The knives are out again for May… handed to her rivals by Trump

by Martin Odoni

A rather misleading introduction to an article by the BBC (surprise, surprise) suggests that sterling’s value is rallying quite healthily, implying that ‘Brexit‘ is not necessarily the fatal wound that occasional slumps over the last eighteen months had indicated. With further encouraging news today of improving unemployment figures, the pound’s value has risen against the US ‘greenback’ to $1.42.

Now, in fairness, there was never any certainty about post-Brexit financial armageddon anyway, merely a considerable danger. And that danger has far from gone away; until a healthy severance deal for the UK for leaving the European Union is secured and its details published, another slump could happen at any moment. More significantly – and this is sort-of admitted later in the article – the pound is not really ‘rallying’. At least, it is not rallying nearly so much as the US dollar is slumping. That the pound has hit a reasonably stable level for the time being is undoubtedly good news, all-things-considered, but it should not be announced as something it is not.

The reason to doubt that sterling is strengthening particularly is that the status of a currency cannot be measured against one other alone. For instance, when measured against the single European currency, the euro, the pound’s value is not nearly as exciting; it has hovered around the €1.15 mark for around four months now.

The US dollar has been weak for well over a year, and the slump in international demand for the greenback – European activity is seen as more appealing among speculators right now – has meant its value is taking a bit of a kicking. The Donald Trump administration in Washington claims that this is precisely the plan; with the dollar continuing to depreciate, US exports become more attractive to foreign markets as sufficient dollars to afford them can be purchased more cheaply. And in fairness, US exports have risen fairly sharply since mid-2017; –

But there are plenty of reasons to be skeptical that this depreciation is a deliberate plan, and not just the inevitable ‘closing-down-sale’/bright-side-accident effect of a slumping currency.

Firstly, the Trump administration has a certain track-record of (what would be a nice way of saying this?) not remembering the recent past with sharp accuracy. When presented with inconvenient facts and incontrovertible evidence that these facts are true, Trump and his cronies tend just to cry, “FAKE NEWS!” and run away. It is quite possibly the crudest, most infantile form of propaganda seen in a major country since the First World War, and claiming bad-news-is-good-news would fit that same pattern very neatly.

Secondly, the rise in exports was visibly part of an on-off trend that had started early in 2016, when Barack Obama was still at the White House. Furthermore, that trend more or less stopped for some months after Trump was inaugurated last year. It only really picked up again about halfway through 2017.

Thirdly, were the aim of ‘deliberately’ letting the dollar’s value slide really to boost exports, why did Trump not just devalue the dollar and keep the process under some measure of control? Letting it happen more or less naturally is far more dangerous, as speculators may respond by dumping dollars at runaway increasing speed. Indeed, that makes the claims of Steve Mnuchin, the US Treasury Secretary, doubly dangerous. If he declares that he will deliberately make the dollar weaker and weaker, he will encourage speculators to dump greenbacks in a panic, as they will know that they cannot expect to make a profit on them. There comes a point where even an export-loving economy cannot afford for its currency to drop any further i.e. when it gets so low that domestic prices become unaffordably high. A flat devaluation at the outset would probably have avoided that danger.

Fourthly, the US economy is geared as an import economy, and the depreciation of the dollar makes imports more expensive, as do the new tariffs introduced this week. That would fit in with Trump’s obsolete, protectionist mindset, for sure. But making imports unattractive by artificially making them more expensive ultimately scuppers exports too, as other countries tend to retaliate with similar policies of tariffs and depreciation of their own currencies.

NB: Take China, a country that is export-locked i.e it produces far, far more goods than its population needs, and so has to keep exporting them as much as possible to prevent the glut from making them valueless on domestic markets. China has often deliberately undervalued the renminbi for many years, as its insane over-production levels mean that it has little need for most types of imports, while desperately needing to keep sending goods abroad. A weak Chinese currency means other countries can buy Chinese exports cheaply, while the enormous glut of domestic goods means that the increased price of imports is fairly meaningless. The heavy need for exports and relative irrelevance of imports means the Chinese Government would not be at all reluctant to devalue the renminbi as a response to any deliberate currency manipulation by the USA.

And finally, boosting exports while simultaneously making imports more expensive can be contradictory aims for another reason; if imports become pricier and therefore start to decline, demand for ‘homegrown’ goods may well go up domestically to fill the gap. If that happens, there will, by definition, be fewer homegrown goods available for export, as the home market will consume more of them (unless there is some kind of ‘supply-side miracle’ i.e. a surge in home production – not really something that can be relied upon to happen). Furthermore, and somewhat paradoxically, prices at home would very possibly go up even further in response to such a climb in demand, making imports more attractive again, and so defeating the object of the exercise.

For all these reasons, and possibly more, I think we can dismiss Mnuchin’s ‘tweak-of-the-moustache’ claims that “it’s-all-part-of-the-plan!”

So overall, the real cause of sterling’s gains against the greenback is that downward pressure on the pound has been overtaken by the downward pressure on the dollar. The stabilisation of sterling’s value against the euro, meanwhile, is likely because, despite Tory attempts to say otherwise, there are signs from the Brexit negotiations that the UK is likely to stay in the Single Market after all, which is improving confidence among investors. This is a symptom of how weak the British bargaining position has been, and how poorly the Government has negotiated, but all-in-all, it would not be bad news were that the final outcome.

Back in Britain, all these (relative) silver linings are happening to the accompaniment of renewed whispers of discontent among Government MPs, regarding Theresa May’s performance as Prime Minister. This highlights an amusing paradox in her position; the better the economic news is for her, the likelier it is that she will be overthrown.

Since the General Election farce last June, May has been on borrowed time as Prime Minister. In a sense, in fact, she has been a Prime Minister in name only, as underlined by the Queen’s Speech being so short and setting out such an unambitious program for the current year. May has so little authority that she is presiding over the Government more than she is governing the country. In most circumstances, she would have been gone within days of the Election.

The only reason no Tory has dared challenge her for the leadership since that time is that the national outlook has, for the most part, looked pretty dire; being Prime Minister has looked like the proverbial poisoned chalice. Inflation has risen to around three per cent – very low by the standards of some decades but high by the standards set since the mid-1990s – the negotiations for Brexit have been messy and have fallen far behind schedule, GDP has weakened, parts of industry still have not recovered to anywhere near the pre-Credit-Crunch levels of performance, the NHS is in an all-time crisis, productivity is low, under-employment remains rampant, public service performance remains sketchy, and is in a fragile shape with the startling news of Carillion’s collapse, which could still drag a lot of other companies down with it. Nobody wants to risk becoming Prime Minister should the time come when all of these underlying problems hit ‘critical mass’.

But now that there are some positive signs (do not get excited, mind, they are nothing to write home about), including a stabilised pound, suddenly the idea of getting the keys to 10 Downing Street does not look quite so daunting. So the usual suspect, Boris ‘BoJob’ Johnson, has been making characteristic noises to undermine May’s position again, and to make his deceits during the Brexit referendum look plausible once more – while of course casually leaking the details of his manoeuvres to the media at the same time. Others on the lunatic Brexit fringe of the party may also be getting itchy feet about the drift towards a ‘Soft Brexit’, and wish to intervene to harden the British negotiating position once more, even though the prospect of staying in the Single Market appears to be precisely what is reviving the fortunes of the pound. Some other Tories are simply fed up with the general listlessness of the May administration.

This is the bizarre position May is in; if she wishes to remain as Prime Minister, she has to hope that the economic outlook does not improve much. If it does, someone will finally see a sufficient reward in replacing her. And Donald Trump is the man who, inadvertently, has created an illusion of British success through economic failure in the USA. He could just have triggered the rebellion that ends May’s premiership.

As for the brightened outlook, on the one hand it is good news, but in some ways it is irritating. This is because the most impassioned and jingoistic Brexiteers are bound to try and present this as a sign that leaving the EU is a good move, and it is not.

Be under no illusions, the improved forecast is because global conditions are looking up. It is not because of ‘good’ Government policy, and it is certainly not because Brexit is not harmful after all. (Brexit has not even happened yet, folks, the really tough times lie in the future, especially if the UK leaves the Single Market in the end.) The optimism is in spite of Brexit and Government policy. There remains, with wages still sluggish and high domestic borrowing, a serious danger of a second Credit Crunch in the near future – no, thankfully it did not happen last year as I had been openly fearing it might, but the underlying problems that make it a likelihood, of household debt rising faster than wages, have not been solved, or even addressed. The increase in interest rates in November, although small, will certainly not help to reduce the amounts owed. Brexit could still go horribly wrong, especially given how little time is left to complete a mammoth program of negotiations for a new trade deal with the EU, if we wish to avoid defaulting to the far harsher World Trade Organisation rules. The issue of a new border settlement in Ireland that will be acceptable to both Unionists and Nationalists has still not been straightened out; if that goes wrong, the repercussions could literally include war. The collapse of Carillion could still lead to a domino-effect of cave-ins throughout the construction industry and across the wider public services sector. Interserve is another big firm caught in the headlights.

There is still so, so much that could go wrong. Just because the situation does not look completely hopeless for the moment, it does not mean the country has made the right move after all. The brighter global outlook would have happened without Brexit, and the UK would probably benefit more from it without Brexit exerting a ‘drag factor’.

Still, there is a very satisfying way of looking at this; even when hampered by Brexit, the UK’s economy is still doing better than Donald Trump’s USA.