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This is the crisis with just about everything. Failing banks, the drying up of credit, crashing house prices, rising unemployment, weakening growth and - as the official figures showed yesterday - a ballooning budget deficit. Students of economic crises will detect only one thing is missing from this litany of woe - a sterling crisis of the sort that Britain went through in 1967, 1976 and 1992.
The expectation is that a run on the pound will not be long in coming; one of the playground spats between the government and opposition this week was over whether the shadow chancellor, George Osborne, was being unpatriotic by predicting sterling would hit the skids as a result of plans to cut taxes in Monday's pre-budget report.
There are many reasons to be afraid - very afraid - about the state of the world, but a sterling crisis is not one of them. Unless there is a catastrophic loss of confidence in the government's economic and financial management, the pound is likely to stabilise close to current levels; the risk of it falling should certainly not deter the Bank of England from cutting interest rates aggressively.
Why? Because there has already been a marked depreciation over the past year. Sterling is at a record low against the euro, has dropped by 40% against the yen, and has fallen by 20% against the dollar since the summer - a more rapid descent than in the aftermath of Black Wednesday. Anybody who decided this summer to take advantage of the $2 pound with a winter shopping spree in Manhattan is in for a shock.
That decline was justified given the UK's unique exposure to turmoil in the financial markets and its absurdly overblown property market. But after such a precipitous fall, the downside potential is limited - especially since the outlook in the US, eurozone and Japan looks just as bleak. News from across the Atlantic has been dire, with Ford and General Motors on the point of collapse and the stockmarket down 45% this year. Germany is suffering from weaker demand for exports, Italy is suffering from a chronic lack of competitiveness, and Spain, like the UK, is grappling with a housing boom-bust. Japan also relies heavily on exports, but reported its third successive seasonally adjusted monthly trade deficit yesterday.
It is important to identify why the pound has been under pressure in recent months. Investors were concerned that not enough was being done to prevent a painful recession; the currency was falling, in other words, because interest rates were too high, not too low. The dollar has been rising on foreign exchanges this year because of anticipation that aggressive and early cuts in borrowing costs from the Federal Reserve would mean it would beat the rest of the developed world out of recession. That optimism looks misplaced, but it is indicative of a climate where investors are more concerned about growth potential than interest rates.
That's not to say the pound won't fall further, since currencies tend to overshoot. But sterling looks undervalued against the dollar and cheap against the euro. That may depress UK tourists looking to clean up on 5th Avenue but it is good news for the economy.
Since 1997, an overvalued currency has made imports cheaper and exports dearer; there has been a silent sterling crisis that encouraged speculation while making manufacturing less profitable. The economy needs a competitive level for the pound that helps cut the trade growth and so create the conditions for more balanced growth. Its depreciation, coupled with the likely prolonged squeeze on consumers when they have to start paying back Monday's tax cuts, means there is a better chance of tackling the structural imbalances in the economy than there has been for years.
larry.elliott@guardian.co.uk
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