Thursday, 13 October 2016

Why the sudden fall in value of the pound is nothing to worry about


'The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational.' Miss Prism in "The Importance of Being Earnest"
My friend the writer Mark Griffith explains why the recent vertiginous drop in the value of the pound is nothing to worry about.

It's something similar to the big devaluation in 1993.  

That too was treated as a disaster, and used by many as an excuse for saying the Tories had "failed" and it was time to elect the ghastly Tony Blair four years later.

The devaluation happened in a similar way too - sterling was ejected from the ERM - a mechanism preparing for the enormous mistake of the single currency, the euro. 

Economists had long warned that currency convergence around the Deutsche Mark (and by extension, the euro itself) overvalued currencies, depressed growth, and raised unemployment. France's appalling 10% unemployment level today is largely due to the euro under this effect. 

Once sterling got ejected in 1993, it dropped sharply (producing cries of panic very similar to today) and then an export-led boom started that lasted 15 years (as a side-effect creating the illusion that Blair and Brown were competent).

That boom was composed of raised growth and falling unemployment and lower imports. This second step is the second part of unwinding the currency overvaluation effect of membership in a relatively closed tariff bloc. Sterling has fallen to wipe out the effect that future tariffs might have on raising the price of British goods going into France, Germany, Holland etc. The currency markets are factoring in the worst possible Brexit deal.

This means that if we get a slightly better Brexit deal than the worst possible, sterling will bob up a little, to somewhere between today's value and the value a year ago.

The euro was/is of course an incredibly stupid idea, as some of us have been warning for decades, but in practice it's hard to tease apart the destructive effect on members and neighbours of the euro (the euro also harms countries not in the euro zone) and the destructive effect of the EU itself, with its regulatory burden and expensive raising of tariffs against non-members who'd like to sell us cheap goods.

Britain - being a more open and outward-looking trading culture than France or Germany - reacts faster to problems, so we get the pain first. However, this is like going to the dentist sooner when it hurts a bit, rather than later, when the agony becomes unbearable.

France and Germany are countries that put off going to the dentist as long as possible, and the temporary costs to Britain of leaving the EU will be minor compared to the long-term costs to France and Germany of trying to hold the whole cardboard castle together. The EU is a slow-burning disaster in the making, and it has been increasing unemployment, depressing growth, and boosting support for xenophobic parties like the Front National or the former Vlaams Blok for fifty years now. In the 1990s former EU bureaucrat Bernard Connolly warned that the EU's dreadful design would eventually _cause_ rather than prevent the next west European war, and I think he's right. They should have all joined EFTA in 1970 - much smarter.


  1. ... sudden fall in value of the pound ? I think it was about the same value a year or so ago


  2. Michael White of the Guardian commented on Twitter

    Yes, a cocky little piece, it's partly right. Like most such events sterling's fall has winners and losers. The poor usually lose

  3. Every time I read about stupid political decisions Keynes comes to mind: the best way to destroy a country is to debauch the currency, for it unleashes forces not one in a thousand can comprehend. Once a political problem moves into the currency and bond markets then disaster is assured- only the size is open to debate.
    History is littered with examples of monarchs-or other political leaders- that couldn't handle monetary matters. I believe that, apart from the above point by Keynes, there are two other characteristics of monetary matters that drive politicians crazy: a) they give an order and there is not even the APPEARANCE of obeying it b) there is NO OBVIOUS POLITICAL ENEMY involved, as bond and currency markets self organize with ease. Appearances are very important to politicians. If their orders are openly flouted then their power (for which they live) is non-existent. However it is the lack of political enemies that is probably the worst. Disobedience by political opponents is understandable, even occasionally welcomed, for it gives the opportunity to exercise power and the people understand and often enjoy the spectacle. However, with nobody to attack, monetary problems create a picture of impotence. It is this picture of impotence that will sink the T May government, especially if is is compounded by obvious deterioration of global status, eg by IMF statements about kicking sterling out of SDR. Or heaven forbid like in 1976 the UK approaching the IMF for a contingency fund because it has lost the confidence of the markets and cannot cover it's defecit.