Op-ed: How British Politics Pose Existential Risk to Pound Sterling

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British politics are prominent among reasons for why the national finances have deteriorated throughout much of the new Millenium but with inflation at generational highs and interest rates rising, electoral considerations may now be posing an existential risk to Pound Sterling.  

Politics of ‘austerity’ and a phony ‘Thatcherism’ have often driven economic policy in the UK but when they installed former Prime Minister Liz Truss into office at the expense of the now-incumbent Rishi Sunak’s candidacy, they also sent an unwelcome message to the rest of the world. 

This was demonstrated by the financial market reaction to the so-called mini-budget later unveiled by the now-former Chancellor Kwasi Kwarteng in September, though it’s not yet clear that British voters and political representatives fully understood the message returned to them.

Decoding and understanding that message requires an understanding of the nature and concept of money itself.

This includes a recognition that all of Britain has been built on the assumption that everybody can accept Pound Sterling as a currency, and so also as a trustworthy form of payment for goods and services.

For this to be possible, Sterling must keep or otherwise store up the value of all goods and services it is exchanged for, and the September mini-budget led the currency market to question whether it would be able to do this in the future. 

That is in part because of the currently high inflation in Britain that has eaten away at the Pound since the middle and later stages of 2021, which can only be corrected by Bank of England (BoE) interest rate policy.    

But September’s mini-budget debacle will have made restoring the value of Pound Sterling a far more difficult task than otherwise while also likely ensuring that the national budget balance remains in a state of disrepair. 

Current Prime Minister Rishi Sunak already saw and understood these realities before the latest Conservative Party leadership contest in which phony Thatcherite politics won out over the necessary politics of sound money.

This has played an important role in the depreciation of Sterling but with a sound money prime minister now in place, the politics of phony Thatcherism are less likely to imperil the Pound going forward than the electoral politics of ‘austerity,’ which also seek to resist the politics of sound money.

That is if political polling can be taken at face value - it has often been a poor predictor of electoral decisions - because since the ousting of Boris Johnson from the Prime Minister's office the polls have suggested that a spendthrift and anti-austerity Labour Party is now favoured to lead the next government.

But those aren't the only politics to have kept Britain from helping itself while preserving the value of the Pound because those surrounding the subject of migration have also played a role too, and could continue to do so as the economy deteriorates over the coming months. 

This is because for the government to be able to correct the national finances at the same time as the Bank of England brings down inflation, economic policy has to preserve or otherwise grow the real economy in a non-inflationary or otherwise disinflationary way. 

One of the few ways, if not the only way, in which the real economy can grow as the monetary base shrinks and inflation comes down is through increased levels of inbound migration into Britain. 

But the competition this creates for employment and the suppressive effect it can have on incomes makes migration policy a political battleground. 

These are just some of the politics that have undermined the UK economy over time and which could yet imperil Pound Sterling into the future unless a fix is found.