A race to the bottom

The USD, funding currency of this bubble's carry trade, and the GBP are in a race to the bottom against the Euro. It seems that the pound has it by a head at this stage as Gordon Brown is likely to use the last days before the resounding Tory election victory to devalue the nation's currency.

There is a certain element of intrigue when analysing the dollar, a geopolitical matrix of funding, reserves, commodities and trade relations. Most importantly, the dollar is the world's reserve currency and will remain the same for the foreseeable future despite calls from Russia, Asia and Marc Faber. I don't doubt the rise to prominence of the euro as a reserve currency, but the dollar's hegemony is not going to end in a hurry.



Sadly, the pound is like a Morris Marina, it works but it is ultimately doomed to extinction.

Gordon Brown's announcement on Monday that the government will start selling assets doesn't do much to bolster support for sterling. Let's be honest, £16 billion is a drop in the ocean, but it points more to the idea that things are getting pretty desperate on Downing Street. Facing a surging budget deficit, Brown and then Cameron will be facing the juggling act of fiscal tightening, spending cuts, and tax increases. It makes for a hugely unpopular mix for the next PM, and to devalue the pound looks like the easiest route for the moment.

However, here is a very real danger that devaluation won't work this time as it has in the past. The United Kingdom is no longer a manufacturing nation, it is one built on financial services, government spending and television shows on property development. The GDP boost from cheaper exports might not be enough to counteract falling tax revenues and stagnant domestic demand caused by more expensive imports.

Horrendous British cars from the 70's aside, here's the real stuff:




The pound has it by a nose: