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| The log-graph of German inflation in the inter-war period Each line on the vertical access is 10x the value of its preceding |
'The incoming Bank of England Governor may attempt to depreciate sterling by as much as 15 per cent against a basket of currencies as he seeks to help British exporters to tap into foreign demand', Mike Amey, the head of sterling portfolios at Pimco, said.The contrarian view has oft been reported in the Telegraph and the Financial Times. But none of them actually explain to you what exactly devaluation is and what it means to you.
In short a 15% devaluation of the pound means that the price of everything will increase by 17.5%, everything not produced in the UK at least.
But that may not be the full story, looking at the fx rate between the GBP and the USD for the past ten years shows that the pound has already been devalued
And against the Euro
But the story is even more pronounced if compared to a currency which has not been actively de-valuing such as the Thai Baht
Devaluation is simply a euphemistic way of saying 'you are going to be paid less and everything will cost you more'. Your savings and investments which are denominated in pounds are going to be worth less and the value of your home which is also calculated in pounds will also decrease. Most importantly your benefits including pension are not going to be increased to compensate.
He may find it harder than he thinks to achieve a comparative devaluation. Other countries have similar aspirations. The inevitable fate of all fiat currencies is in the offing?
ReplyDeleteIt would not be so bad, but what exactly does Britain produce to export? If the value of the pound falls everything will simply go up because it is all imported.
DeleteOk it will be pretty good for me as I buy a lot of UK manufactured jewellery... but Gold and Silver are not mined in the UK so the cost of the raw materials will still increase which may absorb all the saving on manufacturing costs.
On the plus side the copper that I have been hoarding in the form of pre 1992 tuppences will likely see a further gain over their face value, but of course that is balanced by the reduction in value of a 2p coin.
Someone has to take the hit and I believe it should be the banks and the civil servants...
I can think of hundreds of specialist products that the UK exports. Buy in iron, rubber etc and then make a Rolls Royce jet engine or helicopters as examples.
ReplyDeleteThe brains in the UK have always been masters of invention and useless at marketing and profiting from their inventions, but they still export.
I suggest the export market should not be under rated. It may be worth mentioning there is extensive competition from bankrupt Eurozone country companies that will do the same to scrape the money in.
Boatyboy.
Devaluation of the pound is absolutely necessary. Manufacturing has already shrunk to much less than 15% of the economy and needs oxygen to stay alive. There are hardly any things that we produce so much better than China that the cost should be twice or even thrice.
ReplyDeleteAs for the author saying there aren't many things we produce anyway, this is a very 'chicken and egg' comment. Give us a chance to produce something.
Even more important than devaluation is also rationalising the indirect tax system to a GST format from VAT and exports must be 0 rated. Government should take some money out of social security which drives wages even higher and turn them towards some subsidies that could boost manufacturing especially exports.