On Tuesday, September 15, 1992, the two most powerful financial officials in the British government held an urgent meeting that night to review their plan for when the markets opened the next morning.
"Germany had vastly higher productivity, far greater savings, low inflation, high growth, and much more responsible monetary policy.
So, to even pretend that a country like Italy or even Britain could fix its exchange rate to the Deutschemark, i.e. to essentially mirror Germany’s economic performance– was a total joke."
Please spell this out for people who aren't really into finance.
Are you saying that the foreign exchange value of the British pound is determined by what physical products that other countries want to buy from Britain? I assume that's right, but not sure.
I am just the syndicator.. BTW, just found your stack... awesome! I subscribed! Check out our Five Meme Friday stack if you haven't seen that yet... I'll be raiding you for content!
"Are you saying that the foreign exchange value of the British pound is determined by what physical products that other countries want to buy from Britain? I assume that's right, but not sure."
No. That would be the description for a floating exchange rate. The rate was fixed.
For example, let's say it was 2 British Pounds per Deutschmark. (not bothering to look up the actual rate here, but IIRC, it's close)
This would mean that a Vauxhall (General Motors subsidiary) Astra [Toyota Corolla competitor, if you're not sure] would be roughly the same price as a BMW M3, as an approximate example, using the fixed rate of exchange. Which do you think a person with that money would choose to buy? Apply this sort of comparison across the whole range of goods produced by each country, and the decoupling of the pound was inevitable.
So you're saying that Britain's chosen fixed rate was untenable because of the actual difference in purchasing power between pounds and marks, right? So people would automatically correct that by buying marks and selling pounds in order to buy the goods they want at a reasonable price.
Britain didn't choose the rate (which was Thatcher's chief objection to going with it) it was set by the EU, and in the end they had to decouple/devalue the pound or go under.
Pounds were effectively over-valued, which is why Soros shorted them. and won big on the correction.
You often hear the US and printing of money, fiat currency and fractional banking. While it is generally true the US broke away from the gold standard during the Nixon Administration, 1971 ending the Bretton Woods Accord, a new error was also born. The PetroDollar. For now the vast majority of oil purchased around the world is required to be done in the USD. In total , the oil market is greater than all commodities combined. So you see, the dollar is tied to a limited supply of oil. And many sovereign debts around the world are denominated in USD (IMF and The World Bank HQ in DC). I am not dismissing the behavior of the US Fed and the US Government, quite the contrary. But while the world has need for USD, and therefore there is demand for USD, the US can maintain supreme financial power for some time at their discretion. Until an alternative comes along. What, would you deposit $10k into a Chinese or Russian bank today? Perhaps some day.......... BRICS
"Germany had vastly higher productivity, far greater savings, low inflation, high growth, and much more responsible monetary policy.
So, to even pretend that a country like Italy or even Britain could fix its exchange rate to the Deutschemark, i.e. to essentially mirror Germany’s economic performance– was a total joke."
Please spell this out for people who aren't really into finance.
Are you saying that the foreign exchange value of the British pound is determined by what physical products that other countries want to buy from Britain? I assume that's right, but not sure.
I am just the syndicator.. BTW, just found your stack... awesome! I subscribed! Check out our Five Meme Friday stack if you haven't seen that yet... I'll be raiding you for content!
Thanks, I subscribed!
We shall steal from each other in a true Communist paradise!
"Are you saying that the foreign exchange value of the British pound is determined by what physical products that other countries want to buy from Britain? I assume that's right, but not sure."
No. That would be the description for a floating exchange rate. The rate was fixed.
For example, let's say it was 2 British Pounds per Deutschmark. (not bothering to look up the actual rate here, but IIRC, it's close)
This would mean that a Vauxhall (General Motors subsidiary) Astra [Toyota Corolla competitor, if you're not sure] would be roughly the same price as a BMW M3, as an approximate example, using the fixed rate of exchange. Which do you think a person with that money would choose to buy? Apply this sort of comparison across the whole range of goods produced by each country, and the decoupling of the pound was inevitable.
Thank you!
So you're saying that Britain's chosen fixed rate was untenable because of the actual difference in purchasing power between pounds and marks, right? So people would automatically correct that by buying marks and selling pounds in order to buy the goods they want at a reasonable price.
Britain didn't choose the rate (which was Thatcher's chief objection to going with it) it was set by the EU, and in the end they had to decouple/devalue the pound or go under.
Pounds were effectively over-valued, which is why Soros shorted them. and won big on the correction.
Who would go under by refusing to devalue the pound then, Britain or the EU? I assume Britain.
And how would this happen? I suppose Britain would try to buy pounds with, say, marks to defend the pound and then run out of marks.
You often hear the US and printing of money, fiat currency and fractional banking. While it is generally true the US broke away from the gold standard during the Nixon Administration, 1971 ending the Bretton Woods Accord, a new error was also born. The PetroDollar. For now the vast majority of oil purchased around the world is required to be done in the USD. In total , the oil market is greater than all commodities combined. So you see, the dollar is tied to a limited supply of oil. And many sovereign debts around the world are denominated in USD (IMF and The World Bank HQ in DC). I am not dismissing the behavior of the US Fed and the US Government, quite the contrary. But while the world has need for USD, and therefore there is demand for USD, the US can maintain supreme financial power for some time at their discretion. Until an alternative comes along. What, would you deposit $10k into a Chinese or Russian bank today? Perhaps some day.......... BRICS
Thanks for the value add!