We have been living through an old fashioned Sterling crisis. If we were still living in an era of fixed exchange rates, or managed ones, we would be deep in panic by now. The UK government would be borrowing abroad to buy pounds to try to stop the currency falling. The foreign money lenders would be demanding cuts in public borrowing and spending as part of a package of better economic management. Floating rates takes the immediate sting of such a crisis away from a Chancellor wishing to prolong his holidays away from London.
A little bit of devaluation, when you are running a big balance of payments deficit, is no bad thing. It helps your exporters become more competitive, so they can sell more. It puts people off buying a few luxury imports, so you spend less. The balance of payments start to correct. Just as Japan found a little bit of inflation was preferable to deflation, so a little bit of devaluation for the UK is fine in current circumstances.
The problem is, we are now getting a big bit of devaluation. There is a sense of carelessness, even of incompetence in the air, underwritten by the Chancellor’s foolishly pessimistic remarks from his Scottish holiday home. Overseas holders of sterling have got the message that the government does not seem to care about the value of the currency, and is taking none of the steps to run its own affairs prudently that you expect from a strong country wishing to have a strong currency.
This does now matter. It means we will have to pay more for many imports, including commodities like oil and wheat that are priced in dollars. We will all be worse off.
There is likely to be an immediate price to be paid for this imported inflation. The Bank of England will feel it has to keep interest rates higher for longer than it would otherwise. The Bank, if it were truly independent, would tell the government we need lower interest rates badly, but can only afford them if the government takes other action to reassure foreign holders of sterling, sufficient to stop the collapse of the pound.
What should the government do to stop the slide? It needs to reassert itself in a way which breeds confidence in its actions and in the UK economy as a whole. That means issuing some credible forecast of how bad the downturn is going to be, and changing what it says about the state of the UK’s economy. It means getting a grip on public spending and borrowing.
Floating exchange rates are usually a good thing. They allow adjustments to be made in easier ways than fixed rates allow. If a government thinks they give it carte blanche to spend and borrow as much as it likes it can get away with it for quite a long time, but there comes a reckoning. The first thing to go is the currency. That is now happening to the UK. Later it might become difficult or too costly for the government to carry on borrowing at the level required. They need to take corrective action now. That’s why we need the Chancellor full time in London, and we need Parliament back to put some pressure on them to take the necessary stabilising action. I am frustrated that I am not allowed to cross examine the government in Parliament on any of this, as they refuse to recall it to discuss the crisis.
The odd billion pounds for the residential property market is not going to turn it round – the sum is too small. Another billion on the deficit is a further increase in an already alarmingly large figure, and does not help restore confidence in the conduct of public finance.