DoctorFaustus

The Great British Pound Slimming Down

Long
DoctorFaustus Pro Updated   
FX_IDC:USDGBP   U.S. Dollar / Pound Sterling
"You may have to fight a battle more than once to win it."

-Margaret Thatcher

The United Kingdom stands divided, choosing self-exile in some quest for a new identity. An identity without colonies, without crown. An identity of stoic British independence, self-reliance, and profound economic growth and prosperity. The birthplace of Shakespeare, Newton, and Beckham. Home of the last great empire, and all of her peoples. Rooted with the most imminent educational institutions and universities in the world. A nation that put the constitution in Constitutional, with one of the most globally revered monarchs in Monarchy. A central bank with a history of unparalleled global financial domination. In every record of mention, it will be the United Kingdom firmly entrenched as a founder. With a rich culture combining the diversity and character of her own lands, and every other once conquered. Heroes mighty as King Arthur and wise as Paddington. The final boss of this quest is nothing short of England herself.

Where the UK might have one of the higher population growth rates in Europe, recent data suggests a more imminent decline than previously assumed. Since COVID, the UK has seen a major inflection point in population dynamics with a reduction in growth, age distribution skew increasing towards the elderly, all stimulated with anti-immigration policies and a healthcare system in crisis. Meanwhile, energy distributors are bankrupting by the dozens, with more and more set to go as Oil prices maintain upward support. Nuclear power plants in the plan but with most set to close over the next 3 years, leaving an energy grid reliant on exports of fossil fuels; making UK's energy system in crisis. Sturgeon's Halloween costume just might have been blue facepaint and a kilt, as Scotland continues it's Independence battlecry. Tories are all but assuredly out of power should a general election be called anytime soon after 12 years, 5 leaders, and one of the biggest declines in economic and quality of life conditions since the 1970s. Queen Elizabeth II has died, with King Charles III establishing his rule at a 42% approval rating; all to say UK's political system is in crisis. The United Kingdom has been a net importer for the last 40+ years, with inflation higher than ever in the same span. Employment is near historic highs as interest rates continue to rise - all set to trigger a drop, turning UK's economic system in crisis. And the new best hope, as opposed to the last best hope that spoiled before a head of lettuce, is a 42 year old bloke whose career has been enabled by the volatile turnover in Tory leadership rather than some personal achievements hedged in his 13 year career as a Goldman Sachs analyst or personal Hedge fund. Four years ago, if you asked the average Brit who Sunak was, the answer probably would have been "who?". Now he has just completed his second week as the second most powerful man in British government.


True to form, Sunak has already vocalized plans to decrease public spending with tax cuts. Initial quantifications sitting at a 50 Billion pound spending cut with potential windfall taxes on healthcare and Oil & Gas producers. However, the Treasury has calculated a 30-40 billion pound deficit, suggesting a massive spending cut would be all that's necessary, and likeliest given Tory philosophy. But a spending cut amidst a Cost of Living crisis is the surest way to a decline in GDP, something the Bank of England understood quite well. Keynes, and the school and house of economics after his namesake, is a fine mix of basic arithmetic and psychology: harbouring long monologues against ideologues of financial pandemonium while congratulating his peers for their own deceit. With some Olde way of saying "fake it 'til you make it", Keynes understood the BoE's role in giving the government stability and strength through acclamation. When current BoE headmaster Bailey instead gave diatribe amid Truss and Kwarteng's 'Mini-budget', he knew the ramifications. Long past are the days of reign by the Bank of England, now playing little more than a soliloquy to the Federal Reserve's operatic roar. Long past are the days the Bank of England can stress psychology over arithmetic, and long past are the days for self-destructive financial policies. Bailey knows this.

The world order is changing, albeit divergent from any machinations of Goldbugs, Cryptohodlers, Russo-China fanatics, et al. The world order is constantly changing, and it is not some dramatic event so much as a regular equilibrium between nations via international trade and currency exchange rates. The relative value of the Dollar is changing every second; the Yen, Yuan, Peso, Peso, Peso, and Pound are no different. The logic being that countries would and should rebalance congruent to economic dispositions in a ratio of their debt and ability to pay it. While relativity remains relative based upon a mix of fiscal policies and system mechanics, Great Britain has bowed before, and will again, to the Greater Markets. The Greater Markets aren't abstract. It follows the majority's principles at the majority's behest. The UK has degraded it's ratio of population, GDP, technology, science, finance to the US for far longer than the past ~2 years, and has maintained fair parity. Whether in some grand appreciation for a great king or respect for an elder, age sets in.


There are Emerging Markets (EM), and there are Advanced Economies (AE). Except there aren't, at least not in any rational sense for the sake of understanding generalized system mechanics. When economists play statisticians and clump together fruits, they ignore esotericism. Greece is an advanced economy, 24% unemployment, Agriculture driven, and all. Taiwan is an advanced economy, while China isn't. Contra to the US being an advanced economy with states like West Virginia which shouldn't. This analyst will make the argument that the UK is a post-Advanced economy: highly developed urban and rural structure of mixed industries and homesteads fitting appropriate population standards with advanced infrastructure. China got decades of building skyscrapers to bring the largest population size to modern technological standards with all the joys that debt can bring. While China is just realizing the imminence of theirs, the UK has been in an identity growth crisis for decades. And the Tories best path forward is to become a (bigger) tax haven to the rich. This analyst isn't going to argue whether Trickle-down style policies work or not, because they don't. There is no quantifiable or qualifiable proof in any time period that suggests trickle-down policies succeed at promoting growth or prosperity. In fact, the proof against has become so vast that it's become arguing against gravity . Furthermore, the days of the Irish corporate tax haven is ending as the Global Minimum Tax takes hold, and UK is no less a prisoner. If the United Kingdom wanted strength in fiscal sovereignty, increasing taxes on the super-rich among extreme wealth disparity and enforcement of taxation is the sounder strategy. While taxation may be a factor, there are significant privacy and legal benefits to wealth hoarding in prominent shelters, and removing these is impossible and altogether insane for the UK. Until viable loophole and tax shelter strategies are punished there will be no rush back for the aristocratic wealth of the lonely island' aristocrats.

Inefficiencies are allowed during growth. If a sub-process is a negative to a minor percent, but the overall is still positive, then the system is naïve or lassiez-faire to inefficiencies. Some inefficiencies are designed into the system as a valid form of control; growth left uninhibited and without testing is growth without support. Bureaucracy exists to ensure growth is checked and rechecked and rechecked by valid quality assurance and expert opinions, or at least that's how its supposed to go. As growth slows and ceases, certain inefficiencies need resolution. As a Post-AE, the UK needs to find a way to grow, and needs the direction for it. Advanced economies have, and need, designed layers of negative-REAL production to ensure economic participant involvement, both as a means of integration and social net for those without a real economic purpose. No, Software As A Service is not an efficient production model, but it is profitable in artificial conditions. If everyone grew enough food for themselves and lived in a completely self-sustainable lifestyle - the economy would probably crash. Advanced economies walk a thin line in fiscal competition, thus born is the prerogative of inflation . And the UK exerts that inflation on the globe, primarily in the forms of persistent price increases on exports.


Inflation begets inflation . As the UK exports inflation , their trade partners bear an unfair burden on balancing books. This pours through two major facets. The first is Germany; Germany plays a big part in eating rising export costs and buying & supporting UK debt. Germany's economy has been the strongest in the Eurozone, by design and with the intent on all Europe to share via the Marshall Plan. The Marshall Plan was absurdly successful considering the state of Europe post-WW2, with that success derived in directing economic and productive efforts. Brexit set in motions the disbandment of the financial structure key to maintaining a united economic party against a growing and developing world. As the UK attempts to renegotiate terms, barriers to cheap trade between European partners arise, and they are finding the original deal was quite kind already. Germany remains one of the most sensitive to rising energy costs as they imported 55% of their gas making up over a quarter of their energy supply, with 31% coming from Russia. As Germany's economy faces sustained negative growth due to the energy-intensive demands of their manufacturing industry paired with the global inflationary regime, their ability to support Eurozone partners, and sustain constant import inflation without exporting it right back, saps. The second is America; as the dollar increases in value relative to the pound, trade and debt financing costs increase. The United States Dollar is the preferred, and in some instances required, denomination of trade and investing. UK Corporate debt totals $6.4 billion USD, of which $3.3 billion is issued in USD. 52% of financial and non financial corpore debt is now suffering from a 30% currency devaluation on the year, 20% on the 3 year, 18% on the 5, 44% and 10, 47% and 20 years. In fact the only UK company benefitting on forex sold debt in a brief peak 37 years ago without ever refinancing. Every UK company is paying considerably more on debt payments from interest rates and a costly exchange rate, while still suffering from meteoric energy prices, labour struggles, supply chains, et al. British businesses will look to cut expenses and raise prices in efforts to stay out of the red, while consumers will be struggling with a very, very real cost of living crisis.

The Government of England and the Bank of England can call it whatever it wants, but the UK has experienced a sustained decrease in GDP to Consumer Price Index since the GFC in 2007, and a smaller real economy than before COVID with negative growth fairly consistent since. Announcing formal austerity will be the final blow for a formal recognition, something the BoE has recently alluded to. A recession. Tories have until the beginning of 2025 to call a General Election, which is the most likely scenario given polling shows a complete loss to Labour. Tories have two years to either cycle through as many candidates as they want while they keep pushing the same policies, or to leave Sunak in to keep pushing the same policies. There is no stark contrast between Truss' and Sunak' mini-budget, only the messenger. As global economic conditions worsen, Sunak's government might find an easier donkey to pin the tail on to stomach through policy-choice, but it is unlikely for a general election barring a low-probability event catastrophic to Tories as a whole. Boris Johnson took a 44 day vacation from office due to the sheer weight of countless investigations into him and his government. And then he still almost won the nomination for PM. This is a party without shame or remorse, and it would take an extreme situation to remove them. Historically speaking, Thatcher sat through a 60+% devaluation in currency, and won 2 more general elections. Throw on top David Cameron's PigGate, and one is left with the question of what exactly would it take?

The Dollar to Pound correlate well to the difference between UK and US interest rates, naturally congruent to arbitrage opportunities. Lower UK interest rates creates a valuable arbitrage opportunity for investment in international markets, and as this opportunity extends, monetary inflation is a high probability outcome. However, raising UK interest rates will further hurt UK businesses. Albeit the same businesses should have plenty of capital liquidity given several central and concentric banks have bought heavily into the corporate bond and equity markets. Bankruptcies should be limited given standard risk management for standard variations in economic conditions, but surviving a major and drawn out recession will be tough - especially with energy prices in excess multiples of historic and recent averages. The same energy prices that are likely to get worse. Boris Johnson had been one of the earlier European leaders to realize nuclear was the right choice, but nuclear reactors can take excess of 10+ years to build, especially if just starting now. Furthermore, the UK is set to lose a majority of current nuclear energy production over the next 3 years with limited options or moves to extend lifespans. The United Kingdom gets ~80% of it's energy from Natural gas , Coal, and Oil . They import 40% of their Natural Gas , 33% Oil , and 90% coal. However, the UK has large reserves of all three and could easily utilize release policies similar to the United States given a dramatic enough demand. Smaller releases have been parallel to the US', but hitting that bid red button has to be on the mind of someone in cabinet. While renewable energy construction projects continue to move forward, the solar PV industry is centered in China and built upon the highest energy cost technology. Add a dash of the United States big solarpunk push and anti-China tech policies, costs for building solar will continue to rise.


The United Kingdom should reapply for European Union membership, and re-initiate a Marshall-style plan with unmalleable commitments between member states. The developing world is developing, Emerging Markets are getting and will continue to be squeezed, but time is running out for the United Kingdom and European nations to maintain the same economic strength relative to value. The Italian and Greek economy hasn't had a heartbeat in decades, Spain's economy is mostly Catalonia, Germany's economy is too energy intensive for such little energy production, and France's economy is astutely French. Delaware has the most developed corporate legal system in the United States, thus is naturally suited to become the corporate headquarter of the United States. Other states can, and some do, compete with Delaware. The Federal Government is the United in the States, and smooths major funding disparities. UK and Eurozone parties need to take a unified structural policy seriously and develop a European network for easy trade of goods and services, travel, and information. The European Union should resolve to create a European Union-spanning energy grid allowing for diversity in regional and substrate production. France is one of the nuclear capitals of the world, and (when they aren't being French) enjoy the benefits of cheap and clean energy. Germany enjoyed rule by a nuclear chemist and has one of the most anti-nuclear energy policies in the world while maintaining a commitment to carbon neutrality on paper. Allowing member states to specialize, and for the entire Union to benefit from that specialization, the EU must build easy-to-access markets with nationalized and guaranteed interfaces.

Agriculturally, the United Kingdom has had one of the toughest growing seasons in recent history. Climate change is guaranteed to continue to alter food production for every country. By enabling more transparent and user-friendly agricultural trade markets, farmers will be able to rotate into the "best-fit" crop rather than "easiest to sell". Expanding the reach for local farms enables cost and production efficient trade. The UK government has reported a 60% self-sufficiency in food production, with large variation between production and quality. 100% self-sufficiency is not an economically ideal or mechanistically feasible outcome, thus crop specialization is natural and favourable for international trade. While specific crops have seen drops in production 30-50%, general production of Vegetables, Fruits, and Cooking Oils remains within standard counting error of averages since 2015. Farmers are capable of rotating to crops best suited for known conditions, thus enhancing their ability to forecast combined with resources for rotation will best help local agricultural outputs, local economies, and global populations. With that said, the UK and EU need to push policies for more regenerative farming efforts as the cost of fertilizers has and will continue to raise total agricultural production costs. Regenerative farming is less efficient than pouring miracle grow on the ground, but by creating circular economies with regulated outlets there will be a net job and wealth creation as localized supply chains are created. Furthermore, a land and people priding themselves on a long history should take proactive measures at ensuring said history can continue. The Union needs to ensure member redundancies given intranational political volatility across diverse regions and populations, inefficiencies that are important in establishing and rewarding competition. Reasonably speaking, the United Kingdom could take on a secondary role in any competitive markets knowing that sufficient quality will find potential buyers across 10+ Englands. On a more specific note, the United Kingdom would be best served towards Japanese examples given natural comparisons with available geography and population. Barring a massive influx of British or Immigrant children, the UK will need to take automated manufacturing stances, and would utilize a strong educational background in establishing heavy technology and automation industries. Mixing energy inputs with a need for constructing energy-efficient production methods, the United Kingdom could take a heavy solar polyvinyl production industry stance that would establish a European home for a budding market. Technology is sovereign independence, and as the threat and danger of cyberwars increase, the United Kingdom should develop a British silicon and silica valley. While all of these may appear redundant on a global scale, until country lines are erased and Pangea Two is announced, independence is economically profitable.

From there, a slew of policies and regulations limiting international capital spillover: Ensure appropriate taxation over corporate resources and structures based in the country. This doesn't mean tax companies into the ground so much as prevent international corporate tax sheltering in the name of reinvestments into the UK. Taxation is one of the best defenses for investment as companies extend the lifespan of profits and possibly return greater profits as they invest to avoid large tax bills . Next, UK companies should be listed on a nationalized stock exchange; the chaos of the London Metal Exchange isn't a unique event rather just the loudest in a while. The United Kingdom stock market capitalization has seen a 30% decrease over the past year, from a relative parity with total GDP, suggesting one to follow the other's direction. If the United Kingdom wants to take on their Cost of Living crisis seriously, and control monetary inflation while supporting supply-chain growth policies without the composite costs, the United Kingdom must control where Pounds go. Easy to borrow capital is required for solution production. Ensuring capital goes towards solutions and not unproductive measures is the only way to prevent continued excess inflation and devaluation. Limiting M2 to M3 travel allows for continued wage and employment inflation , while international trade can be done within the European Union without punishing either side for internationally restricting dilution.

Social redistribution policies should be investigated to stimulate localized circular consumer-based economies, with all the inefficiencies included. Construction and labour costs can be lessened via nascent technologies such as 3D Construction Printing, but need to be subsidized and promoted ASAP to ensure supply. Designing and building a hundred tiny towns with localized debt and localized resources can create ideal circularized communities, but will require intelligent labour distribution and open borders enabling family unit immigration. Education reforms utilizing research and technological innovations enables versatility, social wellbeing, and continued increases in production efficiency and quality. Research and technological innovations need to be funded by increased government spending in construction of research facilities and businesses, personnel, and equipment. Every country doesn't need it's own Large Hadron Collider, but significant capital expenses in laboratory equipment is a major hindrance to maintaining leading innovations. Cultural, social, and artistic organizations need major stimulus to normalize and bridge societal gaps; but also for designing capital inefficiencies among low "real" production sectors.

Ultimately, none of this is likely. Even if Labour wins in 2025, there remains a low probability outcome of any of this coming together, especially given a lack of indication of strategic foresight or platform. The UK will deal with continued energy price volatility with an upwards drift until production issues are normalized via geopolitical and domestic production resolutions. Russia returning to the previous status quo, and her markets, is extremely low without regime change. Agricultural and labour markets will continue to provide upward strains in delayed cycles as fixed contracts reach the end of their's paired with continued restrictive immigration and population growth agendas. Financial markets are far from easing, burning capital to keep businesses running. This analyst believes the likeliest outcome, supported in current data trends with appropriate context fitting historic periods from the early 1980s and more, is for the Pound to continue it's devaluation to the Dollar - even in the event of global deflation and depression. In fact, as bad as the United States may or may not have it, the United Kingdom is in a worse relative position to the United States, and other leading global economies.

End the self-exile in the face of proof. King Arthur had his court, as self sustainable as he may have been. Similarly, after decades of Thatcherism and privatization of key industries to the highest profit margin seeking groups without regulations and provisions for the future, the United Kingdom needs to formulate and fund a real plan. Politicians will continue to roll out every word in the Oxford dictionary, but a cohesive and systemic course of action directly pushed by the British government in concert with European peers to establish transparent and competitive markets while fostering and furthering British innovation and culture. Utilize it's history to guide it's future and embrace Keynesian Economics with modern regulations, ditch Keynesian sociology as archaic as it always was. In that homage to the great economists this author was forced to read as a child, a final adieu: America did it better.

Addendums:

*The Day Soros broke the Bank of England:
https://en.wikipedia.org/wiki/Black_Wedn...
Very quick summary is 1992-precursor European Central Bank had a basic rule that each nation's currency must be within a certain limit. UK was suffering with poor economic conditions from a mix of Thatcherism and Thatcher, and was in risk of falling under the minimum threshold. The UK government set off a plan to buy up Pounds for foreign currency reserves, which wasn't enough. The government set a fixed value for the pound, big traders with Soros the major ringleader borrowed pounds and sold them, aka short-selling. The Bank of England failed against speculator-driven currency devaluations of a major advanced economy. There are finer nuances to the story that make it worth the time to read more, but this incident drove UK development into the 21st century.


Selected References:

https://www.reuters.com/world/uk/uks-sun...
https://www.bloomberg.com/news/articles/...
https://mises.org/wire/keynes-master-con...
https://carnegieendowment.org/chinafinan...
https://oec.world/en/profile/country/gbr...
https://www.eia.gov/international/analys...
https://stats.bis.org/statx/srs/table/c1...
https://doctorfaustusf2a.substack.com/p/...
https://www.imf.org/en/Publications/GFSR...
https://www.iea.org/countries/united-kin...
https://www.worldometers.info/gas/uk-ene...
https://www.gov.uk/government/statistics...
https://www.ceicdata.com/en/indicator/un...
https://www.fao.org/faostat/en/#data/QCL...
https://worldpopulationreview.com/countr...
https://www.oecdbetterlifeindex.org/topi...
Comment:
Personal Note: I've watched The Iron Lady a few too many times. I'm prone to mocking Thatcherism for what it is, but I'm saddened to compare it to Thatcher herself: a thin veil of someone too eager to please any father figure she could concoct and being manipulated into toxic policies for easy money by those without the wit to make any themselves.
Comment:
Behold, a recession:
Chancellor Jeremy Hunt confirmed the UK was officially in recession, as he said his economic plans would lead to a sharp drop in inflation from the middle of next year.
https://www.scotsman.com/news/politics/j...
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