Ever since his first written evidence to the Treasury committee, the governor of the Bank of England, Mark Carney, has hinted that he understands the UK’s real deficit problem. This is not the budget deficit, of which chancellor Osborne has made such a fetish, but the balance of payments deficit.
Indeed, that distinguished former permanent secretary to the Treasury and cabinet secretary, Lord Turnbull, recently pointed out that debt owed to citizens of this country is not a problem – and that by not borrowing more for infrastructure at such low rates, Osborne is actually impoverishing future generations. He is, said Turnbull, “playing a dirty game”.
On the real deficit problem, it is obvious from his various pronouncements that Carney can, for a central bank governor, be quite relaxed about a fall – let us call it an “adjustment” – in the foreign exchange value of the currency if it is necessary to restore, or at least prevent a further deterioration, in Britain’s competitiveness in international trade.
Thus it emerged last week that the governor had written to Andrew Tyrie, the chairman of the Treasury committee, explaining that a 10% fall in the pound would boost economic growth by reducing the price of exports (or making exports more profitable) and encouraging companies and private individuals to buy more domestically manufactured goods.
And the impact on inflation – which is already well below the official target – would hardly be sensational.
But he distinguished between the effects of such a depreciation arising “for no underlying reason” and a run on sterling that might result from a vote to leave the European Union – commonly known as “Brexit”.
He explained: “If increased uncertainty were a key underlying cause of this depreciation, aggregate demand might be affected.” Firms might postpone investment projects and households defer spending.
Well, to judge from recent figures for gross domestic product in general and retail sales in particular, the economy may already be affected by concerns about the outcome of the referendum.
These are deep waters, because our sensationally bad balance of payments position suggests that a major devaluation of the pound is needed anyway. I do not know whether Carney has read my good friend Sir Douglas Wass’s magisterial work on the 1976 sterling crisis,
Decline to Fall, but I assume he worries that a necessary devaluation could get completely out of hand – as happened in 1976, when the balance of payments position was not nearly as bad as it is now, although inflation certainly was.
Read more: Devaluation is a dangerous game. But Britain may have to try it | Business | The Guardian
Indeed, that distinguished former permanent secretary to the Treasury and cabinet secretary, Lord Turnbull, recently pointed out that debt owed to citizens of this country is not a problem – and that by not borrowing more for infrastructure at such low rates, Osborne is actually impoverishing future generations. He is, said Turnbull, “playing a dirty game”.
On the real deficit problem, it is obvious from his various pronouncements that Carney can, for a central bank governor, be quite relaxed about a fall – let us call it an “adjustment” – in the foreign exchange value of the currency if it is necessary to restore, or at least prevent a further deterioration, in Britain’s competitiveness in international trade.
Thus it emerged last week that the governor had written to Andrew Tyrie, the chairman of the Treasury committee, explaining that a 10% fall in the pound would boost economic growth by reducing the price of exports (or making exports more profitable) and encouraging companies and private individuals to buy more domestically manufactured goods.
And the impact on inflation – which is already well below the official target – would hardly be sensational.
But he distinguished between the effects of such a depreciation arising “for no underlying reason” and a run on sterling that might result from a vote to leave the European Union – commonly known as “Brexit”.
He explained: “If increased uncertainty were a key underlying cause of this depreciation, aggregate demand might be affected.” Firms might postpone investment projects and households defer spending.
Well, to judge from recent figures for gross domestic product in general and retail sales in particular, the economy may already be affected by concerns about the outcome of the referendum.
These are deep waters, because our sensationally bad balance of payments position suggests that a major devaluation of the pound is needed anyway. I do not know whether Carney has read my good friend Sir Douglas Wass’s magisterial work on the 1976 sterling crisis,
Decline to Fall, but I assume he worries that a necessary devaluation could get completely out of hand – as happened in 1976, when the balance of payments position was not nearly as bad as it is now, although inflation certainly was.
Read more: Devaluation is a dangerous game. But Britain may have to try it | Business | The Guardian
