Overvalued exchange rate is a symbol of Britain's economic malaise

[CHIMO]

Sterling fell on the foreign exchanges last week. That's good news. Halifax reported that house prices were down 1.5% in February. That too is good news.

This may seem strange, given that the pound is a totem of national economic virility, while we all know how deeply attached the Brits are to property inflation. Ministers will no doubt feel a bit jittery about last week's events since dearer imported goods, more expensive foreign holidays and the drop in house prices are likely to lead to a diminished "feelgood factor" and thus favour the opposition parties at the election.

But the message from the past 40 years – which includes repeated boom-busts in the property market and three deep recessions in manufacturing that have hollowed out the country's industrial base – is that an overvalued exchange rate and an over-heated housing market are the ugly sisters of the UK economy. Only in Britain would it have been possible for a fall in output of almost 5% in 2009 to have been accompanied by a 10% jump in house prices. Only in Britain would it have been seen as a cause for celebration.

As the chart shows, the decade up to the crisis of 2007 was a period of sterling strength. Adjusted for unit labour costs – a measure of the different inflation rates affecting exporters in different countries – the pound was even more expensive than in the early 1980s, when the over-valuation of the exchange rate helped wipe out a sixth of manufacturing capacity. The high value of the pound between 1997 and 2007 made exports dearer. Industry struggled and there was a steady deterioration in the trade balance. These trends, though, were ignored. You will, for example, struggle to find a mention of the balance of payments in Gordon Brown's budget day panegyrics to his brilliance. That was because overall economic growth remained robust.

http://www.guardian.co.uk/business/2010/mar/08/sterling-exchange-rates-house-prices

[Art_from_Ark]

1. Overvalued exchange rate?

And to think that at one time in the not-too-distant-past, a British pound was worth nearly $5

[roamer65]

2. The Brits love the competitive currency devaulation game.

They played it during the 1920's and 1930's and the disruption it caused lead to the speculative stock market bubble of 1927-1929.