Prospects for Pound Sterling

With the UK economy taking a sharp downturn, prospects for the pound have deteriorated. A recession looks increasingly likely. Consumer spending is falling on the back of falling house prices. This downturn is made more problematic by the levels of debt in the UK. Both personal and public sector debt have grown to record levels leaving the economy little room for manoeuvre.

Although rising inflation make interest cuts difficult, the weakness of the UK economy will be reflected in a weaker currency. The only issue in favour of the Pound is the fact that our main trading partners US and Eurozone are facing similar difficulties. By many standards of purchasing power parity, the Euro looks overvalued. If the Euro enters into recession, the ECB may come under increasing pressure to cut rates (something they have been reluctant to do)

The US economy was the first into a slowdown and so maybe the first to emerge. With US interest rates at 2% there is little further that they can fall. Also the dollar has been falling for so long, that on purchasing power parity standards it is starting to look increasingly attractive. (Compare price of buying a mac computer in UK and US)

Forecasts for Interest Rates in UK

The UK economy is struggling. It faces the unwelcome twin problems of rising inflation and falling growth. With house prices falling consumer spending is drying up. Luxury food and clothes shops are going out of business and there is a strong threat of recession. The CBI and other business leaders are hoping that the MPC will cut interest rates. The lower rates will help to boost investment and consumer spending and maybe avoid a recession.

However, the other economic problem is rising inflation. INflation is increasing because of higher oil prices and food prices. This is contributing towards cost push inflation; this means the MPC should be trying to increase interest rates to reduce inflation.

The MPC will probably not increase interest rates because:

• The threat of recession is more serious than the threat of inflation.
• The inflation is cost push and hopefully temporary
• Falling growth should reduce wage push inflation and inflationary pressures.

The MPC could even cut interest rates to 4.5% if the economy does slide into recession. it would be most unusual for an economy to experience a recession without a cut in interest rates.

The problem with cutting rates is that they may not help increase spending very much. The level of debt is very high and people will take advantage to increase their savings rather than maintain old spending patterns.

Are Dotcoms Coming back into Fashion?

Remember the great dotcom bubble. There was a time when dotcom firms went for ridiculous prices. If you had even an idea to do something on the net, people couldn't get enough of it.

The wildly inflated price to earnings ratios didn't last and many of these fledgling dotcom firms lost 90% or more of their value.

But, now that the emerging sector is becoming more mature; maybe there are many dotcom firms who offer good value for the future investment.

Why Internet is going to Keep growing:

1. Young generation used to buying and selling on the net.
2. Increasingly used for not just some products but everything
3. Net used for socialising. Number of hours people spend online is increasing all the time.

Some of the exciting new dotcom firms include:

• Extate -Intelligent search of property websites.
• Garlik - Online identity management.
• Moo - Print on demand: cards, notes and stickers.
• OnOneMap - Map-based property search.
• Trusted Places - User-created local information.
• Zopa - Peer to peer lending.
• Zubka - Recruitment 2.0.

This list just shows how just about anything can be done on the internet.

Should We Worry about Rising Oil Prices?

With people worrying about the rise in the price of oil. (see: people praying outside gas stations in America [link] - presumably world peace has been achieved if people have time to spend praying for cheap gas) Dealing with high oil prices

Reasons to Worry About Rising Oil Prices

1. Causes inflation. Rising oil prices cause increased costs for business leading to inflation
2. Reduces living standards. higher oil prices mean lower disposable income for families. This will lead to lower spending in other sectors of the economy.
3. The combination or rising costs and falling spending means that there is the risk of recession.
4. Things could continue to get worse in the future.
5. Increased political power of oil exporters such as Saudi Arabia and Iran

Reasons not To Worry about Rising Oil prices

1. High prices create an incentive for people to look for alternatives
2. Higher oil prices will reduce carbon emissions and improve the environment
3. Higher prices will encourage more efficient engines and more efficient driving.
4. Price rises are only temporary and may fall soon.

Gordon Brown's Economic Record

Becoming chancellor of the exchequer in 1997, Gordon Brown presided over a long period of economic expansion. It seemed the UK laid the 'boom and bust' ghosts of previous decades to rest. The government failed to do anything to create inflation and a boom and bust.
One of the key factors in this was making the Bank of England independent in 1997; they have proved astute at using monetary policy to keep growth stable.

1. Unemployment. Under Gordon Brown, unemployment has continued to fall. The OECD have remarked on how the UK's competitive labour markets have helped to keep a lower inflation rate than other EU countries.
2. Inflation. Inflation has remained mostly on course and close to the government's target of 2%.
3. Gordon Brown is perhaps rightly proud of his economic record. He frequently tells us that the economy has done very well. But, although some statistics support this, why are not more people congratulating him?

Problems in the UK Economy

• Boom and Bust in the Housing Market. House prices have boomed in the UK, leading to a fall in prices which now threatens a recession
• High levels of debt. UK's growth has, to a large extent, been financed by high levels of consumer borrowing. Now that the credit crunch is tightening people's belts, there is little scope for extra spending. People's confidence is falling and people are looking to save.
• High levels of government borrowing. Brown increased spending leading to a rise in government borrowing, therefore there is limited potential for expansionary fiscal policy.

Overall - not bad, but could have done better, if he had reduced the housing boom and encouraged greater levels of spending rather than debt. Government finances unnecessarily deteriorated as well.

How Long Till We Run out of Oil?

It is a mute point how much oil the world has left.

Previous predictions about running out of oil have proved inaccurate because new supplies of oil have been found. As the price of oil rise, it becomes even more attractive to invest in creating new oil fields in less attractive areas such as Siberia and the Antarctic.

The problem is that world demand for oil shows no signs of abating. In 2008, the consumption of oil equated to around 87 million barrels a day. Some forecasts suggest this could rise to 130 million by 2030. However, this assumes a stable price and a failure to develop new alternatives to oil.

Peak Oil Theorists say that the world doesn't have to run out of oil to make it uneconomic. It is when supply reaches a certain point, we will reach the end of cheap and plentiful supply of oil. As the price of oil nudges towards $200, alternatives will look increasingly attractive. As the Saudi minister said the stone age didn't end because we ran out of stones, we just found better technology to stones.

Also it is worth bearing in mind that present rises in the price of oil are partly due to temporary short term factors

Dealing with High Oil Prices

Is the world running out of oil? at BBC

Predicting the Decline of the Dollar

A good question to ask is how often do economic forecasts prove correct?

In practice, the track record of economists is not great when it comes to trying to predict future economic trends.

I am relatively pleased with myself for writing this article back in 2006, suggesting why the dollar was weak and why it would continue to devalue - Why dollar is devaluing

The interesting thing is that many of these economic imbalances remain in place.

There is still a current account deficit (although it is slightly smaller at 5% of GDP than its peak of 6.5% of GDP)

US interest rates are very low as the Fed try hard to stave off recession.

US housing market woes continue to weaken the economy.

But, on purchasing power parity, the dollar is beginning to look cheap. Surely the decline of the dollar has to stop sometime?

The other issue is the dollar as a reserve currency. The Euro is increasingly being looked to as an alternative. With the dollar out of favour with international investors there may be no easy ride for the dollar in the forthcoming months