There is one group of people begging for a "YES" vote next week: British exporters.
One poll over the weekend, and the pound drops almost 5% against the US dollar. And against the Euro, it was the single biggest one day fall for almost 3 years.
The pound has been slowly increasing in value against a basket of major currencies over the past 18 months or so, particularly the US dollar, ranging from a low of about $1.50 to the pound in March 2013, to a high of almost $1.71 over the summer. An absolute riot if you spent the summer gambling in Vegas, or hightailing it across the American Mid-West, but something of a disaster if you are an exporter who has a fixed price list in dollars, still the world's leading reserve currency.
It is a myth that the UK (if it remains as such) is not an exporter. Not only are there the obvious major commodities such as oil, but significant intangibles, from financial services products to computer games, a field in which the UK leads the world, as well as huge licence and royalty payments. Britain is even a significant exporter of cars, in some years even a net exporter, managing to sell more vehicles abroad than we buy from overseas: What a turnabout, even if most auto companies have foreign owners.
The pound has climbed to new heights because our economy has seemingly come out of recession faster and with greater strength than our major economic partners. New job creation is at record levels. Property prices are booming, in part due to capital flight to London from weaker European economies. Go Britain, yeah!
And you'll never find a 50" TV this cheap again: When the pound is strong, imports are cheaper.
If the Scots vote "YES" on 18th September, we are in uncharted economic territory. One thing that is for certain is that the value of the pound will be affected while the issue of what currency Scotland will use is sorted out. And the effect it will have is that the pound will go down. Nomura recently predicted a 10% drop against the dollar, but other commentators are talking in terms of a "currency crisis".
We've had Sterling Crises in the past. And they are not pretty.
In 1976, with massive UK inflation and a new Labour Government under Jim Callaghan, there was a massive sell-off of sterling, lead in part by the Bank of England in an apparent attempt to devalue sterling deliberately to protect exports. However, the Bank of England miscalculated the effect of their sales combined with other massive simultaneous sales by other countries, and the price of sterling plummeted, rather than taking a gentle path downwards. By the end of the year, the price was as far down as $1.60 to the pound from $2.00, far lower that had been originally intended. And so battered were public finances, the country had to have an emergency bail out from the IMF, to the tune of $3.9 billion, at that point the largest loan the IMF had ever made.
More recently, in 1992, "Black Wednesday" saw the pound drop from over 15% in one day, with a longer term drop of over 25%, from just over $2.00 in September, to a low of just under $1.50 in December. George Soros walked off with the contents of the Bank of England and central banks became a lot more wary of fighting currency speculators.
Ironically, and perhaps in part the reason for this blog post, it is credited as one of the reasons that the British economy was able to rebuild and come out of recession, because British exports suddenly became very cheap. For that reason 16th September 1992 is known in some circles as "White Wednesday" - Didn't feel that way for anyone who had a mortgage when interest rates shot up to 15%.
The key question, of course, is knowing when we have reached an acceptable bottom value. In 1979, with a new Conservative government, the pound rose to $2.40. This is in part credited with kicking off the long recession of the early 1980's. However, sterling slid, and hit a nadir in 1985, when a combination of weak British economy, and a US economy seemingly thriving on Reaganomics, brought it to near parity with the dollar.
If Scotland leaves the UK, we have to hope that the markets price the uncertainty into sterling as soon as possible.
So, maybe it's not all doom and gloom. British companies can be ready to fight hard for new exports with a weaker pound. Overseas investors, particularly those holding dollars due to the tightening of US fiscal rules, may well be looking to invest in British companies, which is good for the tech sector in particular.
Just don't try to go on holiday to the US. It will be cheaper to let the Yanks come to us!Suggest a correction