Is our financial system fit for purpose? The case of the Pound’s recent fall
A drastic fall in the value of the British Pound has quickly become ammunition in the ongoing political debates about Brexit and its impact on the United Kingdom and the rest of Europe.
Irrespective of feelings about the referendum result, and there are undoubtedly plenty of reasons to be disappointed, an equally fundamental question about financial speculation and the mechanisms that govern our global economy, which have very real impacts on the lives of ordinary people, is being missed.
Valued at a 30-year low of $1.33 at close of play on Wednesday, forecasts for the Pound are not positive, the Bank of America expects the currency to drop to $1.30 by the end of the year, while Capital Economics predicts that it will fall to $1.20 before 2017.
Over time a devalued Pound could lead to higher import prices and lower levels of inward investment causing any number of impacts from rising costs of basic living to fewer financial opportunities for small businesses, to making it more difficult to access affordable housing. Moreover, the British economy is reliant upon significant foreign investment, which isn’t a beneficial position in the context of a weaker currency.
A currency’s value is determined by a variety of factors including inflation, interest rates and growth, and though there’s no simple or certain explanation for the Pound’s depreciation, the shortest version is that the confidence of investors in growth and the potential for the UK to raise interest rates has been affected by the fallout from Brexit.
Intuitively, this feels problematic. A democratically determined political decision is resulting in negative economic impacts, not because of the actual decision itself – the split from the EU is still at least two years away – but because of the confidence of unaccountable and mostly unknown investors.
Uncertainty is the king of the day, as Robert Carnell, the chief international economist at ING Group told the Wall Street Journal, “there is no historical precedent for this and all of our models can’t help”.
It is fundamentally paradoxical to operate in an economic system that performs poorly in response to uncertainty in a highly unpredictable world. This reality could also acts as a barrier to true systemic innovation, where things will inevitably be less “certain”.
It illustrates what Hunter Lovins calls “bad capitalism”, by which she means that we are operating in a one track linear model, where the determination of success is dominated by the financial markets, and fails to take a more holistic economic, environmental and social picture into account.
Alternative visions are beginning to come to the fore, including the circular economy, a convincing case for business structures where creating additional value on the stock market for shareholders is not the only objective and a reduced role for short termism and speculation has also recently been made by John Fullerton and the Capital Institute.
The financial sector does create value and wealth in the economy and the fall in the Pound’s value may not be permanent, it is possible that it will prove to be a reflection of the fickleness of the markets. However, the reasons for its decline should be sparking greater debate about our current operating model, especially in a context where systemic ideas and a shift towards a longer-term and more resilient regenerative framework, where facilities GDP growth and maintaining the best interest rates may not be the only priorities, continues to gain traction.