Chapter 61: The Beginning of the ’90s (4)
To summarize everything I’ve said so far:
Q: If Germany raises interest rates, doesn’t that mean the UK has to raise theirs too, and wouldn’t that destroy the UK economy?
A: Yup. That’s exactly what happened. Or to be precise, they surrendered right before it collapsed.
The dopamine- and money-addled hedge funds bet on the UK pulling out of the ERM—and thus began one of the most legendary short-selling episodes in financial history: the assault on the British pound.
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Of course, the UK didn’t drop out of the ERM right away. In fact, they had only joined it about three months earlier.
—Wait, then did they join knowing Germany would hike rates?
You could ask that, sure...
But honestly, the UK probably didn’t expect Germany to be this shameless. And since national policy decisions require months of preparation, the agreements had likely been settled in advance.
To their credit, the UK, proud former empire that they were, held out for quite a while.
Right now it’s January 1991, and the short-selling event—the pound crisis—doesn’t happen until September 1992... so the Bank of England manages to hang on for 20 more months.
This is always the problem. Everyone knows the fall is inevitable, but the exact timing is everything.