Pity the Pound

A few weeks ago I wondered if Britain was back. According to the Bank of England, it's not.

The Times reports:

In its Quarterly Bulletin, the Bank tried to explain the reasons for the collapse in value of sterling since the final quarter of last year. It said: "It is possible that sterling's depreciation may be part of a more prolonged process of rebalancing of the UK economy, generating a fall in the long-run sustainable real exchange rate."

It pointed out that Britain has run current account deficits, financed by foreign investors buying British assets, since the mid-1990s. The financial crisis, however, may have forced those overseas investors to look elsewhere.

"The financial crisis may have led overseas investors to reasses their willingness or ability to purchase sterling assets and thereby finance the UK trade deficit. As a result, the long-run sustainable real sterling exchange rate ... may have fallen."

The Economist is equally pessimistic about its home turf:

ARGUABLY, the recovery won't be self-perpetuating until banks start lending again. So today's survey from the Bank of England ought to give the bulls pause. The Bank shows "the weakest flow of total net lending to UK businesses since the monthly series began in 1998" and adds lending fell further in August. Meanwhile, net lending to individuals in the form of mortgages or consumer credit declined - in other words, people paid back more than they borrowed.

Tony Blair once quipped that Britain served as a bridge between the United States and Europe. Britain's economic malaise may portend bad news on both sides of this "bridge", especially for America, which suffers from many of the same structural problems as Britain. Try replacing "UK" with "USA" in the Bank of England's statement and you get the idea.

Last May, rumors spread that S&P was considering a downgrade of the UK's credit rating. Immediately, investors feared that the United States would be next, and the dollar took a pounding. Will history repeat itself? 

A significantly devalued dollar and pound certainly won't bode well for the eurozone's attempt to export its way out of the recession.

The US has a key benefit over its British counterpart: size. Markets can abandon sterling, with little ramifications for the global economy. The same cannot be said for the dollar. 

Nevertheless, policymakers in the United States would be circumspect to take note of the woes on the other side of the Pond.