What Would Thatcher's Government Have Done About the Plunging £

They *can* help the market to correct itself.

The snake-oil merchants, certainly.

Had the venerable Milton Friedman been asked for his views a decade ago, he would never have advised ten years of rock-bottom interest rates and record borrowing.

Countries cannot be net importers or net exporters over anything more thn a trivially unimportant time-scale.

Either concept automatically and necessarily implies the exchange of exports for foreign currency which is then not used to buy imports or to invest overseas (which is a form of importing).

Looking at the Pink Book, we've been a net importer for at least 20 years. So what do you regard as an unimportant time-scale?

If we were a household or a business, we would have run out of money long ago. But we're a country that prints currency, so we haven't. We're richer than we were in 1998, in the sense that our standard of living is higher.

If a country that grows its own carrots and sells them at a pound each suddenly starts buying carrots from Germany for 50p each and selling them at

Exacty. The world, predominantly, is very much run by free-marketeers. It is indeed they who are responsible. The right-wingers here really are a laughable crowd of losers.....for years they have been arguing that the government is too legislative and there is too much red tape etc.

so, the free marketeers and right-wing slop-heads have had their way, and screwed everything up. Now, even the right-wing losers here are weakly requesting better regulations and control of the banks etc.

What?...the right-wingers here blame the world-wide economic crisis on socialism? How laugable!! :-)

On Tue, 9 Dec 2008 01:46:07 -0800 (PST) 'Mark, Devon' wrote this on uk.politics.misc:

I'm amazed that you have the gall to appear here after the chaos your beloved Leader Brown has brought to this country.

Though I like the epithet "right-wing slop-head". I hope it's an original Devon creation.

On Tue, 9 Dec 2008 10:16:01 -0000 'DVH' wrote this on uk.politics.misc:

Yes I quite liked that one myself. Maybe it's on the daily list of pejorative slime texted out by Lab HQ each morning to use against the opposition ;-)

The printing of money (creation of cash) is a very rare event indeed.

When government expenditure exceeds revenues then the deficit is met almost invariably by borrowing. The Treasury issues bonds that are bought and subsequently traded on bond markets by investors from home or abroad.

The reason I have changed my tune somewhat on this and qualified my assertions with words like "very rare" and "almost invariably" is that over the past couple of weeks or so the question of "underfunding of government borrowing" in response to the current crisis has raised its ugly head.

This would involve the government creating bonds in its own name which would be bought up by the BoE. In effect the government borrowing money not from others in time honoured style where it would need to find bondholders and pay interest but from itself. This represents the mechanics of cask creation or money printing if you like.

There are economists out there seriously proposing such actions. The idea is a simple one. The nature of money is that it passes from hand to hand and in and out of the banking system. Because of the difficulties within the banking system, this circulation has slowed and attempts to stimulate it, thus far would appear to have been at best only partially successful. If this sluggish rate of inflation were accepted and instead of trying to stimulate more flow the physical amount of cash within the flow were increased, then the effect would be similar or the same.

Fine so long as things stay as they are. However, one day the baking system will resolve its problems and the flow of money will quicken. Then comes the problem of taking this created cash out of the system otherwise inflation and possibly hyperinflation (a la Zimbabwe) would let rip. This would involve large government spending surpluses, high taxation coupled with low spending. Austerity in other words. Not a voter friendly policy.

As regards the "net importer question" Your analogy only holds so long as the productive capacity of the world remains constant. It has not. In recent years China, India and a whole host of smaller Far Eastern nations have increased their productive capacity considerably. In future these will undoubtedly be joined in this respect by Russia and the countries Eastern Europe.

Further money markets prevent any country from either spending more cash than it has or keeping more cash than it spends. If there is extra cash of a particular currency slushing about then it finds buyers through weakening of exchange rates. The opposite will happen if there is a shortage of a particular currency. However, most governments do try to influence these processes though CB intervention in the markets. China, for instance, makes great efforts to maintain it's currency at a relatively low exchange rate vis a vis the others to secure a trading advantage.

Nonetheless all trade surpluses are invested in countries that suffer a trade deficit. Any imbalances in this respect are swallowed up by the money markets and are mitigated though rising and falling exchange rates.

So to sum up, the reason that the UK (and others) can run a significant payments deficit year on year without those imported goods (mainly) becoming so expensive so as to be choked off is down to two causes.

First the expansion in productive capacity I refer to above. More productive capacity = lower prices. I read recently that a machinist working in India can earn 7p / hour. How is a British manufacturer to compete with that?

Second the willingness of these countries to buy into British debt and invest in British enterprise.

Given our declined fishing industry, there is probably insufficient local demand for nets to sustain a domestic industry for their manufacture. So yes, it could be desirable to be a net importer.

On the other hand, it might be better to be a net exporter. But to flog them to foreign fishermen, our nets would need to be of high quality and competitively priced. An impossible dream.

On Tue, 9 Dec 2008 03:29:22 -0800 (PST) 'Mel Rowing' wrote this on uk.politics.misc:

But this is becoming increasingly difficult is it not?

The amount of Brown's borrowing has caused a rise in CDS rates for insuring it (3x that of Germany I believe). And why should foreigners lend to the UK Govt when the pound's falling and the dollar's rising, and the US Govt has a better track record of honouring its debts?

Indeed.

IE: Brown's Monopoly money.

In the short term IIUC.

Perhaps this is what Brown is quietly planning? Flooding the economy with cash now and take it back later on.

But isn't there a serious risk that he would become addicted to printing money?

Are you counting every export, including invisible ones?

If it were true that we were a net importer, with what would we have been paying for the excess imports?

You mean foreign currency, of course.

We can't print foreign currency. So the only way to gain enough foreign currency to pay for imports is to export goods or services (on the one hand) or to buy foreign currency with sterling. But sterling can (ultimately) only be used to buy things from us - exports (I'm not distinguishing inversting sterling in the UK from buying British goods).

I once heard Milton Friedman pour scorn on the fashionable notion (so prevalant in the sixties) that in order to be wealthy, a nation should ideally only export and never import anything. As he said, that's a recipe for denuding the nation of its wealth. Exports are simply the price you (have to) pay for imports. If you don't ned to import anything, you don't need to export anything.

It would depend on where it got the 50p's worth of Deutschmarks from.

You can't use sterling to buy German goods. It's not as simple as it looks.

We've been exporting mortgage backed securities over that period. That's how we managed to balance the books.

Problem is that they can ask for the money back, and that's what they are doing now.

asking isn't getting....

regards

That may or may not be the case. I don't know but government bonds are not subject to Credit Default swaps which are applied to instruments such as corporate bonds, mortgage backed securities and so on. Instruments not backed by the British government.

UK bonds are as safe as it gets. They are not termed Gilt Edged for nothing.

Because the yield on UK bonds compensates for any risk involved.

When a bond is first issued a fixed coupon rate is set. This is the interest rate that will be paid on the bond on fixed dates throughout its lifetime until maturity. The bonds will then be put out to public tender. If a tenderer considers the coupon rate too low then he will tender at a discount (say 98% of face value) hence he hopes to gain 2% over the lifetime of the bond. At the end of the tender period then H.M.T. will allocate bonds to the highest bidder(s) first and then to the next highest bidder and so on until the issue is all allocated.

It may well be that a bidder considers a coupon to be generous in which case he will bid at a premium to face value (say 102%) and so sacrifice a little of his yield so as to ensure his allocation.

Once in issue there is no question of the bond ever being redeemed before it's redemption date. However, during the meantime it can be traded. It's through trading in the bond market that additional returns are realised. Here it's price may go above or below it's face value according to market conditions as well as influences such as general intrest rate changes and exchange rate fluctuations.

Most bonds are not held for the full term.

You say that the the pound is always falling whereas the dollar is always rising. That is clearly nonsense. It is not even true in the short term. If I buy a bond denominated in pounds today and the pound strengthens modestly tomorrow ( say 0.05%) then I should be able to make a profit, A typical institutional transaction will involve hundreds of thousands or even millions of pounds worth of securities.

The further the price of any negotiable security goes in one direction then the greater the likelihood that it will "bounce" in the opposite direction at the next trading session.

There you are simply wrong. The UK government belongs to that group of countries that includes the US, Switzerland and the Eurozone where there has never been a default on a government bond which is why the UK government bonds are referred to as gilts (gilt edged) That is the reason that the UK government was able to address the inter bank lending problem by swapping mortgage securities for UK government bonds. The latter are as acceptable for collateral purposes as collateral can be.

No! That would inevitably result in the destruction of the currency's credibility.

Such action could only be contemplated over the downturn phase of the recession Even then it would be a last resort.

I'm not convinced. A weak pound helps exports. Surely that benefit must be offset against the costs you mention?

James

How?

James

Followed by even more massive borrowing being proposed as a solution to problems caused by execess borrowing!

James

Are you sure about that?

In the situation you describe, they're selling the carrots for more than they buy them for, so they should be profiting, unless it caused them less than 50p to grow the carrots in the first place?

James