Reality Bites GB £

Following the shocking news about British economy squeezing in Q4, here’s some advice on what needs to be done in Britain, and what this means for the British pound.

Guest post by  Bob Nielsen

On 19 Jan 11 Yohay posted a brief comment from me titled ‘The Long Trend for GB‘, on the relevance of the UK unemployment figures. I quote from my article:

“We know for certain that over the coming year unemployment will rise in the UK as the budgeted cuts to the Government sector start to be actioned, and we know for certain that growth will be lower than predicted (baring a boost from a further major devaluation). So will the market continue to value GB £ on wishful thinking? The vain hope that uncontrolled inflation will force an interest rate rise – that the very politicised BoE cannot give because it would inevitably produce lower growth and higher unemployment.

The vain belief that the UK is immune from being sucked into the messy fallout of the snowballing Euro debt crisis – when the UK is bound up in European treaties and trading ties. There may be short term bouts of irrational optimism in the currency as we have seen over the past week, but longer term the UK is not coming out of the woods, indeed it is more likely that it will re-enter recession during the next two years.”

I stated then that there was gross over optimism driving the GB £ up. Well reality has now started to bite. The UK must go into recession again because it never properly restructured during the first dip that was papered over by a wall of Labour Govt spending.

Now we need the restructuring (which must include a significant and overdue housing price drop plus reductions in public sector pay and pensions), and to pay off the Labour spending spree. No room for a rate rise and no where for the GB £ to go but further down.

Yes i’m short sterling.