22 September 2009

Economic Churnalism

The BBC reports:
The pound has fallen to its lowest level since April against the euro after a warning that UK public debt levels may not be sustainable.

Except, it didn't happen. The pound has fallen against the euro, but the warning about debt levels didn't happen. This is the "warning" as it appears on the BBC News website:

"In its quarterly bulletin, the Bank of England noted that the UK had run current account deficits for more than a decade - sustainable as long as the deficit was offset by foreign investors' purchases of UK financial assets.

" 'But the financial crisis may have led overseas investors to reassess their willingness or ability to purchase sterling assets and thereby finance the UK trade deficit,' the Bank of England said."

So the warning is about financing the trade deficit, not the government deficit and not the accumulated government debt.

There is a link between government deficit and the trade deficit. Government debt, in the form of gilt edged bonds, is one type of "sterling asset" foreign investors can buy. So too are corporate bonds, commercial paper, shares, property and currency.

Government debt is the "story du jour", and linking the fall in the value of the pound to public debt makes for a better article, according to the values of modern churnalism. By trying to fit the real news (a fall in sterling) to the popular narrative (frightening levels of public debt) the BBC has gone off the rails.

Actually, it gets worse if you read the Bank of England bulletin from which the quote is taken. Chapter 3 is a study looking at the causes of recent changes in the exchange rate. The attractiveness of sterling assets to foreign investors is only one of a number of factors which the study says affect the exchange rate. It concludes: "there is substantial uncertainty about the precise role of each factor"

Finally, I am not sure that sterling has fallen. It seems to me that the euro has risen; it is up against the dollar as well. Fog in the channel; continent cut off.

No comments:

Post a Comment