In my view, no other global currency is as flagrantly overvalued as the British pound. Despite a rapidly deflating real estate market in London, including most commercial properties, consumer confidence at an 18-year low and tepid export growth, the pound remains relatively strong against the dollar.

Since the dollar began its multi-year bear market in 2002, the pound has barely corrected. Though sterling has declined against the euro, it remains expensive versus the dollar.

Over the next 12 months, the pound will probably suffer its worst decline versus the U.S. dollar and other major currencies since its humiliating exit from the European Exchange Rate Mechanism or ERM in September 1992. That day, George Soros of the legendary Quantum hedge fund, earned over $1 billion dollars betting the pound would devalue.

Historically, the British and American economies tend to perform in synchronicity. Both Anglo-Saxon markets are large trading partners and tend to follow the same economic cycle; though the United Kingdom trades heavily with the rest of Europe, its economic performance is more closely correlated with the United States. British companies are the largest foreign investors in America. After Canada, U.S. multinationals are the largest investors in the United Kingdom.

Britain is home to a spectacular real estate bubble, mostly centered in London. Other British cities, though not as expensive compared to London – a major global financial center, are nevertheless deflating. Real estate is now unaffordable to most British homeowners and foreclosures sit at their highest levels since the last property bust in 1989-1990. That’s exactly what’s happening in the United States as real estate continues to hemorrhage.

That brings us back to the pound. This currency should be trading at least 10% lower vis-à-vis the dollar and lending rates should be closer to 3% and not the current 5% rate. The Bank of England, in the midst of a credit and real estate crisis, should abandon its inflation fight and cut rates sharply. Liquidity throughout the British banking system is dodgy at best and most banks are still reluctant to lend to each other in overnight markets.

The British banking system is arguably the most fractured in Europe. Banks have been hit hard by escalating write-downs tied to housing losses and mortgage-backed securities. Credit card installment debt is also coming under pressure as more banks fess up to consumer loans going bust. It’s not a pretty picture. Last September, Northern Rock plc, a mortgage lender, effectively saw a run on its deposits and was bailed out by The Bank of England.

England needs growth now, not an inflation fighting central bank. Like the United States, England is torn between soaring food and energy costs and accelerated deflation or falling prices in real estate and declining bank credit.

We all know the country’s poor inflation fighting track record. The pound, along with the dollar, is a pathetic excuse for a currency. If interest rates continue to remain elevated relative to the contraction of domestic credit and declining real estate values, the United Kingdom will eventually suffer an economic recession – perhaps a hard one.