Thursday, 31 July 2014

UK external balance deteriorates - shock.

The UK’s balance of payments has deteriorated recently. Put that another way, foreigners are keener than usual to get hold of pounds sterling. Well that’s fine by me, as long as we charge them a negative real rate of interest for holding pounds (i.e. make sure the base rate is below the rate of inflation). And for the benefit of anyone who is not clear on how to achieve that, here is “Musgrave’s  politically incorrect guide to screwing foreigners”.
Step No. 1: Don’t raise interest rates when the economy recovers. 2. Instead damp down demand by running a budget surplus. Here endeth Musgrave’s politically incorrect guide.
In any case, using interest rate adjustments to regulate demand is crazy, as numerous people / bodies have been pointing out for some time, e.g.: Positive Money, New Economics Foundation, Prof. Richard Werner (see here for those three). Milton Friedman advocated the same. Plus I’ve advocated the same for some time.
If you can get real goods and services off foreigners in exchange for inherently worthless bits of paper, why not go for it? In effect, they’re asking you to be their banker, or supplier of safe assets. Banking is profitable if you get it right.

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