Sterling devaluation by stealth
Does the bank of England have a secret policy to devalue the pound? It’s being highly successful if it has.
Nigel Lawson had to quit as chancellor when his secret policy of shadowing the German mark was discovered by prime minister Margaret Thatcher. Once Bank of England governors intervened to support the UK currency but Mervyn King looks like he has his own secret sterling policy, and has now admitted publicly that a weaker pound could be helpful.
Devaluation has been the standard policy for solving Britain’s economic problems since the Second World War. It is worth noting that with sterling below $1.60 it is now at the crisis level that caused the IMF to intervene to rescue the economy in 1976. And for students of history, the pound was devalued to a “record low” of $2.40 by Harold Wilson in 1967 and had been just over $4 before the post-war devaluation.
We now have the new measure of the euro to measure this decline, and against that, the pound is heading for parity.
Cutting the value of the pound provides a short-term fix. It makes imports more expensive, encouraging people to buy home-produced goods, and makes exports cheaper, keeping UK factories producing goods for abroad. That means not only jobs (and less social security payments), it helps reduce the balance of payments deficit when the financial crisis has reduced our invisible exports.
But in the longer term, weak sterling boosts inflation. However, with prices falling in many sectors and Mervyn King likely to undershoot his inflation targets and have to write to the chancellor explaining why, boosting prices does little harm to the economy and gets the governor off a hook.
And for King and the Treasury, inflation is good because it reduces the value of borrowing – of which the country has record amounts. Repaying debt in a devalued currency and at prices eroded by inflation makes sense for a highly-leveraged government.
The Bank of England is already in charge of interest rates and quantitative easing (a move that floods the markets with money, itself making it worth less). If there is a secret sterling policy it is also in charge of the value of the pound. Even if it is not deliberately reducing sterling’s value, it is doing nothing to support it.
But is the policy secret? Perhaps this devaluation by stealth has the blessing of the Treasury too?
