The Twin Deficits Way Of Life – GBP
Twin deficits is a way of life. The word used to be as bad as stagflation 1-2 decades back if you ask me yet it has now become accepted as the norm.
It is for the reason of deficits that the world has embarked on this bout of experimental Keynesian-spend-your-way-out policy as we are witnessing which is coming to unprecedented and certainly unpredictable results.
One thing we note about governments and politicians – they always talk down the deficits. And so far, I have not seen a single projection where they would dare to project it higher even if it is to manage expectations. And that is why the numbers always disappoint.
I decided to pull out some numbers and take a look at the various countries and how they are faring, highlighting those with twin deficits.
Empirically, countries like Australia always managed to grow even with its current account deficit and lack of foreign reserves because that was always balanced out with budget surpluses. But of late, the government has ran itself into over spending which I suppose could be attributed to natural disasters along the way.
But the UK sticks out like a sore thumb with her twin deficits taking up almost 10% of GDP even if her budget is improving , the current account has suffered a sharp drop in the past years.
By comparison, Malaysia looks decent and GBP/MYR is back to Asian crisis level these days and MYR’s strength is encouraging this property investment fad in the UK much like in the mid 90’s when my auntie made a huge killing when she bought her apartments at GBPMYR exchange rate of 4 and it rose past 7 within 2 years.
It is much harder for the Singaporean with GBPSGD at historic low this year. Singapore has perhaps one of the highest current account and budget surpluses in the world, trailing or matching Norway.
The typical strategy for the deficit is the path to a currency war as we are living through now and the UK remains firmly in the BoJ camp as evidenced in their latest dovish BoE minutes and remarks out of EU and UK that the economic recovery will take years. Keep rates low, the currency weak to fix the problem.
Link to my latest slightly controversial take on it. https://tradehaven.net/market/fx/round-of-applause-for-china-exiting-the-currency-war-they-had-started/
As for the GBP, I doubt we will see it head any higher in a big hurry.