The ability of a gyroscope to remain stable no matter the forces at play around it has immense value.
That perpetual stability – rain or shine, chaos or serenity – has allowed engineers to create ever more complex systems around gyroscopes which we continually reap the benefits from. If you tried to estimate the amount of wealth that has been unlocked through the creation of the gyroscope way back in the 1850s, you’d be looking at a figure in the trillions of pounds.
Today, we rely on gyroscopes all the time. They’re in all the satellites we use for GPS and communications, they’re inside all our phones and tablets (and even some laptops now).
They’re in cars now, and of course they’ve been in planes for a very long time. Good luck flying anywhere without them (though I admit that’s maybe not high on your list of priorities right now); the standard dashboard in a glider has three flight instruments which rely on gyroscopes, let alone in a powered aircraft.
Just like many technologies we enjoy in our private lives today, much of the development of gyroscopes was driven by their military applications, as gun and bomb-sights aboard aircraft, and later in guided missiles. There were numerous Nazi and Soviet spy plots to steal the designs for the advance of their respective regimes.
Not much has really changed since then. Ever more advanced gyroscopes are still being developed, for the perpetual stability they provide is still of immense value to engineers. And as before, they have considerable military applications and are a target of espionage. Just a few years ago an agent of the Chinese Communist Party was sent to prison in the US for attempting to steal the blueprints for a silicon gyroscope being developed for applications in “micro-navigator” and target location systems.
By why am I going on about gyroscopes today?
It comes back to that stability – that perpetual stability – in gyroscopes that engineers can build great works upon. And similarly, there’s a financial gyroscope that economies can use to build and prosper upon – though as we’ll explore, there aren’t many of these going around and this will be revealed more and more as the economic disruption we’re watching continues.
You see, the world is currently experiencing a period of deep economic instability… and compared to most of the other major and developed economies in the world…. the UK is one of the only countries to have an economic gyroscope.
This is a crucial advantage, which tips the scales in favour of the UK prospering in future and it’s something those in the UK should draw comfort from in these trying times.
Let me show you what I mean.
Gyro-sterling
A couple of months back my colleague Nickolai Hubble made an observation which should be obvious, but which I’d never thought of before, and I hadn’t heard anybody else speak about it either.
The UK is the largest developed economy in the world with its own currency.
While nobody seems to notice this, it’s a factor that is pretty hard to overstate.
When you’re not on a gold standard, and you let your exchange rate float against other currencies, the value of your currency fluctuates against those of other nations in line with the health of your economy.
This works as a rebalancing mechanism: during economic uncertainty and downturns the pound gets cheaper, which attracts foreign investment and bolsters your exports, bringing the economy back to health.
Conversely, when your economy is doing well, the currency strengthens. This reins in booms, encouraging investors in the country to invest elsewhere, as assets abroad look cheap relative to those at home. This current of currency going abroad brings the currency back down in value. Importers are restrained, and exporters of British goods are cut some slack.
Other large economies in the world do not have this luxury. They do not have a currency gyroscope to automatically rebalance their economies. Instead, the value of their currencies is blown about by economic and financial factors abroad – this can make their own economies uncompetitive, prolong recessions, and cause unsustainable booms which lead to busts.
I’ll show you a couple now, and explore more of this tomorrow.
Traitor currencies
1. The US dollar
We’ve written a lot in recent weeks about how the US dollar functions as the world’s reserve currency.
Due to the dollar’s use in foreign trade, in commodity pricing, and in international finance, the US dollar’s supply, demand and thereby value are not dependent or reflective of the US economy.
As a result, the US dollar does not weaken during economic crises – to the contrary, it gets stronger. We saw this in 2008, where though the epicentre of the crisis was the US housing market – and thus a US problem – the dollar became more valuable relative to other currencies. In a textbook scenario, a stronger currency should mean a stronger economy, but in reality the opposite was true.
Though the US economy was imploding, the paper money issued by its government was becoming more valuable relative to the paper money issued by other governments, because so much business is done abroad in dollars by foreign companies, investors, and governments.
This made US businesses less competitive during the recession, as foreign companies charged in a cheaper currency.
2. The Japanese yen
Due to the low growth in Japan following its bust in the 80s, the Japanese invest heavily in other countries. When there’s a crisis in international investment markets, the yen tends to rally as Japanese investors bring their money home. This significantly strengthens the yen, which creates deflation and worsens economic downturns.
To make matters worse, the strengthening of the yen during downturns has caught the notice of international investors who buy the yen when they fear a downturn, expecting it to appreciate in value – this only further strengthens the yen, making matters worse for the Japanese.
We’ll look at the other “traitor currencies” and their economies tomorrow. But in the meantime, amid this time of great flux, we should take comfort in the fact that the UK has a loyal servant by its side – pound sterling. it will adjust in value to whatever our nation needs. No matter how the world around it spins, it will automatically adjust to keep our economy stable.
All the best,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates