It has been an unbelievably busy week on many fronts. Overshadowed by Chinese leader Xi Jinping and Austrian elections was continued “dollar” deterioration in FX. Further down the line than that, though in many respects related to it, was the UK government announcing the disappearance of half a trillion pounds.
The news didn’t make much imprint in America, but it was all over Europe. Given what has gone on in Britain of late, this benchmark data revision to the UK capital account is being tossed into the politics of Brexit.
The numbers appear to be shocking. Last week, the government believed its net international investment position was a robust surplus of £469 billion. This week, reflecting revisions to that nation’s balance of payment streams, the net position is actually a £22 billion deficit. The British media is predictably apoplectic, even if they don’t really know why:
Global banks and international bond strategists have been left stunned by revised ONS figures showing that Britain is £490bn poorer than had been ¬assumed and no longer has any reserve of net foreign assets, depriving the country of its safety margin as Brexit talks reach a crucial juncture.
Half a trillion pounds is, as is being repeatedly emphasized in these commentaries, about 25% of UK GDP. It’s a Brexit nightmare!
Well, no, not necessarily. In fact, it has less to do with Brexit than it does eurodollars. The real issue that is obscured by the political focus is visibility. In other words, in a credit-based global currency regime there is simply no way to tell with any degree of accuracy what any country’s net position might be at any given moment. The whole idea of a “capital account” is anachronistic in a credit-based system.
Let’s not forget that the pound did crash in 2016, which at the time was chalked up to speculation and the usual benign suspects. It was far too reminiscent, however, of China’s severe “devaluation” in 2015, meaning that if “dollar outflows” were the cause of the latter there were surely some in the former.
