Sunday, April 15, 2007

This is a blog in response to one I have just read.

BLACK WEDNESDAY.

In British politics and economics, BLACK WEDNESDAY, refers to 16th September 1992.

When the conservative government of the day was forced to withdraw the Pound from the European Exchange Rate Mechanism.(ERM) due to pressure by currancy speculators- most notably George Soros who made over $I billion from this speculation.
In 1997 the UK Treasury estimated the cost of Black Wednesday at £3.4 billion.

The trading losses in August ans September were estimated at £800m, but the main loss to taxpayers arose because the devaluation could have made them a profit.
The papers show that if the government had maintained $24bn foreign currancy reserves and the pound had fallen by the same amount, the UK would have made a £2.4bn profit on sterling's devaluation.
The papers also show that the treasury spent £27bn of reserves in propping up the pound: the Treasury calculates the ultimate loss was only £3.4bn.


When the RRM was set up in 1979, Britain declined to join. This was a controversial decision as the Chancellor of the Exchequer Geoffrey Howe, was a convinced pro-european.
His successor Nigel Lawson was also a believer in a fixed exchange rate, he admired the low inflationary record of Germany, attributing it ot the strength of the Deutsche Mark.

Although Britain had not joined the ERM, for several years the Treasury followed a semi-official policy of "shadowing" the Deutsche Mark.


At the same time, and in addition to open market trading of currencies, the Treasury's amin tool in attempting to control the exchange rate was through the setting of the value of Sterling. As a consequence, interest rates were set with consideration of the domestic demand and inflation environment as only a secondary consideration. This led to a number of years of lower interest rates than would have otherwise been the case, and hence to rising inflation.

Matters came to a ahead in a clash between Margarets Thatcher's economic advisor, Alan Walters and Nigel Lawson, when Walters claimed that the Exchange Rate M echanism was "half baked." This led to Nigel Lawson resigning as chancellor to be replaced by John Major.
John Major, who, with Douglas Hurd, the then Foreign Secretary, pressured Margaret Thatcher to sign Britain up to the erm in October 1990, effectively guaranteeing that the British Government would follow an economic and monetary policy that would prevent the exchange rate between the pound and other member currencies from fluctuating by more than 6%. The pound entered the mechanism at 2.95 Deutsche Mark to the pound.Hence, if the exchange rate ever neared ythe bottom of it's permitted range, 2.778 marks, the government would be obliged to intervene.
With UK inflation at three times the rate of Germany's interest rates at 15% and the "Lawson Boom" about to bust, the conditions for joining the ERM were not favourable at that time.

From the begining of the 1990's, high German interest rates, set by Bundesbank to counteract inflationary effects related to excess expenditure on German reunification, caused significant stress across the whole of the ERM.
The UK and Italy had additional difficulties with their double deficits. Issues of national prestige and the commitment to a doctrine that the fixing of exchange rates within the ERM was a pathway to a single European currency inhibited the adjustment of exchange rates.
In the wake of the rejection of the Maastricht Treaty by the Danish electorate in a referendum in the spring of 1992, those ERM currencies that were trading close to the bottom of their ERM bands came under speculative attack in the foreign exchange markets by currency speculators.

On September 16th the British government announced a rise in the base interest rate from an already high 10% to 12% in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15%, dealers kept selling pounds.
Major currency traders like Goldman Sachs knew what the British government was trying to do and knew that the international money markets would eventually prevail against the efforts to prop up the pound.
This amounted to a major transfer of wealth from the government to the speculators, both individuals and investment banks.

By 19.00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12%.

Just another example as to why no-one should vote Conservative in the up coming elections.

11 comments:

dickiebo said...

Methinks that the author of this entry is not the same as the others! Indoctrination, Annette?
You are quite right, of course. We could and should have had the extra cash - then we could let in more needy asylum seekers.
Still, not too late. Vote Labour.

totallyun-pc said...

Now who's making assumptions!?

You think cos I'm Old Bill I'm conservative... I never said what I voted babes.... and I'm also aware that Sir Edmund Davies who set our (reasonably Healthy) pay scheme in stone was also Labour, even though this current administration has destroyed our job and makes us beg cap in hand for our 3 percent annual pay rises whilst voting their own 66 percent rise.
Although monster Raving Loony party offered to double police pay and half our working hours..... sounds good to me... but they didn't win!

Although they have put the totally Loony Brigade in charge of the police!

totallyun-pc said...
This comment has been removed by the author.
totallyun-pc said...

Nothing personal Annette, The labour thing was just a little gag....... BUT!.... as you mention it....

The other thing that doesn't sit comfortably with me about the current government, although maybe not the newer members, is that the old school Labour stalwarts were the socialists of the past, who were on the pickets, at the marches, trying their level best at bringing down the government of the day, for doing what THEY do today. I'm not going to paste pages of reports on here, I'll just say, Education, NHS, social services, Policing, Fire Service, Armed Forces, Countryside, Poorer getting poorer, Richer getting poorer, Decline of families, same sex marriages, Victims of crime scared of coming forward, Human Rights running roughshod over justic, Pensions, cash for questions, Sleaze, spin Taxes, Taxes and oh er... Taxes! To name just a few thing worse than they used to be. And i've not even started on the War or the cowardly submission to Iran.

Labout spent the first few years saying they Inherited all the poor services from the previous administration.... they don't have that excuse anymore....

And as an aside .... David Blunket once tripped on the lawn outside Parliament, the nearest Officer offered to help him up to which he spat "get your facist hands off me" thats not NEW Labour. Thats OLD socialism, alive and well.

I think we'd be better talk sport if you knocked on my door Annette! Mwa! X

totallyun-pc said...

PS. have you seen this? I know your embarking on a political career... but this is what your up against.


http://www.youtube.com/watch?v=pF2XfCXeZC0&eurl=


your still my babe. X

PC South West said...

Don't worry I wouldn't vote conservative if my life depended on it! not that labour have done anything for my profession or law enforcement in general of course. But at least we have a reasonable standard of living, albeit we pay a small fortune in tax, stealth or overt that is. The trouble is who do we vote of? who will serve the country as they should?
Maybe no one.

Fitaloon said...

Annette perhaps it should really have been called "White Wednesday".

In the months and years following Black Wednesday, the pound traded substantially below its ERM lower band until spring 1995. From this point onwards however, it began a sustained recovery and reached 3.20 DM.

I would say that 'Black' Wednesday has proved to be good for the British economy in the long-term, as interest rates were allowed to find their natural level and the government was encouraged to adopt institutional changes that have further strengthened the economy. Yes the Conservatives learned something and then used it to their advantage , unlike Mr Brown

In factthe performance of the UK economy subsequent to the events of Black Wednesday has been significantly stronger than that of the Eurozone and, despite the damage caused to the economy in the short term, many economists now use the term 'White Wednesday' to describe the day (a term originally coined by Euro-sceptics happy at the stalling of further European integration).

However, the reputation of the Conservatives for competent handling of the economy was shattered by "Black Wednesday" and that's how Brown inherited the new strong economy that he has now managed to unravel as he sells off our gold, silver and any other assets he can find (36 billion from now until 2011) double what he predicted last year.

I haven't even started on his other great crimes like pensions etc etc.

GirlNextDoor said...

I don't like labour, I don't like them for the amount of damage they've done since they camme to power, like everyone else has listed above, taxes, education, policing, NHS, human rights, criminals rights over victims, (lack of) justice etc etc etc. Im too young to remember previous governments so can't compare, bet Im making you all feel old now! hehehe

Re your comment on my blog, thanks Annette, not sure if I will get in, I may prove to be rubbish! But we'll see how things go, here's hoping because I really do want to do it & succeed :o)
If you get into government ;o) you know who to call if you want police protection! hahaha
(Even if you are Labour through & through ;o)

Noddy said...

Annette,

I don't do Politics - not allowed to, but I do vote even if, as the saying goes, it only encourages them. What I can do is pure macroeconomics, got a degree in it to prove it! Very shortly, but probably after the election (wonder why?) Mr Brown will have to instruct the Bank of England to increase interest rates to level out inflation and the exchange rate against the dollar. He could of course just buy dollars with our gold reserves so pushing up the value of the dollar, but oops he sold most of it when it was in a price trough. But, yes we all recall the crazy interest rates and the meddling in the 'free market' of currency trading. The current Treasury has brought about stability and a degree of confidence in the UK economy and in macroeconomic terms that is a success and vital. I just worry that we have sold the family silver (or should that be gold) to ensure this.

Good luck in the election - you will need it!!!!

Noddy said...

Guess what?

... and at the next meeting after the elections.....

Told you!

totallyun-pc said...

http://pcbloggs.blogspot.com/2007/04/test-of-time.html