Actually just another symptom of overly tight fiscal policy:
Pound Strength Is ‘Crippling’ Britain’s Recovery, Civitas Says
By Svenja O’Donnell
April 12 (Bloomberg) — Britain’s exchange rate is “crippling” the economic recovery, and devaluing the pound by as much as 25 percent could push growth back to an annual 4 percent, research group Civitas said.
The pound’s “significant” drop since 2008 hasn’t been enough to make U.K. exports competitive on world markets, and a future decline in the currency is inevitable, according to John Mills, the author of the Civitas report published in London today. A devaluation of as much as 15 percent would balance the U.K.’s trade deficit, he said.
“The exchange-rate policy which we have pursued for decades has made it much more expensive to run most manufacturing operations here than in other parts of the world,” Mills said. “Getting the exchange rate down is a matter on which, in the end, we will have no choice.”
Data yesterday showed the U.K. trade deficit widened to the most in three months in February as exports of cars and heavy machinery fell, especially to the U.S., China and Russia. British manufacturing has become less competitive as some Asian countries devalued their currencies, boosting their competitiveness and hurting the U.K. economy, Mills said.
Doesn’t MMT teach that this austerity will lead to higher deficits (via automatic stabilizers) instead of lower. So you would think that will drive down the currency. Isn’t it just a matter of time?
it can firm the currency in that it makes it ‘harder to get’ even as the economy weakens. note how strong the yen has been for a very long time with a reasonably large output gap.
If the supply of a currency comes from deficit spending then higher deficits have a downward effect on the exchange rate or not?
Of course the overall effect on the exchange rate also depends on the other currency of the cross and its supply.
Are you suggesting that austerity does not lead to higher deficits?
Is, apart from the yen, the euro an other example?
Even now, with huge pressure regarding Spain, eur/usd comes up again.
Or do we have to understand that from the fact that the ez is a net importer from china and russia, but a net exporter to the US
yes, a proactively higher deficit should have a downward influence on the exchange rate.
however, a proactive policy to reduce the deficit seems to turn into a different story, even though the deficit goes higher due to the automatic stabilizers.
the tax hikes and spending cuts make the euro harder to get, soon offset by income from less income to pay taxes on and additional transfer payments.
at some time the deficit from the tax hikes and spending cuts would get large enough to turn the tide as demand for goods and services would outstrip the supply from the reduced output, but before it gets there taxes are hiked further and spending cut further. etc.
@walter, ‘Demand outstrips supply’
Do you mean that austerity destroys output capacity and eventually will create inflation?
It reduces aggregate demand in the first instance, which is ‘restored’ by the automatic stabilizers increasing the deficit, and you then grow from a lower level, if you don’t again try to cut the deficit, which they unfortunately do.
Absolutely spot on – check out the following chart of M4 money supply in the UK, the contraction is stunning – and naturally strengthens the currency as supply diminishes: