Sketch: how Britain might get its Pound of flesh in the currency wars.

Jim O’Neill of Goldman Sachs insists that currency wars are a media invention. In a way I agree with him: sovereign currency actions are merely the defences being constructed ready for the day when war breaks out. I continue to believe that currency manipulations are nothing more than thinly disguised protectionism.

Having said that, the labyrinthine strategies, conspiracy theories and complex transactions now developing make me wonder where it may all end.

Over the last two weeks, China has been buying euros. Hurrah. Except, um, they’ve also been exchanging them for dollars. It’s getting like a Ponzi scheme: buy euros and express support for the EU Tuesday, then use them Thursday to prop up the Buck. Outcome: the West is once more unable to deflate its date away. Result! Or as they say in Beijing, Lesurt.

Nice theory – but who’d buy the euros off China? And having inflated the Buck, doesn’t that just leave China saddled with lots of dollars that may one day be worth not a lot? Let’s see if we can take this madness to a logical conclusion….relax, tune in, and enjoy the ride…..

The British miracle of 2011

The Arabs start buying euros off China, the more easily to blackmail the EU into buying oil off them rather than Russia. And with the oil price still being expressed in dollars, the Arabs are buying those off China too. This brings a whole new meaning to passing the buck.

Meanwhile, Tricky Trichet at the ECB needs to diversify his portfolio away from Irish and Greek junk – and keep a decent level of confidence in his loo paper single currency. So he too buys euros. But this makes the euro rise in price, thus making EU exports less competitive. So all the ClubMed countries sell euros…which is to their advantage, because a strong euro just inflates their debt too.

This gives Mervyn King the collywobbles in Threadneedle Street, because although a weak Pound helps British exports, a euro going up and down like West Ham United reflects badly on every EU member; and despite a good lunch, the BoE boss has just remembered that we too are members. Also, he has William Hague on one shoulder wittering on about the Special Relationship (deflate US debt) and George Osborne on the other (deflate UK debt). Poor Merv has so many rocks to put in so many small hard places, he hasn’t been able to sit down in comfort for six months. But on balance, he decides to kop out of the Big Issue, and buy some Yuan in order to ensure continued growth in the Civil Service pension fund. Charity, as they say, begins at home.

At the Fed, Bernanke and Geithner get wind of this latest Limey betrayal. They also have Obama telling them that the British suck, and France is America’s new best friend. The answer – obviously – is to pile into Sterling, and thus destroy the British export drive. That’ll learn ‘em.

But inscrutable folks on high in Beijing have spotted the Bank of England driving up the price of the obviously already overvalued Yuan. Two can pray at this game they say, and start buying up Pounds from lots of willing sellers.

Non-profit-making but somehow very rich Muslim banks in Saudi Arabia and Qatar also spot the Brit infidels buying the Chinese currency. They decide that this is Albion’s revenge for the World Cup award and BaE scandal. “They will learn the sharpness of our scimitars”, say senior Arabs straight out of central casting, “we shall destroy them by buying every quid we can lay our hands on…and cut off the hand of every Arab doing otherwise”.

By lunchtime on the fateful trading day, Sterling is trading at four bucks and fifteen euros. Relieved that someone else is in the safe-haven spotlight, the Swiss pile into the Pound. By the close of business in Europe, a Turnbull & Asser shirt costs $50,000. The Chinese stampede to buy them creates 12,500 new British jobs.

Too late, the world’s nations realise that Mervyn King has bought 65% of the world’s gold, hoovered up most of the unsaleable Chinese property, declared the EU a British Protectorate, and reinstalled the British Crown as the sovereign power in Washington. African nations queue up, desperate to be recolonised. Germany offers to lose another war and two World Cups at a time and place of Britain’s choosing.

It is a Sterling Bubble says Martin Wolf, but at the vital moment, the Bank of England relieves the pressure on Sterling by buying every available Dollar and Yuan, and selling them to desperate banks and hedge funds in return for their remaining Single Currency holdings. Nigel Farage publicly burns every last euro, and George Osborne grants every European bank a licence to print £50 notes.

Everyone holding Sterling is ruined by the resultant hyperinflation, but Greater Angloland’s exports become the cheapest on the planet. The City of London is unanimously declared the winner of the currency wars. David Cameron appears on the balcony of Buckingham Palace as a mark of the Elizabeth II’s eternal gratitude for being made Empress of the World.

The alarm clock rings. I wake up.