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Well, it didn’t really crash, but it did suffer the worst one-day fall in a year. So that’s bad, but not the stuff crashes are made of.

The pound is now down by around 30 per cent from peak, and arguably that is the stuff crashes are made of. But then again, before we get carried away, sterling was grossly overpriced at peak, which in turn had a calamitous effect on our exporters.

But now, the latest falls in the pound have had the panic bells ringing out in a deafening cadence that no one can ignore.

So is that it then? Is this the great sterling crisis we have been warned to expect?

 The recent run on the pound is worse than that seen in 1967, or 1992, at least it is if you look at the data from certain perspectives. Short-sellers have built up massive bets in anticipation of further falls. Within the cacophony of screaming hysteria, a few calm voices say things like “The UK isn’t Greece,” “The budget deficit is affordable,” but their voices are like a whisper amongst a forest of wailing mourners.

So, are we in for a sterling rout? And if the pound does collapse, will this be the disaster we are told it will be, or could it be good? But first, what happened? And what were the causes of yesterday’s sell off?

At the time of writing there are 1.49 dollars and 1.10 euros to the pound. To put this in some kind of context, just six weeks ago there were 1.62 dollars to the pound. Just over a fortnight ago, there were 1.15 euros to the pound. So we have seen quite a sell off.

Yesterday’s falls were sparked off in part by the announcement from the Prudential that it is to buy the Asian assets of AIG, the giant US insurer that was bailed out by US authorities at the height of the banking crisis. In all, the Pru is forking out £35 billion in cash, and that means an awful lot of pounds will have to be sold to expedite the bid.

Markets didn’t like the sound of that.

Also, the trickle of news out of the EU that Greece will somehow be rescued by its fellow eurozone partners, meant markets were able to focus their zeal on the UK.

But the key factor seems to have been news from the opinion polls.

Horror of horrors, we may yet face a hung parliament, and that had the markets pressing the panic alarm and trying to make the resulting sound form the notes of Elgar’s funeral march.

UK gilts shot up in price, with the spread against the German Bund widening, while the spread between Greek one-year gilts and the Bund narrowed. (Although yields on Greek five-year gilts remain almost half as much again greater than yields on the UK equivalent.)

The notes of barely disguised hysteria rang out from newspaper-land. Writing in The Times, David Wighton said: “It says something about your currency when foreign exchange dealers are even prepared to swap it for the Zimbabwean dollar. Yet this was the pitiful fate of sterling yesterday as it suffered its biggest rout on the currency markets for more than a year.

“Apart from the pastings received at the hands of the US dollar and the euro, sterling also fell by more than 1.7 per cent against Zimbabwe’s much-mocked paper, completing a decline of more than 7 per cent since the end of January.”

Meanwhile, writing in the FT, Willem Buiter said: “There are good reasons for the weakness and volatility of sterling. Among industrial countries, Britain’s economic fundamentals are uniquely awful. As regards public debt and deficits, Britain’s true fiscal circumstances are about as bad as Greece’s reported situation, once we allow for the understatement of UK public debt through the off-balance-sheet accounting tricks of the past decade (the private finance initiative, unfunded public sector pensions, student loans and other Enron-like constructs).”

Those who fear the effects of a hung parliament look back to the sterling crisis under Mrs Thatcher. You may recall, this was the era when Mrs T. and her economic adviser Alan Walters seemed at loggerheads with her very own chancellor, Sir Nigel Lawson. George Soros saw the political crisis, and bet against the Bank of England, famously winning.

Of course there was no hung parliament, but the government was split. Therefore, reasoned the markets, think how bad it will be if the government is hung.

But wait a moment. As the fingers on the panic button ring out that high-pitched whistle, the sound softens. The whistle changes, it becomes tuneful and starts playing the sound of Greensleeves.

For one thing, the comparison with Zimbabwe is daft. See it in football terms; imagine Manchester United get beaten by Chelsea, and on the same day Accrington Stanley beat, say, Chester. How would we react if a journalist said of Manchester United: “It says something about the once great football team, when it secures fewer points than Accrington Stanley.” Well, we would not be impressed with the line of logic, and neither should we be impressed with the logic that compares sterling’s recent falls with the Zimbabwean currency.

And so what if we get a hung parliament. As has been explained here, half the economists in the world seemed to think that if we cut the budget deficit too fast this will be calamitous; the other half say the opposite. There is no reason to think a hung parliament, one that may perhaps mean Vince Cable becomes a cabinet minister, will be less anxious to cut the deficit than a government made up of a party of waverers.

The truth is that sterling was grossly overpriced against both the dollar and the euro for a very long time. A couple of years ago the dollar sterling exchange rate went to $2.10. At that level the UK GDP per capita was actually higher than US GDP per capita. Against the eurozone, our lack of competitiveness was destroying the economy. We had become too reliant on the City, which seemed to be just about the only UK sector which could still compete.

This situation resembles what became known as the Dutch disease, after North Sea oil pushed up the price of the guilder and made the Dutch economy uncompetitive.

For the UK, the City’s strength pushed up the pound, hitting our exporters.

The general consensus seems to be that for purchasing power parity, the dollar–pound exchange rate should be about $1.60. For the euro it should be mid 1.20s. So, okay, at current prices the pound is cheap. But not that cheap.

But after years of battling against cheap currencies, the pendulum has now swung in favour of our exporters. They deserve this help.

In recent weeks, the crisis in the eurozone with the so-called PIIGS – Portugal, Ireland, Italy, Greece and Spain – had raised the alarming spectre of a crash in the euro. There seemed to be a real risk that sterling would appreciate, killing off exporters’ newly-found advantage.

The current crisis should help cement the great export-led recovery.

That is not to say there aren’t risks.

Should the pound fall much further, then things will start looking nasty.

But those who knock the UK seem to overlook one fundamental truth. The real snag today is not just with the UK, it is global.

Globally, demand is not matching supply. Globally, savings are too great. Globally, the boom saw the build up of massive imbalances. And too many economies are trying to recover via exporting.

The dollar remains too expensive. So the fundamental imbalance remains in place. But a fall in sterling was always going to be a vital part of the global readjustment. The UK economy actually did quite well during the 1930s, thanks to our exit from the gold standard.

The real nagging worry, however, is not with sterling, it is with the dollar. To correct global imbalances, the dollar needs to fall too.

But Uncle Sam’s creditors don’t want that to happen.