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Monday, 3 June 2013

What the devaluation of the One Pound means to you

The log-graph of German inflation
in the inter-war period
Each line on the vertical access is
10x the value of its preceding
Over the weekend the government and banking world has stated its intention to continue to de-value The Times reports,
'The incoming Bank of England Governor may attempt to depreciate sterling by as much as 15 per cent against a basket of currencies as he seeks to help British exporters to tap into foreign demand', Mike Amey, the head of sterling portfolios at Pimco, said.
The contrarian view has oft been reported in the Telegraph and the Financial Times. But none of them actually explain to you what exactly devaluation is and what it means to you.

In short a 15% devaluation of the pound means that the price of everything will increase by 17.5%, everything not produced in the UK at least.

But that may not be the full story, looking at the fx rate between the GBP and the USD for the past ten years shows that the pound has already been devalued

And against the Euro

But the story is even more pronounced if compared to a currency which has not been actively de-valuing such as the Thai Baht

Devaluation is simply a euphemistic way of saying 'you are going to be paid less and everything will cost you more'. Your savings and investments which are denominated in pounds are going to be worth less and the value of your home which is also calculated in pounds will also decrease. Most importantly your benefits including pension are not going to be increased to compensate.