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AAA Rating and the Pound

In the past, Kings debased their currencies by adding base metal into gold and silver coins. Today, governments and sovereigns can debase their currency by simply monetizing the government debt. The UK is a very indebted nation and has been monetizing huge amounts of its debts through the process of quantitative easing, whereby the Bank of England 'creates' money and buys huge amounts of UK government debt with newly-created money.

The Moody's downgrade of UK government debt from AAA, the first cut since the 1970s, reflects the fears of higher UK inflation (and lower economic growth), which can largely be traced to the Bank of England's quantitative easing policy. However, the foreign exchange markets have already been reflecting this change in sentiment about the prospects for UK economy in terms of inflation and growth, with sterling weakening against major currencies since the start of the year - see video below from Financial Times on this.


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