Image by Steve Punter via Flickr

As Robert Peston points out on his blog, the UK is currently caught in a vicious cycle.

UK banks owe billions to overseas lenders; lenders confidence in the UK banks is wavering increasing the likelihood of them demanding their money back; this is causing the value of sterling to fall, as the government, already massively in debt, is effectively guaranteeing repayment; sterling’s fall is in turn increasing the value of the bank/governments’ debts further reducing confidence in the banks and the UK.

Having an independent currency was supposed to have the benefit of allowing gradual devaluation to boost international competitiveness. Unfortunately as we are so in debt to the rest of the world, it seems to be driving us into a potentially nasty scenario where the UK can not pay its debts. Think Russia in the 1990s or Argentina in the early 2000s. Default leads to a sudden sharp fall in the value of the currency which then leads to massive inflation, as the price of imported goods and services soar. This feeds through to wage demands and all the knock on effects of being caught in an inflationary economy.

How long will it be until Gordon is on the phone to the IMF? Would this have happened if we were part of the Euro?

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No sign of a “why” yesterday. Mr Peston generously suggests it may be too early for them to fully understand the motivations behind their actions. Maybe it is too early for them to face up to the reality under the harsh light of the cameras.

I just can’t see that it will. Robert Peston has been out and about getting feedback from retailers who have been very negative about it. See his post here.

I am no great economist, however, if I had to make the call I would treat the challenge like a marketing campaign.

When you launch a new product, the key is to get momentum. If your budget is limited, which they always are, you usually focus all of your marketing around a tightly defined target audience which will get the most benefit from the product and talk about it the most. The aim is then to get that group to tell their friends/colleagues/family and, possibly, pass on the benefit to them.

A 2.5% reduction in VAT looks like the opposite strategy. Targeting everyone, nobody benefits much, little passed on and no momentum. I am sure there could have been a more effective approach. Very frustrating.

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