Thursday, September 8, 2011

Why isn't GBP a flight to quality?

King has no clothes © fintag

News comments:
GBP is a liquid currency so why is the Krone or the Yen more desirable?

Just as Switzerland starts the trend in currency pegging, citing deflationary and painful export price disadvantages as reasons amongst others, the GBP should be taking over its role as a flight to safety.

London is certainly a flight to real estate safety and despite high taxes most international companies have to be there. Banks, media, technology, they love the place. It may be creaking at the seams but it has highly skilled workers, great football and the best bars and clubs. Schools are even better.

So why is the GBP such a poor currency? Mervyn King wants to know why which is why QE nth edition starts again. He knows, like the IMF and everyone else, most banks are bust. Their assets are overvalued and their liabilities hidden off balance sheet. They employ too many expensive people and their business model is bust. They are however the lifeblood of the UK. No banks = lower GDP = higher unemployment = less taxes = lower real estate prices. I mean what else does the UK do these days?

Gone are the manufacturing innovations. Gone are the ship builders. Gone are the slaves. In its place are call centers, distribution centers and shopping malls selling stuff made in China. The UK is just a broker these days.

The UK has run out of options. It is cutting, keeping taxes high, dampening growth and still paying huge monthly debt interest. It needs inflation. We all do. Just as Obama needs to understand why he is the next Jimmy Carter, the UK needs to ensure it doesn't become the next Japan and GBP to become the next JPY.

Today's shorts:
King turns into Bernanke (bloomberg)

Today's longs:
Fitch sees what we all see - China is all smoke and mirrors (reuters)

Gordon Brown to replace Mervyn King at the Bank of England.