"The UK economy looks battered. People don't like the outlook. They are showing their feelings by selling the Pound." Strategist Jeremy Stretch quoted in the Sun. Explain this quote. Does the exchange rate matter? Can and should the UK government do

Abstract

The current UK economic climate is uncertain. Gross Domestic Product (GDP), used as a measure of National Income has only recently in the fourth quarter of 2009 inched out of the negative and into positive growth of 0.1 per cent. This is after a long recession which began in the first half of 2008 brought on by the banking crisis due to sub-prime mortgage loans. With National Debt at its highest ever outlook for the economy is looking doubtful. Firms are unsure about whether to invest or not in local businesses, consumers are unsure about whether to start spending again or not (as opposed to saving) and people in general are anxious.

Strategist Jeremy Stretch claimed that "the UK economy looks battered, people don't like the outlook. They are showing their feelings by selling the pound" signals these feelings of insecurity. There are several possible explanations for this phenomenon.

As a result of the banking crisis banks are less willing to lend money due to worries that there will never be a return on the investment. Consumers are less willing to borrow and spend as a lack of confidence has caused the savings ratio to go up. Combined, these two points indicate a fall in the demand for the pound.

This lack of demand for credit means that interest rates also fall. This was a measure taken by the Bank of England to discourage saving and encourage spending. On the other hand all this may have only achieved to make it even less profitable for banks to supply more credit.