Nov 02 2007
The flight of the pound and the plight of the dollar
The dollar keeps on falling. The policy is working. US exports are becoming more competitive, and US export sales are improving. This week Rolls Royce announced it was switching some jobs from the UK to the US. The US needs it currency to fall more against the currencies of super competitive Asian producers, but the fall to date is going to help its balance of payments substantially.
The UK is in a more difficult position. The British authorities decided to keep interest rates higher for longer to combat an inflation which mainly existed in the incompetent UK public sector. The credit crunch is now worse in the UK, and at the same time exporters face a more difficult time selling with the dollar low and competing against the dollar area producers. The UK government ignores the large balance of trade deficit, just as it ignores the large public sector deficit. Its failure to stipulate better use of resources in the sprawling public sector, or to control the growth of inflationary spending in the public sector, is taking its toll.
Markets this week have remembered the banking difficulties associated with the credit crunch. On other occasions they look through the market turbulence to the lower interest rates and the continuation of world growth sustained by the Asian economies. The Fed helps banks out with liquidity, as does the ECB. It is just the UK authorities who seem unable to comprehend the credit crunch and apparently do not wish to gain proper control of short term interest rates again. It is symptomatic of a government that hasn’t a clue how to run the vast public sector or how to improve public sector efficiency and effectiveness. The price we all pay as a result is higher interest rates and a higher exchange rate.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
JR: “The British authorities decided to keep interest rates higher for longer to combat an inflation which mainly existed in the incompetent UK public sector.”
Inflation is a direct result of government policy. You have rightly said in previous articles, that inflation has been kept low by cheap eastern imports.
This has allowed the government to borrow and print more money that directly leads to inflation. Currently the money supply in the UK is running somewhere between 10 - 15% pa, given that the economy is barely growing that leads to an effective devaluation of sterling inside the sterling zone, actually inflation.
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I really do wish the Bank of England will reduce the interest rates, as it has been proven to work elsewhere. And they, including the likes of Kate Barker, should stop talking down the housing market.
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At last someone who’ll talk about the balance of payments crisis, the huge public sector borrowing figures and inflation being in the public sector. Why do you think it is that the BBC can’t bring themselves to report these figure anymore ?
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Scene: Politician puffing on pipe: The dollar in your pocket will not be affected…
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I’ve never been in favour of floating exchange rates. If we trace the chronological history of our economy we see a great decline in our collective economic prowess as a nation after the end of Bretton Woods.
An answer to currency instability would be to establish a world currency unit and have that pegged to national currencies. Rather like the gold standard a world currency unit would serve to discipline the markets and help bring about equillibrium in pricing.
The Fed appear to be on a damage limitation exercize and are adopting an ad hoc approach to the knock-on effects of the sub-prime crisis. A plummeting dollar may kick-start the export side of the economy but a falling dollar on top of rate cuts also creates the potential for inflation.
John, do you think we are currently in a kind of ‘currency power vacuum’ as the Euro begins to usurp the dollar around the world?
Reply: No I do not think we are in a currency power vacuum. We are experiencing the frictional problems of adjusting to much more competitive economies in Asia, especially China, who kept their currency at a low level for a long time to allow them to accumulate large quantities of dollars which now gives them great buying power. They are using this to buy up the world’s commodity assets. I do favour floating exchange rates - the adjustments they allow happen more quickly and with less underlying economic damage than under a single currency or with fixed rates.
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APL: “Inflation is a direct result of government policy. You have rightly said in previous articles, that inflation has been kept low by cheap eastern imports.”
Gordon Brown has relied on the strength of sterling to mask underlying inflation. It is his one-trick-card. If sterling were ever to depreciate significantly and the BOE baulk at the idea of raising interest rates to support the currency we can be sure that Gordon Brown would step in and use his emergency provision clause to act ‘In the national interest’ and overrule the BOE to raise interest rates.
Gordon Brown desperately needs to keep sterling as strong as possible. Rather than supporting the supply-side to achieve economic growth Brown has gone down the inflationary route and has supported demand through borrowing and spending. This has only been made possible through having a strong currency. However Brown can’t keep this smoke and mirrors economy going forever.
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