Duncan’s Economic Blog

A Question for Free Marketeers on Currency Wars and the UK

Posted in Uncategorized by duncanseconomicblog on October 27, 2010

Yesterday’s post on how some form of state backed investment is needed to both close he deficit and to help reduce global imbalances has provoked some excellent debate in the comments.

The response of some commentators though has left me puzzled – leaving aside the issue of the deficit, I am curious as to how those in favour of free markets believe the UK should respond to the threat of “currency wars”/protectionism/trade war over the coming years?

I understand that their ideal scenario would be unfettered free trade, free floating currencies and minimal government action – but in a real world in which country after country is adopting (or threatening to adopt) measures such as deliberate devaluation, tariffs or export subsidies, what exactly do they propose the UK should do?

12 Responses

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  1. Tim Worstall said, on October 27, 2010 at 11:21 am

    deliberate devaluation, tariffs or export subsidies,

    Their devaluation enriches us: we get to buy more of their time and production for less of ours.

    Tariffs, that’s them making their own citizens poorer by denying them the wondrous things we produce. OK, fine, we’ll consume them ourselves then.

    Export subsidies, that’s them sending us money. The correct answer is “thank you, may I have some more?”

    “unfettered free trade, free floating currencies and minimal government action”

    Yup. Terribly bad form to interrupt your oppo when he’s making a mistake you know?

  2. Luis Enrique said, on October 27, 2010 at 11:43 am

    Tim I’m not sure whether your picture of “their devaluation” is quite complete. Haven’t I seen you argue that one of the UK’s advantages is that we can devalue in the situation we are currently in? But now you think our currency appreciating would be a good thing.

    I cannot speak for “free marketers” but I see no contradiction in believing a free market is optimal, whilst also advocating intervention when other players are intervening.

    • Tim Worstall said, on October 27, 2010 at 11:53 am

      This bit here is micro….you know, the bit of economics which we know is correct, not macro, the bit we don’t know yet.

      • Luis Enrique said, on October 27, 2010 at 11:57 am

        I’m not sure it’s correct to apply micro thinking to macro problems!

        • Tim Worstall said, on October 27, 2010 at 12:01 pm

          Course it is. As the man didn’t say but should have said: in the long run it’s all micro.

          • vimothy said, on October 27, 2010 at 3:14 pm

            Er, no it isn’t.

            • vimothy said, on October 30, 2010 at 11:17 am

              In fact, micro isn’t even micro in the long run, in that there’s a difference between partial and general equilibrium analysis.

              Also, I’m intrigued by your statement, “micro…. the bit of economics which we know is correct”. In what sense do we know that micro is “correct”? You either went to a much better or much worse school than me, because I don’t recognise that certainty at all. The micro I know is just a model built on a set of arbitrary assumptions that insure mathematical tractability–consumer choice theory, theory of supply, marginal productivity theory, stick it all together and end up with answer that follows logically from your assumptions or not. That’s the only sense in which you are ever “correct”.

              Perhaps what you meant to say was, “micro… the bit of economics that hasn’t really changed in the last 100 years”?

      • Cian said, on October 27, 2010 at 12:45 pm

        [Heavy Sarcasm]
        DO WE NOW
        [/Heavy Sarcasm]

    • vimothy said, on October 27, 2010 at 3:14 pm

      Luis: http://en.wikipedia.org/wiki/Theory_of_the_Second_Best

  3. CharlieMcMenamin said, on October 27, 2010 at 12:19 pm

    Paul Mason(pdf) says the only possible way for the current Coalition strategy to work is to precisely join in:

    “In summary, you could make the Coalition strategy work for certain by a vigorous modern protectionism, boosting exports, depreciating sterling and hiking (or abandoning) the inflation target,possibly also abrogating aspects of Lisbon Treaty and limiting A8 migration”

  4. Adam Lent said, on October 27, 2010 at 2:20 pm

    Having read Tim’s first comment above I fear debate is pointless. You might as well try to persuade Ian Paisley of the value of Catholicism.

  5. Neil Wilson said, on October 31, 2010 at 10:55 am

    Fairly simple – ignore it.

    It’s time to get away from the financial and concentrate on real stuff. Once you realise that in a sovereign fiat currency economy money is just oil in the engine, not petrol, then you can stop worrying about meaningless financial ratios and concentrate on what we make and what services we offer.

    If other countries want to devalue their currency we should let them. That gives us the opportunity to stop issuing gilts and just deficit spend with cash. That saves a chunk of government spending and indicates to those private non-financial corporations that appear to be hoarding cash that they need to go and do something real with it if they want a return. Alternatively they can leave it in the bank and ultimately get the Bank Rate from the BoE.

    As far as I can see from the GDP figures, the household sector still has the same amount of debt and the same amount of income it has had for a couple of years. Not a lot has changed.

    Since an export led boom for all is a fallacy of composition in a global slowdown, somebody has to take the other side. A smart move would be to take that other side and absorb as many goods and services as the rest of the world can throw at us – as long as we pay for them in Sterling.

    So the trick therefore is to make sure that there is enough Sterling being spent in the economy to absorb our domestic output and what the rest of the world will sell us in return for Sterling.

    So actually the best thing the UK could do at the moment is probably scrap National Insurance. That has two effects. It puts a lot of Sterling into people’s pockets immediately – mostly at the low end – and it removes a large barrier to hiring in the UK.

    The increase in demand should then flow to an increase in sales – imports and an increase in hiring and production domestically. All these are real increases in stuff being sold in the economy, which is what we need.


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