Yesterday a man decided that the pound's value against the euro and the dollar was 'just about right'. As a result, the pound stopped weakening against the euro and the dollar, as it has been doing so for several months. I was disappointed. I get paid in euros so I benefit from the pound being weak. When I visit London next week, I will revel in the joy of a cheap Pret a Manger, Boots '3 for 1' health supplement deals and Topman's endless array of t-shirts.
But then I looked in my wallet. In my wallet have been some left over pounds, £25 to be precise, since my last visit to the UK a few months ago. My head suddenly tried to do a mental backflip but failed. A few months ago, the £25 in my wallet were worth more than they are now. The notes are exactly the same as the notes I withdrew from the cashpoint in London but, due to reasons that I can't quite get my head round, those notes are now worth a significant amount less.
Having just drunk a very strong coffee, the caffeine in my brain meant I couldn't stop trying to do the mental backflip. I tried to understand the connection between this man, Mervyn King, the outgoing Governor of the Bank of England, saying 'the pound seems about the right value' and the fact that the pounds in my wallet are worth less than they were a month ago.
I considered the reasons this man had given for why he thought the pound was now about the right value. Having considered that this was not the case in November last year, the pound has collapsed in recent months against other currencies. Mr King now thinks that the pound is in the Goldilocks zone: not too expensive, not too cheap. In a nutshell, Mr King is now of the view that the pound, as measured against the dollar, the euro and other major currencies, is 'just right'.
The mental backflips continued. What evidence does Mr King have that I don't have to be able to say that the pound's value is a proper reflection of the UK economy? Inflation rates? Unemployment levels? Business prospects? He seems to think that because inflation is going up, unemployment levels remain stubbornly high and businesses remain gloomy, the pound is overvalued.
By this point, I was getting excited that an individual like Mr King could be so wise and all-knowing about the British economy. The fact that an individual could understand the millions of transactions that occur on a day to day basis and then extrapolate from this data what the true state of the economy is - mindblowing!
Then I began to wonder how it was the pounds in my wallet had lost their value over the period of a month without them leaving my sight. A magic trick?
Well, in a sense yes. As with burgers, you can make a lot more of them if you add cheaper sources of meat, like horse and rat. Money is just the same. You can reduce the value of the pound by finding more pounds and putting them into circulation. So that's what Mr King has done. Because he thinks that the pound has been overvalued, he has been pressing a button at the Bank of England which creates a mound of dosh out of thin air. Mr King has created £375bn since the crisis began.
Not being an economist or a banker, I have to trust what Mr King is doing. Surely the most powerful man in the UK knows what he's doing? He's certainly more powerful than the Prime Minister and the Chancellor because they seem to have resolutely failed to get the economy going again. As the most powerful man in the UK, Mr King can ensure that we all have lots of pounds in our pockets to buy things and that the pound is worth less so our factories can export more.
I can't help but feel slightly concerned. I stopped eating McDonalds when I found out that European burgers often contain horsemeat. I don't trust McDonalds, simply put. Why are my pounds any different? They are now cheaper than they were a month ago, of a poorer quality because Mr King keeps printing more of them. How do I know what they'll be worth tomorrow or next week?
Thank God I'm paid in euros, I thought.
Then I remembered that Mr Draghi at the European Central Bank is doing roughly the same thing as Mr King. Oh, and so is Mr Bernanke in the USA. And the Japanese central bank chief.
Because I don't know Mr King, Mr Draghi, Mr Bernanke and Mr Kuroda personally, I'm going to have trust them that they will do the right thing and make sure their currencies reflect the true value of their countries' economies. But as a result, I have absolutely no idea what the pounds and euros in my wallet will be worth tomorrow.
The sick feeling in the pit of my stomach hasn't left since then.Suggest a correction