Just two years ago, I remember sitting in a meeting with people in our industry when one lady told us she had just returned from London, England. While her general message was about how expensive it is to live in London, one comment stayed with me: “The average martini at a London bar costs the equivalent of about US$20,” she told us. On a subsequent trip to London, I confirmed this finding several times.
Last week, the British pound hit a new 15-year high against the U.S. dollar. One pound is now worth two U.S. dollars. And that $20 martini just became a $30 martini in American dollars.
The jump in the value of the pound happened after a government office in the UK reported inflation unexpectedly spiked in March. This led financial markets to predict higher interest rates in the UK, thus pushing up the pound.
In retrospect, Britain made the right move when it left the European Exchange Rate system and declined to change its currency to the euro.
Going back to the beginning of the industrialized world and throughout history, the country with the strongest currency has usually been the world’s major force. Prior to World War II, Britain’s navy was the awe of the world. But during World War II, America’s military strength became obvious. The U.S. became the new superpower… and with that the value of the American dollar reigned supreme.
Today, the world has changed because of technology and globalization. America’s military is not any weaker because of the falling value of the U.S. dollar, nor is Britain’s army any stronger because of the rising value of the pound. In 2007, because of the rapid pace of globalization, the strength of a country’s military power is no longer tied to the value of its currency. (Look at Canada: One of the best world performing currencies of the past three years — and it practically has no army!)
You could say a world awash in liquidity is causing $20 martinis to move up to $30. More obviously, the U.S. dollar continues to deteriorate because of too much debt in America and a slowing U.S. economy. I expect this trend to continue for the foreseeable future.