Outlook: If you're reading this while sitting in an airport heading off for a Christmas break, my commiserations on the rate you've just been offered in the foreign exchange bureau (particularly if you're headed for somewhere in the eurozone).
Still, leaving aside your unfortunate lack of purchasing power while on holiday this festive season, should we really get so worked up by the falling value of the pound?
Conventional economic wisdom is that currency depreciations matter because they tend to be inflationary. In a country such as Britain, where imports run well ahead of exports, the rising cost of purchases from overseas drives up prices. Not only does the cost of stuff bought directly by consumers rise, but so too does the cost of raw materials, which is subsequently passed on to consumers. Theoretically, the effect is a spike in inflation.
There's nothing wrong with the theory, but, in practice, inflation is the least of our worries right now – the Bank of England expects it to fall below 1 per cent next year. Thecollapse of sterling may indeed have some limited inflationary effects, but they'll be trifling in the context of a global economic environment of deflation next year (and the effects are taken into account in the Bank's forecast).
Why not concentrate on the good news for once. The falling value of the pound could be our salvation during this recession, just as it was during the downturn of the early Nineties, when sterling plunged following Britain's forced exit from the European exchange rate mechanism.
Just as cheaper sterling inflates the cost of imports, it deflates the price of our exports. The goods and services Britain sells abroad are –albeit artificially – now far cheaper than they were a few months ago.
So far, the benefit for exporters has been relatively limited. That's partly because it takes time for the effect of a sterling decline to work its way through the system – and partly because other countries are suffering recession too, limiting theirappetite to buy our stuff.
If sterling remains at the current level for an extended period,however, exporters will begin to feel the benefit. Indeed, we might see an export-driven recovery in the second half of next year, just as the Government is hoping.
It's not a perfect solution. One problem is that many economists believe that a fall in the value of a country's currency depresses the confidence of its population, which has its own negative economic effects. The last time we went through this cycle, however, this downside was more than compensated for by the benefits enjoyed by exporters.
A strong pound is also a matter of national pride – and you can expect anguished howls across the land if sterling does indeed reach parity with the euro over the next few days and weeks.
Still, I for one am happy to swallow a bit of pride if the pay-off is a much less severe recession than we might otherwise be in for. And as a happy side-effect, maybe morepeople will now think about holidaying in one of the endless list of amazing places in our country (which ought to be a much greater source of national pride than the boring old pound).Reuse content