Pounded

Relative to its size (about 51 million for England alone, 61 million for the entire United Kingdom), the UK is a disproportionate global power. Historically, England’s reach around the world, ranging from the British Raj in South Asia, Hong Kong, Australia, Canada and even for a while a large part of what is now the United States, has been vast, her naval power legendary. But even as time as removed most of those territorial holdings as sequential independence broke up the vast British Empire, Britain’s economy has always been built on global trade, investment and finance. Thus, the UK rises and falls on its holdings and trade in the world markets, and it is viewed at Europe’s financial hub, even though it has elected to retain its own British pound as its currency in lieu of the Euro, which is used by most of the rest of the European Union.

I suspect that without this global economic reach – literally the European financial clearing house – England would otherwise be “just another” small to medium sized nation with limited influence. But that influence comes at a price. A year ago, it took over $2 to buy a single British pound sterling; today, even as the US economy slips into a dark hole, the pound has crashed to a meager $1.36, a calamitous fall. The UK didn’t have a local subprime crisis (although household debt, significantly driven by the overheated London real estate market, represents 177% of the average disposable income vs. 141% for the US), but its economy – dependent on the vagaries of its global holdings – faces a troubled recovery, a banking system in near collapse and financial losses based on the intense difficulties faced by such distressed European neighbors, from the totally failed Icelandic economy to the fall of Ireland’s values and the general malaise of large segments of Europe.

Since England is Europe’s virtual financial clearing house (it is estimated that almost 70% of that region’s major financial transactions pass through the UK), the fall of any part of Europe (not to mention England’s massive holdings around the world – including a very large investment in America’s subprime and credit default swap derivatives) has a disproportionate impact on a nation whose economic strength is so predicated on global investments. So dependent on its banking system, the UK faces catastrophic losses in that sector suggesting that the taking over majority control of the Royal Bank of Scotland, as that bank nearly failed, appears to be a harbinger of a more generalized probability that the government will pretty much have to take over – nationalize if you will – a very significant segment of its entire banking industry. Barclays and Lloyd’s Banking Group, for example, are falling fast.

The January 22^nd New York Times notes both economic contraction and required relative deficit spending in the UK make that nation’s financial woes even greater than what we are feeling here in the US: “The British economy is expected to shrink by 2.9 percent this year, compared with a 2.6 percent drop in the euro zone and a 2.1 percent contraction in the United States, according to Gilles Moëc, senior economist with the Bank of America in London… To make matters worse, Mr. Moëc said, Britain is facing a wave of deficit spending, as tax receipts fall and the costs of unemployment benefits and other services rise. He predicts the budget deficit will equal 9.4 percent of gross domestic product in 2009, compared with 4.9 percent in the euro zone and 8.4 percent in the United States.”

The significance to the US of the UK’s economic fall is that our normal partner in global rescue, humanitarian, diplomatic and even military efforts is no longer able to sustain additional burdens that they might have accepted easily a year or two alone, and hence foreign aid and policy decisions made by our new administration in the coming months and years will have to anticipate a reduced willingness by our allies to join in, not to mention a reduced capacity to continue to finance a portion of our national debt. We face our own financial malaise, but it is only amplified by the pain of the rest of the world.

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