Why can’t everyone have a printing press?

Quotes from “Creating New Money”, by Joseph Huber and James Robertson.

“The cost to the state of issuing new money is only the cost of
producing banknotes and coins. The cost to the banks of issuing new money is virtually zero. The state receives public revenues from issuing cash, but banks make private profits. The benefits of the money system are therefore being captured by the financial services industry rather than shared democratically.” (p. iii)

“Allowing banks to create new money out of nothing enables them to cream off a special profit. They lend the money to their customers at the full rate of interest, without having to pay any interest on it themselves.” (p. 31)

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Afterthought (1st Nov). More information about James Robertson here. (Hat tip to Gillian Swanson).

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“Where Does Money Come From”?

I’ve just read / skimmed thru this recently published book (published by the New Economics Foundation, London). It does what it claims to do on the front cover, that is it is “A guide to the UK monetary and banking system”. But there are so many references to bank and money systems in other countries, that the book is arguably a guide to bank and money systems in general.

This book explains the numerous deficiencies in the existing system, but does not propose any particular remedy: that is not the aim of the book. Bits of the book that stuck in my mind (because I’m an MMTer) were thus.

1. Warren Mosler’s “parents, children and business cards” hypothetical economy is briefly explained on p.34.

2. The book accepts that the text book model of banking where banks are constrained by their reserves is out of date.

3. The section headed “Is cash a source of ‘debt-free’ money” (p.66) left me scratching my head. This section claimed that “some monetary analysts have concluded that there are two ‘money supplies’. Firstly a supply of cash, created by the Bank of England and injected into the economy by being lent to commercial banks, and secondly a much larger supply of bank-created money created as banks make loans to and buy assets from businesses…” The authors then try to play down the difference between the two sorts of money, for example by pointing out that commercial bank created money is backed by the state: up to £85,000 per account in the UK (but check the small print before assuming your money is safe!).

In effect the authors play down the distinction between what MMTers call “vertical” and “horizontal” money. However, this attack on the latter distinction is half hearted and not very successful.

But there is much more to this book than the above MMT oriented points.

Incidentally in a separate publication, the publishers (New Economics Foundation) and one of the co-authors Prof.R.A.Werner advocate a basic MMT idea, namely that in a recession, the government / central bank machine should simply create new money and spend it into the economy. See:

http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

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Why on earth does the EFSF want to borrow from China?

The Eurozone (EZ) is contemplating bailing out Greece and possibly other indebted periphery countries. Banks holding those countries’ bonds may also be bailed out.

But the EFSF is contemplating getting some of the money for this exercise from China. The EFSF evidently does not understand monetary sovereignty.

That is the European Central Bank can print any number of Euros for bail out purposes any time it wants. As to how inflationary that would be, that is moot. If the indebted countries acted responsibly and continued with their deflationary policies (which are intended to make them more competitive) they would not go on a spending spree.

Likewise the banks which were relieved of their toxic sovereign debts would arguably not go on a spending spree either. Banks on both sides of the Atlantic have had their fingers burned recently as a result of the irresponsible borrowing they indulged in in the run up to the credit crunch. Give a chance they will certainly make the same mistakes again, but not in the next two or three years. Walter Bagehot a hundred and fifty years ago pointed to the never ending cycle of irrational exuberance followed by busts, followed by a few years of recovering from the hangover, followed by the next round of irrational exuberance.

And in the US and UK, bank bail outs have not led to excessive bank lending: quite the reverse.

But even if indebted countries and banks DO GO ON A SPENDING SPREE, Europe (if it gets its act together) ought to be able to take deflationary countermeasures. And this of course is where the real “core countries subsidising PIGs” effect arises. That is, core countries have to rein in demand so as to enable PIGs to spend.

And finally (and to add insult to injury) borrowing from China does not solve the above “spending spree” problem. That is, if indebted countries and banks are going to go on a spending spree with freshly printed Euros supplied by the European Central Bank, they’ll almost certainly do the same with freshly supplied money coming from China.

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Greek style austerity is not necessary.

Britain’s former premier, John Major, has a good article in today’s Financial Times. However he makes a mistake when he says in reference to Euro periphery countries, “because they cannot devalue their currency, they must devalue their living standards and promote reforms that enhance efficiency.” Not true!

As I pointed out here, individual Euro countries MOST CERTAINLY CAN to all intents and purposes devalue their currencies: they just need to cut their wages, pensions, etc. And contrary to John Major’s suggestion, this does NOT result in a big drop in living standards because the bulk of the cost of stuff consumed in most countries is the cost of labour in that country.

Moreover (also contrary to John Major’s suggestions) periphery countries DO NOT need to become more efficient. As long as they do a “devaluation / wage cut” of the right amount, they can perfectly well remain inefficient. Indeed I quite like the idea of a variety of different lifestyles and levels of efficiency round Europe. If Greeks and Spaniards want to take three hour lunch breaks, sitting in the sun, that’s fine by me as long as they don’t demand the supposedly high living standards that Northern European enjoy. I say “supposedly” because sitting in the sun is arguably more enjoyable than working in a factory in Northern Europe. Thus it’s a moot point as to who is better off: southern Europeans sitting in the sun or northern Europeans in factories.

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On the opposite page in the FT there is a silly leading article which says in bold print (in the hard copy version) that “The challenge is to encourage cash-rich businesses to invest and employ people”. Luckily for us, most people running businesses have their heads screwed on tighter than FT leading article writers. That is, most businesses “invest and employ” when there is demand for their products, not just because they’ve got cash sitting in the bank.

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Let the peasants eat cake.

The Bank of England recently announced an additional £75bn of QE. When Simon Jenkins asked some bankers whether it might be an idea to direct the £75bn straight into the high street, they looked at him as if he was mad.

Well you can see their point, can’t you? I mean the purpose of the economy is to keep the elite supplied with fine wines, large houses, and so on. The purpose is most definitely not to enable ordinary consumers and peasants to buy what they want, please note.

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Lawrence Summers wants to pour gasoline on the flames.

Summers in the first paragraph of this Financial Times article has tumbled to something that has been obvious to most of us for three years. This is the recession was caused by excessive borrowing, yet the elite (i.e. Summers & Co) are trying to get us out of the mess by encouraging borrowing. I pointed out the absurdity here in a letter in The Times in 2008, but the absurdity is doubtless obvious to the average ten year old.

To be more accurate, Summers claims that three things will get us out of the mess: more confidence, borrowing and spending. As to confidence, that is thoroughly elusive and impossible to control, so FORGET IT. As to spending, well obviously more spending is required, but the question is how. Silly Summers wants to do it via more borrowing. Stupid!!!!!!!

Modern Monetary Theory (MMT) advocates spending debt free money (i.e. monetary base) straight into the economy in a recession. That way you get extra spending with no more debt.

Personally, and speaking as an advocate of full reserve banking, I’d take it further, and abolish the system we currently have (fractional reserve banking). Fractional reserve means that every additional $ of money is matched by an additional $ of debt. What’s the logical connection here? That is, if the economy needs an extra $1bn of money, whence the assumption that there should also and automatically be an extra $1bn of debt?

Milton Friedman favoured full reserve banking. He was right.

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Yipee - austerity brings modernisation.

In case you had any doubts as to whether the lunatics have taken over the asylum, the New York Times cites some authoritative figures round Europe to the effect that austerity in Greece will bring modernisation.

Anyone with any ideas as to how mass unemployment and cutting social security benefits helps turn an inefficient transport system into an efficient one, please leave your suggestions below. I’m always happy to learn.

Hat tip to Econospeak.

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Tighter bank regulation does NOT impede growth.

I’m getting tired of being told that tighter bank regulation impedes growth. The fallacies in this idea are as follows.

First, in the long run, economic growth is determined by improved technology (other things like educational standards being constant). Thus even if bank regulation is tighter than optimum, in the long run, the effect on economic growth is negligible.

Second, it is blindingly obvious that tighter regulation will reduce loans by banks to businesses, ALL ELSE EQUAL. In particular, if the sources of funding OTHER THAN loans from large banks are not expanded when funding from banks contracts as a result of tighter regulation, then obviously total funding for businesses will decline.
But there is no reason why funding from the alternative sources cannot be expanded! And this is easily done by the simply by expanding the money supply, or monetary base, to be more exact.

Those touchy feely “small and medium size enterprises” which politicians love to show concern for, are often funded in informal ways, e.g. by loans from friends and relatives. And another alternative is equity finance. These alternative methods of funding automatically become easier if the monetary base is expanded.

Moreover, given the extra aggregate demand that comes from expanding the base, (or indeed the extra demand that can be effected in other ways), businesses will be in a better position to pay the extra fees or interest that banks have to charge as a result of tighter regulation!!!! Doh!

Driving at high speed means higher fuel consumption, which boosts fuel sales, which in turn “boosts economic growth”. Is that an argument against speed limits on roads? I think not. I think the intelligent policy here is to try to design speed limits in such a way as to optimise the trade-off between numerous factors: environmental factors, the costs of treating those injured in road accidents, etc. If that restricts economic activity, then no problem: just boost the economy via the usual methods – interest rate reductions, budget deficits, QE, and so on. That will result in people spending less on fuel or treatment for car related injuries and more on other consumer goods. Is that a problem?

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Afterhought, 1st Dec, 2011. Nice to see the Financial Times main front page story also pouring cold water on the idea that tighter bank regulation impedes growth a week or two after the above post.

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Infrastructure investments are NOT a cure for recessions.

Every time there is a recession, sure as night follows day, infrastructure investments are cited as a cure for the problem. Unfortunately this idea gets a fair amount of support from senior members of the economics profession, e.g. Brad DeLong, Ann Pettifor, Nouriel Roubini (p.4).

Just in case these individuals think they are advocating something original, Pericles in ancient Athens, 2,400 years ago, advocated public sector projects as a means of providing work for the unemployed.

There are a string of problems involved in the above alleged cure for recessions, as follows.

1. Infrastructure investments, like any other form of economic activity requires SPECIFIC TYPES OF LABOUR. In the case of typical infrastructure investments (e.g. road, rail, bridge, school, and sewer construction), it’s electricians, carpenters, civil engineers, architects, people with experience of working with concrete, bricklayers, plumbers etc that are needed.

No doubt during a typical recession there is a decent supply of the latter skills to be found amongst the unemployed. But no more so than the skills suitable to other forms of economic activity. And as regards the current recession, it might seem that there is likely to be a super-abundance of unemployed and experienced construction workers. Unfortunately, the evidence is that former construction workers have found no more difficulty finding alternative work than members of other professions, thus it is not entirely clear that the above “super-abundance” exists. See here and see near bottom here.

To put the above point another way, if we HAVE TO concentrate on creating jobs via the public sector during a recession, there is no reason to concentrate on infrastructure rather than other forms of public spending. In particular, in the US, thousands of teachers, police, etc have been sacked as a result of the crunch. To have these people work on infrastructure projects rather than employ the skills they already have is absurd.

2. One big attraction of concentrating on the public sector in a recession is that effects of this spending are more certain than the effects of channelling more money to the private sector: the private sector multiplier is always uncertain.

However, requiring people to change the type of job they do involves costs: re-training, and time taken to learn profession specific or firm specific skills. If the distortion involved in expanding the public sector during a recession is unwound come the recovery, then further costs are involved as another lot of people have to change jobs and/or profession.

3. What proportion of infrastructure projects are “shovel ready”? In the UK it takes a minimum of about a year to get planning permission for any significant infrastructure project, like a bridge.

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Declining participation rates.

I pointed out here a few weeks ago that the US labour market started deteriorating well before the current recession. Or to be more accurate, the participation rate seemed to be on the decline.

Here is a more striking chart showing the same thing. (HT to Mish). Perhaps returning to pre credit crunch participation rates is not on.

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What proportion of the money supply is created by commercial banks?

I like the ideas in this paper authored by Prof.R.A.Werner, Positive Money and the New Economics Foundation. But I’ve got a technical quibble about the proportion of the money supply that is created by commercial banks.

Pos Money and NEF argue that because about 3% of the money supply is physical cash (£20 notes, etc), therefor about 97% must be commercial bank created money.

That point would be valid if physical cash was the only form of monetary base. But it’s not: there is also book keeping entry type monetary base: i.e. bank reserves.

NEF claim that “central bank reserves do not actually circulate in the economy” which is their reason for not counting reserves as part of the money supply. I beg to differ, and for the following reasons.

Suppose I have government debt which reaches maturity tomorrow. I’ll get a cheque from the central bank tomorrow for the relevant amount, which I then deposit at my commercial bank. And the latter than presents the cheque to the central bank, which then credits the account of the commercial bank in the books of the central bank.

I can then transfer £Y of my recently boosted bank balance to person X. And the central bank, as part of it’s role in helping commercial banks settle up between themselves, will transfer £Y from my commercial bank’s account at the central bank to the account (in the central bank’s books) of the commercial bank where X keeps his money.

Now the above transfer is no different to the transfer of commercial bank created money between two individuals (and hence between their commercial banks). Put another way, when I get monetary base as a result of my government debt maturing, I then in effect have money stored at the central bank. As to transferring this money to someone else, it just happens (because of institutional arrangements) that commercial banks act as “go betweens” when it comes to transferring this money. But effectively, the chunk of monetary base concerned is part of the money supply “circulating in the economy”.

But that doesn’t detract from any of the basic points made by Pos Money or NEF. It’s just that I think their 97% figure is a bit out. Since bank reserves are roughly 3% of total money supply (far as I can see – which is not very far) I am saying the figure should be about 94%. Though at the moment, bank reserves are somewhat bloated, so the figure will currently be less than 94%

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George Selgin’s flawed pro-fractional reserve arguments.

Prof. George Selgin in a work entitled “Should we let banks create money?” argues for fractional reserve (FR).

He takes three anti-fractional reserve arguments (p. 94) and tries to demolish them. These three are as follows.

1. FR is fraudulent.

2. It lowers interest rates to below their natural level, which exacerbates the business cycle and results in uneconomic investments being made.

3. FR gives rise to a fragile banking system because banks cannot pay all depositors if too many depositors demand their money back at the same time.

 
Fraud.

The fraud argument that Selgin criticises (p.95) is this. (Incidentally, this is the “least feeble” of his arguments – to coin a phrase.)

Depositors allegedly don’t know that their money is being invested by the banks at which they deposit. Plus they are allegedly unaware that so much is invested in long term loans, that banks cannot possibly repay all depositors their money, should too many depositors decide to withdraw their money all at once.

Selgin’s answer is that most depositors, especially in countries where there is or was no taxpayer funded deposit insurance, know perfectly well their money is being loaned on. Moreover, so argues Selgin, if there were any significant demand for 100% reserve accounts, banks would offer these.

The first answer to the latter point is that banks do offer ultra safe deposit accounts.

For example in the US (despite FDIC insurance) there is clearly a demand for EVEN SAFER deposits as provided by money market funds or money market accounts offered by banks: these invest depositors’ money only in government securities and high quality commercial bonds. And in the UK there is a demand for National Savings accounts.

Second, absent taxpayer funded guarantees, like FDIC, a full reserve account offered by a commercial bank is still not 100% safe. A large amount of fraud and criminality is perpetrated by banks. If that was not clear prior to the recent credit crunch, it has become abundantly clear now that the reasons for the crunch are being revealed.

If depositors are as sophisticated as Selgin claims, then depositors will be well aware that any claim by a commercial bank that depositors’ money is 100% safe should be taken with a pinch of salt.

In short, given the choice between depositing your money with a less than entirely honest organisation which pays a decent rate of interest, and a less then entirely honest organisation which pays no interest, but claims to offer 100% safety, there are good arguments for going with the former.

Indeed many investors adopted precisely this strategy in relation to Bernie Madoff. It was widely rumoured that he was a crook years before his Ponzi scheme actually collapsed. But many investors stuck with him and did very well. Others lost out, of course.

Third, banks make their money out of investing depositors’ money. They will never be overly keen on advertising the ultra safe nature of full reserve accounts: that implies that their normal bank accounts ARE NOT safe.

Fourth, even if demand for 100% safe accounts is small, I suggest the availability of 100% safe accounts it is a fundamental human right. 


Instability and business cycles.

Selgin’s argument here is not all that clear. On the face of it, his argument is simple enough. Unfortunately for those of us with an understanding of money, his argument is open to different interpretations.

Selgin’s “on the face of it” argument is that increases in the money supply do not matter as long as there is an increased DEMAND to hold money. I’ll assume to start with that he means “hold” in the sense of “hoard” or “hold for the well known precautionary motive”.

The first flaw in that argument is that only a very small proportion of money borrowed is borrowed simply to hold or hoard the stuff. That is, the vast majority of money borrowed is borrowed with a view to engaging in economic activity: buying a house, expanding a business, etc.

Second, for every dollar of commercial bank money created, a dollar of “negative money” is also created: that is, a debt of one dollar is created. It is thus PLAIN IMPOSSIBLE for the commercial bank system to create a NET ADDITION to “money” in the sense of adding to the private sector’s net liquid financial assets.

But that is not to say there is absolutely nothing in the idea that the private sector has a desire to hold liquid financial assets. Put another way, there is definitely something in Keynes’s “paradox of thrift” idea: the idea that given an inadequate stock of net liquid financial assets (which is pretty well another way of saying “money”) the private sector will not spend enough to bring full employment. However, while as stated above these “savings desires” cannot be met by commercial bank created money, they CAN be met by central bank created money, i.e. monetary base.


Holding money so as to do business.

Having dealt with the “hoard” sense of the word “hold”, it is possible that Selgin is referring to “hold” in the sense of “hold for the purposes of engaging in economic activity”. In this sense of the word, the person who originally borrows from a bank does not “hold” the money for long: the money is transferred to someone else, who holds it for a while before transferring it to a third party, and so on. But of course the result is that the private non bank private sector as a whole “holds” an increased stock of money.

Here, Selgin’s argument is that because there is a desire to hold more money, that additional money cannot be inflationary. The flaw in that argument is that it totally ignores the main arguments put by opponents of FR (and indeed many economists who do not see themselves as being particularly anti-FR). This is that during a boom, the private sector wants to “hold” additional amounts of money so as to engage in ramping up asset prices (mainly shares in the late 1920s, and mainly houses prior to the recent recession). Or the private sector wants to “hold” more money because it is in a fit of irrational exuberance not connected specifically with house or share prices.

In short, Selgin’s argument that additional amounts of money supplied to the non-bank private sector cannot be inflationary just because that sector “wants” more money, does not stand inspection.

Another argument that Selgin puts under the “instability” heading is that there are sources of instability other than FR. True. But the more sophisticated opponents of FR have never claimed that abolishing FR will bring perfect stability and an end to the business cycle. They simply claim that abolishing FR will IMPROVE stability. (E.g. see the Werner / Positive Money submission to the Independent Banking Commission).

http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf



Third: bank fragility and risks.

On page 99, Selgin argues that because a full reserve gold based money system would produce an inadequate stock of money, therefor we have to have fractional reserve. The flaw in that argument is that the latter two systems are not the only possibilities.

Another alternative is a fiat based full reserve system. Indeed, gold bugs might not like it, but the reality is that the world’s monetary system is now very largely a fiat system, and there is little chance of it being anything else in the near future. Thus to advocate full reserve is in practice to advocate a “fiat / full reserve” system. If Selgin is unaware of this, then that is a glaring omission.

Indeed, a “fiat / full reserve” system is in the above mentioned Werner / Positive Money paper. Under this system, the private sector can at least in principle be provided with whatever quantity of money it feels comfortable with: the quantity that brings full employment without excess inflation.


Under the latter system, commercial banks can lend to whoever they believe to be creditworthy. But what they CANNOT do is effectively print the money they lend. That is, they have to find a saver who is willing to abstain from using his or her money for some period.


Instabilities caused by central banks.

On page 98. Selgin does make one plausible point, namely that the instabilities brought about by governments and central banks are worse than those stemming from the private bank system.

Given the catastrophic damage done by the private bank irresponsibility that caused the recent credit crunch, the latter point is weak. Also, even if central banks really are responsible for more instabilities than commercial banks, that is not a reason to abstain from improving commercial banks, if the latter is possible.


Fractional reserve funded the industrial revolution?

On his page 99 Selgin argues that fractional reserve banking funded the industrial revolution. True: it did.

But the opponents of FR have never said that FR banking is a system that does not work at all. It certainly does work. But the basic claim made by opponents of FR is that we can do better.

On the same page Selgin puts the very trite argument that the fact that FR involves risk is not a reason to dispose of it. He points out that houses involve risk as they can be demolished by earthquakes. I trust the flaw in that argument is so obvious that I don’t need to spell it out.


Conclusion.

The “full versus fractional reserve” argument is complicated. Some of the pro-fractional reserve arguments are easily demolished. E.g. I think I successfully demolished Steve Horwitz’s arguments here. Plus I think I’ve dealt with Selgin’s arguments above. But what is the absolutely clinching argument for full reserve? I’m not there yet. But watch this space.

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Interns raise aggregate employment levels and GDP?

The UK currently has excess unemployment AND inflation well above the 2% target. My guess is that the Bank of England is right in thinking the excess inflation is temporary (because of the surge in world commodity prices, etc). But suppose the inflation spike is NOT temporary. Do we condemn an excessive proportion of the workforce unemployment? The answer is “no”. There is a way out.


Interns.

Interns work for little or nothing (apart from what they get from benefits, if anything). Now what’s the aggregate effect of interns? E.g. do they simply replace regular or “normally waged” employees on a one for one basis? If the latter is the case, then the aggregate effect of interns on employment levels and GDP is zero or thereabouts.

However, there is a way in which interns actually raise employment levels and GDP, which is thus.

Inflation takes off when employers find it so difficult to obtain suitable labour that employers start bidding up the price of labour (or the price of most types of labour). However, if labour is available for free (as is the case with interns), that makes up for their unsuitability. Ergo NAIRU falls. Ergo employment and GDP can be expanded.

Now any old fool can think of flaws in that argument as it stands. But I can think of remedies for the flaws . . . . . . . . . . . see here.

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Paying off the debt would not hinder the recovery.

Indebted governments think that reducing their debts means raised taxes or public spending cuts so as to obtain the money to repay creditors. And since tax increases / spending cuts considered in isolation are deflationary, debt repayment is allegedly a difficult or impossible option during a recession.

That argument is nonsense.

Incidentally there is no urgency for monetarily sovereign countries to repay debt, particularly where the REAL interest they pay (i.e. after adjusting for inflation) is around zero. But if a country DOES want to pay off some debt, it’s easily done.

The first weakness in the “consolidation hinders the recovery” argument is that the money coming from extra taxes does not disappear into thin air, fantastic as that might seem: it ends up in the pockets of creditors. Put another way, every dollar of consolidation is a dollar of QE (the effect of which is stimulatory – not “recovery hindering”).



If going from A to C is a good idea, then going from A to C via B is probably also beneficial.

Let’s consider a government that decides to pay for some extra government spending by borrowing (while leaving aggregate demand constant), and then decides a few years later to pay off the debt.

When government funds $X of spending via borrowing rather than tax, it will not – it CANNOT – simply borrow $X, period. Reason is that the deflationary effect of borrowing is much less, dollar for dollar, then the effect of tax.

That’s because imposing $X of tax reduces private sector net financial assets (psnfa) by $X, whereas BORROWING $X does not reduce psnfa one iota: government borrowing involves taking $X of cash from the private sector and giving the private sector $X of government bonds in exchange.

In short, when government funds $X of spending via borrowing it will inevitably have to implement some sort of deflationary measure at the same time: e.g. raise interest rates, or do some “anti-QE”. In short it will have to withdraw money from the private sector.


Paying off the debt.

If the relevant government then wants to PAY OFF some debt it simply needs to reverse the above process. That is, it needs to raise taxes and/or cut public spending, AND DO SOME Q.E.

And for the benefit of those who worry about the money supply increase involved in Q.E., the above “run up some debt and run it down again” scenario simply returns the relevant country AND ITS MONEY SUPPLY to where it would have been had it never borrowed anything and funded its spending just from tax.

In effect, the country has gone from A to C via B instead of going direct from A to C. Is there a problem there? I don’t think so.


Foreign debt

The only weakness in the above argument is that it ignores the effects of paying debt back to foreigners. If foreigners invest the proceeds of debt repayment elsewhere in the world, the value of the currency of the debt repaying country declines, which will reduce its living standards. However the “foreigner” effect needn’t be all that dramatic, and for various reasons.

1. The Chinese have been wetting their pants over the possibility that the U.S. will monetise its debt. But they haven’t sold much of the debt and invested it elsewhere in the world: they’re short of other places to go. Likewise foreigners whose debt holdings are repaid will not necessarily take their money out of the country.

2. As to how big an effect devaluation has on living standards, the British pound was devalued by 25% in 2008 and UK citizens scarcely noticed.

3. Debt repaying countries can reduce the foreign exchange effect by coordinating their debt repayment efforts. 

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Afterthought, 1st Oct. The above foreign exchange effect does not of course significantly hinder the recovery in the sense of hindering full employment (though as already stated, it does reduce living standards somewhat). Put another way, there is no reason to suppose a devaluation has a dramatic effect on NAIRU. The only NAIRU raising effect is that firms which export will benefit, while firms which rely on imports will contract. The shift of labour to, and acquiring relevant skills in exporting industries will take time, during which NAIRU will be temporarily raised.

However that sort of NAIRU raising effect is far from unique to devaluations. For example the above hypothetical rise in public spending as a proportion of GDP would also require people to change jobs and occupations.