It's the David Einhorn show this week. His first ever interview on Charlie Rose from yesterday can be viewed here.
On the same evening Charlie, who by the way is about as 'elitestream' as it gets on television, surprisingly ran a program discussing gold with John Hathaway, Peter Munk, & James Grant, which can be viewed here.
Kudos to Charlie for taking an interest in getting up to speed on gold, which as correctly predicted on this blog on Nov. 7 has moved comfortably into $1400+/oz. territory.
Update: Q&A in today's WSJ with Mr. Einhorn here.
Wednesday, December 8
Monday, December 6
Video: Famed Investor David Einhorn on CNBC
Great to see David speaking publicly recently (more recent Einhorn here). Wide ranging interview covering his expectations on the price of gold, and even some positive, upbeat thoughts from the legendary short seller.
The below video features David Einhorn (who was guest hosting on CNBC this morning) sparring with Fed insider Larry Meyer from Macroeconomic Advisors.
The below video features David Einhorn (who was guest hosting on CNBC this morning) sparring with Fed insider Larry Meyer from Macroeconomic Advisors.
Video: Ben Bernanke Interview on 60 Minutes (sans ironic Chase ad)
Federal Reserve Chairman Ben Bernanke conducted a post-QE 2 interview on CBS's 60 Minutes program last night (his June 2009 60 Minutes interview can be viewed here).
One similarity and one difference between the two 60 Minutes interviews:
So why is Bernanke denying that he's printing money when the Fed has clearly expanded the money supply? Semantics. And why would Bernanke start playing word games now? Because Bernanke has chosen to get political, and in politics semantics matter.
Later on in the interview Bernanke, for the first time, dips his toe into the government fiscal debate currently underway in Congress over tax cuts, the deficit, entitlements, etc. Whether you agree if this is or is not appropriate for a Fed Chairman (or with Bernanke's politics) is not necessarily the most important element here. The change in what Bernanke is openly speaking out about compared to what he's previously remained mum on is perhaps the key observation.
Every single word uttered by a Federal Reserve Chairman is carefully considered and reviewed before being communicated publicly. The reason: the Fed Chairman's words can have a powerful effect on investor psychology and global financial markets. Is it this pressure to stay on script which is making Bernanke so nervous when he knows he's on TV? I haven't spent time with Bernanke in private so unfortunately I can't compare how he communicates in a more informal setting with how he is on television.
Appropriately, the CBS online video version of the interview features an ad for a new Chase Bank card called "Slate", which gives the interview a "Ben Bernanke, brought to you tonight by Chase CEO Jamie Dimon" quality. Appropriate perhaps, and also hard to believe Too 'Bigger' to Fail Dimon wanted his advertising budget used for such rich irony.
I hope you won't mind my sparing you from being subjected to Chase marketing, which is excluded in the below YouTube version of Bernanke's interview.
One similarity and one difference between the two 60 Minutes interviews:
- Similarity: he still gets nervous when speaking on television (and in front of Congress for that matter).
- Difference: Bernanke is no longer willing to acknowledge that he's "printing money". In fact, Bernanke now denies it:
"One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way."The below chart, however, suggests otherwise.
Chart courtesy of Felix Salmon.
So why is Bernanke denying that he's printing money when the Fed has clearly expanded the money supply? Semantics. And why would Bernanke start playing word games now? Because Bernanke has chosen to get political, and in politics semantics matter.
Later on in the interview Bernanke, for the first time, dips his toe into the government fiscal debate currently underway in Congress over tax cuts, the deficit, entitlements, etc. Whether you agree if this is or is not appropriate for a Fed Chairman (or with Bernanke's politics) is not necessarily the most important element here. The change in what Bernanke is openly speaking out about compared to what he's previously remained mum on is perhaps the key observation.
Every single word uttered by a Federal Reserve Chairman is carefully considered and reviewed before being communicated publicly. The reason: the Fed Chairman's words can have a powerful effect on investor psychology and global financial markets. Is it this pressure to stay on script which is making Bernanke so nervous when he knows he's on TV? I haven't spent time with Bernanke in private so unfortunately I can't compare how he communicates in a more informal setting with how he is on television.
Appropriately, the CBS online video version of the interview features an ad for a new Chase Bank card called "Slate", which gives the interview a "Ben Bernanke, brought to you tonight by Chase CEO Jamie Dimon" quality. Appropriate perhaps, and also hard to believe Too 'Bigger' to Fail Dimon wanted his advertising budget used for such rich irony.
I hope you won't mind my sparing you from being subjected to Chase marketing, which is excluded in the below YouTube version of Bernanke's interview.
Friday, December 3
Maverick Fed Governor Hoenig: Too 'Bigger' to Fail Alive and Growing
The maverick of the Federal Reserve, Governor Thomas Hoenig, states the following in his NY Times op-ed:
At risk of causing my high school grammar teacher to roll in her grave, I've started calling what Hoenig describes above as 'Too Bigger to Fail'. The below chart helps illustrate the 'Too Bigger to Fail' concept.
The grey circles represent banks which failed and then were merged with the 'bigger fish' in the banking pond. By eating smaller fish the big fish grows, and that's precisely what's happend at the world's already Too Big to Fail megabanks (hence the new name Too 'Bigger' to Fail).
Regulators — not just in the U.S. but across the globe — activated their Too 'Bigger' to Fail strategy with the hope that the crisis would be solved by spreading toxic assets across a larger, and in theory healthier set of balance sheets. The same toxic assets still exist, but it was hoped that the bigger banks could better cope with the toxic asset losses.
Too 'Bigger' to Fail has one further element: megabanks would have time to lick their wounds and heal by a) generating increased profits due to fewer competitors (the small fish that were eaten), and b) through bank profit and banker bonus friendly programs like unlimited zero interest central bank lending to mega banks and QE2.
Ultimately, any hope for a solution to the Too 'Bigger' to Fail problem depends on whether sufficient political will and leadership can be mustered. Can it?
Small is Beautiful
The U.S. based megabanks -- Chase, Citibank, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley -- will not voluntarily shrink themselves out of a sense of patriotic duty. Hopefully this week's news of the Fed's foreign bank lending of perhaps as much as $1 trillion at nearly 0% interest rates to banks like UBS (Switzerland), Deutsche Bank (Germany), Barclays (U.K.) and BNP Paribas (France) puts to rest any lingering doubt of whether the megabanking establishment is loyal to any one nation's flag.
Turning to our current political leadership, unfortunately Inside Job Director Charles Ferguson may be right in his assessment that the Obama administration is unwilling to step up to the plate and drive the necessary stake through the heart of Too Big to Fail once and for all.
If our politicians can't fix the problem, what hope remains? Thankfully an arguably even more effective solution to Too Bigger to Fail exists completely outside of the Washington D.C. political black hole.
Lost Customers: The Only Language Megabanks Understand
Most of us are bank customers, which makes putting an end to Too 'Bigger' to Fail quite simple: all we have to do is take our banking business somewhere else.
For those customers at one of the above Too 'Bigger' to Fail banks, move your account to a smaller bank. Also never use an ATM at a Too 'Bigger' to Fail bank. Plenty of smaller banks now offer free ATM fee reimbursement, so this won't saddle you with extra fees. While moving your account will require a little extra work it's a relatively simple process. If enough of us pull together and do this it will go a long way towards solving the problem.
And for anyone who works at one of the aforementioned megabanks and has read this far, you can perhaps make one of the biggest contribution of all by seeking out another employer, or career. I did.
Democratic capitalism has many shortcomings. But one of the beautiful things about the marketplace in this particular instance is that it can successfully achieve what D.C. can't and Wall Street won't — cutting the Too 'Bigger' to Fail banks down to an appropriate size.
Disclosure: No positions; I bank primarily with the recently divested from BofA (NYSE: BAC) and IPO'd First Republic Bank (NYSE: FRC) and USAA Savings Bank (private).
There is an old saying: lend a business $1,000 and you own it; lend it $1 million and it owns you. This latest crisis confirms that the economic influence of the largest financial institutions is so great that their chief executives cannot manage them, nor can their regulators provide adequate oversight.
Last summer, Congress passed a law to reform our financial system. It offers the promise that in the future there will be no taxpayer-financed bailouts of investors or creditors. However, after this round of bailouts, the five largest financial institutions are 20 percent larger than they were before the crisis. They control $8.6 trillion in financial assets — the equivalent of nearly 60 percent of gross domestic product. Like it or not, these firms remain too big to fail.Too 'Bigger' to Fail
At risk of causing my high school grammar teacher to roll in her grave, I've started calling what Hoenig describes above as 'Too Bigger to Fail'. The below chart helps illustrate the 'Too Bigger to Fail' concept.
The grey circles represent banks which failed and then were merged with the 'bigger fish' in the banking pond. By eating smaller fish the big fish grows, and that's precisely what's happend at the world's already Too Big to Fail megabanks (hence the new name Too 'Bigger' to Fail).
Regulators — not just in the U.S. but across the globe — activated their Too 'Bigger' to Fail strategy with the hope that the crisis would be solved by spreading toxic assets across a larger, and in theory healthier set of balance sheets. The same toxic assets still exist, but it was hoped that the bigger banks could better cope with the toxic asset losses.
Too 'Bigger' to Fail has one further element: megabanks would have time to lick their wounds and heal by a) generating increased profits due to fewer competitors (the small fish that were eaten), and b) through bank profit and banker bonus friendly programs like unlimited zero interest central bank lending to mega banks and QE2.
Ultimately, any hope for a solution to the Too 'Bigger' to Fail problem depends on whether sufficient political will and leadership can be mustered. Can it?
Small is Beautiful
The U.S. based megabanks -- Chase, Citibank, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley -- will not voluntarily shrink themselves out of a sense of patriotic duty. Hopefully this week's news of the Fed's foreign bank lending of perhaps as much as $1 trillion at nearly 0% interest rates to banks like UBS (Switzerland), Deutsche Bank (Germany), Barclays (U.K.) and BNP Paribas (France) puts to rest any lingering doubt of whether the megabanking establishment is loyal to any one nation's flag.
Turning to our current political leadership, unfortunately Inside Job Director Charles Ferguson may be right in his assessment that the Obama administration is unwilling to step up to the plate and drive the necessary stake through the heart of Too Big to Fail once and for all.
If our politicians can't fix the problem, what hope remains? Thankfully an arguably even more effective solution to Too Bigger to Fail exists completely outside of the Washington D.C. political black hole.
Lost Customers: The Only Language Megabanks Understand
Most of us are bank customers, which makes putting an end to Too 'Bigger' to Fail quite simple: all we have to do is take our banking business somewhere else.
For those customers at one of the above Too 'Bigger' to Fail banks, move your account to a smaller bank. Also never use an ATM at a Too 'Bigger' to Fail bank. Plenty of smaller banks now offer free ATM fee reimbursement, so this won't saddle you with extra fees. While moving your account will require a little extra work it's a relatively simple process. If enough of us pull together and do this it will go a long way towards solving the problem.
And for anyone who works at one of the aforementioned megabanks and has read this far, you can perhaps make one of the biggest contribution of all by seeking out another employer, or career. I did.
Democratic capitalism has many shortcomings. But one of the beautiful things about the marketplace in this particular instance is that it can successfully achieve what D.C. can't and Wall Street won't — cutting the Too 'Bigger' to Fail banks down to an appropriate size.
Disclosure: No positions; I bank primarily with the recently divested from BofA (NYSE: BAC) and IPO'd First Republic Bank (NYSE: FRC) and USAA Savings Bank (private).
Video: Better Place CEO Shai Agassi on Charlie Rose
Perhaps one of the more interesting and ambitious startups of recent years is Better Place, which is working to the build global infrastructure necessary to support the widespread use of electric vehicles. The San Francisco Bay Area, Japan, and Israel among some of the locations which have already begun to employ Better Place's electric vehicle infrastructure.
Many of the world's fundamental environmental, economic and geopolitical challenges are due to the heavy reliance on oil as source of energy. There is very little hope of ending the U.S.'s dependence on foreign oil imports until alternative transportation infrastructure, like Better Place and Nissan's new Leaf electric car, are widely available. The effort to create this infrastructure is one of the most important and ambitious undertakings underway today.
For more information about Better Place check out CEO Shai Agassi's recent interview on Charlie Rose.
Video: The Banker
This is a bit over the top, but with close to 50,000 page views provides yet another example of creative YouTube PR tactics in the battle over financial regulatory reform.
In terms of its effectiveness, I'd rate it somewhere between the 3 million+ views cartoon and the Fed's less compelling comic book.
In terms of its effectiveness, I'd rate it somewhere between the 3 million+ views cartoon and the Fed's less compelling comic book.
The Three Way Intersection: Ethics Problems Atop the Economics Academy?
 |
| Larry Summers and Secretary Geithner |
A related article which I highly recommend is Inside Job filmmaker Charles Ferguson's scathing critique of the academic economics profession (and Larry Summers in particular). From the article:
Summers is unique but not alone. By now we are all familiar with the role of lobbying and campaign contributions, and with the revolving door between industry and government. What few Americans realize is that the revolving door is now a three-way intersection. Summers's career is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power.
In my film you will see many famous economists looking very uncomfortable when confronted with their financial-sector activities; others appear only on archival video, because they declined to be interviewed. You'll hear from:
Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration, president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards of directors of both AIG, which paid him more than $6-million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation.
Glenn Hubbard, chairman of the Council of Economic Advisers in the first George W. Bush administration, dean of Columbia Business School, adviser to many financial firms, on the board of Metropolitan Life ($250,000 per year), and formerly on the board of Capmark, a major commercial mortgage lender, from which he resigned shortly before its bankruptcy, in 2009. In 2004, Hubbard wrote a paper with William C. Dudley, then chief economist of Goldman Sachs, praising securitization and derivatives as improving the stability of both financial markets and the wider economy.
Frederic Mishkin, a professor at the Columbia Business School, and a member of the Federal Reserve Board from 2006 to 2008. He was paid $124,000 by the Icelandic Chamber of Commerce to write a paper praising its regulatory and banking systems, two years before the Icelandic banks' Ponzi scheme collapsed, causing $100-billion in losses. His 2006 federal financial-disclosure form listed his net worth as $6-million to $17-million.
Laura Tyson, a professor at Berkeley, director of the National Economic Council in the Clinton administration, and also on the Board of Directors of Morgan Stanley, which pays her $350,000 per year.
Richard Portes, a professor at London Business School and founding director of the British Centre for Economic Policy Research, paid by the Icelandic Chamber of Commerce to write a report praising Iceland's financial system in 2007, only one year before it collapsed.
And John Campbell, chairman of Harvard's economics department, who finds it very difficult to explain why conflicts of interest in economics should not concern us.
Thursday, December 2
Video: Inside Job Director Charles Ferguson on Charlie Rose
Click here for the 30 minute interview where Inside Job Director, Charles Ferguson, discusses his documentary on Wall Street and the financial crisis, Secretary Hank Paulson's motivations behind allowing Lehman Brothers to fail, how "Obama had a once in a century opportunity and blew it", and other topics.
Neither Ferguson or Rose appeared very comfortable during the interview, perhaps due to the fact that Rose is buddy-buddy with prominent New York based bankers such as Steven Rattner, Felix Rohatyn, etc. Kudos to Rose for perhaps risking some of his Wall Street cocktail party invitations by bringing uber-Wall Street critic Ferguson on his show.
Unfortunately, I have not yet been able to see his film. Apparently Ferguson was encouraged by Sony Pictures to cut some of the more embarrassing footage, such as this stunning clip of former Fed Governor Fred Mishkin speaking about his infamous report titled "Financial Stability in Iceland". Sony's and Ferguson's concern was that the film's central message -- that the financial crisis was a crime that should be prosecuted (which has largely failed to happen to date) -- would be overshadowed the utter destruction of Mishkin's, etc. other's credibility.
More from Charles Ferguson on the "subversion of economics", which includes a scathing critique of Larry Summers, and on "Obama's Depressingly Rational Decision to Give In to Wall Street".
Neither Ferguson or Rose appeared very comfortable during the interview, perhaps due to the fact that Rose is buddy-buddy with prominent New York based bankers such as Steven Rattner, Felix Rohatyn, etc. Kudos to Rose for perhaps risking some of his Wall Street cocktail party invitations by bringing uber-Wall Street critic Ferguson on his show.
Unfortunately, I have not yet been able to see his film. Apparently Ferguson was encouraged by Sony Pictures to cut some of the more embarrassing footage, such as this stunning clip of former Fed Governor Fred Mishkin speaking about his infamous report titled "Financial Stability in Iceland". Sony's and Ferguson's concern was that the film's central message -- that the financial crisis was a crime that should be prosecuted (which has largely failed to happen to date) -- would be overshadowed the utter destruction of Mishkin's, etc. other's credibility.
More from Charles Ferguson on the "subversion of economics", which includes a scathing critique of Larry Summers, and on "Obama's Depressingly Rational Decision to Give In to Wall Street".
The Biggest Loser (Besides the Irish) in Ireland's Ongoing Debt Crisis
Noted economic historian Barry Eichengreen has written perhaps the most scathing damnation of this week's Irish bailout. I strongly encourage reading the full piece.
Professor Eichengreen takes aim at Germany in particular. In the below passage he compares the Irish bailout to Germany's own hopelessly burdensome WWI war reparations, which played a key role in the rise of the Nazis and perhaps the Great Depression:
Irish Bailout Rejection Fallout
European sovereign bailouts may wind up becoming a lot like Department of Defense contracts in that the only thing contract signing signifies is the beginning (rather than the end) of negotiations. For example, if the new Irish government rejects its bailout as expected there may be an attempt to stem the ensuing crisis by negotiating down the hopelessly high bailout interest rate of 5.8% (or 7.25% depending on how it's calculated). And Ireland's controversial low corporate tax rate of 12.5%, rumored during the height of the drama to be on the table for european 'harmonization', may also be revisited.
Any such renegotiations should be viewed as window dressing aimed at delaying the final reckoning. The fundamental problem is that Ireland is insolvent. No amount of additional liquidity or tax rate bargaining alters this inescapable fact. Faced with this prospect, Europe's current leaders are struggling to determine who will take the biggest hit from Ireland's inevitable default.
Who Will Be the Biggest Loser?
Arguably the key issue to keep an eye on is whether senior Irish bank debt holders will be forced to take losses. If in fact Eichengreen's suggestion of 100% haircuts on insolvent Irish bank debt is adopted the ramifications for Europe's banking system would be difficult to overstate.
The below chart is helpful to understanding the implications of an Irish bailout rejection/and or default.
The U.K. is Ireland's largest creditor with approximately $220 billion in exposure, so any Irish bailout rejection and/or default will weigh heaviest on Britain. Royal Bank of Scotland (RBS) and Lloyds TSB, which were previously placed on government life support, are particularly threatened.
An Irish rejection of the bailout will put substantial pressure on the still fragile British banking system, which post-bailout consolidation is now home to three of the world's five largest banks (including #1 RBS).
In spite of the current austerity push in the U.K., the government participated in the Irish bailout and pledged approximately $10M to "a friend in need". An Irish Times editorial, reflecting the long and conflicted relationship between these two nations, greeted British 'kindness' with a degree of skepticism.
It's would appear that the U.K. (an EU member which never adopted the euro currency) helped bailout Ireland because rescuing a neighbor is politically more palatable than what would have been necessary if Ireland's debt situation had further deteriorated: recapitalizing the British banking sector (again).
A Lonely Lady
But if at some point an Irish default is inevitable, and the Eurozone nations align to protect their euro based banking system, Britain may well find itself the odd man out. And since further bank bailouts by parliament are politically DOA, Mervyn King and the Old Lady of Threadneedle Street may be left to step into the breach to recapitalize British banks. Any such Bank of England support would be coming on top of calls from the Cameron government for further quantitative easing to reduce the effects of government budget cuts and nagging inflation. In other words, sterling would be forced to do even more at a time when the currency is already stretched thin.
It is worth briefly reviewing the history of pound sterling in the 20th century. In the 1920s one pound fetched almost $5. The country was forced off the gold standard during the September 1931 Sterling Crisis, resulting in a sharp devaluation. Following the massive accumulation of debt during WWII, the pound was devalued again in 1948. This was followed by a further 15% devaluation in 1967. Following a severe recession in the early 1980s, the pound has traded as low as $1.03 in March 1985. Overall, there is well established history of devaluation when the going gets tricky.
While the recent plunge in the euro has provided a relative respite in what had been a steady weakening trend in the pound, Britain will bear the foreign brunt of any Irish bailout rejection and/or default. Further compounding this problem is China's curious financial support to Europe's 'Club Med' nations, but not Ireland, and Britain's total debt position which stands at a whopping 5x GDP (the world's largest total debt/GDP ratio). Based on these and other factors one can make a very good argument that over the medium-to-longer term the pound will continue its long drift downwards. Several ETFs are available to hedge against this risk.
Professor Eichengreen takes aim at Germany in particular. In the below passage he compares the Irish bailout to Germany's own hopelessly burdensome WWI war reparations, which played a key role in the rise of the Nazis and perhaps the Great Depression:
"Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year.This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable. The Commission, the ECB and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor. Do Mr. Trichet and Mrs. Merkel have a contingency plan for this?"The short answer to Barry's question is, of course, no.
Irish Bailout Rejection Fallout
European sovereign bailouts may wind up becoming a lot like Department of Defense contracts in that the only thing contract signing signifies is the beginning (rather than the end) of negotiations. For example, if the new Irish government rejects its bailout as expected there may be an attempt to stem the ensuing crisis by negotiating down the hopelessly high bailout interest rate of 5.8% (or 7.25% depending on how it's calculated). And Ireland's controversial low corporate tax rate of 12.5%, rumored during the height of the drama to be on the table for european 'harmonization', may also be revisited.
Any such renegotiations should be viewed as window dressing aimed at delaying the final reckoning. The fundamental problem is that Ireland is insolvent. No amount of additional liquidity or tax rate bargaining alters this inescapable fact. Faced with this prospect, Europe's current leaders are struggling to determine who will take the biggest hit from Ireland's inevitable default.
Who Will Be the Biggest Loser?
Arguably the key issue to keep an eye on is whether senior Irish bank debt holders will be forced to take losses. If in fact Eichengreen's suggestion of 100% haircuts on insolvent Irish bank debt is adopted the ramifications for Europe's banking system would be difficult to overstate.
The below chart is helpful to understanding the implications of an Irish bailout rejection/and or default.
 |
| (click to enlarge) |
The U.K. is Ireland's largest creditor with approximately $220 billion in exposure, so any Irish bailout rejection and/or default will weigh heaviest on Britain. Royal Bank of Scotland (RBS) and Lloyds TSB, which were previously placed on government life support, are particularly threatened.
An Irish rejection of the bailout will put substantial pressure on the still fragile British banking system, which post-bailout consolidation is now home to three of the world's five largest banks (including #1 RBS).
 |
| (click to enlarge) |
In spite of the current austerity push in the U.K., the government participated in the Irish bailout and pledged approximately $10M to "a friend in need". An Irish Times editorial, reflecting the long and conflicted relationship between these two nations, greeted British 'kindness' with a degree of skepticism.
It's would appear that the U.K. (an EU member which never adopted the euro currency) helped bailout Ireland because rescuing a neighbor is politically more palatable than what would have been necessary if Ireland's debt situation had further deteriorated: recapitalizing the British banking sector (again).
A Lonely Lady
But if at some point an Irish default is inevitable, and the Eurozone nations align to protect their euro based banking system, Britain may well find itself the odd man out. And since further bank bailouts by parliament are politically DOA, Mervyn King and the Old Lady of Threadneedle Street may be left to step into the breach to recapitalize British banks. Any such Bank of England support would be coming on top of calls from the Cameron government for further quantitative easing to reduce the effects of government budget cuts and nagging inflation. In other words, sterling would be forced to do even more at a time when the currency is already stretched thin.
It is worth briefly reviewing the history of pound sterling in the 20th century. In the 1920s one pound fetched almost $5. The country was forced off the gold standard during the September 1931 Sterling Crisis, resulting in a sharp devaluation. Following the massive accumulation of debt during WWII, the pound was devalued again in 1948. This was followed by a further 15% devaluation in 1967. Following a severe recession in the early 1980s, the pound has traded as low as $1.03 in March 1985. Overall, there is well established history of devaluation when the going gets tricky.
While the recent plunge in the euro has provided a relative respite in what had been a steady weakening trend in the pound, Britain will bear the foreign brunt of any Irish bailout rejection and/or default. Further compounding this problem is China's curious financial support to Europe's 'Club Med' nations, but not Ireland, and Britain's total debt position which stands at a whopping 5x GDP (the world's largest total debt/GDP ratio). Based on these and other factors one can make a very good argument that over the medium-to-longer term the pound will continue its long drift downwards. Several ETFs are available to hedge against this risk.
Comparing European Nations to U.S. States/Regions
The Europeans are garnering the bulk of media's debt crisis attention these days, but there is also a growing fiscal crisis underway in many U.S. states.
WSJ Real Time Economics has put together the following helpful graphic comparing the size of the Eurozone nations to U.S. States.
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