Whats the diffrence in devaluing the pound in the 70's + quantitative easin

How do you work out that QE is devaluing the pound?

p1ssing in the wind there kent.

are you joking chisel?

It will not effect the value of the pound in your pocket................... ;)

Oh and sorry

If we wanted to devalue teh pound , increasing long term inflation target to 3% would do the trick!! Think about it!

Chisel, swich on the neurons.

What do you think would happen to rates if the BoE tried to unload the 200bn of gilts it has QE bought, on top of the record gilt issuance over the next few years?

Have a squint at the latest Barclays Gilt review which is forecasting long-term gilt rates of 10%, reflecting demographic changes and high public borrowings.

Cut and pasted obviously. I wholeheartedly agree with this article and, particularly interesting, is Gordon Brown's quote at the beginning.

Sorry it's so long. Thanks for reading it to all those that take the time.

"It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued."
Harold Wilson, British Prime Minister, after the Pounds devaluation in 1967

"A weak currency arises from a weak economy which in turn is the result of a weak Government."
Gordon Brown, During the Pounds devaluation after it was withdrawn from the ERM


Mervyn King the Bank of England's Governor has been causing a stir in the markets this week. Despite Sterling being a flawed currency it hasn't stopped Mervyn King from making comments that he feels a weaker currency is beneficial for the UK. Undeterred by the pound losing around a quarter of its value, it seems that the BoE still feel the need to send it lower. US-centric reporting has been emphasising the Federal Reserves draconian monetary actions, but yet it is the UK that leads the way in QE and the destruction of its currency. Labour Governments always seem to be in power when the pound gets a pounding. 1931, 1967, 1976 and recently 2008 and beyond. If Neil Kinnock had won the 1992 election like so many believed at the time, they would have got the whole set for the past one hundred years. So what does it matter that the pound has devalued of late? Is it as black and white as 'it will boost our exports', that the media and business pundits proclaim? I agree with the quote above, not Harold Wilson's, but Gordon Browns. Over the long term, Governments that use their currencies to try and solve their economic troubles are doomed to fail. If you try to alleviate trade deficits with this mechanism over the short term it may succeed, but eventually more devaluations will be required in order to 'boost' exports again.

Implications of Devaluations

An examination of the devaluation is required to understand what benefits/disadvantages it brings. Governments always claim that this will lower the cost of our exports, which it does, but no analysis is paid to what actually occurs. If we examine a factory that exports goods, they may be struggling to compete, say against similar German products. A devaluation would instantly lower the cost of the good on the export market. The German Government, for example, may hold steadfast and are not willing to allow their currency to depreciate by the same margin. The British company without doing anything have instantly gained a cost advantage, in effect a free handout. The German company on the other hand has to look for savings itself. Management immediately begin cost cutting, increase productivity or improving their processes. They look at their product, they start to innovate or add extra features or improve the quality to justify the short term price dynamic that has just occurred. The British management does not need to do the above. They can produce the exact same product, using the same processes as there is no immediate need to innovate.

Also something much worse occurs. For the sake of the example say the two products, German and British, now are priced at €500 and €400 respectively after the devaluation, whilst previously they were €500 and €550 respectively. The British management now can increase the price over the short term, to say €450 as they are still cheaper than the German products. This extra margin may go into inflating workers pay, or other company benefits. Not only have no product or business improvements happened, but the British company is also rewarding itself.

The Import Dynamic

Misreporting in the media leads us to believe that the cost of our overseas holiday is the biggest headache when the value of our currency goes down - if only. When the currency takes a fall the whole nation is immediately given a pay cut, all our imports now go up in price. If we have to buy raw materials or products produced abroad it now costs us more, our purchasing power has effectively fallen. In the example given above, if the British company has to import any materials to produce its end product these will drive up their costs. Also the public now have to pay more for the product in question. The cost may seem to have reduced to €450 but remember its all relative, the British people are still getting paid in pounds. People can't buy the same amount of products as imports go up. A price spiral starts. The mechanic who imports car parts from abroad must now charge the public more for car repair work. There are an infinite number of other business transactions that take the same format as the given example. All these costs eventually come back to the British company as their workers require higher wages to cope with the higher prices. This in turn keeps driving the cost of the product higher. Meanwhile in Germany, they have continued innovating lowering their costs through business improvements, driving costs down in order to compete and in turn producing a better end product. The end products cost after a year or two, could now be say €400 and €500, for the German and British companies respectively. The British company is back where it started but in a worse condition, as they have fallen further behind in terms of productivity and end product quality.

The above process can develop into a vicious spiral, with the British company loosing further export share and demanding further devaluation in order to 'boost' exports. There is no simple** if a currency goes down in value it doesn't help anyone.

What needs to occur is to let the market take the pain, not the currency. This may mean higher unemployment in the short term, but people and companies get competitive again. Any nation in history who has enjoyed an export boom has done so on the back of a strong domestic currency. Britain during the 19th Century, Germany and Japan through the second half of the 20th Century, the US when they rose as the global superpower. However times change. For the past 30 years or so US politicians have put forward the benefits of a lower Dollar for jobs and exports, but over the years it hasn't worked. Workers wages continue to decline, and US companies continue to disappear.

In Japan from the end of the second world war up until just before the lost two decades, the Yen dramatically appreciated against the US dollar. Yet Japanese exports during the same time frame also increased. Westerners used to joke that Japan only produced kimonos or tiny cheap ornaments. Japan subsequently underwent a huge economic development, beating the West on car manufacture and electronics to such a point that it has now become hard to name a handful of Western electronics companies. In 1970 the Yen was valued at around 357 to the US dollar. Within 20 years it was 146, more than doubling in value. During the lost two decades it hasn't moved much further, to around 90, however its worrying that its still appreciating despite the stagnation of the Japanese economy during this time.

Fact is that QE probably is not enough to replace the credit that USED to be lent in this country. Equity in peoples homes , which has been spent in the economy for years has all but dried up! There is no more remortgageing to 90% at teh best rates to pay off debts, buy new cars etc.

MR B , you are right, Inflation will not be caused by Qe at times like these. QE will obviously be unwound, or intersst rates rise when inflation is rising. Short term spikes in Inflation will have litte affect on policy. That is why BOE is making it clear of its views. Bottom line is that QE money is NOT staying in economy forever! It is not permanent

govt said the same old nuts when we went from old pence to new pece......of coure this does not mean the poundin your pockehas devalued....lol.

Excellent Chisel, well done I am glad that you have accepted my argument that QE has caused inflation, I'm not quite sure that a simple "Actually Washington I agree" wouldn't have been simpler. However I appreciate that you had to try and put your own confused spin on it to make you feel better but this is hardly a retort, is it?

As for QE having ended I think you pointed out the other day that in fact it is on hold.

Yes the BoE does foresee inflation falling back but there forecasts have being undershooting reality for some-time now as the BoE happily admits, so we are yet to see if they have it right this time.

Washington.

The difference between my description and yours is that the BOE in teh UK and the FED in US are adamanyth that QE WILL be unwound!

Will they ever actually retract the cash though .. I wanna see it all BURN ;)

Chisel

Doesn't 1) contradict .. 2) .. ?

and the QE money Was Used to buy up Government Bonds ... so forth devaluing them too :(

Maybe your idea - but it hasn't happened. 10 year gilt yield now exceed those of Italy and Spain, and that is before QE is unwound.

QE was a sticking plaster strategy, designed to put off the car crash till after the election. As the recent rise in UK gilt yields above those of some of Europe's pending basket cases, the market may burst the bubble sooner than the government would like.