But Everybody Knows You Can’t Devalue at the ZLB!
It’s the liquidity trap, stupid! Everybody knows you can’t devalue the currency at the ZLB. Everybody, that is, apart from the central banks of Switzerland, Japan, and the Czech Republic, everybody who has read about forex market gyrations after British, European or American central bankers engage in those almost daily “open mouth operations”, Lars E.O. Svensson, Ben Bernanke, students of economic history, and now Labour Party donor John Mills:
In the paper, which is due to be published this week with the think tank Civitas, Mr Mills has called for an immediate devaluation of the pound. He argues that the UK will be consigned to years of mounting debts and austerity unless manufacturing and productivity levels are boosted. As a major importer of goods, from kitchen gadgets, irons and sports bras, Mr Mills says manufacturing will only return to the UK if the costs come down. De-valuing the pound is the fastest way to achieve this. “We’ve got to get the pound down to make light manufacturing profitable,” he told The Telegraph. “At JML we would buy UK products but we can get everything we sell produced in China for two-thirds of the cost. This is almost entirely an exchange rate issue. And as a result, industrial output just goes down. We can’t pay our way in the world and the economy stagnates – that’s what we’re heading for.”
He said that UK politicians are only using two of the three major ways that a Government can influence the economy – fiscal policy, monetary policy and exchange rates. “Everyone is fixated on the first two and has totally ignored the third,” he said. “And this is the big, big policy mistake that has been made.”
It will be interesting to read the paper; the “real” policy mistake is the choice of nominal anchor, not the level of the pound per se. I hope the proposal is more substantial than a call for a “discretionary” one-off devaluation, but retention of the CPI target.