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A devalued pound can’t save the British economy

There it goes again. Sterling has been dropping sharply this year against the U.S. dollar and especially the euro, as Britain turns to a tried and trusted remedy for its economic problems: devaluation. Even with its slight uptick on Wednesday, sterling is down more than 6 percent against the euro since the beginning of 2013 and has slid 10 percent over the past six months.

This is not something the British government is boasting about, especially at a time when there’s concern over -- and sometimes a high-level condemnation of -- countries such as Japan that allegedly seek to manipulate their currencies. But it’s also not something the British government or the Bank of England is trying to hide – or stop.

The big question is: Does devaluation still work? It’s an old tool aimed at restoring competitiveness that has been used countless times by Britain in the past. In the 1960s and 1970s, the Labour government devalued sterling sharply against the dollar (and gold). And over the past 60 years the pound has lost more than 80 percent of its value against the German currency – first the mark and now the euro. In that time, the two countries’ economic fortunes have fluctuated, with Germany showing very robust growth in the postwar years and Britain performing relatively better from the early 1990s, when it crashed out of Europe’s system (at the time) of semi-fixed exchange rates, just as Germany was struggling to digest the economic impact of reunification.

Devaluation hasn’t always helped: In 1976, Britain famously had to go to the International Monetary Fund to ask for a loan to end a damaging run on sterling. It can also be a risky strategy if inflation gets out of control, which is why Germany, for one, is so skeptical about devaluation as a policy tool. But there’s a new concern surfacing: Can it even work? In the era after the financial crisis of 2007-08, there is mounting evidence that devaluation may not be able to help kick-start a stalled economy as readily as it may once have done.

from Breakingviews:

Were Luddites the victims of 2011-style finances?

The British weavers known as Luddites, who destroyed looms precisely 200 years ago, thought rising unemployment within their ranks was due to machinery. But there's a case to be made that inflation, money supply expansion, budget deficits and trade barriers were equally to blame. Maybe we haven't learned much in two centuries.

The first Luddite riot occurred on March 11, 1811, an attack on wide knitting frames in the Nottinghamshire village of Arnold. The rioters were mostly skilled artisans, whose livelihoods had been endangered by what they perceived was a "dumbing down" of their skilled work by automated looms. The riots spread to the main cotton center of Manchester late in 1811. Prime Minister Spencer Perceval's government, which had a robust approach to public order, made frame breaking a capital offense a year later, executing 17 offenders the following year. After that, Luddite activity gradually died down, petering out after 1817, when the economy improved.

from MacroScope:

Broadbent’s BoE appointment keeps hawks in health

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BRITAIN-BOE/Ben Broadbent’s appointment to the Monetary Policy Committee ought to dispel any notions that the Bank of England would be left short of hawks after the departure of Andrew Sentance.

A brief look at the history of Reuters polls shows that Goldman Sachs' UK economists – led by Broadbent – were uber-hawkish in their outlook for British interest rates early last year.

Britons face rising price pain

Fiona Shaikh is Reuters’ Economic Correspondent, based in London. –

BRITAIN/Stubbornly high inflation has proved something of an inconvenience for the Bank of England over the last year, but the unrelenting rise in prices is turning out to be a real headache for ordinary Britons — one which is likely to get worse before it gets any better.

from MacroScope:

How uncertain exactly is the uncertain BoE?

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king-inflation.jpgFor a central bank that looks certain to bust its 2 percent inflation target for most of the time between now and the London 2012 Olympics, there is still a lot of uncertainty out there.

Bank of England Governor Mervyn King referred to "uncertain" or "uncertainty" about the outlook five times at the May quarterly Inflation Report press conference according to the bank's transcript, and the latest one didn't seem much more confident in tone.

from The Great Debate UK:

Bank of England Inflation report offers markets a reality check

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-Mark Bolsom is Head of the UK Trading Desk at Travelex Global Business Payments. The opinions expressed are his own.-

Sterling tumbled to a one week low against the dollar in trading this morning, after the Bank of England delivered its latest quarterly inflation and growth forecasts today.

from MacroScope:

Rip-off Britain in effect

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While most of the developed world frets about deflation, in Britain, inflation just won’t quit. 

The Bank of England has been forecasting a sharp fall in consumer price inflation for about as long as Britons have hoped for a summer of uninterrupted sunshine. But at least Britons are still betting on a fair amount of rain. 

BoE’s King “doesn’t do sex appeal”

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Bank of England Governor Mervyn King was on good form when he addressed the Royal Society – Britain’s oldest scientific discussion club – on the vexing issue of communicating complex forecasts to the great unwashed.

Aside from his usual moan about the media’s desire to reduce the BoE’s beautiful but baffling ‘fan charts’ of inflation forecasts to one or two numbers, he made a rare and welcome admission that in past years the central bank had not done as well as it could have to flag up the risk that a financial crisis was about to happen.

Is a 1.8 percent inflation rate good or bad news?

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- Sumeet Desai, Reuters senior UK economics correspondent. -

Inflation unexpectedly held steady in July, official data showed Tuesday, but economists still expect big falls in the annual rate this year and monetary policy to stay loose for some time to come.

Is a 1.8 percent inflation rate good or bad news?

from The Great Debate UK:

Deflation? It’s inflation you need to watch

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-- David Kuo is a director at the financial Web site The Motley Fool. The views expressed are his own. --

david-kuo_motley-foolWhat are consumers supposed to make of the latest inflation numbers? Do we have inflation, deflation or a bit of stagflation?

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