Reply to: oh dear: Morgan Stanley fears UK sovereign debt crisis in 2010

[HairyArsedBloke]

Dominos: S&P Revises Spanish Outlook to Negative From Stable

[AtW]

In September 1949 the GBP had to devalue. So did the German Deutschmark. The French Franc was on its fourth revaluation by this point.

In their defence they did have some serious mitigating circumstances for that to happen...

[Gonzo]

But what was my point?

Ah yes, just because the country is not exporting by the truckload, weakening the currency means that imports and foreign holidays become more expensive so the demand for them goes down.

In doing so the balance will be restored and the country can get back on its feet. It is not nice while it happens, but sometimes you have just got to do it.

It might push inflation up but that is the cost of reducing demand (along with unemployment) unless you think sixties and seventies style incomes policies can be used to reduce demand?

Obviously, socialists will disagree with this approach because it is hard on people, but I defy anyone to get a centrally planned approach to work. The Labour government will run out of money and the IMF will impose austerity measures.

[Gonzo]

But did everyone live happily ever after? I hear you ask.

The sad fact of the matter is no.

For the system to work it requires that each participant should grow and/or decline in rough equilibrium and that has never happened.

In September 1949 the GBP had to devalue. So did the German Deutschmark. The French Franc was on its fourth revaluation by this point.

But the revaluations were managed and stability remained for some time.

Through the period of the 1950s Britain managed to get itself back on its feet after the second world war and was exporting goods and running balance of payments surpluses. "most of our people have never had it so good" said Harold MacMillan before being reelected in 1959.

As people got richer the economy began to overheat. Cracks had already started to show in Convservative economic policy making in 1958 when Treasury Ministers had resigned when they had been overruled over the need to reign in the money supply and live with some unemployment.

The economy overheated but British productivity was not rising as fast as the competitor nations. Imports were sucked in and the balance of payments went into deficit. When Harold Wilson's Labour government was elected in 1964 they found that the balance of payments deficit was far worse than expected.

Their efforts to redress the balance all failed, they had run out of reserves with which to support the currency and in 1967 a devaluation was required again. This was humiliating but less humiliating than going to the IMF (which would come later).

This had the desired effect and combined with austerity measures on government spending the balance of payments returned to surplus.

Wilson called a snap election in 1970 but lost.

[Gonzo]

It may well be "standard", but given increased dependency of UK on imports it no longer has the benefits it had in the past. Effectively right now devalued pound is responsible for inflation of food (ie: it's not going down from levels it reached 2 years ago), house prices may have dropped if measured in euros, however UK is not exactly Italy or Greece or Spain: who from Europe would want to relocate to Birmingham for example?

Sometimes I think that I am wasting my time, but I have nothing else on this afternoon so here goes.

Trade (imports and exports) has always been a feature of life in what we know now as the British Islands.

The ancient greeks knew that if they sailed all the way to Cornwall they could trade with the people there to get tin. All this was without money of course.

If you are ever in London the Museum in Docklands has some fantastic displays taking you through the history of trade in the country. It is well worth paying slightly more for a ticket that allows multiple visits IMO.

But I digress.

Trade is one side of the equation, money is the other. We can go back as far as the Gold Standard but I think modern history begins after the great depression.

Our story begins in July 1944 in the small New Hampshire resort of Bretton Woods.

With World War still raging and the memory of the 1930s depression still in everybody's mind, representatives from the United Nations (such that it was at the time) met to establish a framework for international trade and capital flows that would put an end to the protectionist measures that individual countries had taken during the depression which with hindsight people believed had made everything worse for everyone.

Signficantly, these nations agreed that their currencies would remain fixed in a narrow band against the US Dollar, the US Dollar was to remain fixed against the value of gold.

Nations were therefore required to intervene in foreign currency markets to ensure that their currency remained in the agreed band.

In the event that a country was in surplus (i.e. it was exporting more than it was importing) it was able to build reserves of gold, recycling its money back into the system and maintaining its value.

In the event that a country was in deficit (i.e it was importing more than it was exporting) it would be able to use its reserves to prop up its currency. The IMF was created to provide loans under stringent conditions to countries that ran out of reserves.

And so everything was set to maintain international economic stability in the period after the Second World War.

[AtW]

It is nothing to get too concerned about. Devaluing the currency is the standard British response to digging the country out of the economic tulipe.

It may well be "standard", but given increased dependency of UK on imports it no longer has the benefits it had in the past. Effectively right now devalued pound is responsible for inflation of food (ie: it's not going down from levels it reached 2 years ago), house prices may have dropped if measured in euros, however UK is not exactly Italy or Greece or Spain: who from Europe would want to relocate to Birmingham for example?

[Gonzo]

They'll print more euros, just like USA prints dollars. Unlike UK however those countries do have good sound parts that help them bail out carp. The UK is not in this position, so it is likely that it will have to "get one for the team" as it will be rated as "below peers" or whatever the classification those IB "analysts" use these days.

HTH

It is nothing to get too concerned about. Devaluing the currency is the standard British response to digging the country out of the economic tulipe.

Harold Wilson (OK he was PM not chancellor) in 1967 - "The pound in your pocket, blah blah blah"
Norman Lamont withdrawing the £ from the ERM in 1992

Both times these moves rescued the economy and saw a quick return to boom time. One very good reason not to join the euro as devaluation is an option that Greece and Eire do not have now.

[AtW]

Snigger. Sminki

They'll print more euros, just like USA prints dollars. Unlike UK however those countries do have good sound parts that help them bail out carp. The UK is not in this position, so it is likely that it will have to "get one for the team" as it will be rated as "below peers" or whatever the classification those IB "analysts" use these days.

HTH

[HairyArsedBloke]

Euro zone has got the resources to bail them out - at least they won't suffer currency drop. UK is on its own.

Snigger. Sminki

[DiscoStu]

Why is everyone worrying? We can just print more money to pay off our debts

[HairyArsedBloke]

Indeed.

It was them Shadows.

I couldn't get that final out of my head so I had to go and find it: sminki. I cried when that was originally shown.

[Doggy Styles]

Indeed.

It was them Shadows.

Are you saying GBP will fall off a Cliff?

[HairyArsedBloke]

Ah.

The Last Best Hope for Peace. (Spoken in a Portentous Voice).

Or something.

And look what happened to that!

[AtW]

Sminki Pinki
And so it begins .......

Euro zone has got the resources to bail them out - at least they won't suffer currency drop. UK is on its own.

[HairyArsedBloke]

The UK may be the first G10 to have problems, but we will have euro members Greece and Ireland to entertain us all before that happens.

Sminki Pinki
And so it begins .......