Why Jolly Old England Isn't So Jolly

We understand why the Euro dropped in relationship to the dollar – lots of toxic Euro-based countries (like Iceland, Hungary and Belarus) pulled down the overall value of the currency well beyond the fall experienced in other markets – but why in the world would a country like England, which has had a strong pound sterling, fall against the decrepit U.S. dollar? After all, the U. K. didn't have a mortgage meltdown, was not party of emerging market fear-frenzy and didn't have a currency dragged down by being packaged with nations in deep trouble.

My personal belief is because they spoke “English” and lived in Europe . Sounds far-fetched? The British Empire , which once included us, spread its commercial power globally for more than a century. They were in Asia, Africa, Australian and North America in a huge way. English was and still is the language of commerce as any good corporate executive based in Hong Kong, Sydney , Singapore or India can tell you. Russians, Arabs and mega-wealthy magnates from "all over" maintained "flats" and offices in London.

When Wall Street banks decided to expand into Europe, they picked a legal system that looked just like the one we have in the States (common law allowing courts lots of flexibility to build judicial laws required for commerce versus, for example, civil law practiced in places like France, which is must more statute-oriented), a language they already spoke and labor laws that resembled American practices (you could actually fire people). Hey, England gave birth to America ! But daddy and mommy are in trouble?!

The truth is in the numbers, and thanks to this week’s Time Magazine (Global Business Section), we begin to learn why. Between 2001 and 2007, the U. K. almost doubled the gross domestic product generated from financial services (from 5.5% to 10.1% - add lawyers, accountants, etc. and that number rises to 14%). “About 70% of the international bonds, one-third of the world’s foreign exchange and almost half the volume of international equities are traded in London .”

So when the global markets fell, by definition, the British markets felt the pain in direct proportion to their participation in the global economy. They got killed. Banks dived in value, and on October 8^th, the British government began bailing out banks (a few slipped through the net and died) and partially nationalized some pretty big financial institutions that would probably have melted without intervention: Royal Bank of Scotland , HBOS and Lloyds TSB. 4,500 people who worked in the London office of Lehman Bros. joined a mass exodus of overpaid executives from the financial sector.

And while the Brits weren't drinking toxic subprime mortgages, they weren't immune from the “good times borrowing” syndrome that plagued the U.S. “Buoyed by rising property prices, households ratcheted up their borrowing to a massive 173% of disposable income, vs. 106% in 1995.” Even profligate Americans only borrowed 139% of such income! U. K. jobs are disappearing (especially in London), property values are falling, the credit crunch is crunching… and well, I guess that’s why the British pound, which had been trading at more than double the value of the U.S. dollar, has dropped about 40+ cents.

We're not alone! The good news for anyone with any money left: there are bargains for European travel (fuel costs are down and airlines are desperate for customers), and you might be able to afford a bad hotel room and a cheap meal in London (or was that a bad meal and a cheap room?) again!

I'm Peter Dekom, and I approve this message.