins and banknotes as elements of a material culture. Assessments are made based on individual taste. Personal relationships can also be formed with inanimate monetary tokens, and through them with the economic systems they embody and represent. And like all relationships, they take time to establish.</p>
<h2>Give it time</h2>
<p>People will, of course, get used to the new coin. It will quickly become an entirely unremarkable part of our daily routine, its specific dimensions and angular edges – at first touch so strange and unusual – will become familiar under people’s finger tips. Of course, they do not need to like a coin for it to remain useful to them, and the new pound will still be worth a pound, even if we hanker after the well-worn and comforting curves of its precursor.</p>
<p>The process of familiarisation takes time. But there are some coins that the public never warms to, or actively rebuffs: the 1887 double florin (worth four shillings) was <a href="http://www.bbc.co.uk/ahistoryoftheworld/objects/DMykwXkaTm-JPOz4ZANsOw">withdrawn after just four years</a>. And for a while, the 1937 threepenny was at risk of being added to the list of numismatic rejects. Being 12-sided, it was thought to look insufficiently British – polygonal coins were at the time <a href="https://academic.oup.com/hwj/article-abstract/doi/10.1093/hwj/dbw016/2669842/That-Alien-New-fangled-Thick-Intractable-Dodecagon?redirectedFrom=fulltext">associated with “foreign” currencies</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/162394/original/image-20170324-12136-1868jnv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/162394/original/image-20170324-12136-1868jnv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=304&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162394/original/image-20170324-12136-1868jnv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=304&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162394/original/image-20170324-12136-1868jnv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=304&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162394/original/image-20170324-12136-1868jnv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=382&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162394/original/image-20170324-12136-1868jnv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=382&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162394/original/image-20170324-12136-1868jnv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=382&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The 1887 double florin that was rejected after four years.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File%3A1887_British_double_florin.jpg">Coinman62</a></span>
</figcaption>
</figure>
<p>Plus, the threepenny was an unusual colour – its nickel-brass composition lent it a distinctive yellow tinge. It also had no history and people didn’t know what to call it – newspapers ran competitions asking readers to suggest a <a href="http://blog.royalmint.com/coin-nicknames-the-british-fondness-for-change/">suitable nickname</a>, which would bring it into line with popular coins such as the tanner (sixpence) or bob (shilling). In Scotland, many harboured a preference for the smaller, lighter, rounder silver threepenny, which the Mint continued to produce until 1945. The two threepennies had to compete for the public’s affections.</p>
<p>Distrust lingered because of the time it took to produce enough dodecagonal threepennies for them to become commonplace. Of the first 30m struck, most quickly vanished from sight, hoarded in personal collections rather than circulating freely. The Mint eventually forced the new coins into wider circulation by asking government departments to include them in the pay packets of state employees. It was only during World War II, with bronze pennies in short supply, that the 12-sided threepenny came to enjoy any real popularity. Its unique shape also made it easy to distinguish by touch in the blackout.</p>
<p>The extensive promotional campaigns run by the Mint ahead of the new £1 coin’s introduction suggest that lessons have been learned from the past. A concerted effort has been made to prepare the public for the change. And as cash is less important these days, whether or not the public develops any sort of affection for the this coin that seeks to blend the old and the new might not, in the end, matter tuppence.</p><img src="https://counter.theconversation.com/content/75027/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Farmer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The UK’s new £1 coin is touted as being the most-secure in the world. Its dodecagonal shape harks back to an old threepenny forebear.Richard Farmer, Research Associate, Film Studies/Cultural History, University of East AngliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/735332017-02-24T12:55:01Z2017-02-24T12:55:01ZKraft Heinz’s short-lived Unilever swoop is a warning on weak takeover policy<figure><img src="https://images.theconversation.com/files/158125/original/image-20170223-32695-18y8vya.jpg?ixlib=rb-1.1.0&rect=0%2C54%2C2607%2C1692&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/kaptainkobold/6143125094/in/photolist-2ECjV-7eamex-5iF2NB-aohkC6-pESXfF-bJLZED-cFemgm-qedYj9-7FpKWx-5x6LMt-fwsxK-4mZF58-amR84U-6Dy5it-4n4JfW-8qi1jM-4qnrsx-7TYCX6-cfmStJ-j9JX5-e7B7p-4n4JHL-4mZGtF-bj69GF-99Tiqa-8kFS7e-7rvmPe-8nttuM-4TSqRT-AT1GK-566F2s-AbSouT-68dm6o-zWE7xR-63rUYc">Alan/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>Anglo-Dutch giant Unilever may have (for now) <a href="http://www.bbc.co.uk/news/business-39022692">seen off a clumsy takeover bid</a> by Kraft Heinz, but that doesn’t mean questions over corporate takeover policy in Britain have gone away. In fact, it was odd that such a discussion was absent from the UK government’s recent <a href="https://beisgovuk.citizenspace.com/strategy/industrial-strategy/supporting_documents/buildingourindustrialstrategygreenpaper.pdf">industrial strategy proposals</a>.</p>
<p>It was a glaring omission that Greg Clark, the business secretary, appeared to acknowledge in <a href="https://www.theguardian.com/business/2017/feb/22/uk-to-draw-up-response-to-foreign-takeovers-of-firms-business-secretary-bid-unilever-jobs-carmaker-vauxhall">a recent commitment</a> to look at how ministers should handle controversial bids.</p>
<p>Kraft Heinz’s £115 billion bid was swiftly rejected by Unilever. A <a href="https://www.unilever.com/news/press-releases/2017/Joint-statement-from-Unilever-The-Kraft-Heinz-Company.html">joint statement on Feb 17</a> announced the US food group had “amicably agreed to withdraw its proposal”. Clearly, Kraft Heinz had misjudged the hostility from Unilever, the media and from politicians. The firm is owned by <a href="http://www.marketwatch.com/story/warren-buffett-is-4-billion-richer-after-kraft-heinzs-merger-bid-for-unilever-2017-02-17">US investor Warren Buffett</a> and a Mexican private equity firm run by <a href="https://www.bloomberg.com/news/articles/2013-08-29/jorge-lemann-he-is-dot-the-worlds-most-interesting-billionaire">Jorge Lemann</a>. Neither had picked up on the <a href="https://www.ft.com/content/a0586fba-060f-11df-8c97-00144feabdc0">intense debate</a> that followed the Kraft takeover of Cadbury back in 2009-2010, or deep concerns over <a href="http://www.parliament.uk/astrazeneca">Pfizer’s failed 2014 bid for Astra Zeneca</a>.</p>
<h2>Bidding down</h2>
<p>Unilever’s management was bound to reject the initial offer, which represented a rather meagre takeover premium of 18%, which <a href="https://www.ft.com/content/d846766e-f81b-11e6-bd4e-68d53499ed71">Unilever felt undervalued the firm</a>. Some £70 billion of the bid would have been in cash, funded by debt. Kraft Heinz already has almost <a href="https://www.nytimes.com/2017/02/17/business/dealbook/kraft-heinz-unilever-deal-.html?_r=0">$30 billion in long-term debt</a> on its books. An even bigger debt pile could have been a drag on Unilever’s credit rating and might mean higher debt servicing costs.</p>
<p>Unilever shareholders are also overwhelmingly long-term investors who have held their shares for more than five years. They value the long-term trajectory of the firm and were always likely to be <a href="https://www.theguardian.com/business/2017/feb/20/how-unilever-foiled-kraft-heinzs-115m-takeover-bid-warren-buffett">sceptical of a deal</a> which could jeopardise that. No wonder Unilever is now looking at ways <a href="https://www.theguardian.com/business/nils-pratley-on-finance/2017/feb/22/humbled-unilever-show-shareholders-values-loyalty">to reward tbeir loyalty</a>.</p>
<p>Kraft of course is remembered for making jobs promises during the Cadbury deal before swiftly reneging on them, with job cuts and an end to paying tax in the UK. A slap on the wrist ensued <a href="http://www.bbc.co.uk/news/10166241">from the Takeover Panel</a>.</p>
<h2>State defences</h2>
<p>Last year, in a <a href="http://www.ukpol.co.uk/theresa-may-2016-speech-to-launch-leadership-campaign/">speech</a> which launched her bid to secure the Tory leadership, Theresa May referenced the Astra Zeneca and Cadbury cases: </p>
<blockquote>
<p>A proper industrial strategy wouldn’t automatically stop the sale of British firms to foreign ones, but it should be capable of stepping in to defend a sector that is as important as pharmaceuticals is to Britain.</p>
</blockquote>
<p>May was right. There shouldn’t be an automatic barrier to takeovers as some bring benefits – think of Tata’s <a href="http://www.telegraph.co.uk/business/2016/06/01/jaguar-land-rovers-turnaround-shows-britains-car-industry-is-any/">careful stewardship</a> of Jaguar Land Rover. However, at the moment there is very limited scope for the UK government to intervene.</p>
<p>This, and post Brexit currency moves, leaves UK firms vulnerable to takeovers, and this can force them to focus on short-term profitability. As a <a href="http://www.policy-network.net/publications_download.aspx?ID=8407">Policy Network report</a> has highlighted, takeovers in the UK are more common, more likely to be hostile and more likely to go ahead than in any other major economy. It suggests that a significant proportion of takeover activity is not beneficial to the creation of long-term shareholder value, the industrial base, the national economy or to society as a whole.</p>
<p>Indeed, most big takeovers fail, as many <a href="http://oxfordindex.oup.com/view/10.1093/acprof:oso/9780198706205.003.0018">academic studies</a> show. So some sort of balance is needed when it comes to takeover policy.</p>
<p>And that’s why it was such a curious decision to leave takeovers out of the industrial strategy green paper. Maybe the UK’s financial sector earns too much from mergers and acquisition fees for the government to try to make takeovers harder – in the Kraft–Cadbury case those fees were thought to have run into <a href="http://www.birminghampost.co.uk/business/business-opinion/david-bailey-time-throw-spanner-7091610">several hundred million pounds</a>.</p>
<h2>Going cheap?</h2>
<p>To be fair, Unilever’s ice creams, spreads and soaps may not be seen as strategic technological assets that must be protected, like the pharmaceutical science base. But this is nevertheless a big firm, which employs lots of workers and takes <a href="https://www.ft.com/content/a0586fba-060f-11df-8c97-00144feabdc0">corporate social responsibility</a> seriously.</p>
<p>And, like Cadbury before its takeover, Unilever is a successful firm that has performed well and paid decent dividends. Its share price has risen by 70% since 2010, even before the bid. This is hardly a poorly performing company in need of takeover to insert a new management team to turn things around. Rather, Kraft Heinz probably thought they could get it on the cheap – that post-Brexit-vote depreciation of sterling makes UK assets appealing to foreign buyers. They could then pile their new acquisition with debt and cut costs.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/158118/original/image-20170223-24067-10ogf6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/158118/original/image-20170223-24067-10ogf6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/158118/original/image-20170223-24067-10ogf6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/158118/original/image-20170223-24067-10ogf6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/158118/original/image-20170223-24067-10ogf6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/158118/original/image-20170223-24067-10ogf6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/158118/original/image-20170223-24067-10ogf6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/158118/original/image-20170223-24067-10ogf6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Not what it used to be.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/worldoflard/6792303493/in/photolist-bmdkbV-4vFQ7H-9kNZEL-fcgHMF-pBqB4P-7pgSLH-qy1Voa-fcgMRi-fcgKYp-fcvNFh-ybmWZ-37yA1G-jepQHh-7CgpYb-37yA4d-9kJuve-7CcyKe-37yA2S-pn1WtL-fpm5xs-9kMyo5-9kJuLP-StfP-fcgQvz-fcwaDs-qgLHFn-Yeem-aB4FtK-9VAQ4b-7jFCeP-q3W68A-4vFQSR-4vFS9x-9VB3wz-4vKV4L-Ts4s-hEnQB-4vFSo8-4vFRqc-4RXqnj-9VxYSH-4vKVhs-4vKX3h-4vKWts-4vKWTY-sjcoV-fcgAbt-9VAGo9-5HJJBU-4vFS1P">Chris Ballard/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>To prevent this kind of poaching, particularly in the white heat of Brexit uncertainty and a weak pound, the government could usefully look at four broad areas when re-examining takeover policy.</p>
<p>First, there should be reforms to the tax system and financial system to encourage longer-term commitment by shareholders. A tapered capital gains tax would act to reward long-term investors while discouraging hedge funds and other speculators trying to make a quick profit from a takeover.</p>
<p>Broader corporate governance changes could also be brought in, such as limiting voting rights in takeover situations until a shareholder had held shares for a year or more. And amendments to the Takeover Code could be used to give greater protection to defending firms. That might include “raising the bar” on obtaining control in takeover situations (to 60% rather than the current 50.1% perhaps).</p>
<p>Perhaps most fundamentally, the government could reintroduce a <a href="researchbriefings.files.parliament.uk/documents/SN05374/SN05374.pdf">Public Interest Test</a> which was largely scrapped in the 2002 Enterprise Act. That could enable an independent body to examine the public interest impact of takeovers above certain thresholds. Effectively, this would at least enable a block to be made in large takeover cases which are not deemed in the public interest.</p>
<p>Together, these measures could have been enough to help Cadbury see off Kraft back in 2010. More broadly, they would throw some sand in the wheels of an inefficient and costly takeover machine just as currency fluctuations make British firms look attractive to acquisitive eyes.</p><img src="https://counter.theconversation.com/content/73533/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Bailey receives funding from the European Union under its Horizon 2020 Marie Sklodowska-Curie Research and Innovation Staff Exchange project MAKERS (grant agreement number 691192), the ESRC under its City Evolutions project, and the Regional Studies Association under its ‘New Manufacturing Regions’ research network.</span></em></p>A weak pound is likely to lure more international bidders to UK shores. Time then to make sure we have our defences in place.David Bailey, Professor of Industry, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/714392017-01-17T18:39:26Z2017-01-17T18:39:26ZTheresa May’s Brexit speech spurred a sterling recovery – but don’t get too excited<figure><img src="https://images.theconversation.com/files/153096/original/image-20170117-21163-1i3jrdt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>The pound reacted positively to Theresa May’s Brexit speech, but don’t let this give you the impression that it is good news for the UK economy. The bounce from around US$1.2150 to around $1.2380 at 5pm UK time on Tuesday is probably no more than what is known as a <a href="http://www.investopedia.com/terms/s/shortcovering.asp">short covering phenomenon</a>. This is where investors who bet against a currency start to cover their positions to limit their losses when the currency appreciates in in the short run. </p>
<p>So: in the days building up to the speech, there were numerous leaks from May’s speech, suggesting she would outline that a hard Brexit was on the cards. This likely led to expectations of a large depreciation in sterling and large bets to that effect.</p>
<p>The problem is that when a number of investors speculate against a currency then, on occasion, it can be very profitable for others to bet the other way – and profit if it then appreciates in value. If those betting the other way do so in sufficient numbers and sterling starts to appreciate, then those betting on a fall in sterling will find they start losing money on their positions. Many will then conduct what is known as reversing trades, such as buying sterling forward and futures contracts to limit their losses. This is short covering and these purchases cause sterling to appreciate even more. Typically, it takes a day or two to work its way out of the market. </p>
<p>Another factor that may well have driven sterling higher, which was not foreseen by the markets, was May’s commitment to get the final deal with the European Union to be put to the British houses of parliament for approval. Getting such approval may well require a softer version of Brexit than she outlined in her speech and may even raise the possibility of a second referendum if parliamentarians reject the deal she brings before them.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/153092/original/image-20170117-21167-1c1thgr.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/153092/original/image-20170117-21167-1c1thgr.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/153092/original/image-20170117-21167-1c1thgr.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=213&fit=crop&dpr=1 600w, https://images.theconversation.com/files/153092/original/image-20170117-21167-1c1thgr.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=213&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/153092/original/image-20170117-21167-1c1thgr.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=213&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/153092/original/image-20170117-21167-1c1thgr.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=268&fit=crop&dpr=1 754w, https://images.theconversation.com/files/153092/original/image-20170117-21167-1c1thgr.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=268&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/153092/original/image-20170117-21167-1c1thgr.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=268&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Value of sterling before and after Theresa May’s speech at 11:45. A green candle represents a five-minute appreciation of sterling a red candle indicates a five-minute depreciation of sterling.</span>
<span class="attribution"><span class="source">Keith Pilbeam</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>However, a natural question to ask is whether her speech will be good or bad for sterling in the longer-term? Here I believe there will be a period of further sterling weakness. There are three key ways that I see Theresa May’s Brexit plan hitting the UK economy and, with it, the value of sterling. The first is from reduced trade, the second from reduced investment (at home and from overseas) and the third from reduced immigration.</p>
<h2>1. Reduced trade</h2>
<p>By opting out of the single market and the customs union (to be free to do trade deals with other countries) the UK maximises its losses from both trade in services and trade in goods. Opting out of the single market ensures that the UK’s services industries – particularly financial services – will <a href="https://theconversation.com/theresa-may-confirms-itll-be-a-hard-brexit-heres-what-that-means-for-trade-71417">lose their passporting rights</a> to sell financial services into the EU. </p>
<p>Opting out of the customs union means that the UK will face potential tariffs from the EU and potentially have to impose tariffs on EU products. This could mean extensive border checks and an impact on supply chains – upon which much of manufacturing is based these days. </p>
<h2>2. Reduced investment</h2>
<p>By announcing early on in the negotiation process that she is opting for a hard Brexit Theresa May has sent an early signal to foreign investors to avoid the UK economy, as it will most likely have only a very basic WTO-type trading arrangement with its biggest export market, the EU, which currently accounts for over 44% of UK exports. </p>
<p>UK investment in large part requires a long-term guaranteed access to the EU market and May has signalled that this access will be put at risk as she prioritises restricting EU labour movement and ending the jurisdiction of the European Court of Justice. This will hit business confidence and with it investment. Furthermore, investment in the UK has to a large extent depended on having access to skilled migrants from the EU which she is proposing to heavily restrict.</p>
<h2>3. Reduced immigration</h2>
<p>The UK economy has become reliant on importing both skilled and unskilled labour from the rest of the EU. The net inflows of labour have helped in <a href="http://ukandeu.ac.uk/fact-figures/where-do-eu-migrants-in-the-uk-work/">many sectors of the UK economy</a> – in producing its financial and non-financial services, in the construction industry, manufacturing and in <a href="https://theconversation.com/the-truth-about-migrants-and-the-nhs-60908">its healthcare sector</a>. </p>
<p>Do not fall for the argument that this has been at the expense of jobs for UK workers. The increased productivity and job creation has been a <a href="https://theconversation.com/latest-migration-figures-make-no-economic-case-for-brexit-60070">boost to the UK economy</a>, creating extra aggregate demand and extra taxes for the UK government, enabling it to improve UK infrastructure. This, in turn, stimulates investment and growth.</p>
<p>These three channels of the economy – trade, investment and the migration of labour – have in the past reinforced one another in a virtuous circle. Theresa May’s speech and Brexit plan threaten to create a vicious circle whereby reduced trade, investment and labour flows will combine to undermine the dynamism of the UK economy. This will hit jobs and economic growth, cause a rise in inflation, damage business and consumer confidence, and lower the living standards of tens of millions of UK citizens. None of this is likely to be good for sterling over the longer term.</p><img src="https://counter.theconversation.com/content/71439/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Keith Pilbeam is affiliated with the Labour Party. </span></em></p>The way the pound rebounded does not reflect long-term confidence in the currency.Keith Pilbeam, Professor of Economics, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/700042016-12-06T15:32:20Z2016-12-06T15:32:20ZFive-pound history lesson: animal fat and the British empire’s biggest revolt<p>On first reading about the protests because the new <a href="http://www.independent.co.uk/news/business/news/new-5-pound-note-animal-fat-fiver-bank-of-england-vegetarians-a7445221.html">plastic British five-pound note contains animal fat</a> – and the mass petition to have it withdrawn – I immediately thought of the protests in 1857 that led up to the Indian Mutiny rebellion. “You’d have thought we’d have learned the lesson since then,” I said to myself.</p>
<p>Of course, the introduction – for use by the British army and its Indian troops – of a new cartridge for the 1853 Enfield rifle which had <a href="http://www.victorianmilitarysociety.org.uk/reserach/2012-09-09-11-20-22/archive/52-the-causes-of-the-indian-mutiny">allegedly been greased in pig and cow fat</a>, was not the key trigger for the British Empire’s biggest revolt. Its power lay more in its force as a rumour than it leading to actual cases of Hindus or Muslims being directly polluted via contact with animal products.</p>
<p>But this is in some ways beside the point – as is the case with the <a href="http://metro.co.uk/2016/12/05/the-vegan-man-behind-petition-to-make-new-5-banknotes-suitable-for-vegetarians-6302131/">petition started by Doug Maw</a>, a hotel worker from Cumbria. The 120,000-odd petitioners – including vegetarian and vegan cafés across the UK and a range of religious groups – are probably aware of the fact that plastic bags, crayons, cosmetics, soaps and detergents, latex, toothpaste, and candles contain animal fats, too. But the tangibility and exchangeability of a banknote – its symbolic and material power – brings a greater social significance to the contaminated fiver.</p>
<h2>Cartridges and chapatis</h2>
<p>Like the greased cartridge affair of 1857, then, these symbolic campaigns suggest that the state’s relationship with consumer groups is fragile and the nature of political communication is ebullient. Key aspects of the £5 protest are its forms of rapid transmission. In 2016, social media allowed Maw’s greased fiver petition to quickly gather momentum. Similarly, the mysterious appearance of thousands of chapatis being passed from hand to hand among sepoy soldiers across northern India in February and March 1857, led British officials to surmise that the spread of this odd secret message, which outpaced the mail service, might be the harbinger of something serious.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/148902/original/image-20161206-15197-ru2gtd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/148902/original/image-20161206-15197-ru2gtd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/148902/original/image-20161206-15197-ru2gtd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/148902/original/image-20161206-15197-ru2gtd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/148902/original/image-20161206-15197-ru2gtd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/148902/original/image-20161206-15197-ru2gtd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/148902/original/image-20161206-15197-ru2gtd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Sikander Bagh in Lucknow was the venue for a fierce battle during the Indian Mutiny.</span>
</figcaption>
</figure>
<p>The chapati wave had no proven link to the rebellion of May 1857 – despite official beliefs to the contrary. Nevertheless, government disconnection and security paranoia – as well as the enormous possibilities of mass communication via objects – characterise these moments of symbolic token distribution at both times.</p>
<p>So it is worth pausing to consider the historical signs running through these bendy notes, both religious and secular. In calling people to join the fiver ban, the <a href="http://www.nchtuk.org/index.php/component/content/article/8-news/latest-news/452-when-currency-becomes-bad-karma">National Council for Hindu Temples</a> in the UK made explicit reference to 1857, and the use of pig and cow grease in its statement of 1 December 2016.</p>
<blockquote>
<p>The ensuing revolution has been called the First Indian Revolution … and helped to focus such a sense of national identity that many remark that it created the wave of anti British rhetoric which coalesced in the expulsion of the colonialists and ultimately the demise of the British Empire. Could an <em>adharmic</em> £5.00 be an equally expensive mistake? Time will tell.</p>
</blockquote>
<p>Claiming that the “devout Brahmin” Mangal Pandey’s discovery of the contamination sparked the ultimate “demise of the British Empire” is hyperbole, but Hindu organisations in particular draw on a deeper history of anti-colonial protest rooted in animal product taboos. From the 1880s through to the 1930s, for example, protests against the slaughter of cows and the use of cow products in manufactured goods served as a mobilising (albeit religiously divisive) symbol across north India. </p>
<p>Ever since its election in 2014, the BJP and its associated organisations have also <a href="http://www.bbc.co.uk/news/world-asia-india-34513185">maintained a multi-faceted campaign</a> to end cow slaughter in India, specifically targeting Muslim and low-caste traders in hides and meat.</p>
<h2>Moral dilemma</h2>
<p>In other ways, though, these reactions are predominantly secular and illustrate how minority groups perceive or articulate their political rights. Hindu, Sikh and Jain temples have <a href="http://www.bbc.co.uk/news/uk-england-leicestershire-38156650">pointed to the importance</a> of “charitable donations” to their sustenance and the moral dilemma posed by the £5 note. Likewise, cafes in the UK banning the note <a href="https://www.theguardian.com/uk-news/2016/dec/03/vegetarian-rainbow-cafe-cambridge-5-note-animal-by-product">have pointed out</a> that they make a living by not having animal products anywhere near their establishments. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"804285517080788993"}"></div></p>
<p>The twitter storm around the dirty fiver made references to the “rights” of vegans, vegetarians and religious communities, whose ire was raised against Professor David Solomon, inventor of the note for Innovia, for <a href="http://www.bbc.co.uk/newsbeat/article/38181808/the-new-5-note-creator-says-the-protest-over-beef-content-is-stupid">describing protesters as “stupid”</a>.</p>
<p>But we might also consider here the significant moral purchase of vegetarianism in relative terms. There have been no protests yet against the inclusion of Winston Churchill’s image on the note – a <a href="http://www.independent.co.uk/news/uk/politics/not-his-finest-hour-the-dark-side-of-winston-churchill-2118317.html">diehard opponent of Indian independence</a> and a man widely believed in India to have been responsible for the deaths of more than 3m during the <a href="http://www.bbc.co.uk/blogs/thereporters/soutikbiswas/2010/10/how_churchill_starved_india.html">Bengal Famine of 1943</a>. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"805046298567147521"}"></div></p>
<p>It may be that the UK Treasury will bite the bullet and consider new forms of manufacture before it releases the planned polymer £10 note featuring the image of Jane Austen in 2017. And in that year of the 70th anniversary of India’s independence, we might also consider anew – like Austen’s Colonel Brandon with his East India fortune, or the Austens’ friendship with Warren Hastings – the many difficult and ambivalent relationships between Britain and India.</p><img src="https://counter.theconversation.com/content/70004/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William Gould does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s like the Indian Mutiny all over again (but much less violent).William Gould, Professor of Indian History, University of LeedsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/689562016-11-23T10:08:53Z2016-11-23T10:08:53ZThe weaker pound is a mixed bag for UK PLC as rivals move to adapt<figure><img src="https://images.theconversation.com/files/146728/original/image-20161121-4544-lumu2r.jpg?ixlib=rb-1.1.0&rect=59%2C79%2C940%2C573&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-323763059/stock-photo-one-pound-coin-on-fluctuating-graph-rate-of-the-pound-sterling-shallow-dof.html?src=Dckjtmb8uQZwgIgJw27Gzw-2-84">Valeri Potapova/Shutterstock</a></span></figcaption></figure><p>The value of the pound plummeted after the Brexit referendum. From close to US$1.50 before the vote to leave the European Union, sterling has now found a new <a href="http://www.xe.com/currencycharts/?from=GBP&to=USD&view=1Y">level close to US$1.20</a>. This has been greeted as a welcome boost to UK exporters as it makes it cheaper for other countries to buy British goods. But this is a simplistic take. The reality is far more complicated and dependent on the markets in which these companies operate. </p>
<p>The <a href="http://www.thisismoney.co.uk/money/markets/article-3701788/What-sterling-s-slump-means-UK-s-economy-businesses-households.html">conventional wisdom</a> about a falling currency and exports fails to acknowledge some fundamental points. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2843755">Our research</a> highlights that such analysis typically does not account for the existence and nature of a company’s competition, domestically and overseas. </p>
<p>In other words, nimble corporate rivals can quickly adapt to counter any potential gains from currency effects, and that applies to UK-focused firms as well as exporters. Let’s take an example from one of Britain’s favourite pastimes: beer. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/146782/original/image-20161121-4564-1qxeamg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The tippling point?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/andywilkes/2481933944/in/photolist-4Mjyuy-6EsBky-2VK1Gm-GaA8f-9dSq2a-CXuzn-DDA12-iEwMm-39hwn6-5LMGRC-iEwKW-5RdGNR-3bmBpQ-4MjyBu-6DwLz5-6C68Ec-6Cagi5-8CaK7-2rbhJ-4MfoYz-6DwLif-BF7jy-9cYLym-397iC-98aXMm-6ffCew-6DsBHr-25pc5-24F2K-4TLWV-twRQ-9hvmws-H1eo-6DsBPB-2kd9y-ikoK-wTsuK-kSgo-rRHh-mvTQ-4oz3N-VU1U-4xRqce-twMg-o1Be-QuMp-mvVz-mvSF-hE3b-vSpd">Andy Wilkes/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<h2>Losing its fizz</h2>
<p>Our research studied data from 22 multinational firms and nine markets. One such firm was the brewer SABMiller, a British exporter, which competes in an <a href="http://www.economist.com/node/18651308">international duopoly</a> with Belgian group AB-InBev, the maker of beer brands such as Budweiser, Corona and Stella Artois. We looked at a period before the companies agreed a merger which was <a href="http://www.wsj.com/articles/sabmiller-ab-inbev-shareholders-approve-100-billion-plus-merger-1475059015">approved by shareholders in September</a>. </p>
<p>Now, under conditions of a falling pound, SABMiller would in theory enjoy an increase in its profits as foreign buyers snapped up products now markedly cheaper in their home currency. However, that assumes that its Belgian rival failed to cut its own product prices by what was required to offset the change in the GBP/EUR exchange rate. If AB-InBev is on the ball, and sensitive to exchange rate changes it can very easily decide to cut its product price by more than the increase in the exchange rate. In that scenario, the profits of SABMiller could fall.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/146783/original/image-20161121-4544-1u86zzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Muscling in?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/waltermera182/9514909861/in/photolist-bAE4RS-5k6Nad-9riTv7-5bdRpv-e6vzgM-84dYoJ-7ACBYj-8aT42e-88Gjd3-55QM1h-dHvgA-8fNbuC-dihQkj-4s7jic-dHvyK-8vt2aY-cvd7kS-dHvBH-59aMyo-6mdG3n-7mp44V-4bmT2C-25cRBJ-25cRRo-4bUN7Z-fv3EB7-4CPbKB-aS9xQt-fuNpd2-7UM9wi-ewBZ1s-38hDMs-8c8Pu6-s49Nv-EYo9vC">Walter Gustavo MERA MELO/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Then, what if you have to factor in a third competitor, such as the Netherlands-based Heineken, which shares the same currency as AB-InBev? This means that the exposure of SABMiller will also be affected by Heineken’s change in its product price in response to the exchange rate fluctuation of the euro relative to the pound. The picture here becomes more complex because the degree to which foreign competitors will change their product prices will also depend on the degree of competition between them in their own home markets. It will also depend on their desire to curb product prices in any attempt to offset a boost to the competitiveness of the UK firm; how much margin they are willing to sacrifice in order to stay competitive. </p>
<p>If our UK brewer also faces a domestic competitor then the picture becomes even more complex. SABMiller’s profits would also be affected by the pricing decisions of that local rival in response to changes in the exchange rate.</p>
<p>In short, these are far muddier waters than some would have you believe. The profits of UK-based exporters might enjoy a brief window of opportunity if rivals are slow to adapt, but earnings could just as easily take a hit from a rapidly changing environment as a sector gets used to new realities. Our conclusions don’t only apply to British exporters. It is the same for any multinational firms which face competitors at the international and local level. The sports market is another good example, with its <a href="http://www.economist.com/blogs/graphicdetail/2013/08/daily-chart-14">international oligopoly</a> of US firm Nike, the global leader, and two German firms, Adidas and Puma.</p>
<h2>Kindness</h2>
<p>It is clear the argument that a weakened currency makes domestic exporters better off is not necessarily true. Whether or not a fall in the currency is a good thing for an industry depends on the market structure, and specifically on the size of the price sensitivities with respect to exchange rates of their international competitors.</p>
<p>When <a href="https://www.theguardian.com/business/2016/jan/26/mark-carney-fails-to-rule-out-eight-year-term-at-bank-of-england">Mark Carney</a>, the governor of the Bank of England, said, that Britain “depends on the kindness of strangers”, he had in mind UK’s heavy current account deficit. We argue that British exporters also “depend on the kindness of rivals”. </p>
<p>There is a clear link between the ability of a firm to pass on the exchange rate changes to its customers and the magnitude of their exposure to rival firms operating in the same market, both domestically and overseas. In our example of the beer market, the ability of AB-InBev to pass on the increase in the euro to the price of its beer affects the profits of SABMiller. The higher the former is, the lower the profits of SABMiller will be. This clearly depends on how loyal (i.e. non-price sensitive) the consumers of the Belgian brewer and SABMiller are. </p>
<p>Our theoretical and empirical results suggest that a falling currency is not always good for exporters. If the companies ignore these complex relationships between firms’ price setting behaviour, profits and exchange rates, mistakes are more likely and sometimes these will benefit the exporters of the appreciating country at the expense of the firms in the depreciating country. </p>
<p>The idiosyncrasies of each market, and the price sensitivity of consumers, will play a significant role in determining whether a devaluation will be beneficial for the exporters of a country. Simplistic arguments that a weakened pound is good for British exporters fail to take these into account.</p><img src="https://counter.theconversation.com/content/68956/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>All the talk about a golden time for UK exporters forgets one crucial point.Xeni Dassiou, Reader in Economics, City, University of LondonAthanasios Andrikopoulos, Lecturer in Finance, University of HullLicensed as Creative Commons – attribution, no derivatives.