ON Monday the pound sterling fell to its lowest value ever against the US dollar. Back during the American Civil War, you could get $10 for a pound. It stayed around $5 for the first part of the 20th century.

Even in the 1960s, you got around $2.50 for a quid. Now the pound is headed for parity with the greenback – a sign that investors and financial institutions prefer keeping their money in America rather than Britain.

The pound has lost over 15 per cent of its value (and with it the value of British assets, factories and property) since the start of the year. Why?

First, British inflation is the highest among the G7 industrial nations, at around 10 per cent per annum. Anyone holding investments in Britain is therefore losing wealth fast. So it is better to move your assets abroad. Chancellor Kwarteng’s mini-budget risks accelerating inflation by pumping up demand. Hence the sudden rush to sell pounds.

READ MORE: Treasury announce Chancellor Kwasi Kwarteng will outline fiscal plan in November

Second, British interest rates are lower than America’s. So you get more putting your cash in a US bank than keeping it in the UK. The Chancellor is leaning on the Bank of England to keep interest rates down.

But there is another factor at work in the collapse of the pound. This has to do with something called short selling. This is where speculators borrow pounds and sell them below market value. They are betting this will panic the currency markets into selling more pounds and lowering their value even more. The speculator can then buy back pounds ultra-cheaply, return the borrowed pounds, and pocket the difference.

Here's an example. The financial spiv borrows £100 pounds when sterling sells at one for $1.50. But the spiv sells cheaply at $1.40 netting $140 in total. If the spiv guesses correctly, and the pound falls further to $1.20, they can sell their $140 for £116.7. The speculator can then return the original borrowed £100 and net a profit on the deal of £16.7. All by selling the pound short – literally and figuratively.

Some countries ban this kind of gambling. During the 2008 financial crash, short selling was banned in America, Switzerland and Denmark. Some economists defend short selling on the grounds it allows speculators to ferret out weak currencies or company shares, and so shift capital to more productive use. But short selling also destabilises markets and diverts capital into naked gambling.

There is no doubt that there has been considerable short selling of the pound. The main culprits are financial institutions called hedge funds. These take in deposits from wealthy clients. This money is used in the main to “short” currencies, government bonds and company shares. At the same time, the hedge funds “hedge” their financial bets by matching one gamble with another. It is like spread betting in horse racing. You bet on a range of outcomes, calculating that one will earn a lot of money and cover losses on the other bets.

One of the most successful UK hedge funds is run by Crispin Odey, who is reputedly to be worth personally nearly £1 billion. Odey is a Tory supporter and helped fund the leadership campaign of Boris Johnson. He is also a Brexiteer who gave substantial donations to various Leave campaign bodies in 2016. After the EU referendum, Odey shorted the pound and made a reputed £300m. In other words, despite being a Brexiteer, he bet on UK trade deteriorating after leaving the EU and the pound falling in value against the dollar and euro. Hedge funds thrive on economic chaos because it allows them multiple bets.

The new Chancellor of the Exchequer, Kwasi Kwarteng, originally worked for Odey as an investment analyst. In other words, he worked out which companies to short sell. Odey continued to pay Kwarteng a financial retainer after the latter was elected to Parliament - justified as providing “political advice” to Odey’s hedge fund company. Just what sort of advice is not known but presumably covered the internal Tory civil war over Brexit and its likely impact on the pound.

This year Odey’s main hedge fund has soared in value by 145 per cent after short selling British government securities. Odey is betting on massive inflation, which reduces the value of these bonds. This hardly shows confidence in the ability of his protégé Kwasi Kwarteng to manage the economy. Odey believes inflation is here to stay – the very opposite of what the Chancellor thinks. The difference is that Odey is betting billions on the outcome.