Duncan’s Economic Blog

Currency War and the UK

Posted in Uncategorized by duncanseconomicblog on October 15, 2010

The Economist leads today with the developing “currency war”.

There has been excellent coverage of this from Paul Mason and FT Alphaville.

Paul Krugman is now arguing for tariffs against China, with John Ross arguing against.

For a detailed discussion of what is happening and why, I’d recommend the above links – although I briefly summarised developments here and considered the longer term issues here.

Adam Lent, of the TUC,  has asked if this might not end up over shadowing the coming austerity.

It should also leave us wondering whether the biggest political debate of coming months and years might not be austerity (or at least, not austerity alone) but how the UK should react to a round of competitive devaluations and, more widely, how it should respond to the rise of China.  It might be wise for Labour to start considering its response now.

I agree Adam is right to speculate. This certainly feels bad.

One lesson of the Great Depression, according to Ben Bernanke, is that countries that devalued early returned to grow quicker. The vogue for export-led growth might tempt many countries into pursuing this policy.

The international co-operation that Gordon Brown cobbled together in March 2009 is breaking down with the G20 split on the question of stimulus and split on the question of exchange rates.

A global solution to the unbalanced world economy looks unlikely as countries put their domestic constituencies first.

Flash points at the moment are the US trade deficit (especially in the face of high domestic unemployment), the notion of QE 2 (which to many in the East looks like devaluation by other means), the spat between Korea and Japan over intervention and of course the level of the Chinese renmimbi.

Over the past few weeks there has been currency intervention, or talk of it, in China, Japan, Korea, Brazil, Taiwan, Russian, the Eurozone, Switzerland and India (by my count).

A race to the bottom will help no one.

But being parochial – what are the implications for the UK?

Clearly these developments make the hopes of an export-led recovery more forlorn. Increased currency uncertainty may also hamper the freedom of monetary policy – George Osborne’s only “plan B” if the economy heads South.

Does the coalition have a currency policy? How long will the line that “Sterling is freely floating and its level set by the market” hold if governments ramp up intervention?

We haven’t, in the UK, really had a currency policy since 1992, when Cameron was but a young Spad in the Treasury. Now might be the time to consider one.


4 Responses

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  1. James Doran said, on October 15, 2010 at 1:49 pm

    Being even more parochial – how does Labour respond?

    The latest I read is in Tribune (http://www.tribunemagazine.co.uk/2010/10/new-labour-leader-forges-deal-on-economic-policy-to-set-seal-on-new-team/) suggests that AJ’s surprise appointment as Shadow Chancellor was part of a deal to rally behind a “new economic paradigm”…

  2. Stuart said, on October 15, 2010 at 6:53 pm

    I read this in John Gray’s latest article for the London Review of Books (http://www.lrb.co.uk/v32/n20/john-gray/progressive-like-the-1980s):

    “What is evident is that the era in which states were ready to surrender control of their economies to market forces is over. The postwar welfare state may be history, but governments cannot risk leaving their populations without a shelter against chaos. If social democracy is not a viable option, neither is market liberalism.”

    Just afterwards I read on the New York Times’ website that the US government were considering responses to China’s currency manipulation and their subsidising of clean energy companies. It certainly does feel like something is changing, and it’ll be interesting to see Labour’s response. Gray’s article ends (in a typically paradoxical way) “Cameron and Clegg belong in a generation shaped by the ideas of the 1980s; but in forming the coalition they have demonstrated an impressive ability to break with the past. They may turn out to be the politicians who lead Britain into a new era of statism”.

    • James Doran said, on October 16, 2010 at 10:19 pm

      I’m of the view that -isms follow rather than define economic policy, so I’m rather worried that as Slavoj Zizek points out the model for Capital might be Singapore…

  3. James said, on October 15, 2010 at 11:28 pm

    From my home in the suburban landscape outside Crewe, the story of the currency war would seem to have little immediate value.

    Obama criticised Chinas currency manipulation as far back as Jan 2009, so the Subject is not new. What is perhaps fresher was the growing rumour of the benefits that a flotation of the Yuan would bring to the financial services sector we all know and love. This rumour was reported on in June this year, if my recollection serves me, in the Economist.

    For China flotation or an appreciation of the Yuan makes it more difficult to compete in terms of manufactured gods with developed countries, though it may also have social welfare benefits.

    For the USA Yuan appreciation would see the continuation of a Foreign exchange rate policy that has been the mark of the Fed since the 80’s, that of making the dollar as competitive as possible in terms of its manufactured goods, an issue more important than ever given the collapse of its automotive industry.

    The worry I have with the flotation of the Yuan in my own part of the British Isles is that while the 2008 devaluations of Stirling were bad, they may have been in line with Europe in general and that the present position of Stirling is effectively overvalued.

    Prior to the crash Stirling was buoyed by the importance of London to global trade and finance. The Square miles activities and profits gave the rest of the country an inflated currency with which to buy goods.

    Therefore, while the Yuan’s appreciation could see the manufacturing sector blossom, and here in my hometown to see the Bentley factory working at capacity and the railway yards loading rather than unloading is a seductive image. The fly in the ointment as I see it is that threat of an overvalued Stirling, and and the desire for City traders to make a fast buck.

    The floating of the Yuan or a major appreciation set upon by an over eager financial sector could see a massive immediate and shocking depreciation of Stirling, while labour prices would go down, so would British companies abilities to buy materials to fuel manufacture. Given also that so much of our national wealth is reliant on global trade and the transfer of funds, anything that slows the trade east to west will see long-term damage to the status of the City of London.

    At present the yards in Bentley are still ticking over, the goods are, as with much of the UKs current manufacturing, so high-end labour costs are not prohibitive. The appreciation of the Yuan would see a massive shock to Britain’s place within the world economy. With British firms having to desperate scramble to readjust to the new economic landscape with many falling by the wayside.

    Market Corrections are just that corrections. But as a Labour supporter I realise that pure economic efficiency exists within the anthill and the wasp nest, governments are created by societies to protect them from the worst ravages of an uncaring and essentially amoral system. Given that a refusal to allow the City free reign, to take advantage of a Yuan floatation or appreciation to save the most vulnerable in our society its immediate consequences may be necessary. We have to ask ourselves does the present government have the maturity and values necessary to stand up to the wolves of the financial sector, and deny them this chance at another feeding frenzy.

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