Should the UK have a policy on the Pound’s exchange rate?

 

One point of agreement between the more radical of Post Keynesian economic thought and the mainstream is that there should be little or no intervention in the exchange rate and that the pound should be allowed to float freely. However, whilst many Post Keynesian economists would argue this way, they would also not be in favour of being quite so concerned about the budget deficit which is behind the austerity drive favoured by the mainstream.

An exchange rate policy need not be in the form of an old fashioned peg between the pound and the dollar, or even a basket of currencies, at any one particular rate, but it could be that government tries to ensure that imports and exports are always close to being in balance and always is prepared to nudge the exchange rate either way to try to achieve that. At present the imbalance is approximately 4% of GDP which puts the UK as a whole into debt. Either the government or the private sector has to cover that. There’s no point there being a squabble over just who that has to be. But that is where we are now in our economic thinking.

So what are the options?

We can have a policy on the government’s deficit, the trade deficit and the exchange rate. We can have a policy on none of these or any other possible combinations of policies we care to propose. What we do have, currently, is a policy only on the government’s deficit (meaning it needs to be turned into surplus) which is not only not the best choice – it is just about the worst possible. We either should have a policy on all three or no policy on any.

As it is, we are just chasing our tail, and not really doing anything but put the economy into a tailspin when we try to reduce the government’s deficit by cutting spending and increasing taxes. We need a smarter approach and to look at the problem from another angle. We also have to ensure that we make a rational choice and not just indulge in wishful thinking. We cannot, for example, choose that the pound should be as high as possible, and the government’s deficit or the trade deficit should be as low as possible or even be a surplus. The numbers simply do not stack up.

One way to achieve a higher pound is to ensure that the UK  is exporting goods and services that the rest of the world wishes to purchase and at a price which it is prepared to pay. Another way is to sell gilts and pay interest on them. At present, there is a good case to be made that the interest is very low on those gilts and we should sell as many as possible. If the Government does that it has to then recycle the proceeds into the economy by deficit spending.

So we need to understand our options and decide what we would like to do. The economic principles are nowhere near as difficult as many media and political mainstream economic pundits try to make out. If Liberal Democrat economic spokespersons explained the situation as it really was, they would not only get my vote at the next election but they would get many more too. Most voters are a fed up with the spin we’ve had from both left and right on the issue of ‘austerity economics’.

* Peter Martin is not a LibDem party member but has voted LibDem in previous elections.

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10 Comments

  • Nope

  • Christopher Haigh 22nd Feb '16 - 6:06pm

    I agree Peter. The globalised free market crash in 2008 proved to be the perfect opportunity for George Osbourne to discredit labour economic competence and implement austere right wing Tory/Libertarian policy of minimal state involvement in the economy. Unfortunately it seemed that Nick Clegg, David Laws, Danny Alexander were just as enthusiastic for this as the Tories themselves ! The party seemed to have ditched Keynesianism completely making it look right wing in the eyes of the electorate.

  • Eddie Sammon 22nd Feb '16 - 7:15pm

    I don’t like exchange rate targeting. For me, monetary policy is about interest rates and inflation. Anyone can add a or take away a decimal point to/from the pound and all you would get would be a load of admin work and contract re-writing. Some people have long-term fixed rate contracts. You can end up with currency wars too when nations with a lot of bonds or assets in that currency respond.

    I feel quite strongly that monetary policy is not about exchange rates and I’ve never really liked it when people analyse them too much. Interest rates on the other hand, are very important.

    Yes, it matters when the pound drops or rises, but when the pound drops because Boris says he wants to leave the EU, then the answer is to win the argument, not start playing with the currency.

    Best regards

  • Eddie Sammon 23rd Feb '16 - 7:10am

    Petermartin, you’ve lost me. Interest rates are 0.5% and we’ve had three rounds of quantitative easing, what are you proposing to boost exports? More quantitative easing?

    We need to be careful about currency devaluations because of fixed rate annuities and the much larger market of fixed-interest securities full stop. It can just create currency wars.

  • Eddie Sammon 23rd Feb '16 - 6:50pm

    Hi Peter, you seem to know more than me about this. Why if a country is a net-exporter, such as Germany, do they have to buy bonds to “balance the books”? Can’t they just accrue currency reserves?

    Regards

  • Eddie Sammon 23rd Feb '16 - 8:09pm

    Thanks. Peter, I agree that if we have a trade deficit then we need to finance it, so that’s not good, but I just think the way to eliminate it is to build higher quality products.

    Unless there’s evidence that other people are manipulating our currency, then I don’t really see the need to intervene in that area, besides with interest rates, which are a way to influence the money supply without increasing or reducing the monetary base (the physical and digital stock of money).

    Are you talking about changing the monetary stock/base? Or perhaps just buying other people’s currencies to weaken our exchange rates?

    Regards

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