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| Devalued penny will have to drop on Brexit | |
| (35 minutes later) | |
| Almost all economics commentators persist in giving the misleading impression that the rise in the FTSE 100 index is a “good thing”, offsetting the collapse in the pound (Upside of pound’s fall; Foreign exchange jitters push sterling to low of $1.21, both 12 October). It is not. The falling pound means the value of the stock market and its companies has actually gone down. Since the referendum the FTSE 100 has risen by 12%; the pound has declined by 18%. If you do the arithmetic, the net contraction is even worse than it appears – a decline in company value of 9%. | Almost all economics commentators persist in giving the misleading impression that the rise in the FTSE 100 index is a “good thing”, offsetting the collapse in the pound (Upside of pound’s fall; Foreign exchange jitters push sterling to low of $1.21, both 12 October). It is not. The falling pound means the value of the stock market and its companies has actually gone down. Since the referendum the FTSE 100 has risen by 12%; the pound has declined by 18%. If you do the arithmetic, the net contraction is even worse than it appears – a decline in company value of 9%. |
| There are three factors involved, not one. The first, which is constantly mentioned, is that the income of many international companies is denominated in dollars – the dollar rises against the pound, so these companies are shielded from the falling pound. But the London market quotes company value in sterling, therefore their true value has declined. | There are three factors involved, not one. The first, which is constantly mentioned, is that the income of many international companies is denominated in dollars – the dollar rises against the pound, so these companies are shielded from the falling pound. But the London market quotes company value in sterling, therefore their true value has declined. |
| The FTSE 250, which comprises more UK-centric companies, has meanwhile contracted by more than 13%. The total value of companies on the UK stock market has thus significantly fallen. | The FTSE 250, which comprises more UK-centric companies, has meanwhile contracted by more than 13%. The total value of companies on the UK stock market has thus significantly fallen. |
| Third factor, interest rates being at rock bottom, investors’ money goes into the stock market (while also transferring from FTSE 250 companies), pushing up company values and the FTSE 100 index. This is purely inflationary, and when interest rates go up this will evaporate. The conclusion is that both the pound and the stock market have declined substantially in real terms because of Brexit.Chris HendryWest Bridgford, Nottinghamshire | Third factor, interest rates being at rock bottom, investors’ money goes into the stock market (while also transferring from FTSE 250 companies), pushing up company values and the FTSE 100 index. This is purely inflationary, and when interest rates go up this will evaporate. The conclusion is that both the pound and the stock market have declined substantially in real terms because of Brexit.Chris HendryWest Bridgford, Nottinghamshire |
| • Larry Elliott’s analysis of the potential benefits of a fall in the value of the pound misses an important factor (Sterling’s decline is chance to reset UK economy, 17 October). The traditional view is that, all other things being equal, while the fall will lead to more expensive imports, it will also result in cheaper exports, providing a stimulus for export-led growth. But all other things are not equal. If, as seems inevitable, hard Brexit immigration controls push us out of the single market, tariff and other restrictions will offset some or all gains from supposedly cheaper exports. He doesn’t mention this, possibly because he’s keen to find ways of justifying the fact that he backed the Brexit horse. So we are likely to end up with both more expensive imports and more expensive exports. Not a good mix and, at some stage, this devalued penny will have to drop.Alan HealeyBishops Castle, Shropshire | • Larry Elliott’s analysis of the potential benefits of a fall in the value of the pound misses an important factor (Sterling’s decline is chance to reset UK economy, 17 October). The traditional view is that, all other things being equal, while the fall will lead to more expensive imports, it will also result in cheaper exports, providing a stimulus for export-led growth. But all other things are not equal. If, as seems inevitable, hard Brexit immigration controls push us out of the single market, tariff and other restrictions will offset some or all gains from supposedly cheaper exports. He doesn’t mention this, possibly because he’s keen to find ways of justifying the fact that he backed the Brexit horse. So we are likely to end up with both more expensive imports and more expensive exports. Not a good mix and, at some stage, this devalued penny will have to drop.Alan HealeyBishops Castle, Shropshire |
| • Join the debate – email guardian.letters@theguardian.com | • Join the debate – email guardian.letters@theguardian.com |