Devaluation – not such an easy option for most of us.

Readers of this site will know that I expect the squeeze on people’s incomes to intensify this autumn and winter. The government has decided that it is not going to make any of the adjustment in the public sector by reducing its spending – on the contrary it is boosting it in the most irresponsible way, to pay for its state pensioners like Northern Rock. As the country has borrowed too much on a grand scale that means individuals and families have to tighten their belts even more.

We all know that part of the belt tightening is forced on us by higher Council taxes, higher tax from petrol and diesel, threatened higher Vehicle Excise Duty and the abolition of the 10p band. We all know another part of it comes from rip off government, with endless increases in fees and charges for government “services”.

This week we are witnessing a third part of the squeeze – devaluation of our currency. In recent months we have got used to devaluation against the Euro. We have had a 10% devaluation compared with its starting rate, meaning that if anyone does want to buy a German car or a bottle of French wine it costs 10% more. Now we are having to get used to devaluation against the dollar. The government has presided over a 7% devaluation in just the last couple of weeks.

Labour governments have a habit of devaluing. In the days of fixed exchange rates there was drama, with a government trying to “save” the pound, only to give in in the end. Labour took us down from the $4.03 rate to $2.80 on 14th September 1949, and devalued again on 18th November 1967 from $2.80 to $2.40. Now they are in the process of taking the pound down from over $2 where it had reached in the early 1990s and again last year, under a regime of floating rates. There will be less drama, but the effects on our living standards will be the same.

I prefer floating rates to fixed rates, and recognise just how much damage was done to the UK economy in the past by trying to defend silly rates. The devaluation we have had recently against the Euro will help our exporters. However, if a government uses floating rates to remove discipline over its own budgets and finances, it will end in tears. If a government spends, borrows and inflates the public sector too much the currency will give too much, helping fuel the inflation. This government had better be more careful, now it is embarked on this slippery path. Currency falls can run further than the authorities might like if they remain careless about them and their causes.

What we can be sure about is that people are getting poorer because the government is determined to stay richer. The devaluation of recent days against the dollar, and the devaluation of recent months against the Euro has cut the value of the “pound in your pocket”. Many commodities and products are priced in dollars on world markets. They are suddenly dearer thanks to the fall in the pound. That means we can buy less of them.

So pull in that belt a bit more. Living standards are falling and have further to fall. An overborrowed government has no intention of tightening its belt, so that means the rest of us have to do so even more.

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17 Comments

  1. Johnny Norfolk
    Posted August 16, 2008 at 8:57 am | Permalink

    This has been concerning me for some time and your piece is the first I have read about this. It makes you wonder why so many in the media do not appear to understand basic econonomics and just follow the proaganda given out by the Labour government. It was not as easy for the last Tory government as everything was examined by the media in minute detail. Whats changed. ?

    Reply: The media are still too casual, accepting Labour spin instead of coming to http://www.johnredwood.com to see what is really going on!

  2. John
    Posted August 16, 2008 at 9:30 am | Permalink

    I agree with your analysis. Perhaps you could also pass it on to John Butterfill, who as my local conservative MP took it upon himself a short while ago to vote for above inflation increases in MP's pay and expenses.

    Obviously everyone is entitled to his own vote, but in the current climate I expected rather better from all Tories, not just most of them.

  3. Brian Tomkinson
    Posted August 16, 2008 at 10:55 am | Permalink

    Further bad news for the hard-pressed public but market sentiment regarding the Bank of England's intentions to reduce interest rates, as advocated strongly and persistently by you, has greatly exacerbated this situation.

    Reply: I have always advocated less public spending and borrowing as well- a balanced package – starting with no spending on N Rock

  4. MartinW
    Posted August 16, 2008 at 10:59 am | Permalink

    This is exactly what we should be discussed in these stark terms on the BBC.
    It is scandalous that the mismanagement of the economy by Brown has never subject to proper scrutiny. Instead we have the NuLab apologist, Robert Peston.

  5. Acorn
    Posted August 16, 2008 at 11:57 am | Permalink

    It appears that economies are moving back in-line as far as exchange rates and current account balances are concerned. See: http://www.economist.com/finance/economicsfocus/d

    As our current account balance is now around minus £70 billion, we should not be surprised the currency is falling to try and balance the macroeconomic basics.

    BTW. I am not sure that we have an equivalent of the US Government Accountability Office, it works for and is accountable to Congress. It seems to have a much more powerful remit than our NAO or whatever. Anyway, its ex head a David Walker is making a film about US public debt; see; http://www.economist.com/finance/displaystory.cfm

    I think we need to find the UK equivalent of Mr Walker and do a similar presentation to the nation. Time to put your make-up on Mr Redwood???? http://www.economist.com/finance/displaystory.cfm

  6. Tony Makara
    Posted August 16, 2008 at 12:15 pm | Permalink

    The problem we face, with manufacturing at only 9%, is that we are not in a position currently to revive our economy through exports, in spite of any devaluation. The incoming Conservative government must have a strategy in place to support manufacturing and allow it to grow with special-tax-status so that we allow manufacturers to keep more of their money in order to expand and to create jobs. I should also like to see a 'wage-equalization' tariff imposed on competitor nations who pay sweatshop wages, so that British manufacturing can compete on an equal basis for access to our domestic market.

    Devaluation has some transient benefits but its worth remembering that it will push up the cost of imports, particularly food and fuel which are daily purchases for most people. The floating system is a major factor in boom and bust as economies swing from one extreme to the other, in trade between liquidity or greater purchasing power. The UKs economic performance since Sterling was floated is proof of that. Ultimately we need a stable system of forex, otherwise we will continue to lurch from boom to bust and back again.

  7. Iain
    Posted August 16, 2008 at 12:33 pm | Permalink

    Unfortunately the Conservative treasury team (if you can call them that) are stumn on the issue, as they have been on pretty much everything economic. We have had the fastest house price decline, including the early 90's , but the Shadow Treasury team aren't trying to remove that albatross from the Conservative party necks, put there by Major, and hang it round Brown's neck. The same with Starlings collapse. Labour buried the Conservatives when they presided over such incompetence, yet it seems the Shadow Treasury team just can't be bothered.

    But its worse than that for the Conservative Shadow Treasury team haven't bothered to develop up any sort of economic narrative. The issues of the housing market and sterling are the product of Brown's economic mismanagement, who has built an economy on debt and consumption. Debt as can be seen by our pitifully low saving levels, and the fact that we in the UK carry half of Europe’s personal debt, and consumption as seen in our trade deficit, which has hit a truly horrendous £80 billion deficit, or £50 billion balance of payments deficit. Yet are these issues being raised by the Shadow Treasury team? No, nothing, they can't be bothered. Yet these things should be being rammed home and the Shadow Treasury team ensuring that these issues are at the front of everybody’s minds, just as Labour rammed home the mantra of negative equity and ensured the electorate were never to forget it.

  8. Posted August 16, 2008 at 1:54 pm | Permalink

    The amount of public resentment of Labour about the recession is surprising in light of the fact that there is no recession of the economy. The explanation is that there is a recession in what people take home since the government are taking more of it. This devaluation is bound to increase this effect. It also makes it more difficult for Labour to claim that rising prices are because of world conditions though I have no doubt they will continue to try to do so.

  9. Stuart Fairney
    Posted August 16, 2008 at 2:13 pm | Permalink

    Currency devaluations are no joke. My own wife saw a devaluation her country of birth between 1979 and 1980 of staggering proportions. Pre-revolutionary Iran saw the toman go from eight to the pound, to one thousand to the pound when the ayatollahs took over. It basically makes paupers out of everyone. And if you have booked a holiday this summer, you will have observed the extra costs.
    As a trading economy, we import inflation to boot. There is only one positive light (not of Labour's doing, indeed they would like to do the opposite). The pound has sunk to reflect our weakened economic position. This is what floating currencies should do. If we were in the Euro we could not of course devalue relative to Europe thereby making the coming recession much the worse.

  10. Keith McBurney
    Posted August 16, 2008 at 2:13 pm | Permalink

    Glad you see and say it as it is John. When you feel the pinch, imagine the effect it's having on others much less well placed to see it through.
    It's all so inept. The only thing left for the UK-wide political parties to deliver is us from them.

  11. Matthew Reynolds
    Posted August 16, 2008 at 2:54 pm | Permalink

    Government spending growth must be set at a maximum of 1.5% less than average GDP growth every year in real terms untill the PSBR has been wiped out . Falling public borrowing and smaller government will stimulate private investment while bringing greater economic stability . It is wrong to pass on extra burdens to future generations for the sake of spending too much on government procurement , QUANGO’s , consultants ripping off Whitehall and excess numbers of civil servants that explain why departments of state cost too much to run . If someone like me on £12,000 or so a year has to tighten his financial belt due to soaring prices and a credit crunch why cannot the public sector wring out its pointless spending and get borrowing down paving the way for cuts in interest rates & inflation ?

    Instead of loading money onto tax credits that cost a bomb to manage and cause distress & poverty by making the poverty trap worse to help with fuel costs why not just raise the basic personal allowance ?

    Speeding up asset sales and selling off the post office , Channel 4 and the BBC (along with a little extra borrowing to be offset by stringent public spending cuts the following year ) could fund giving all taxpayers a once of refund for one year only of say £500 0r £600 from April 2009 ? The extra borrowing would only last a year and if spending reductions in 2009-10 where big enough it could be fiscally neutral in 2009-10 and then tighter from 2010-11 onwards as spending continued to be cut while no further tax cuts happened untill the PSBR was wiped out . That flat rate refund would mainly benefit the least well off as they would get the biggest boost in terms of the % of extra income gained ( £600 means more to a person on £10,000 p/a than one on £100,000 p/a ). As conditions could be worse in 2009 we need a plan to slash the PSBR and the size of government to secure lasting recovery while some short term stimulus to mitigate present day woes .

    Forcing the Bank of England to slash RPI -x to 2% within two years should be the new MPC target with members on non -renewable ten year terms and appointed after approval following an inquiry via the Treasury select commitee . That would help economic stability as would giving back the Bank the powers it lost in 1997 .The aim being to streamline the system and stop future bank runs . Financial regulation ought to be reformed a la the USA so it is lighter and smarter thus allowing the mortgage market to recover while stopping feckless lending . Deregulating the construction industry could help slash building costs while thwarting scams – again regulation in a modern economy for obvious reasons needs to be lighter & smarter !

    Voters are sick of high taxes & rising prices and they do not like the reckless waste of public funds and the financial mess up of Northern Rock . A Tory recovery plan designed to end this melt down is needed along with reforms to upgrade transport , energy & water provision so as to boost job creation at a time of rising unemployment while providing an infrastructure needed for a modern , prosperous economy when recovery starts . Social spending & wasteful training schemes do not work – Wisconsin style welfare reforms and tax credits being replaced with a bigger personal allowance might do the trick in terms of cutting economic inactivity and lowering jobless rates . The poorer the taxpayer the more likely they are to spend cash gained from tax cuts so my stimulus plan would help hard pressed household budgets and get the high street back on track at a time of economic distress as sales fall as the economy readjusts .

  12. mikestallard
    Posted August 16, 2008 at 6:22 pm | Permalink

    Yes, why isn't this discussed on the BBC? The answer, at least on Newsnight, is that they are now in Southern Russia.
    I do not think they have, on the whole, got a clue about economics. Before the News, there was an hour long programme on China and its pandas. The beginning was a huge hymn to Mao for making the Chinese grow wheat instead of rice and orchards (without a word about the fact that he then gave it all away so that he could go nuclear.) their naughtiness seemed to be that they took trees down and farmed land which created a dust storm. The fact that millions of peasants died was not mentioned. Trees, I presume, are much more important than distant Chinese people. (Is that, actually, a case of Liberal racism by the BBC?)
    Simon Heffer in the Mail today is half way to discussing the economic crisis although he is convinced that the real enemy is now runaway inflation as the "public sector" gets to grip with increasing their own salaries at the expense of the rest of us. (Milovan Djilas and "The New Class"?)
    Another little straw in the wind, I thought, was OFSTED (What a Communist word that is!) ordering children of 4 to work harder and then that awful, ferocious little girl pretending to sing at the start of the Olympics.
    Funny isn't it how all Socialism is the same in the end. The pigs eventually always move into the farmer's house……

  13. APL
    Posted August 17, 2008 at 9:03 pm | Permalink

    JR: "The media are still too casual,"

    MartinW: "This is exactly what we should be discussed in these stark terms on the BBC."

    Mikestallard: "Yes, why isn’t this discussed on the BBC?"

    If the next Tory government is to have any chance of success, the BBC must be 'transformed' as one of the first acts of the incoming government. A first step might be to move to a voluntary subscription basis of funding of the corporation.

    Given that the BBC archive has been bought and paid for by the long suffering licence payer, the archive should be stripped from the BBC and items in it made available to the the general media for a fee. The proceeds used to maintain the archive, something the BBC has signally failed to do.

  14. Monoi
    Posted August 18, 2008 at 4:39 pm | Permalink

    Please stop trotting out the old "currency lower, exports up" canard.

    As you say yourself, we are a trading nation, so we have to import to produce. It rather cancels out.

    Germany's currency appreciated vs France and the UK as far as I can remember, yet they have the largest trade surplus in the world, ahead of China. The problem is rather more simple: produce crap (leyland anyone?) and you won't sell it, cheap or otherwise. It takes years to build a reputation, and that is worth more than any currency level anywhere.

    Same with interest rates. Their effect on currency level is not all it is cracked up to be, as the low level of US rates vs UK demonstrates so well at the moment with the dollar appreciating.

    A low pound makes us all poorer, that is the bottom line.

    I cannot descibe the rage I feel when I see Brown or any of his bunch of showers, because they are the only culprit for the situation we are in.

    Worryingly, as other commenters have poited out, the tories are nowhere to be seen.

    I really do not give a flying f… about a social agenda as spouted by Cameron when I know I am worth 25% less today than I was 1 year ago, let alone 10 years ago.

  15. Bazman
    Posted August 24, 2008 at 11:39 pm | Permalink

    What happened to the worthless Euro? A bit like the minimum wage. Huh? Idiots. Blame the BBC. Was the Mail Right? Get Some! I am well sick of you old right wing fools. 41 1/2 years old.

    Reply: I am proud to have helped see off the Euro – that would have done even more damage to the UK economy.

  16. Julie Morris
    Posted September 15, 2008 at 9:30 pm | Permalink

    Hi, I too am concerned about rip off Britain, but mainly with public services, particularly OFSTED, they have just compiled a damning report on my child's school. I can only say the school is fanatastic, they may not achieve the highest academic results, but turn out polite, caring, sharing and well mannered children. The teachers work really hard on the children's social skills, and basic reading, writing and sums. I would like to see an inspection on Ofsted, who are they?

    I am also concerned at devaluation of the £ against the Euro, but believe that this is a government tactic to make us accept the euro as our currency in England, as soon as we do the euro will go down in value.

    And the stealth taxes on so called 'global warming' are appalling, notice it is now climate change 'yes the climate changes and always has'. Funny how MPs aren't afraid and still fly their private planes, cars etc., AND PLEASE TELL ME HOW ANYONE CAN PAY FOR A CARBON FOOTPRINT!

    • mikestallard
      Posted September 16, 2008 at 8:05 am | Permalink

      Allow me to ask – have you actually studied the OFSTED report? I only ask because, as a retired teacher, I have seen far too many Press Releases quoting "Excellent OFSTED reports". The dear old local newspaper prints them, also without having read them.
      If you take time to read the whole thing, of course it says something like: "Although the maths results have improved minimally, the teachers ought to be taken out and horsewhipped because they have still been utterly incompetent".
      What appears in the local press is: "OFSTED PRAISES MATHS RESULTS."
      Maybe there are some good things in the report? The only people I know who have worked for OFSTED were excellent teachers. But that, of course, was in the 1990s.

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    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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