The British Pound Plummets to a Record Low – Consequences?

The Pound has held a downward trajectory since Britain’s historical exit from the European Union was declared. However, it hit a record low against the American dollar on Monday. So, that news is already stale, but the discussions, speculations, and predictions about the consequences of the devaluation of the Pound have just begun.

The American economist and former secretary of the treasury, Lawrence. H. Summers took to Twitter to express his angst against the British leadership which in many opinions has caused this potential economic breakdown.

“I was very pessimistic about the consequences of utterly irresponsible UK policy on Friday. But, I did not expect markets to get so bad so fast. 

A strong tendency for long rates to go up as the currency goes down is a hallmark of situations where credibility has been lost.”

The British Pound was equivalent to $1.03 on Monday which is 22% lower than what it was six months ago. It pulled up a little bit to stabilize at around the $1.08 mark yesterday.

What may have caused this decline? 

Well, Britain was already facing its steepest inflation in the last 40 years while also reeling from the demise of its longest-reigning monarch. 

The new prime minister Liz Truss has declared a strange financial strategy where she wants to increase government borrowing, cut taxes for businesses, and somehow hopes to instigate more economic activity to generate more revenue. It is as confusing as it sounds even to the investors. 

John Cassidy of The New Yorker writes, “Having just buried Queen Elizabeth II, their last remaining link to a time when their schoolbook maps showed great swaths of the earth’s surface colored imperial red, they now face a humiliating currency crisis.”  

Consequences can be grave for Britain. They imported 46% of their food in 2020. Since most international trade uses the dollar, food prices will soar. So will the energy prices. At the same time, the solid financial services industry in London will suffer a blow as investors are likely to pull funds owing to the volatility of the dollar.

The US dollar has been soaring due to the country’s policies like increasing interest rates to fight inflation. A lot of currencies have fallen drastically against it including the South Korean Won and the Indian Rupee. Recovery is going to be difficult.