Politics, Not Money Creation, Drives UK Exchange Rates

A recent suggestion that the UK's national debt poses no risk was met with opposition on social media, citing concerns over its impact on international exchange rates.

The author of the original suggestion employs modern monetary theory (MMT), which explains how the country's monetary system works. MMT is not radical or speculative but rather a straightforward explanation of what has been happening since the gold standard was abandoned in the 1970s.

To address concerns over exchange rates, the author analyzed data from Claude AI, plotting the sterling exchange rate against both the US dollar and euro from 2004 to 2021. The results show that major changes in exchange rates are primarily caused by politics rather than money creation or quantitative easing.

The analysis revealed that the value of the pound rose against the dollar after 2004 due to a boom in UK stock markets, which attracted additional funds into the City of London. However, the 2008 crash and Brexit fundamentally altered the exchange rate, causing it to decline.

Notably, money creation from 2010 to 2016 and again from 2020 actually strengthened the exchange rate against both currencies. This challenges the notion that money creation harms the value of the pound.