(email exchange)
> On 12/3/08, Kevin wrote:
>
> Hi Warren,
>  
> The UK deficit and debt to GDP is increasing dramatically as the government
> seeks to stabilize the economy.
>
Yes, good move on their part. That will restore demand/output/employment.
>
> With the UK being a net importer of goods.
>
Yes.
>
> And sterling not benefitting from being a “reserve” or “commodity based
> price” currency.
>
Whatever that means with floating FX.
>
> What impact does the increased reliance on foreign based capital as a funding
> source for the government.
>
The government is not reliant on foreign based capital with it’s currency of issue. It spends first by crediting accounts at its own central bank, the offers those accounts interest bearing alternatives like guilts, etc..
>
> have on the price of sterling and gilt yields in the medium term?
>
The currency could go down relative to other currencies. It’s sure looked way over valued to me for quite a while. Even at one to one with the dollar prices would still be high there.
>
> Ask this question as it appears foreign investors are beginning to question
> whether the UK, with its huge reliance on the financial services industry, very
> low domestic savings ratio and a consumer that has incurred residential
> property debt levels dramatically in excess of those in the US, should be
> compared to Iceland and may suffer similar consequences if there was a
> dramatic loss of confidence in the UKs economic prospects.
>
Iceland’s problems are with external currency debt, and with a govt that doesn’t know how to best deal with private sector external currency issues.
>
> Many thanks
>
> Kevin
>
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