Pound of Flesh

Tough luck for any American planning a visit to Ye Olde England—as of today, one pound sterling costs two American dollars. Yikes. The dollar hasn't been this feeble on Oxford Street since 1992!

British Pound Breaks Through $2
By Jane Wardell, Chicago Tribune

How can we stop the pound from ravaging the dollar? Last time, it took the collective effort of speculators (led, famously, by George Soros) to take the pound down. Such a market event doesn't look likely today—what are we to do? Here's another question: Should we even care?

We play a game around here called "And What Happened Then?" (Try it anytime you read a scary story about XYZ not being thus-and-such since this point in time.) Let's play now: The pound hasn't been this strong against the dollar since 1992! And what happened then? Eight years of above-average economic growth and stellar market returns, even counting a fairly puny 1994.

This is absolutely not to say a two-dollar pound is the trigger for non-stop economic sublimity. However, it does nicely counter a punditocracy that insists a weak dollar must lead to ruin. It didn't before—why should it now? No one is presenting an argument why this time is different. They just report a weak dollar and a strong pound and imply horrors ahead.

Of course, a weak dollar is generally blamed on our massive trade deficit (or sometimes—the reverse). In turn, the trade deficit is blamed for a host of other economic ills. This otherwise optimistic article piles on:

The IMF Reports on a Wonderful World (April 12, 2007)
By the Editorial Board, Financial Times

The world economy will also do better if the large US trade deficit and corresponding surpluses around the world deflate gently rather than blow up.

Et tu, FT? This censure is particularly amusing coming from London. Somehow, the U.S. and its trade deficit are responsible for slowing economic growth, but the U.K.'s equally-sized trade deficit (as a percentage of their economy) escapes scrutiny. We view trade deficits in developed nations not as economic negatives, but rather as symptomatic of healthy economies—which is why we wouldn't bag on the U.K. for having a massive, near-record size trade deficit. Over £6 billion! (Which is $12 billion, in case you're counting.)

So does a super strong pound hurt us? Nah. First, the pound is up a mere 2.5% year-to-date on the dollar. Hardly worth all the fuss. Second, over long time periods, the currency effect on a global portfolio nets out to close to zero. Don't fret a strong pound or weak dollar—they won't have the negative impact on the market folks fear.