Chapter 91 Sniping the pound for the first time

   Major and his cabinet have clearly felt the pressure from all sides.

  In the 1980s, there was a wave of privatization in Europe. Large state-owned enterprises were broken up into pieces and sold to private consortia, which injected a boost to the British economy at that time. But the good times didn't last long. In the 1990s, the economic recession that swept across Europe did not let Britain go. In 1990, the real economic growth rate of the United Kingdom was only 0.6% for the whole year, and in 1991, the annual GDP It actually dropped by 2.1 percentage points compared with the previous year.

   Entering the third quarter of 1992, the British economy still hasn't improved, and various data have not increased significantly compared with the previous year, and are basically in a flat state.

  In fact, the recession of the British economy is not due to domestic factors, but is affected by the overall international economic environment. Due to the collective recession of the American economy and the European continent in the late 1980s and early 1990s, the economic growth of the United Kingdom, which has become more dependent on these two markets after privatization, was weak.

  In order to have closer ties with the continental European market, the British government joined the European Exchange Rate System (ERM) and exchanged one pound to 2.95 marks, but this exchange rate is too high for the United Kingdom. There is no other reason, that is, the economic situation in Britain at that time was not on the same level as that in Germany.

  At the beginning of 1992, the foreign ministers and ministers of the twelve countries of the European Community signed the "Maastricht Treaty" in Maastricht, the Netherlands. The main core of this treaty is the European Monetary Union. According to the provisions of the treaty, the twelve countries will complete the work of unifying their currency in three stages. The first stage is to strengthen the European exchange rate system and realize the free circulation of capital. The third stage is to launch a unified European currency - the euro, and upgrade the "European Monetary Institution" in the second stage to the European Central Bank to formulate a unified monetary policy for all countries.

Under the constraints of this treaty, the exchange rate policies of various countries have been compressed to a very small range. It can be said that the original independent monetary policy has gradually been lost, and it has become a currency that can only be adjusted within a certain small range. policy.

   When the pound joined the European Monetary System, the exchange rate against the mark was 2.95, the upper limit was 3.1320, and the lower limit was 2.7780, with a range of 6%. This is a seemingly freely adjustable fixed exchange rate system, which naturally laid the groundwork for the subsequent pound crisis.

In April 1992, during the British general election, due to concerns about the nationalization policy of the Labor Party, capital began to flow out, and the exchange rate gradually fell. The previous strength was restored, but the economic data never improved. As a result, after two months of rising, it began to fall again in June.

   Regarding this situation, Major and his cabinet are very anxious. They are very aware of the impact of currency on the economy. When the exchange rate market cannot be adjusted freely, they can only raise interest rates to keep capital from flowing out.

The increase of interest rates cannot be unlimited, because the increase of interest rates will dampen the enthusiasm of investors, which may worsen the already depressed economy. Therefore, the British authorities will face a dilemma. It is possible to allow the depreciation of the pound in the case of an appreciation of the mark, and the second is to raise interest rates to a certain extent.

  Drukenmiller entered the field at this juncture.

  He began to buy a large number of Deutsche marks and sell British pounds to obtain profits from the exchange rate changes between the two. By the end of August, Quantum had built up a position of more than $1.5 billion.

  In addition to Quantum Fund, other traders in the foreign exchange market also smelled something different, and established short positions on the pound in the market.

  The pressure from the foreign exchange market quickly shifted to the Bundesbank.

  The Bundesbank plays an important role in the European Monetary System. Due to the merger of East and West Germany, in order to revitalize the entire German economy, the German government implemented a proactive fiscal policy and invested a lot of financial resources in infrastructure construction and social welfare to offset the adverse effects of the merger of the East German economy. .

   The German economy grew strongly, spurred by fiscal policy, and the mark was therefore impregnable.

  In this case, what can be done to get capital to flow back from Germany to other countries is not on the mark, but on the interest rate policy, that is, to reduce the interest rate level in Germany, so that capital flows to other countries' markets.

  You must know that the interest rate is generally regarded as a risk-free investment in the financial market, and it is an ideal investment income. There is no other reason, because most of the interest rate depends on the interest rate level of short-term national debt, and national debt is a bond issued with the guarantee of the credit and fiscal taxation of the state government, and there is basically no risk of default.

  Therefore, some risk-averse capitals in the market specialize in investing in different markets with interest rates as the target. These capitals do not aim to maximize profits, but to minimize risks as the purpose of their investment strategies. Such a capital is very welcome for a country.

  The German government cannot lower interest rates!

It’s a long story, it’s about before the Second World War, when the German government wantonly issued currency in order to pay the war debts and failure compensation owed before the First World War, so there was an extremely serious crisis in Germany. In just a few years, the mark depreciated billions of times.

  At that time, banknotes were printed day and night and could not keep up with the speed of inflation. Later, there was no way but to change to monochrome ink printing. There used to be two jokes. The first one was that there was an old couple celebrating their golden wedding. According to the local customs, the government would distribute some courtesy money, and then the mayor solemnly presented the old couple with a gift in the name of the country. Trillion marks; there is another one that in winter, people put marks instead of firewood into the stove for heating, because it will be more cost-effective.

  In this case, Hitler complied with the will of the people, emerged as the savior of the country and the nation, and became the leader of the country. We all know what happened afterwards.

   Therefore, the successive governments of Germany after the war have spared no effort in preventing inflation, and interest rates have also been maintained at a relatively high level. In the United States, the Federal Reserve's responsibility is to ensure low inflation and full employment as its goals, while the German Bundesbank's task is to specifically combat inflation.

   At the same time, the perennial low inflation rate has also made the people accustomed to this kind of treatment. If the government changes the interest rate, it will be subject to great pressure and doubts from public opinion.

   When Soros and the others discovered that the pound was overvalued, Druckenmiller had completed his first snipe against the pound. However, because of the position, the profit obtained is quite limited. But soon, the attitude of the German central bank will become clear, and Soros and his disciples will make a comeback with a huge amount of capital. (Seeking Sanjiang tickets, I hope everyone will continue to support, thank you very much!)

  (end of this chapter)