Is Sterling About to Tank?

Willem Buiter, who had a ringside seat at the Iceland meltdown, warned that the UK could follow back in November:

With the pound sterling dropping like a stone against most other currencies and credit default swap rates on long-term UK sovereign debt beginning to edge up, this is a good time to revisit a suggestion I made earlier on a number of occasions (e.g. here, here and here), that there is a non-trivial risk of the UK becoming the next Iceland.

The risk of a triple crisis – a banking crisis, a currency crisis and a sovereign debt default crisis – is always there for countries that are afflicted with the inconsistent quartet identified by Anne Sibert and myself in our work on Iceland: (1) a small country with (2) a large internationally exposed banking sector, (3) a currency that is not a global reserve currency and (4) limited fiscal capacity.

In the rest of a quite long and detailed post he shows how the UK is indeed at risk.

Fast forward, today we have a post from Ambrose Evans-Pritchard on the plight of the pound. Even by his standards (he has a great fondness for apocalyptic views), he is, as he warns, “Seriously Alarmed“:

The slide in sterling has turned “disorderly”….

For the first time since this crisis began eighteen months ago, I am seriously worried that British government is losing control.

The currency has fallen five cents today to $1.39 against the dollar. It is now perched precariously on a two-decade support line — the levels tested in 2001 and 1992. If it breaks that line, traders may send it crashing down towards dollar parity.

The danger is blindingly obvious. The $4.4 trillion of foreign liabilities accumulated by UK banks are twice the size of the British economy. UK foreign reserves are virtually nothing at $60.6bn. (on this, more later in a piece I’m writing today)

If the Government is forced to nationalise RBS and perhaps Barclays with their vast exposure in dollars, euros, and yen, it risks being submerged. It is one thing for a sovereign state to let its national debt jump in a crisis — or a war — perhaps even to 100pc of GDP. It is another to take on foreign debts on such a scale with no reserves. Yes, the banks have foreign assets as well to match the debts. But how much are these assets really worth?

This is the moment when the “rubber hits the road” — to borrow from American argot — the moment when the reckless debt experiment of our economic and political leaders comes back to haunt.

We cannot even do what Iceland did to save its skin. Reykjavik refused to honour the foreign debts of its buccaneering banks. It let them default, parking the losses in Resolution Committees. Small islands can do that. Iceland has fish instead, and lots of metals.

Britain cannot follow suit. The debts are too big. If London takes such disastrous action it will set off global panic and lead to an asset death spiral, drawing the entire world into deep depression.

What have our leaders wrought? The reckless conduct of City, the fiscal incontinence of Gordon Brown (3pc deficit at the top of the cycle), and the pitiful regulation of the UK housing boom have all combined to bring the country to the brink of disaster.

England has not defaulted since the Middle Ages. There is a real risk it may do so now.

And no — just so there is no misuderstanding — it would not have been any better if Britain had joined the euro ten years ago. The bubble would have been just as bad, or worse, as Ireland and Spain can attest. We have our disaster. They have their disaster. When the dust has settled in five years we can make a proper judgement on the sterling-EMU issue. Not now.

The Baby Boomers have had their moment in power. The most spoilt generation in history has handled affairs with its characteristic hedonism. The results are coming in.

The blithering idiots.

The one cheery bit of news is I haven’t seen this line of thinking elsewhere….

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  1. Anonymous

    Does Britain even have enough of a decent manufacturing and export sector to take advantage of the falling pound?

  2. Anonymous

    yves, what do you think of UK or pound future? you just posted what others think.

    It(UK/pound) does look quite scary…potential for pound to be dollar parity. what happens then?

  3. Yves Smith

    The fact that I put a story up is a sign I think the view is reasonable.

    The pound went very briefly to $1.03, for a day maybe, in the early 1980s. Amazingly sharp fall and bounce.

    I don’t give investment advice, particularly since I made some tactical moves that went against my long term views and now am very unhappy with myself.

    But I will say a I was looking at buying euros, but thinking I’d wait for something extreme. I am pretty bad about sitting on meaningful losses unless I am very confident in the trade, and I miss a lot of trades because I do not have the stomach for the volatility. So I am not a good person to ask.

    A buddy was advocating sterling instead. I think he is nuts. There is a lot of prejudice in the US against the euro that I do not understand. I think there is a real risk of a currency crisis, much greater than with the euro.

    But if the UK muddles through the RBS/Barclays worries (RBS is in a real mess, but a lot of the losses were writedowns of goodwill; Barclays insists it is OK, and seems to have more ground for that view than Citi or BofA, which does not mean it is in the clear by any means, but may not be a basket case either) sterling ought to get a respite. Whether that holds would be anyone’s guess.

  4. GreenspanPutExpired

    “The one cheery bit of news is I haven’t seen this line of thinking elsewhere…. ”
    … though it sounds plausible, especially the last two paragraphs: “The Baby Boomers have had their moment in power. The most spoilt generation in history has handled affairs with its characteristic hedonism. The results are coming in. The blithering idiots.”

  5. lewy14

    Pound is down vs dollar but still five pence or so above recent low vs Euro.

    Maybe this is just dollar strength due to general banking unease.

    The dollar had a sickening swoon after the Fed announced QE; maybe this is similar.

  6. bb

    default of the uk is off the table. default of an country that has borrowed in its own currency is impossible. trading cds on sovereigns is a pure profit for the writer. when things come to choosing between evils, the lesser (inflation) is always preferred. if you have any doubt, look at the mission of any central bank: to maintain positive (but small) inflation.

    i think the uk in the eurozone will be a huge destabilizer and will be unwelcome unless they agree to heavy regulation and influence from the continent.

  7. Anonymous


    Once the UK nationalises those banks, RBS and Lloyds at least (barclays and possibly hsbc after the body blow from the first 2), it instantly has a enormous pile of foreign-denominated debts as sterling continues to tank.

    It’s lost 30% of value from its peak vs $ and shows no signs of stiffening up.

  8. Anonymous


    You seem to have ignored the fact part of the liabilities of many UK banks about to be assumed by UK goverment are denominated in another currency which BoE cannot print.

  9. wintermute

    Agreed with lewy14. The 1.39 rate is as much a story of renewed dollar strength.

    The credit crisis has infected the currency markets driving extreme volatility. We are likely to see many multi-decade extremes of exchange rates. When sterling was at 2.11 in Nov’07 that was another extreme.

    The real tragedy for the UK is that it has an absolutely dreadful prime minister in charge of the country during this crisis. Reason is that Gordon Brown has long deluded himself into thinking he is an expert economist and fiscal policy guru. He claimed prudence for 10 years but did not put a penny aside for a rainy day. He claimed to have abolished “boom and bust” when this is integral to healthy capitalism (at mild levels).
    He expanded the state until parts of the UK have over 50% of the GDP government-owned (a grand socialist experiment – partly to gerrymander the electorate to lock-in a labour vote base). He is oblivious that government debt is part of the problem. He was lauded for giving the BoE independence – which worked until the first crisis came along – and now he barks orders at it until it jumps at every command. He is intoxicated with political power such that he wants to micro-manage people’s lives and designs the tax system to suit i.e. collects taxes and then redisburses part of it in the form of “tax credits” creating a double-hit of bureaucracy and inefficiency. He sees no problem with unfunded state pensions – and has “cooked” the goverment accounts by keeping off-balance sheet debts (such as £20bn railways debt) so that the headline government debt to GDP is 40% when the real figure is about 100%.

    The UK would do better with Henry Paulson as PM instead of Gordon Brown.

    So, yes, UK is headed for bankruptcy with the helm effectively unmanned.

  10. 212213

    Pritchard: “England has not defaulted since the Middle Ages. There is a real risk it may do so now.”

    Wrong, the UK defaulted on its WWI debt to the US in 1934. The UK was trying to make reduced payments in 1933, and FDR wanted to let them. However, Congress passed the Johnson Act making the reduced payments illegal, and in early 1934, US courts enforced the Act. In June 1934, the UK refused to pay any of its war debt.

  11. Anonymous

    If RBS and Barclays are fully nationalised then Sterling may be the least of the problems. Ranking companies by foreign assets then these are in the top five of companies world wide. Once government ownership goes over 80 percent I think you risk triggering a credit event which could act as a dominoes effect for European and US banks. Throw in HSBC and Lloyds banks as well and it is not just a UK problem but a world wide problem.

    The UK though is not the basket case of Europe with credit default spreads on government debt for Austria, Spain, Ireland, Greece, and Portugal being higher. Ireland with its credit default spreads significantly higher than any other European country and with all there banks even closer to full nationalisation than UK banks looks very precarious. While Ireland may have the Euro, Switzerland looks more vulnerable with its banking systems almost as big as the UK’s. Germany the powerhouse behind the Euro has seen its exports drop more than any other European country so almost every European Country is in serious trouble.

    The UK does have a big weakness and that is that it does not really have much manufacturing left. When sterling drops the trade deficit just gets worse as there is not enough manufacturing to take advantage of the adjustment (as shown in recent trade deficit figures). The other big problem in the UK is that it relies on wholesale funding and with many European banks pulling the plug on lending to the UK then UK banks are struggling to provide credit. I guess even though their UK banking operations are profitable their US operations are seen as very risky.

    In all honesty with the exception of France it may be that all European countries are fairing worse than the UK. Some UK company results have been surprisingly good and once the deadwood is cleared, the UK may be the economy that pulls Europe through. The worse case scenario is probably a sterling rout which would force imported goods prices to rise squeezing the consumer into default as inflation begins to soar. I personally think there are weaker links to break before a major sterling crisis. It does not help that the UK government makes no attempt to redirect its spending(inefficiency and red tape) or to fix its own dubious financial reporting (pension deficits) and statistics (inflation index basket bias).

    News that Chinese leaders will be coming to Europe to discuss the economic situation, suggest some sort of alliance on global currencies may be forth coming.

  12. bena gyerek

    nationalising the banks is not the same as guaranteeing their debts. i don't see why we can't follow the same path as iceland / citi – i.e. split the (nationalised) banks into good banks (gbp assets / high street commercial bank) and bad banks (international assets / investment bank), then guarantee the former and hang the latter out to dry. if this would potentially lead to an international banking crisis, then presumably the imf will cough up some money like they did in the 70s.

    an important aspect of the default risk to remember is that although the international assets of uk banks are matched by same-currency funding, most of that funding is short-term wholesale funding – i.e. exactly where we have seen the run on the international banking system in this crisis. if there were any serious question over the size of foreign currency losses and the uk govt's willingness to underwrite those losses, then the uk banks would suddenly find themself with very serious currency mismatches as they fail to roll existing funding.

    perhaps that is what we are seeing now, i.e. an undoing of the moral hazard trade? or perhaps the share price collapse only reflects the expectation that nationalisation will be done at great loss to current shareholders (a la railtrack plc)? unfortunately i do not have recent data on interbank rates, but would be grateful to anyone who does.

    you need to add lloyds banking group to the list of troubled major banks. it is the uk's equivalent of bank of america, i.e. a big messy amalgam of a good bank (lloyds) that is being brought down by a govt-sponsored rescue acquisition of a bad bank (hbos). hbos was the most exposed major bank to the housing market. i believe lloyds has just joined the 90%-er club. it is already 40-something percent owned by the govt thanks to the hbos bailout (pref shares that would equate to >50% if converted to ordinaries). i think barclays' problems relate to corporate cdos (they were very big in synthetic cdos with all the related correlation mis-marking issues). hsbc will get sunk by the coming chinese recession.

    i personally am very sanguine about a collapse of the pound (esp as i moved half my savings into euros a month ago with no intention to move them back any time soon). the uk is an open economy, so devaluation (esp vs euro) does a lot to stimulate real demand (in this case, mainly by import substitution). the pound was overvalued for years and years because of the financial services industry "exports". devaluation also helps stave off the deflation bogeyman. the risk of a concurrent spike in funding costs for the uk govt is a little more worrying, but imho actually not a bad thing if it encourages greater fiscal discipline. after all the uk (like the us) economy ultimately needs to rebalance its terms of trade to stimulate demand, and not simply nationalise its borrowing habit.

    despite the above, i am in favour of long-run euro membership. but that is a different discussion.

    message to bb: we already have "heavy regulation and influence from the continent" by virtue of our eu membership. fortunately the uk is also one of the most influential countries in helping draft that regulation (esp when we decide to opt in).

  13. ndk

    Remember that these nations, such as the UK and South Korea, compete with the US more directly in a set of industries where China is less of a player. A drop in their currencies will induce more deflationary forces in the US, as there is both a rise in the REER value of the USD and cheap capacity from desperate competitors.

  14. Anonymous

    I find amazing these days looking at all this people well trained in (liberal) ideology who spent last couple of decades teaching everybody about privatization (railways?), public debt (ignoring that the private sector turns to be “public” as far as unsustainable debts rush in), pension funds (is anybody calculating the charge to keep solvent the “private” system with current values and expected yields?). Really, really amazing. Sorry that ms. Thatcher seems to be unable to appreciate and understand the extent of the damage done: some people is really lucky.

  15. aw70

    @anon 5:07 am…

    Your contention that the UK might come through this mess as one of the least affected economies in Europe seems very far fetched to me. After all, you did mention the fatal weakness of the country: there is almost no manufacturing sector left – and there is very little you can do past a certain point if you do not have at least remnants of real value-generating enterprise in a country.

    That some UK companies are reporting good results now is IMHO misleading; the meltdown is happening in stages, and ere this is over, few British companies will remain unscathed. The rest of Europe, and in particular the Eurozone, have far more tangible assets and more sensible political leadership, and will come through this better than the UK. At least, that is what I think (being half British, I do know the country a bit), but not being an economist, I might of course be wrong. On the other hand, with the recent track record of professional economists, anyone’s guess is as good as theirs.

    Either way, the UK is totally, totally screwed (to put it in appropriately rude UK-ish terms).

  16. Tim

    Aren’t there super-rich in Britain that they can just tax the crap out of? Since the super-rich caused this mess, take all their monies and make them pay for it.

    There’s no reason ordinary taxpayers should be stuck cleaning up a mess caused by rich SOBs.

  17. bb

    anon @ 4:15 & 4:17
    a default of government owned bank does not trigger government default. those are separate entities. reference: the orange county default did not trigger default of all state of california debt. or take the town of vallejo

    'Jim Rogers says that the UK has nothing to sell to the world once the North Sea Oil ends.'
    could he be more spot on?

  18. Gannet

    “Middle Ages” since UK tanked? Not so, the Stuarts froze everything Charles II and James II time, leading to The Glorious Revolution of 1689. 1720 was bad as was 1772, and in 1825 the currency nearly collapsed. Things got very tight in 1847-48, but then it was a gold monetary system. Sorry, we have been here before and with dire consequences in the past.

  19. cornelius

    How do you people sit there and compare currencies and which one is better worse when they are ALL fiat, and only ‘seem’ better or worse based on the correlations that we have become used to. A nations strength is only as good as it’s real capital – which is natural, built, social and human. Things will sort out in next 5 years or so along those lines, not along current account deficits or forex reserves – the era of financial markers representing real assets is ending.

  20. Anonymous

    All they have done is take an insolvent banking system and turn it into an insolvent country. The US is hot on their tail to follow the same path.

  21. Anonymous

    “All they have done is take an insolvent banking system and turn it into an insolvent country. The US is hot on their tail to follow the same path.”

    I think people are confusing GAAP consolidation with legal assumption of liabilities. A government may have to consolidate a company’s liabilities if it buys the shares of the company, which may impact the government’s internal budget estimates. However, GAAP consolidation does not in any way give creditors of the company recourse against the country. If investors think otherwise, they are ignorant.


  22. Anonymous

    UK is cooked
    There is NO good export or else industry left (thanks to Tatcher).
    Gaz and oil reserve on the North Sea are quickly depleted and will soon be part of the past.
    20 % of their gdp was on financial services.
    Thanks God they refused to join the eurozone….

  23. Waldo

    Please excuse my hurried efficiency (copy/pasted one of my earlier comments):

    Strength is the point of hardwork! Why work if not to gain.

    We can add volumes of financial and economic factors to one currency having an advantage being devalued and such but in a “caveman” point of view more food stored (stronger currency) in the cave the stronger the chances of survival.

    Winning a race is the first object of the competition. All the other factors (more press coverage, ugly commentaries, etc) come with being a champion.

    The Euro is stronger than the dollar! Less not forget the idea of the Euro is the dollar’s example (dollar’s leadership).

    When the Euro would transcend the dollar (in real terms, not today’s immoral reality here in America) it would be very subtle and would take considerable time (match infrastructure, single monetary governing body, etc). There was a considerable abrupt “jump” above the dollar.

    The Euro is essentially “storing” value from America (heavy lifting) until such a time as American money managers think all is safe again. Gold is doing the same heavy lifting.

    The English are subtly pushing the City (London) to get past NYC as the premier financial district in the world. This has never been more possible. But if the English gentleman thinks he can do it on the back of the Sterling he is sadly mistaken. It is like wanting to be the strongest sea captain by sailing a dingy. The world is changing. Unified currencies are a real tool in the formation of free market power. The UK is hindering this from occurring. Not smart at all.


    The British must find the humility.
    It’s continued reliance on the pound,
    Will risk Europe’s future; no tranquility;
    Completed unification; civil liberty to sound.

    The British must let go of their past,
    It’s identity being created by a queen.
    Find the courage so real freedom to cast,
    If not, will rot it’s free character; today unseen.

    Let go of the pound.
    Let go of the queen.
    Completed unification; freedom found.
    Uniting financial power to lead, to glean.

    They will always be unique, the United Kingdom.
    We will always be kindred spirits; America’s soul.
    Let them now stand for an individual’s freedom,
    Let them take their natural European role.

  24. rtah100

    Sterling is certainly in for a prolonged weak spell, but:

    1) Manufacturing is still a significant % of GDP (20%?) and will be proportionately more significant given the more rapid collapse in financial services (cross fingers that manufacturing does not follow suit due to lack of credit)

    2) North Sea Oil has not run out, we are merely declining gently from nett exporter to nett importer. Since the energy market is determined globally in many different categories (kerosene, diesel, petrol etc.) and the UK has a complex energy mis (with exports and imports), the effect of sterling weakness on the resulting import bill is very hard to judge.

    3) Wealth is as important as income. There are plenty of UK private assets left that can be used to pay down the liabilities that HMG may assume, should income be insufficient. Obviously, this reduces private income, but debts must be repaid in the end….

    4) I would expect to see the Euro drop to follow sterling’s decline in short order, as the impact of the various peripheral debt crises (starting with Ireland) becomes clear (either in terms of Rhineland transfers to bail them out or peripheral depressions).

    The Euro is very definitely a nett oil importer and is not a major exporter overall (although it is in certain categories of goods to certain regions, but these are highly pro-cyclical, e.g. machine tools and luxury cars to Asia).

    5) There have been many examples of the UK defaulting as a pre-modern state, e.g. Edward VI (?) and the Medici (who were in turn being financed by the Venetians with their looted Byzantine wealth). However, I have the impression that most of these defaults, e.g. the “stop” on the Treasury by Charles II, were domestic defaults.

    6) The WWI debt is the only modern example. The WWII was paid off – and let’s not talk about being forced to hand the US geopolitical and economic hegemony through Lend-Lease. Actually, this is probably why the WWII was paid off – we were no longer a reserve currency and had to mind our credit rating.

    So I think sterling will hold its own against the Euro and is unlikely to aproach below dollar parity, and we will honour our sterling and non-sterling obligations….

  25. Whaaa?

    Later this year the UK government are going to bring in a foriegn dividend exemption so that companies with big offshore operations can bring back ill gotten gains tax free. I know we will be bringing billions back at this point, and I will bet we are not alone. This will create a short term spike in the demand for Sterling as the funds are repatriated… So if the UK hasn’t disintegrated into Mad Max style anarchy by Q3 then I think there will be a great short term opportunity to buy Sterling vs USD and Euro.

  26. Robert Helgason

    While having a manufacturing base helps, it seems that every country out there plans on “increasing exports, and decreasing imports.” Who exactly is going to buy these exports every country plans on having? Protectionism and competative devaluations look to be just around the corner…

  27. john bougearel


    Thank you for your input and background on the dire UK situation, particularly how GB is almost single-handedly driving the country to its doom. GB in this respect is far worse than GW, who in many respects oftentimes never had his hand on the wheel.

  28. FairEconomist

    I see Evans-Pritchard is trying to dodge discussion of the Euro precisely when something truly horrible for Euroskeptics comes up. Most of the foreign exchange risk for the UK banks is Euro-denominated, and if they were trading in the Euro they’d be freed from an enormous currency risk. And, trivially, a currency crisis wouldn’t be in the cards. Of course the bad debts would still be bad; but these huge additional risks would be avoided.

  29. Edwardo

    Someone asked:

    It(UK/pound) does look quite scary…potential for pound to be dollar parity. what happens then?

    My answer.

    I can finally afford a decent dwelling in London. But having my cake then, will I want to eat it.

  30. Moopheus

    Maybe it’s time for the wife and I to finally take the trip to London we’ve been talking about doing for a long time. With the pound off by about a third of what it was a year or so ago, maybe one of the better deals for American tourists right now.

  31. Anonymous

    “Brown expanded the state until parts of the UK have over 50% of the GDP government-owned (a grand socialist experiment – partly to gerrymander the electorate to lock-in a labour vote base). He is oblivious that government debt is part of the problem.”

    I was talking to a Scottish friend of mine in the summer and he was telling me what was happening in Britain. It was pretty much Britain sold everything that made the country revenue under Thatcher and then he sarcastically said the Brits now wonder why the country doesn’t have any money to pay for anything.

    He didn’t think much of their long-term.

  32. doc holiday

    My current opinion, is to go with the good bank, bad bank theory as a way to help solve this global deflation problem. The main issue is future cash flow impacts which are resulting as a side effect of mis-managment in the global banking industry.

    As an example of future cash flow or burn, I suggest you think in terms of a mortgage and then look at your Truth In Lending disclosure statement, i.e, that little section that offers some reality in terms of Total Payments and the amount you will pay after making all your payments (if things go well).

    The Truth In Lending disclosure statement provides a fantastic window to look through and see what went wrong with this systemic financial crisis, because it offers a clue as to the impact on banking revenue streams which are disrupted.

    As a very general example, a person taking out a 30 year loan could well end up paying the bank interest that will almost amount to two and half times the amount of the principal loan, for example, the loan is $100,000 and then the total payments with interest after 30 years could be about $250,000 +/-.

    The bank uses that cash flow to re-invest in other loans and in some cases, your cash flow could be used as collateral, or maybe it was used in a CDO, or an SIV, or in a way that excessive leverage was used on a casino bet, which is backed and linked to revenue streams that stretch and flow for thirty years — until, something goes wrong!

    The interruption of cash flow streams, revenue, accounts receivable and accounting mis-managment related to reserves and regulated risk management, is why the train is off the tracks. As an example of current news and cash burn, here are a few tidbits:

    1. …the leading online marketplace for foreclosure properties, today released year-end data from its 2007 U.S. Foreclosure Market Report, which shows a total of 2,203,295 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 1,285,873 properties nationwide during the year, up 75 percent from 2006.

    2. The number of foreclosures soared in 2007, with 405,000 households losing their home, according to a report released Tuesday. That's up 51 percent from the 268,532 homes that were repossessed in 2006.

    3. Bank of America To Modify 630,000 Loans in 2009 To Avoid Foreclosures

    > Now, think in terms of BAC modifying that many loans and the annual impact of 630,000 loans that are linked to MBS, CDOs, ABS, and a various pot of witches brew derivatives and compensation games linked to option grants and a string of lies that stretch out 30 years.

    IMHO, the stream of lies by all these banks and the impact to cash flow problems for decades ahead, is why good banks have to be separated from bad banks. Government accounting and auditing must be put into place to force disclosure and determine which banks were involved in the worst lending practices, and then those banks should fail and sell off their good assets to banks that have credibility and management in place that plays by the rules.

    TARP should be suspended ASAP and an army of auditors should scour the financial industry to collect data and search for fraudulent activity going back 10 years, then prosecute anyone involved in illegal activities.

    New tax laws should be written:
    See: Tax Break May Have Helped Cause Housing Bubble

    This crap should stop today: The provision — part of a sprawling bill called the Taxpayer Relief Act of 1997 — exempted most home sales from capital-gains taxes. The first $500,000 in gains from any home sale was exempt from taxes for a married couple, as long as they had lived in the home for at least two of the previous five years. (For singles, the first $250,000 was exempt.)

    > For good measure, this should happen:
    flush out derivative speculators

    Daniel Dicker, a former oil trader writing at, contends that there is a way to test the hypothesis that speculation is influencing oil prices (a view that Dicker supports). Exchanges could impost a "liquidiation only" requirement, which was last used to break the Hunt brothers' attempted corner of the silver market in the early 1980s (hat tip reader Michael).

    In one instance, however, the speculation premium was "successfully" tested – in the silver markets in 1980 when the Hunt brothers attempted to corner the market. As silver approached $50 an ounce in January 1980, the commercial participants asked for relief from the enormous margin calls from ever-rising prices. The CFTC and the Comex (the predecessor to the Nymex) responded effectively by imposing "liquidation-only" trading — traders were allowed only to close existing positions and not permitted to initiate new positions.

    This forced purely speculative positions to be closed rapidly, as they could no longer be "rolled" into future months at expiration. This caused the price of silver to drop by $12 the day after it was imposed, a decrease of over 20%! Over the course of the next three months, as contract months expired, the price dropped over 50%.

    >> This whole rant here is about future value and regulation which will restore confidence. Currencies, stocks, bonds, homes and cars will all crash in value and deflation will destroy world economies if the government does not root out he cancer in the banking world. The evil bastards that have brought us to this point need to be treated like retarded, drunken idiots and they need to be taken away from the controls ASAP. If they are not placed in prison, they at least need replaced by someone that fears prosecution — we need a friggn tsunami of accountable managers that are not in a euphoric cocaine/meth-like haze where their main focus is to remain high, in a jet on the way to Aspen to snort drugs and live in the world of illusions.

    … Ahhh, I feel better already…

  33. Waldo

    Doc Holiday: Damn good post above, damn good. Lets get accountable (work hard, apply necessary professional services to this mess). Could we do the silver scenario to George H.W. Bush’s manipulation of the oil prices for these past eight years?

  34. bluestater

    Evans-Pritchard’s economics may be right, but his command of American idiom is shaky. What’s going on in the UK right now isn’t a case of where the rubber hits the road, but when the shit hits the fan.

  35. cian

    I don’t think its particularly good in the UK, and Gordon Brown carries a lot of the blame for that. However anyone who thinks Wintermute has a clue should note that Gordon Brown is not a socialist, any more than the NZ government of the 90s were. He’s been an enthusiastic de-regulator, has pushed privatisation and has given the city whatever it wanted, while encouraging wealthy ex-pat tax dodgers. Of course the opposition would be far worse and demonstrate astonishing levels of financial illiteracy. So there’s that.

    I don’t know whether Pritchard is right, but in common with many his analysis is based upon what would happen if the UK was an isolated case. Who knows what bond buyers will do in a situation where everyone is borrowing money, everyone has collapsing financial institutions and everyone is borrowing vast amounts for stimulae. After all, in a few weeks the US will probably announce similar measures, then we’ll discover the German financial system is in worse shape than we thought and so it will go on.

  36. wintermute

    Socialism is a broad brush and not just limited to public means of production. China is an extreme case where communism rules – but capitalism is employed/tolerated as a means to an end – wealth creation.

    Socialism also involves “social engineering” and this is what has been relentlessly pursued in 11 years of Blair-Brown administration. Government has expanded into every crevice of the social fabric of the UK – to the detriment of libertarianism. The welfare state itself has been perverted from the original remit of a “safety-net” to a cradle-to-grave social-control mechanism. Government wants people to live they way it thinks they should. This is expensive (as well as highly inefficient). Capitalism is given its head in the City of London and private-ownership of production in order to provide the largest tax-base possible for costly social-engineering.

    The results are dismaying. As well as huge bureaucracies at every level – personal privacy is weakened (240 different laws allowing government officials into your house). Democracy is weakened (local council’s budgets micro-managed from London) and unrepresentative: 4,000 quangos (non-governmental organisations) make rules about which medicines should be allowed to patients to which books are acceptable in schools. Government in the UK is 80% larger than it needs to be – and this is bankrupting the nation – even before the credit crisis)

  37. Savage

    It’s a bit harsh to accuse the UK of exporting nothing at all. The problem is that the top export categories are oil (worth ever less) and cars (unwanted throughout the globe at any price).

    Still, there’s always whisky.

  38. cian

    Socialism is a broad brush and not just limited to public means of production.

    No it isn’t and China hasn’t been communist for a very long time. Sweden isn’t socialist, and the UK is no Sweden.

    Thatcher was responsible for the original massive increase in quangos, and the massive push to centralisation, the defenestration of councils and a huge crack down on civil liberties. I far from being an apologist for Blair and Brown, but to pretend that they’re an aberration is ludicrous.

  39. Wadlo

    Savage said: “The problem is that the top export categories are oil (worth ever less)”

    Lets not forget BP’s acquisition of Arco here in the States. Add that to the North Slope asset class. BP has been “siphoning” off wealth from California for these past eight years. If oil goes back to its proper free market price of say $20/barrel I wonder if BP will divest there Arco subsidiary. It would follow same line of thinking in place when they acquired the firm.

    How about Israel moving out of Gaza the day Obama took office? First Hamas fires rockets into Israel a week or so before the change of power then it is revealed that Bush, Jr. “prevented Israel from attacking Iran”. This last escapade from my point of view was to put some of the “dirt” on Israel masking Bush’s terror fighting efforts these past eight years.

    It is not hard to see a correlation between terror and oil. Even a “high school drop out” could discern this. But be damned if any of our economists here in the States can???

    Find histograms for oil, dollar, gold, silver, platinum and see the correlation. Undergraduate level analysis. America is dumbing themselves down. Free markets require courage and intellect!

  40. Anonymous

    My take:

    as long as UK “public debt” is not in other raising currency, they are going/they should devalue their currency.

    Their only gambit left is exporting their way out of recession.

    If their currency reaches near $1, It doesn’t matter what the world think. The UK export will explode.

    A jet engine made by UK company will be 10-20% cheaper, big machines will be 10-20% cheaper.

    And UK is still leader in fine chemical, biological and has pretty good media products.

  41. Juan

    free and associated producers

    is not what existed in any of the so-called communist nations (state capitalisms would be the better term, especially as this allowed understanding of the sharpening contradictions between such centralizations and the global system they were embedded within).


    has little meaning if applied to mixed economies, and still less meaning if class power is not taken into account, i.e. which class (or class segment) controls production and distribution.

    more on topic – to what degree is the smaller mfg sector in the uk not-national but a fragment or mere node in the network of transnational value-chains?
    iow, does it still make sense to speak of ‘uk mfg’as though it has remained national.

  42. Anonymous

    “Socialism also involves “social engineering” and this is what has been relentlessly pursued in 11 years of Blair-Brown administration. Government has expanded into every crevice of the social fabric of the UK – to the detriment of libertarianism.”

    Well, our president did the same thing the past eight years, and I wouldn’t call George W. Bush a socialist. Obama FWIW is a populist too.

  43. Anonymous

    This blog is remarkable, if only for the unique blend of well-founded critical analysis and its counterweight of utter ignorance. All the world is here, and unfortunately I doubt that some of them have the intellectual equivalent of indoor plumbing.

    The UK is in dire straits; however, unless I missed something, so are a number of economies, and the point about Euro/non-Euro irrelevance is well made. In this context a weakening of £ GBP may actually offer the UK a tactical advantage realtive to its immediate peers.

    However, the true significance of recent events is to highlight transfer of global influence and power away from Western nominal democracies. This will have geo-political, cultural and social consequences, but its roots lie in economics, and in that context we are currently witnessing the equivalent an involuntary World War III.

    I built my early career on computer literacy and fluent German; my children will require different skills if they are to thrive – being a white Anglo Saxon will no longer confer any material advantage

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