As the PIIGS spend their way into oblivion, and with France not far behind, the United Kingdom is quietly working its way to financial responsibility. The Cameron ministry is the first coalition government in Britain since the end of the Second World War. Pundits on both sides of the aisle gave little hope for this government to survive, due to the differing agendas of the Tories and the Liberal Democrats headed by Nicholas Clegg. However, against all odds, and against much wailing and gnashing of teeth by the Labor Party which is now out of power, the U.K. has been making the tough decisions to cut spending, raise taxes, and balance the budget. This tough medicine will pay huge dividends down the road for Britain. Cameron’s grandchildren don’t know how well they have it. Of course it doesn’t hurt that the UKIP, or UK Independence Party, is nipping at the heels of the conservatives. Many big name conservative party members and donors have already defected to the UKIP. Already holding a majority of seats for the U.K. in the European Parliament, the UKIP just won its first seat in the House of Commons. This pressure has ensured the Tories stay the course on financial discipline, similar to the effect the Tea Party has had on the U.S. Congress.
Of course the Keynesians on both sides of the pond have decried the “austerity” pushed by George Osborne, Chancellor of the Exchequer. However, one cannot mess with success. The U.K. economy continues to expand faster than analysts’ expectations as Cameron’s medicine begins to take effect. The third quarter of 2014 saw above average growth. After an initial contraction from the spending restraints incurred by Gordon Osborne, the markets are starting to see the future growth as well. The FTSE 100 is about 1000 points higher since Cameron took office.
Although it’s been a volatile ride, the pound has held its own against the dollar during that time period as well. But the real question is, what is in future for the Pound Sterling against the dollar and other reserve currencies? The immediate effect of the austerity enforced by the conservatives in Britain will be a continuation of the pound’s status as a reserve currency. Countries, companies, and wealthy individuals want to keep their assets in something that will hold its value. The pound has been one of the top three global reserve currencies for decades. This status will continue as the world gains faith that Britain can manage its way back to responsibility. Therefore, the demand, or bid for the pound will remain strong and its value will hold. Inflation is under control in the U.K. and this will neuter demand for interest rate hikes which would increase demand for the currency. But Inflation is the metric to watch. As the British economy improves, overall prices could spike again at some point. Then the Bank of England would have to act and normalize interest rates. For now, if you are looking for a currency to store your wealth and one with a bright future, the British pound is a great port of call with its good fiscal karma.
- Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to many media outlets and is a foreign correspondent for Newsmax TV. LToddWood.com