The Bank of England Governor Says It’s True

Posted October 22, 2008

The economic markets are now grappling with how to respond to the global recession. The stock markets dropped on 21/October/2008 as the dollar continued to strengthen against world currencies.

 

In some ways, you have to give the Bank of England Governor, Mervyn King, a lot of credit.  Many government leaders continue to shy away from saying the truth out loud.  It’s like they believe that if they avoid saying the “recession” word, then it won’t happen.  But Mr. King decided to tell it like he sees it, to borrow some US vernacular, and he sees a recession quite clearly. 

The result of his truthfulness was the British pound fell to a low it has not seen in 5 years.  Yesterday, 21/October/2008, the pound fell to below $1.70 in US dollars after Mr. King’s statements to end up closing at $1.6941.  But you can’t blame him for simply being honest.  Confidence in manufacturing production in the UK fell to its lowest level in 30 years as credit between banks continues to remain tight. 

Sometimes the truth hurts…a lot.

But it was not just the British pound which weakened against the US dollar.  The Australian dollar and the New Zealand dollar also fell against the US dollar to $.6848 and $.6148  respectively.  And of course there is the story of the euro.  The euro fell to a 20 month low on Tuesday closing at $1.3129 in US dollars.  Did any major currencies strengthen against the US dollar? Actually the Swiss franc rose to $.8688 from $.8687, and the Japanese yen rose to $.0099 from $.0098.  But that could all change tomorrow.

The US dollar is strengthening as low risk funds are sought by investors.  Traders have been busy liquidating their long positions in riskier assets in the form of hedge funds.  International traders are actually acting as if the US will now be the first to recover from the global economic meltdown.  There is a lot of irony in this since the US created the problem in the first place.  But the fact the US continues to propose ideas for continued economic stimulation is sitting very well with traders.  The most current suggestion is the initiation of another taxpayer stimulus plan which returns actual money to taxpayers to be hopefully spent on goods and services.

There is a lot of pressure to continue to cut losses in the stock markets.  As stocks go up, investors begin to pull out of the market which then leads to declines by the end of the day.  With the first admission the UK is in a recession, the US unemployment rates rising, and banks still teetering with financial uncertainty in many countries, the stock markets continue to be volatile though the 3-digit swings have not occurred in the last few days.  The Dow closed down by 231.77 points reaching 9,033.66; the FTSE closed down 52.94 points reaching a low of 4,229.73; and the Nikkei fell 487.19 points to reach 8,819.06.

The predictions are the European Central Bank will be lowering interest rates by .75%.  As the European economies grow weaker, the dollar and yen will continue to strengthen. 

So should the truth be told?  Is it okay to say the “r” word now? Finally? Can we admit there is a global recession going on right now?  The truth may hurt at times, but it’s always better to deal with the facts when it comes to economics. 

 

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