Category Archives: Britain

Britain, Economic, Government, Politics

The Government must allow markets to do their job

ECONOMIC

Intro: Fallout from the Iran war and the energy crisis that has followed is the ultimate test of the UK Government’s economic acumen

A famous story which used to be known by every schoolchild in the land, King Canute famously sat on his throne at the edge of sea during the early 11th century, and ordered the tide to stop coming in.

Needless to say, the tide did not obey. Some modern interpretations suggest that he wasn’t crazy or mad but was rather trying to demonstrate to his courtiers the limits of regal power. Even the King could not stop the tide.

Governments today need to recognise what little power they have in relation to the current energy crisis.

Although there isn’t a lot they can do, unlike King Canute and the tide governments are not completely powerless. But first comes the need for understanding. The energy crisis is a supply shock which changes the terms of trade, acting as a sort of tax that transfers money from net energy-consuming countries to net energy-producing ones. We are a net energy consumer. This crisis, then, makes us worse off, whatever we do.

And there are two major knock-on effects. First, the economy can be sent into recession as people react to the loss of income by spending less. Second, this “tax” takes the form of a rise in the price of energy that delivers an initial upward spike to the general price level, thereby increasing inflation in the short term, and carrying the danger of embedding higher inflation.

Although there is nothing that governments can do to stop the loss of net national income, there are things they can do to try to mitigate these two knock-on effects.

There could be a case for loosening fiscal policy to reduce the hit to consumer incomes and consumer spending and hence aggregate demand. The parlous state of the public finances, however, means that the scope to do that now is restricted. One way they could seek to limit both the hit to real incomes and the upward pressure on the price level is through granting subsidies and imposing caps on prices.

But this isn’t a free lunch because, unless the Government can justifiably and safely borrow more, which it really can’t at the moment, such things have to be paid for by the taxpayer. It is a case of robbing Peter to pay Paul or, most of the time, robbing Peter to pay Peter.

This is actually still the case if the money for such subsidies is found by more borrowing rather than through new tax rises. This simply defers when Peter and Paul have to cough up.

Most importantly, the Government needs to let market forces do their job. The increase in energy prices acts as a signal to consumers to minimise their use of energy and simultaneously sends a signal to producers to boost the output of energy.

If the help to consumers takes the form of artificially keeping energy prices down, then the signal to economise on energy usage is smothered. More importantly, in our case the signal to producers is cancelled by the Government’s net zero policy, which is preventing the new extraction of North Sea oil and gas.

The best that governments can do in these circumstances is to manage the economy and their own finances most efficiently. Of course, they should have been doing this anyway, but in these difficult and turbulent times the importance of doing the right thing increases significantly. In the UK’s case, the fundamental error in the Government’s economic policy has been to preside over huge increases in government spending, while passing on a good deal of the burden to employers in the form of higher National Insurance payments.

One thing the Government could do to mitigate the consequences of the current energy crisis is to reverse this policy and bring in substantial cuts to government spending. This is not to tighten fiscal policy. Rather, the money saved should be redistributed to the economy.

The best use of it would be a reduction in employers’ NIC, which would reduce their costs and thereby lead to lower prices. It would also encourage firms to retain their workers.

This, too, would make a contribution to staving off the inflation danger. Over and above this, the principle responsibility lies with the Bank of England and its monetary policy.

History provides an illustration of how different responses to the same adverse shock can produce quite different results. In the 1973-74 oil crisis, all the oil-consuming countries of the West – including the UK – suffered an adverse terms of trade shock. They were all made worse off.

But different countries responded differently to the spike in the general price level. In the UK, inflation peaked t almost 25pc. In Germany, by contrast, inflation peaked at just under 8pc.

It has become clear that this UK Labour Government doesn’t really understand or believe in markets. You can see this everywhere, from the wish to control rents in the belief that this will somehow make tenants better off to the recent blaming of price rises on retailers.

This Government cannot avoid the adverse economic shock that higher energy prices imply but it can limit its consequences by letting markets perform their function.

It should abandon at once the headlong pursuit of net zero and allow new production from the North Sea, while cutting government spending and reducing business costs.

We should understand the political forces standing against such action; it is unlikely that the Government will do anything like this. But that doesn’t mean that there is not an alternative course of action available, if only the Government had the insight and the courage to pursue it.

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Britain, Digital Economy, Financial Markets, Society, Technology, United States

A digital payments system is undermined by cryptos crash

DIGITAL CURRENCIES

Intro: Digital payments systems are taking hold in China and America, and the eurozone is chasing hard to set one up. The Bank of England’s lack of enthusiasm for a digital pound is a blessing in disguise

China already has one, and envious of the near monopoly American companies enjoy in European digital payments systems, the eurozone is chasing hard in setting one up.

Trump’s America has made it illegal for the Federal Reserve to pursue such a project, and instead has set its sights on privately sponsored stablecoins.

We’re talking here about so-called central bank digital currencies (CBDC) – in effect, digital versions of physical cash.

On this issue, the UK and the Bank of England stand pretty much nowhere. It might surprise you to learn that’s faintly reassuring. Digital money is not an issue to set the pulse racing, but what is amazing is how people are so exercised by it.

A Bank of England consultation on proposals for a digital pound provoked an unprecedented tidal wave of more than 50,000 responses, overwhelmingly negative in nature.

It wasn’t just issues over privacy posed by a digital currency that many respondents seemed to be upset about. Nor was it the complex and costly logistical problems in providing universal access to central bank money.

Still less was it the threat that a digital pound would pose to the future of fractional reserve banking.

Rather, it was the creeping encroachment on physical cash that people feared most.

Plain and simple, people still like the idea of notes and coins, even if they hardly ever use them.

No decision has yet formally been taken on whether to establish a digital pound, but the sense is that any appetite the Bank of England might once have had for such an enterprise has all but disappeared.

Nor does the Bank appear to be that eager on the supposed alternative of sterling-based stablecoins. Its proposed framework for regulating stablecoins has gone down in the industry like a lead balloon, and although the Bank has rowed back on some of the regime’s more costly features, is still widely thought of as too demanding to allow for the creation of a significant stablecoin presence.

George Osborne, a former UK chancellor, has claimed that Britain is in danger of being left behind in a payments revolution which is taking the rest of the world by storm.

But then, he would say that, wouldn’t he? Among a seemingly ever-widening portfolio of positions enjoyed by Osborne, he is an adviser to the US-based crypto exchange, Coinbase, which has a powerful vested interest in as lightly a regulated stablecoin environment as possible. Since Osborne went public with his concerns, Bitcoin and much of the crypto universe has crashed, and many so-called stablecoins – theoretically backed by the real-world, ultra safe, fiat currency assets – have faltered too.

At least half a dozen of them have “broken the buck”, or lost their dollar peg. Some have fallen to as low as a few cents in the dollar, resulting in losses running to hundreds of millions of dollars.

There’s plenty more damage still to come from that sell-off, so if the Bank of England has been asleep at the wheel in failing wholly to embrace the ecosystem of decentralised finance, we may have much to thank it for.

Instead, the Bank has focused its attention on its plain vanilla business of updating its systems for making direct, account-to-account payments between buyers and sellers.

It’s a kind of muddling through alternative to the European Central Bank’s (ECB) empire-building on the one hand, and Trump’s enthusiastic embrace of crypto on the other.

This should not be read as a derogatory view, but the Bank of England regards payments as a simple utility, not as either a way of maintaining the Central Bank’s grip on the “moneyverse”, which seems to be the ECB approach, or as a fintech opportunity for money-making, which is the current White House approach.

Critics complain that the Bank is further condemning the pound – and indeed the City – to the slow lane. Others would say that its safety-first approach is actually what you want out of a digital payments system.

Certainly, it needs to be faster, even instantaneous if possible, and to cost as little as possible. Above all, though, you want it to be robust, so that it acts as a wholly reliable means of exchange.

Four years ago, the House of Lords economic affairs committee concluded after a lengthy inquiry that a digital pound managed by the Bank of England was “a solution in search of a problem”.

Nothing has happened since then to change that verdict.

The vast majority of sterling transactions are already digital in nature, in any case, but they take place between commercial banks or on card networks, not via the central bank.

The benefits of a central bank digital currency are far from obvious, yet there are clear cut risks to financial stability, privacy, credit provision and security, to name just some of them.

Why then is the European Central Bank fixated on establishing a digital euro? In the main, it’s about monetary sovereignty and parallel fears of US dominance.

All the main card networks are American-owned, while existing systems for direct bank-to-bank settlement in retail transactions are clunky and inefficient in many euro-dominated countries.

And it’s about the threat posed by dollar-denominated stablecoins as an alternative means of payment.

The ECB and its political masters do not want this particular Trojan horse at the centre of the eurozone payments system.

Indeed, Scott Bessent, the US treasury secretary, has openly admitted that part of the purpose of the Genius Act, which sets out a regulatory framework for stablecoins, is to attract money into US treasuries, thereby underpinning dollar hegemony in international markets. Financing the US treasuries market is not what Frankfurt has in mind when thinking about the future of money.

Instead, the digital euro is proposed as part of Europe’s wider, statist approach to “strategic autonomy”, or making the continent less dependent on rival jurisdictions for core industrial, agricultural, and monetary functions.

The idea that money can in some way be reinvented is what really lies behind developments such as CBDCs and stablecoins.

So here’s the truth: it cannot. The Bank of England is no doubt guilty of many failings, but it does at least properly understand this basic maxim. Its overarching responsibility is to ensure that a pound is worth a pound, no more, no less.

Like cryptocurrencies, stablecoins are at root just another mechanism for rent extraction. And as long as there is scope for improving existing pubic infrastructure for digital payments, which is where the Bank of England is focusing its efforts, it is also hard to see the point of digital cash.

Paul Volcker, a one-time chairman of the Fed, had it about right when he said that the only socially useful innovation to come out of finance in the past several decades was the ATM.

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Britain, Business, Economic, Financial Markets, Government, International trade, United States

The US dollar: down but not out

ECONOMIC

Intro: Reports of the declining status of the US currency have been greatly exaggerated

For economists, the impact of a falling US dollar and how that impacts Britain will be observed and monitored closely. Of interest will be why the dollar has fallen of late, what President Trump’s attitude is towards the US currency, and how that impact will be felt.

The dollar lost around 2pc during January against a basket of major currencies (as measured by the DXY index). At the time of writing, the DXY is close to a four-year low of 96.79 – a staggering 10.7pc lower than this time last year. This significant weakening of the dollar has been driven by US policy shifts, tariff uncertainties, and geopolitical tensions. It also, to a lesser extent, reflects global effort to “de-dollarise” led by China and other large emerging markets.

Just days ago, the Federal Reserve held its main policy rate at 3.5-3.75pc. But the US central bank previously cut rates by 25 basis points at three consecutive meetings – in September, October, and December 2025. Lower rates typically weaken the dollar by reducing its appeal to yield-seeking investors, prompting capital flight to higher-return assets elsewhere. Financial markets are anticipating one or two more US rate cuts in 2026, putting further downward pressure on the dollar.

Since Trump took office last January, Fed boss Jerome Powell has come under intense pressure to cut rates faster and further, with the President eager to stimulate investment.

Nominated by Trump during his first term and reappointed four years later by President Biden, Powell has resisted. He has warned of the dangers of US inflation – 3pc as recently as September and still up at 2.7pc, above the 2pc target. Trump’s announcement that he wants Kevin Warsh as the next Fed boss when Powell’s term ends in May has seen the dollar strengthen, given Warsh’s reputation as an inflation-fighting hawk. Warsh, however, is also son-in-law of Trump’s long-standing friend and billionaire donor Ron Lauder. It is doubtful whether he’d be the president’s pick without having pledged to nudge the Fed’s policy committee towards lower borrowing costs – so the pace of rate cuts could quicken, putting more pressure on the dollar.

In theory, Trump’s tariffs should have bolstered the US currency by reducing imports and improving the US trade balance. But the scale of the measures announced on “Liberation Day” in April 2025 instead contributed heavily to the dollar’s fall in value.

The president’s measures – initially hiking average effective tariffs from 2.5pc to 27pc within a month – sparked market turmoil, including an asset sell-off that pressured the US currency. Direct retaliation from major trading powers including China and the EU further eroded investor confidence and prompted US capital outflows. Trump’s tariffs, while they are less punitive than first announced, have combined with broader macroeconomic concerns – including the rise of America’s debt from 100pc to 125pc of GDP over the last decade – to drive considerable “sell America” outflows to other major currencies.

While the related dollar weakening has aggravated US inflation, a cheaper currency helps US exporters, not least “rust belt” manufacturers that are a priority among Trump’s “Make America Great Again” (MAGA) movement. That’s why many are inclined to think the president wants the dollar to keep on falling.

Trump has fuelled these concerns, pointing to the “great valuation” of the sharply depreciated US currency. There are suspicions the White House initially made its maximalist tariff demands not only as a bargaining ploy, but to strategically devalue the currency. The president’s dollar stance is nuanced – and often contradictory. He values “reserve currency status”, which sees the dollar demanded around the world both for payment transactions and a store of value. That supports the US currency, allowing America to run looser monetary policy without the inflationary impact of a dangerously weak dollar. Nonetheless, Trump has also shown willingness to tolerate and even encourage dollar depreciation for export gains (given his emphasis on appealing to blue-collar workers). Talk of the dollar’s demise, and its loss of reserve currency status, is, without doubt, overdone. The US currency still accounts for about 60pc of global foreign exchange reserves and almost 90pc of global transactions by value, underscoring its entrenched role.

Quite clearly, as the dollar has weakened, certain “safe haven” currencies have gained, with the Swiss franc up 13pc against the dollar during 2025. And despite its recent volatility, gold has soared from around $3,100 to over $4,900 an ounce since April 2025, such has been the impact of Trump’s “shock and awe” tariff announcement and the escalation of geopolitical tensions ever since.

When it comes to pound sterling, and the broader UK economy, a weaker dollar delivers a mixed offering. Benefits in lower import costs and inflation are offset by challenges for exporters, investors, and multinational firms. Since Trump’s second term, the pound has strengthened around 12pc against the dollar, from roughly $1.23 to $1.37. This makes dollar-denominated imports cheaper, reducing costs for US goods and dollar-priced commodities like oil.

And while the UK remains an inflation outlier, with a headline rate of 3.4pc in December, up from 3.2pc the previous month and higher than other G7 nations, domestic price pressure would have been even worse were it not for a falling US currency. Tourists and businesses travelling to, or dealing with, the US have also gained, with pounds stretching further abroad.

Yet the downsides are significant, particularly for UK-based companies with substantial US exposure. British-based exporters to the US have found their goods more expensive in dollar terms, undermining competitiveness and demand – especially amid US tariffs that add further barriers.

Overall, while a weaker dollar has flattered the value of sterling, and helped keep a lid on UK inflation, it has also exposed many of the UK’s structural weaknesses – a trend that looks set to continue.

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