taking a pounding

A BBC story jumped at me from my screen today that forced me to write a post whose idea had laid dormant for several months. This post had first been cooked up in the closing days of last year, scheduled for publication on the infamous day that the once-mighty pound would reach parity with the relentlessly climbing euro. Against the odds, this day still hasn't come.

When I interviewed for my current position, early in 2007, the pound stood at €1.54. London was an eye-wateringly expensive city. Rent would be at least three times what it was in Grenoble. Any piece of electronics, any gadget I could think of desiring was substantially cheaper in the US. Once I started working here, I held my money tight and enlisted friends as couriers for major purchases. In contrast, traveling abroad was a royal pleasure.

Things have changed since then. The pound has hobbled from one low to another bottoming out at €1.02 just after Christmas before recovering somewhat. It remains stronger than the euro, and relative to my pay, London is still expensive. However, for visitors with paychecks in the right currency, the city is become a shopping and dining paradise. There have never been so many good deals in one place. Conversely, carriers of sterling suffer a dramatic loss of purchasing power outside our little island. What is it with seven-pound pieces of cake in Paris, and four-pound teas?

The falling pound has nearly universally been hailed as a boon to the British economy. Exports, it was reasoned, would become cheaper, giving businesses thus engaged a much needed boost. Our fine government was quick to enact policies to block any reappreciation of the currency. Interest rates on pound-denominated deposits were all but abolished. The Bank of England started an ambitious money printing scheme.

This seems highly misguided to me, and I fear that I, together with the rest of the country, will have to pay for it. Exports might in theory benefit from the cheap pound, but what does the UK actually export? What do you buy that's made in Britain? There might be gin, whiskey and the Mini, but they don't compete on price and are thus to a certain extent immune to exchange rate fluctuations. The sad truth is that the UK doesn't produce much. The economic prosperity of the last decade was based primarily on financial shenanigans and house price inflation. Both are coming undone, and much wealth is exposed as illusion. Hard times lie ahead.

On the other hand, a lot of stuff is imported – clothes, cars, and computers for example. These things are now so cheap here compared to other economic areas that their prices have only one way to go, up. I bought my wide-angle lens and my eeePC here because I couldn't get it cheaper in any other easily accessible country. Bargains abound.

While it lasts, we should enjoy the fact that inflation is scant. There is certainly no risk at all of deflation. The numbers are so low at the moment because oil, metals and food prices collapsed last year after being driven into a bubble by panicking crowds in 2007. If you look at the longer term, it all averages out, and there is no reason to worry.

No reason to worry about deflation. In the other direction, the dangers are real. As the pound is today worth only two thirds of what it was two years ago and international markets operate in dollars, increases in commodity prices will hit the UK doubly hard.

Prices are already inching up again. Today, news was released by Office of National Statistics that the UK has been struck, seemingly out of nowhere, by a sudden bout of inflation in the month of February. Most experts saw their predictions invalidated. They were quick and insisting in pointing out that this represents just a hiccup on the inevitable downward slide. They were also patently wrong. Get rid of your pounds while they're still worth something, before they are wiped out by the dual scourge of inflation and depreciation.