Currency fables – the devaluation myth

The notion persists that a particular country’s economic hardship may be alleviated by an official devaluation of its currency on the basis that this would make its exports cheaper to overseas buyers.

Let’s therefore pretend, just for the sake of debate, that all countries in the world are using the same currency – say gold (as was once the case) – and that there are no separate national currencies. Consequently it would not be possible for any one country to improve its situation by devaluing its currency. Indeed, the very concept of devaluation would be meaningless.

Although disparities in standards of living would undoubtedly continue to exist, it would not be possible to attach any blame for this inequality on the currency. Everyone is using it!

International differences in productivity would still be there, of course, and these differences, rather than the currency being used, would be seen more clearly as the reason for differences in standards of living.


Here is an editorial comment in the business section of one of last week’s papers:

“There is still an enormous gap in competitiveness between EU members. Since this cannot be absorbed by currency revaluations, the only lever available is government spending”.

Some observations:

(i)            Being “competitive” means having the ability to produce goods of acceptable quality at prices your customers are willing to pay. When all nations have adopted a common currency, differences in competitiveness cannot be “absorbed” by currency revaluations.

(ii)          The writer quoted considers, however, that when a single currency is in use the only way to reduce the gap in competitiveness is to have recourse to government spending – hardly an appropriate longer term strategy.

(iii)         Many substantive reasons lie behind such comparative lack of competitiveness, but the article does not address remedies beyond government spending.

(iv)         The quoted passage connects competitiveness with currency revaluations but it does not refer to the intervention of obstacles and restrictions – none of which are connected to the currency – that are far more likely to affect competitiveness.


Any currency will function perfectly well as long as it is trusted


Any currency will function perfectly well as long as it is trusted. Putting it another way, it will function as long as its purchasing power is not undermined by inflationary money printing, or unbridled credit expansion, by a government and its central bank – the modern equivalent of “coin clipping”.

Such inflationary practices have a direct, adverse, impact on industrial and commercial costs, and hence the nation’s productivity, and the result is a steady increase in state dependency. Reliance on welfare and other state handouts generates a cycle of institutionalised indolence that sucks resources while creating no wealth.

This process of economic descent was all too evident when we visited South Africa last February. It is reflected in its currency’s slide in purchasing power against the British pound over the past 20 years. Even ignoring the fact that the pound has itself lost 30 percent of its purchasing power over the same period, the rand has slipped from 3 to the pound in the mid-‘nineties to 18 to the pound today – a de facto devaluation against the pound of some 600 per cent.

Perennial budgetary imbalances have led to a culture of dependency on state and charity handouts, and a rash of begging and petty crime – all the inexorable result of ignoring the most fundamental principles of civil housekeeping. The formal devaluation of the SA rand is hardly an option when the international currency markets are doing it for you, anyway – month in, and month out!

Well-intentioned but ill-conceived

When it comes to placing obstacles in the way of productivity, last week’s Conservative Party conference was replete with examples.

We all know that house-owners represent the core of Conservative supporters, and Chancellor Philip Hammond and Theresa May are making much political capital out of their undertaking to allocate £2 billion to the government’s “affordable housing” budget and a £10 billion extension to the “Help to Buy” loan scheme.

But the road to hell is, indeed, paved with good intentions. The volume of regulatory red tape that attends every such intervention is a nightmare in the making. Why does it not occur to them to unwind the red tape that already hobbles housebuilding? For starters, just think of all the pointless local authority pen-pushing involved in overblown “health and safety” minutiae that list factors already known to every builder. Yet these add hugely to box-ticking administrative costs and insurance premiums – just like all those obligatory investment nanny-warnings that tell you “investments can go down as well as up”!

Consider all the no-go building areas, the labyrinthine greenfield/brownfield restrictions that facilitate local government corruption; the zoning permits and arcane planning regulations; stamp duty, and all the other pernicious imposts and fees that add no value but collectively create the very conditions that leave millions without homes.



our government’s carefully considered solution is to throw still more billions at it?



And our government’s carefully considered solution is to throw still more billions at it?




The capping illusion

It’s the same with tuition fees. To some ministerial genius, “capping” of fees seemed like a proverbial “good idea at the time”. Why didn’t anyone tell him or her that “freezing” fees at £9,250 p.a. was another way of guaranteeing that every better managed university with lower fees would unhesitatingly, but stealthily, raise its fees to the level of the cap? And this government purports to favour free market economics?

Try the proposed energy price cap. Forget all the broadcast intentions, and think about the effect – because no one in government has. This utterly anti-competitive move will not in fact guarantee lower energy prices for consumers. It is more likely to backfire in the short term, with companies actually raising prices pre-emptively in anticipation of the cap.

When government ministers believe that they know better than we do how to spend our money, their days in power are surely numbered.