Inflation, interest, money supply: Currencies.

Printing money (2009), printing money (2012-2013), currencies and trade (2011-2013), sectoral balances (2015), Brexit (2016), further reading.

Printing money, 2009.

Tomorrow the Bank of England’s monetary policy committee is likely to give the go-ahead for quantitative easing, otherwise known as printing money. . . The argument in favour . .  . is simple: nothing else has worked. To date, normal monetary and fiscal measures . . . have failed spectacularly. . . Quantitative easing means the Bank of England will simply invent deposits and use this electronic money to buy existing financial and corporate bonds, putting that new, instantly spendable cash into circulation.

(George Kerevan, The Scotsman, 4 March 2009).

The Bank of England’s departure from normal monetary policy . . . and concerns that Britain was following the policy of Zimbabwe into bankruptcy and hyperinflation . . . prompted Mervyn King, Bank governor, to give a series of rare interviews. There are few good comparisons for the bank’s policy move, with only Japan and the US having previously reached the lower limit of normal monetary policy. . . Mr. King . . . conceded . . . it is very unlikely interest rates can go any lower.

(Chris Giles, Financial Times, 6 March 2009).

The new Bank of England interest rate, 0.5%, announced this week, is the lowest in 315 years. The highest was 17% in 1979. Before the 1970s the interest rate always stayed within the range 2 to 10%.

In the last 3 years the money multiplier, defined as “broad money relative to central bank money” or “the link between central bank money . . . and money in the economy”, was highest, at about 64, in early 2007, and lowest, at about 25, late last year. Broad, non-central-bank, in-the-economy money is what monetary reformers want reduced or prohibited. They also want low or zero interest rates. So as the “Bank tiptoes into uncharted waters“ it is going where monetary reformers want it to go. But the Bank hopes quantitative easing will facilitate bank lending, so that more broad money will be created and the money multiplier and interest rates will return to normal levels. That is not what monetary reformers want.

(Alison Marshall, March 2009. Data from the Financial Times, 6 March 2009).

Printing money, 2012-2013.

The Bank of England will be told by MPs today to look into the impact that its £325 billion money-printing operations and low interest rates are having on savers.

(Sam Fleming, The Times, 18 April 2012.)

On Wednesday the Bundesbank celebrated its 55th birthday . . . it developed an enviable reputation as the world’s pre-eminent central bank. It presided over first the Wirtschaftswunder (“economic miracle”) . . . then came a long period of steady, strong growth . . . The political independence of the Bundesbank was vital. Three times in the previous half century . . . German currency savings had been shredded by politicians generating hyper-inflations. . . My understanding is that, even now . . . the predilections of German policy-makers are plain; they will not “print money” and endanger price stability.

(Sean O’Grady, 3 August 2012.

. . . our currency is set to become more powerful for importers and disastrous for exporters, and those who compete with importers.

. . . The US Federal Reserve this week announced an unlimited plan for money-printing. It pledged to print US$40 billion a month and buy US mortgage bonds until unemployment was reduced to an unspecified level. This looks set to push the US dollar even lower against currencies that aren’t printing money.

. . . The world’s other central banks are also stimulating and devaluing in an unlimited fashion. This month the European Central Bank unveiled its programme of unlimited bond-buying . . . This, too, is devaluing the euro versus the NZ dollar, which has strengthened 64 per cent against the euro since March 2009 . . . Even the Bank of Japan, which has been stimulating with zero per cent interest rates for almost 20 years, is considering fresh money-printing to drag its yen lower.

The Swiss National Bank has been printing francs for months to cap a rise in its currency against the euro. The People’s Bank of China is also on the verge of fresh stimulus.

The rest of the world is engaging in beggar-thy-neighbour devaluations to stay alive. . . we are standing aside . . . wondering why the world is so unfair.

(Dollar creates dire straits for exporters. Bernard Hickey, 16 September 2012.

Japan has launched an eighth round of quantitative easing . . . Japan’s finance minister . . . praised the bank’s “bold” efforts to hold down the yen, lending credence to suspicions that the real motive is to counter “beggar-thy-neighbour” currency devaluations by other powers and prevent the strong yen choking Japan’s export industry.

. . . David Rea, from Capital Economics, said attempts to weaken the yen are doomed to failure as Japan’s safe-haven role makes it a magnet for funds fleeing the unresoved crises in the rest of the world.

. . . Japan blazed the trail for modern QE in 2001 and has been on monetary life-support for a decade, yet the country is still stuck in perma-slump. . . Japan flooded the reserves of the commercial banks in its early rounds of QE, rather than buying assets. This changed in 2010, but the BoJ predominantly bought bonds from banks. Monetarists say this does little to boost the broad money supply.

(Ambrose Evans-Pritchard, Daily Telegraph, 20 September 2012.)

. . . as far as Germany is concerned, the euro is . . . not nearly strong enough, while for the beleaguered eurozone periphery, it is far too strong.

. . . in the 1930s . . . the fixed exchange rate regime operated through the gold standard prevented governments from applying measures that might have stimulated domestic demand, in much the same way as the euro does today. . . Winston Churchill was later to describe allowing the Bank of England to persuade him of the merits of the gold standard as the biggest mistake of his political career.

. . . If we accept that countries are indeed trying to gain competitive advantage through devaluation, then . . . Britain is one of the worst offenders. At Wednesday’s Inflation Report press conference, Sir Mervyn King, Governor of the Bank of England, aired some . . . numbers. Since the financial crisis began, not only had interest rates been reduced to close to zero, but the Bank of England’s balance sheet had been expanded by a factor of five.

Expressed as a share of GDP, the increase has been greater than that of the US, greater than that of the European Central Bank, and greater than that of Japan.

. . . Monetising the deficit in the way Lord Turner suggested, or simply distributing the spoils of QE to the population at large by way of hand-outs, needn’t necessarily lead to hyper-inflation, and it is certainly quite hard to imagine that the Government could be any worse than the banks in applying the freshly minted money. But . . . no government given the freedom to spend what it likes would know when to stop.

(Jeremy Warner, 13 Feb 2013. )

The quantitative easing pursued by central banks around the world – including the Bank of England and the US Federal Reserve – has enraged emerging economies such as Brazil as the value of their foreign reserves dwindles, raising fears over “competitive devaluations”.

(G20 summit to focus on “currency war” dangers, Russell Lynch, Independent (i), 16 February 2013.)

Currencies and trade, 2011-2013.

. . . The East-West trade and capital imbalances that lay behind the Great Recession are as toxic as ever. Surplus states are still exporting excess capacity with rigged currencies — the yuan-dollar peg for China and, more subtly, the D-Mark-Latin peg within EMU for Germany.

(Ambrose Evans-Pritchard, 03 Jan 2011, )

The conventional wisdom is that if it is possible to source goods more cheaply from overseas, then it makes sense to do so. . . Better to accept that there are some areas where we can’t compete, and to move our labour and capital to industries where we can develop and exploit a competitive advantage. . . The whole focus on free trade under successive governments . . . has proceeded on the basis that it is worth sacrificing production and jobs in a range of industries in return for expanded opportunities in overseas markets for those products that we are good at producing.

Unfortunately, the comforting theory about perfect competition doesn’t always work out in practice. . . while we congratulate ourselves on increasing our primary product exports to China, we try not to notice the much greater increase in the value of our manufactured imports from that country. . . Furthermore, whatever the market says, we may be prepared to pay a premium for goods made in New Zealand on the ground that they are more likely to meet our particular conditions and requirements, and to offer better after-sales service than would cheaper imports. And we may have strategic reasons for wanting to maintain some manufacturing capability in areas that the market tells us are difficult for us; we may not wish, in other words, to become totally dependent on overseas suppliers for goods that we can’t do without.

(Cheap imports versus jobs, Bryan Gould, 7 August 2012,

. . . this contrast between the surplus and deficit countries is . . . not a new problem. It was a problem discussed at length at Bretton Woods in 1944.

. . . after the collapse of the Bretton Woods fixed exchange rate system . . . the industrialized countries . . . put in place a regime . . . unless there was unanimous agreement on exchange rate intervention, exchange rates would float . . . in order to eliminate the buildup of imbalances. That came to an end with the rise of some of the emerging market economies and their entry into the world trading system combined with a wish to earn export surpluses as part of their strategy for development.

. . . back in the 1960s there was a British member of parliament who ran on the slogan, “I want to see a world where every country can have a balance of trade surplus.” (Laughter) . . . the countries that have built up debt . . . are having to adjust. The surplus countries are under no such pressure . . . and many of them show great reluctance to expand domestic spending to allow the deficit countries to re-balance.

. . . my concern is that in 2013 . . . we will see . . . the growth of actively managed exchange rates as an alternative to the use of domestic monetary policy. With interest rates at very low levels, with balance sheets having expanded a great deal, and with the inability of monetary policy indefinitely to postpone the adjustment that’s required to bring about the re-balancing, some other mechanism will be needed. And you can see month by month the addition of the number of countries who feel that active exchange rate management, always of course to push their exchange rate down, is growing.

(The Honorable Mervyn A. King, Governor of the Bank of England, 10 December 2012.

The Group of 20 (G20) finance ministers on late Saturday moved to calm fears of looming “economic warfare” on the currency markets, pledging that they would not target specific foreign exchange rates or devalue currencies to make them more competitive.

. . . The statement on currencies differed from the G7 communique by aiming to move towards market-set forex rates, to take account of G20 member states like China which have a more managed economy. The G7, by contrast, had declared a simple commitment to “market-determined exchange rates.”

. . . A senior US administration official . . . described the statement on exchange rates as a leap in the language for some G20 states and an evolution from previous positions.

. . . All the G20 states are to a greater or lesser extent faced with the same dilemma—how to boost fragile growth rates without overextending budget deficits or alienating international partners.

( 18 February 2013. ).

Printing money creates inflation and damages economies. Countries do it when [they] feel they have no options left or, as we saw in 2008, when they are on the brink of catastrophe. And they should be doing it to stimulate their domestic economy by freeing up capital. They shouldn’t be doing it specifically to drive down their currency. That is the path to trade war.

Japan is particularly desperate having been economically stalled for far longer than the five post-GFC years that have killed growth in the rest of the developed world. It seems unfair to single them out given the vast scale of quantitative easing in the US and Europe – and China’s state control of its currency.

. . . It is conceivable that New Zealand should be able to print as a last line of defence. But are we at that point? Commodity prices are rebounding and taking the sting off the currency spike for a big section of exporters. Against the US dollar we are still some way off record highs, even if the kiwi is looking uncomfortably strong at record highs against the trade weighted index.

. . . The country’s biggest problem is the failure to improve productivity. . . Too many of our companies are failing to invest for the long term. The failure to increase productivity translates to a constant focus on costs and results in wages that don’t keep up with the increasing cost of housing. As long as the tax system is weighted the way it is, it’s a big challenge to raise capital domestically and curb housing market speculation.

(Liam Dann: Currency war a dangerous game. 18 February 2013.

Sectoral balances.

Economic growth and the fiscal deficit have had a lot of attention in this election campaign. But the current account deficit may be more important.

Imports may cause more problems, as current account deficits, than government spending, as fiscal deficits, or the level of GDP growth. (“Debts and deficits, Europe”, December 2011, .)

To improve the current account, consumption should be reduced and production encouraged. A relevant policy was favoured by the FoE in the European election campaign in 2014. They recommended “a new EU economic strategy . . . which shifts the tax burden from labour to resource consumption” ( ). Citizens incomes could be used to make resource taxes progressive. (“Red and blue reasons for a Green tax switch”,

In the UK in the quarter-century from 1987 to 2012, the trade balance, exports minus imports, was nearly always negative, and the government balance, government spending minus tax receipts, was mostly positive.

The domestic private sector balance, private savings minus private investment spending, was also mostly positive, with two three-year exceptions, from 1987, when the sharemarket crashed, and around 2000, when the dot-com crash happened.

Richard C. Koo wrote in 2009 that under ideal conditions, a country’s economy should have the household sector as net savers and the corporate sector as net borrowers, with the government budget nearly balanced and net exports near zero. ( ).

Fred Bethune described three examples of sectoral balances in the USA ( ):

Clinton Era (1992-2000): The trade deficit results in the foreign sector saving. The government also saves by reducing its deficit and eventually establishing a fiscal surplus. The private sector picks up the slack by increasing its borrowing, encouraged by Greenspan’s low interest rates.
Trend: private dissaving, public saving, foreign saving.

Bush Era (2000-2008): The trade deficit is still widening, and the foreign sector is saving even more (Bernanke’s “savings glut”). The drag from the trade deficit is so bad that Bush’s large fiscal deficits and Greenspan’s low interest rates are necessary to keep the economy afloat. Trend: private dissaving, public dissaving, foreign saving.

Obama Era (2008-2010): The trade deficit is still an issue, but now the private savings rate has gone up while private borrowing has collapsed. The private sector can’t be convinced to increase its borrowing, even with interest rates at 0%. Now the public sector has to pick up the slack for two sectors, necessitating huge deficits. Trend: private saving, public dissaving, foreign saving.

(“Westminster election”, Alison Marshall, May 2015).

The UK has a long and unhappy relationship with deficits on its current account. In the past half-century, the shortfall of overseas income over spending forced an unwanted devaluation in 1967, brought in the International Monetary Fund to bail the country out in 1976 and presaged an unsustainable boom in the 1980s that ultimately helped to precipitate sterling crashing out of the Euopean Exchange Rate Mechanism in 1992.

. . . The current account deficit widened in 2014 to 5.1 percent of national income, the biggest in postwar history. . . The composition of the decline underlines the risks of the model the UK has been following for years, where investment income from overseas has offset a chronic deficit in the trade of goods and services.

. . . Current account figures . . . are . . . the relatively small difference between two very large numbers . . . Denis Healey, chancellor of the exchequer during the 1976 IMF rescue, later learned fiscal and trade deficits were far smaller than believed at the time . . . Nigel Lawson, chancellor in the late 1980s . . . was misled by wildly over-optimistic deficit forecasts based on faulty data . . . Policymakers must be alert to the current account deficit and its potential consequences, but it is a warning signal to be kept under watch rather than a direct focus of policy.

(Financial Times, 3 November 2015).

Brexit, 2016.

Britain may be better off outside the European Union, Lord King of Lothbury said, as he warned that interest rate cuts would have little impact on the country’s prospects.

Sterling’s 9 per cent collapse against the trade-weighted currency basket since the Brexit vote was Britain’s best hope for rebalancing the economy from consumer spending to exports, creating a more sustainable future, the former governor of the Bank of England added.

. . . Central banks “are approaching the limits” of what they can do and “I’m not sure that much more . . . quantitative easing . . . will achieve very much,” Lord King said.

. . . Lord King also warned that placing increasing pressure on central banks to deliver a solution could ultimately imperil their independence.

(Philip Aldrick, The Times, 29 August 2016).

Further reading.

Inflation, interest, money supply: History.
Inflation, interest, the multiplier, broad money, quantitative easing.

Inflation, interest, money supply: Targets.
Inflation targeting, deflation, alternative targets.