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Roger Bootle: Is any exchange rate too low for him? (Heinrich-Boll-Stiftung CC BY-2.0)

Good news and bad news are generated endlessly by the foreign exchange markets. Some currencies go up and some go down, and newspapers boo and cheer. Almost invariably, the tacit assumption of the headline writers is that a fall in the exchange rate is bad news. The pound’s fall since the EU membership referendum on June 23 is taken as a blot on Brexit, just as its tumble in 1992 after its expulsion from the European exchange rate mechanism (on so-called “Black Wednesday”, September 16) was seen long afterwards as a national humiliation.

In a recent pamphlet from the Civitas think tank about what they term The Real Sterling Crisis, Roger Bootle and John Mills turn the newspaper stereotype on its head. Their worry is that the pound has been too high in recent years. In their view the real crisis is not that the pound has fallen, but that it has not fallen enough. They want Britain to export more, in order to eliminate (or at any rate to reduce) the large balance-of-payments deficit that Britain is now running. This deficit totalled just above £100 billion in 2015 on the current account, equivalent to more than 5 per cent of national output.

Roger Bootle is well-known as the founder of Capital Economics and he writes an influential column for the Daily Telegraph. John Mills, a successful entrepreneur and long-time supporter of the Labour Party, has for decades been an advocate of devaluation as a means of boosting export competitiveness.

It may be a little unfair to say that Mills applies the Trotskyist notion of permanent revolution to economic policy. But to say that he believes in “permanent devaluation” does capture the flavour of his recipe. Is there any exchange rate that Bootle and Mills regard as too low? 

As long as Britain has a current account deficit on the balance of payments, their answers are “no” and “never”.  Any depreciation in the pound, no matter how large, is in their view to be greeted with enthusiasm. The risk here is that currency depreciation becomes self-reinforcing. The currency goes down, which drives up domestic inflation, which reduces the gain in competitiveness, which encourages policymakers to push the currency down again, which drives up domestic inflation once more, which again reduces the gain in competitiveness, which encourages policymakers to embark on more depreciation, and so on. The attempt to achieve export competitiveness results in ever-accelerating inflation.

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December 7th, 2016
4:12 PM
"Yet the UK has a big current account deficit, while Germany has a mammoth current account surplus of more than 8 per cent of national output. Indeed, Germany’s current account surplus has risen despite the relative stability of its currency, whereas the British current account deficit has expanded since the large devaluation of late 2007 and 2008. No mechanical relationship holds between currency movements and changes in nations’ current account balances." Prices don't allocate resources?

December 7th, 2016
4:12 PM
Monetarism is bunk? John T. Harvey 5 years ago “Thank you for posting a reply, Marcus. Again, however, I’m afraid I don’t see a direct answer to my question. I asked what mechanism in the real world the Fed has available to raise money supply above money demand (something that you said above is necessary if inflation is to occur). Money supply can rise if the Fed buys assets or if loans are made from available reserves. To my way of thinking, neither of these can occur without the full and conscious participation of the other side of the transaction. Hence, the supply of money cannot be increased in the absence of demand. Yet you say (above) that inflation only occurs when money supply is in excess of money demand. You have defended this with analogies, but not with real-world examples of the underlying process. I am a huge fan of using analogies to get the essential idea across; however, unless these mirror something that is going on in the real world (and in a very real and tangible sense), then recommending policies based on such stories is dangerous to say the least. I hope you don’t think I’m being rude, but I think this is a key question and one that I have never found a monetarist able to answer: how is it in the real world that the central bank raises money supply above money demand? Can you please tell me this and in the context of actual Federal reserve policy tools? This is not a trivial question. The entire monetarist superstructure rests on it. If the answer is that in reality this cannot happen, then I’m not sure how the rest of the monetarist analysis survives.”

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