Skip to main content

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.


  

Popular posts from this blog

The Failure of Herstatt Bank

As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press . 

The Great Depression

Marginal Revolution University has a great video on the Great Depression.