Faced with the prospects of a double-dip recession, a devalued pound is needed to save Britain’s fragile recovery.  Compared to the 11 top-traded world currencies, the pound is the worst performer over the last six months.  It is 10 percent above its 24-year lows reached 14 months ago.

Front-running with tighter budgets and slashing the deficit would likely support the pound and abort recovery.  There would be a loss of competitiveness and the attendant deflationary pressures incurred from slashing the deficit.

There is no support mechanism for the pound similar to the euro-positive bond purchases of Greek debt by Germany.

The U.K. deficit is similar to Greece’s – a country faced with austerity measures to fix its finances, and stave off bankruptcy. 

Fortunately for the U.K., it has its own currency to devalue, unlike Greece which has no domestic currency – instead stuck with the euro – and consequently having to slash and burn its finances in order to survive.

Differences in interest rates present ‘carry trade’ opportunities, wherein traders borrow in one currency, and invest in another, thereby profiting off the difference in the rate paid on funds.

The U.S., Britain, Japan and the EU do not appear to be early rate-hikers, given their attention to credit issues and debt burdens instigated by their stimulus spending.

More likely candidates for early rate-hiking include Brazil, Mexico, Norway, Sweden, Australia and Canada.  Australia has already raised theirs to four percent.  Canada may not be far behind - possibly coming on stream as soon as mid-year.  Speculative fever is contributing to the rise in the Canadian dollar.

Last week, it was reported that sales and average prices fell for both new and existing homes.  And, government rescue efforts for this sector of the economy are about to end.

In January, U.S. employers announced the deepest job cuts since last summer.  The unemployed receiving extended benefits hit a record, and a consumer confidence index reading recorded its worst report in 17 years.

True, the U.S. economy did grow faster than expected in the fourth quarter, but that can be attributed to inventory restocking.  The consumer is not spending, and it’s anybody’s guess as to what is going to happen once things tighten up, and the government turns off the taps to easy money.

U.S. money manager Rob Arnott sees years of anemic returns for investors ahead. He sees no reason for exuberance any time soon.  He also sees another dip coming - more likely to be in high gear next year.  He advises to steer clear of commodities, emerging market equities, high-yield bonds and U.S. growth stocks.

The is a time for wealth preservation, he asserts - not risk taking.  He claims that there will be a right time to pounce, and get back in the market, but not right now - only when the ‘maddening crowds’ are petrified.

The reason behind the markets mustering sizeable rallies off the lows can be attributed to Fed-induced liquidity.  The recent move in the discount rate is an attempt on the part of the Fed to start withdrawing from intervention in the economy.  Such support came in the form of expanding its balance sheet, through quantitative easing, rather than relying solely on interest rate cuts. Such cuts alone did not do the job.  How resilient the markets are will depend upon how they react to the Fed trying to shrink its balance sheet.

The Fed now holds more housing loans than Treasury bills, notes and bonds, representing a seemingly insurmountable challenge in dealing with a super-inflated balance sheet.

What happens after a credit collapse?  Take Japan, for example.  Its Nikkei index has closed higher 2,500 times since 1990, but it is still down 70 percent from its peak.

The last credit collapse in the U.S. took place in the dirty 30s.  What followed was a decade during which 20 quarters put in five percent-plus sequential GDP growth.  But, there were also 13 quarters of contractions mixed in between those expansions - hence, the dreaded word ‘depression.’ And, get this, the next secular bull run didn’t commence till 1954 - 25 years after the prior peak.

Source: David Rosenberg, Report on Business - Globe and Mail

The euro is facing its biggest challenge since it was launched a decade ago.  Even George Soros has warned that the 16-nation union may not survive.  Any attempt at an EU bailout could lead to further debt crises in the continent’s troubled south.

Greece has been at the center of the storm, rattling currency and stock markets, and raising fears of a sovereign default because of its massive debts.  Other countries could soon be on the same radar screen - Spain, Portugal, Ireland, and Italy.

Athens only has enough funds left to keep its government afloat for two more weeks. European officials don’t want the International Monetary Fund to rescue Greece, because such a move would be perceived as a failure on the part of the euro zone to fix its own problems.

The euro was launched as the official currency for 16 countries a decade ago, and this is its first crisis of major proportions.  Nobody seems to know how to deal with it.

Previously, when countries like Greece and Italy were faced with debt crises, they simply let the printing presses roll, thereby devaluing their respective currencies with attendant inflationary and economic consequences - but, at least such measures did not impact neighboring countries.

The euro was intended to prevent such calamities, but it was conceived without any regard to a central treasury.  The European Central Bank cannot interfere with fiscal policy.  Further, no euro zone country is allowed to bail out another by buying its debt.  The problem here is Germany would have to intervene with-out any semblance of state involvement.  It is the only euro zone country strong enough economically to finance a rescue plan.

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