Don't Blame Sliding Sterling on the Referendum
My prophecy department has suggested that I should write about the fall in the Pound Sterling. I feel very much entitled to do so as have been standing on the platform with my watch in my hand, drumming my fingers and waiting for this particular long-expected event to come steaming in, for some time now.
Rather more than three years ago, I wrote the following:
‘..One of the things which constantly strikes me about modern Britain is that there must be many people who would actually quietly like to see the collapse , or at least the shrinkage, of the currency. They cannot hope to pay off their debts in any other way .The same is true of the government, which has no idea how it will manage its deficit, and borrows more each day, an action no less stupid than Weimar Germany’s incessant printing of worthless money. How convenient a large inflation would be for them.
‘Could anyone do such a thing deliberately? Possibly. The book (‘When Money Dies’, which I was reviewing at the time) quotes but does not endorse suggestions that both the Bolsheviks and some of the Warsaw Pact states deliberately used hyperinflation to destroy the hierarchies, the certainties and the middle classes which stood in their way. I have seen no proof of this, but it is not incredible, and we all know John Maynard Keynes’s attribution to Lenin of the (justified) belief that if you wish to destroy a nation, you first debauch its currency. It is also a very good way of destroying the power and influence of the independent middle class, who are the mainstay of any truly free and law-governed society, and the reliable regiments of conservatism.
‘But of course those who are in charge of all these things are not Bolsheviks.
‘They are ordinary politicians, far too stupid to be so well-organised or directed. It is just an accident, a bungle, an unintended consequence by people too dim and short-sighted to understand that bills have, in the end, to be paid somehow. I am not sure whether that makes it any better, though. The results will still be very bad.’
For full article see http://hitchensblog.mailonsunday.co.uk/2013/05/when-money-dies-the-horrors-of-inflation.html
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And also this :’ It looks to me as if the government has now decided to inflate its way out of the crisis. The new Governor of the ‘independent’ Bank of England has been given the nod that he may carry on with more ‘quantitative easing’, and the Budget seems to be offering help with mortgages to people who can’t really afford mortgages, which will create a new bubble of unrepayable borrowed money, possibly in return for a short-term boost to the economy. Everyone knows this is a bad idea, after what happened in the USA when they lent mortgages to people who couldn’t repay them. It is not even a kindness. Why do they do it?
It’s all pretty desperate, as one might expect from a government which never had any ideas in the first place. As far as I can find out , Vladimir Ilyich Lenin didn’t actually say ‘The surest way to destroy a nation is to debauch its currency’. Maynard Keynes rather hesitantly attributed it to the old monster. But it’s true, whoever said it. Since Gold-backed currencies gave way to paper, man has had to have faith in banknotes – so much faith that perhaps he hasn’t had the strength to have faith at the same time in God, who is considerably more credible than the average Cabinet or Central Bank.
He has to believe absolutely that the pretty blue, green or pink beer-token in his wallet is worth the goods which he purchases with it, and so does the shopkeeper who accepts it in return for those goods. He has to believe with all his heart that the columns of figures in his bank account stand for real value, along with the price he thinks he can get for his house if he sells it.
Once he ceases to do so, then money dies.
For full article see here http://hitchensblog.mailonsunday.co.uk/2013/03/inflation-the-gods-of-the-copybook-headings-speak.html
Well, this is coming to pass, and it is most provoking to be told that it is ‘caused’ by the referendum vote to leave the EU. No doubt this event was the trigger for the rapid slide of Sterling. But that was because the markets were waiting for such a trigger, and no doubt a lot of currency dealers, by gambling on a ‘Leave’ vote, did well in the money markets by betting on a post-referendum drop.
Sop now it has become established wisdom, and it may even be that, because the media are used by the markets to bring about little jumps and falls in the ratings of stocks or currencies, we will now see a constant link between the two, with each stumble and shudder along the road to exit being followed or accompanied by a lurch in the currency.
But this is correlation, not causation. Those with savings have known for years that inflation has been eating into their carefully hoarded stores of wealth, pensions included, thanks to the virtual abolition of interest and the repeated raids on pension schemes by Labour and Tory chancellors, which have nearly killed off what was once quite a solid sector of the economy, and left a lot of people wondering if they’ll die before the money runs out, or the other way round. . The message from investment advisers has been ‘put your money in something risky if you want to earn anything’. The old idea, that you could make a steady if modest income by just leaving the money on a reasonably safe deposit, is gone, I think for good.
But now those without savings, those living from hand-to-mouth and those (almost everyone under 60) with non-mortgage debts, must experience it too. For them it is a much more mixed experience. Their debts will visibly shrink, which they (and the government, whose debts will also shrivel visibly) will enjoy. But a lot of prices will rise, because we now import so much, and foreign holidays, which so many now regard almost as a right, will become swiftly costlier (perhaps it is time for British holidaymakers to sample the cheaper joys of the Crimea) . Our few export industries will be delighted. Those which rely on imported goods for their raw materials and fuel will not be. My guess, on the basis of what I think I know about our economy, is that a lower pound will hurt us more than it helps us.
Having experienced Harold Wilson’s famous 1967 devaluation (from $2-80 to £2-40) I am trained to laugh at political claims that it won’t hurt the money in your pocket. But in those days the government took direct responsibility for it, and was blamed for it. I wasn’t born in September 1949, when the Attlee government devalued from $4-03 to $2-80, it was a much more savage loss. But the country was well aware ( as it isn’t now) that it had run out of money and credit, and the humiliation just had to be absorbed. Fear of an even more humiliating repeat forced the Tories to abandon the Suez adventure seven years later.
Almost exactly 18 years before, in September 1931, Britain had come off the Gold Standard, Winston Churchill’s disastrous equivalent to the ERM crisis, unsustainable because we were broke and in debt, which we had not been in 1914 when he had helped get us into the Great War that ruined us financially. At that time the Pound sold for $4-87, roughly the same as the just under Five Dollars standard before 1914 (it is amusing to recall that transatlantic travellers reckoned in those days that the old English shilling was the exact equivalent of the American Quarter, which it also closely resembled in size and weight). During the US Civil War, in 1864, the Pound brought in almost ten dollars, peaking at $9-97. That’s war for you, so it is surprising that during World War One, while Britain was piling up a huge unrepayable (and still unrepaid) debt to the USA, the rate did not sink below $4-76, and fell only to $4-43 when hostilities ended, reaching $3-66 in 1920 before being dragged up again by the return to the Gold Standard.
During the 1930s the dollar-pound rate fluctuated between about 3-15 to above 5-00, but in 1940 was fixed at just above four dollars for the rest of the war.
These figures, like the old rate between Sterling and the abolished Deutschemark, always seem to me to give a true idea of how we were really doing against comparable economies in these periods. The answer is, increasingly badly. But the current account deficit, not the same as the trade deficit or the Treasury deficit, is now about as bad as it has ever been, and I can think of no peacetime circumstances when the fundamental features of the economy have ever been so bad, and had so little hope of sustained recovery. To blame the pound’s fall on the referendum is absurd.