Archive for February, 2013

British Conservatives forget their own history

February 27 2013 Leave a comment

Andrew Lilico is a true believer in the logic of austerity and took to the Conservative Home blog recently to argue for bigger, faster cuts.

He was kind enough to respond to my comment and I’ve posted the exchange below.

oblivia: No, no, no. And no.

Lilico reckons Britain could face the same fate as Ireland and Spain. “It is not a “’purely theoretical’ concern,” he assures us.

Err, did I miss the UK joining the euro? If not, then Lilico is talking nonsense. It’s a “purely theoretical” concern that Britain will be forced by the Germans to take the same medicine as Ireland and Spain.

As long as we have our own currency, it’s impossible that we could run out of money and have to go begging to Europe for a bailout. Doesn’t Lilico know this? Is he deliberately cultivating groundless fears or just being ignorant?

It’s bizarre that people who railed against giving up the pound now behave as though we joined the euro anyway. What’s the point of currency sovereignty if you don’t take advantage of the huge power it gives us? We could have spent the past couple of years sprinting past the rest of Europe, but instead we’ve just joined them.

Hard to think of anything stupider.

Lilico: Yeah, yeah, cos countries that print their own currencies *never* have sovereign debt crises, do they? How could anyone have thought that the UK in 1976 had a gilts crisis, or that Angola is anything other than AAA today. And *obviously* the Irish recession and bank failures came *after* the ECB intervened, not before – how could I have been so silly as to think things had occurred in the opposite order.

I am no longer able to be polite about this utterly ridiculous meme that has spread that countries that print their own currencies can never have sovereign bond problems. It’s garbage.

oblivia: There are indeed parallels between Britain in 1976 and the PIIGS in 2009 — they were beholden to others. Britain was dependent on funding from the IMF, while Ireland and Spain had devolved monetary policy under the euro.

News flash: We are no longer indebted to the IMF and we didn’t join the euro. These aren’t accidents. They were the product of deliberate Conservative efforts to protect our independence.

Now you argue that this independence is an illusion. Forget all the arguments of the past, you say, we are in just as much peril today as we were in 1976. Be afraid.

I say this is nonsense.

ps Andrew Lilico is a director and principal at Europe Economics, a consultancy specialising in economic regulation, competition policy and the application of economics to public and business policy issues. You can find him on Twitter as @AndrewLilico, though you do so entirely at your own risk.

pps Martin Wolf also has a good piece in today’s FT that slays a few austerity dragons and makes the point that the problems in the PIIGS were caused by the ECB’s ill-advised austerity (which was forced on them after they gave up their independence to join the euro): “Eurozone countries’ debt crises resulted from European Central Bank policy failures. Because of its refusal to act as lender of last resort to governments, they suffered liquidity risk – borrowing costs rose because buyers of bonds lacked confidence they would be able to resell easily at all times. That, not insolvency, was the immediate peril.”


Helicopters can go up as well as down

February 18 2013 Leave a comment

I commented on Gavyn Davies’ much-discussed article: Helicopters can be dangerous.

This line in particular struck me as odd: “The increase in the monetary base is temporary in the case of QE, and permanent in the case of OMF.”

OMF is overt monetary finance, which is apparently a “less inflammatory” term for helicopter money. I’m not exactly sure why Davies thinks helicopter money would be dropped permanently, or why he thinks anyone is arguing that this would be a good idea.

But what I find particularly obnoxious is how the City is now back to calling for common sense and fiscal restraint. Ha!

Remember, it was bankers who demanded the initial increase in the monetary base (through bailouts) as a way of preserving their bonuses, and it was bankers that drove monetary expansion in the years before the financial crisis as they earned fat margins from cavalier lending, but when someone suggests a monetary expansion that might actually benefit ordinary people… heaven forbid!

Of course, neither MMT nor modern monetarism are concerned with a permanent expansion of the monetary base anyway. The point is to take control of the money supply away from the banking cartel and using a rule-based system instead. Outside of the banking industry, this is not a remotely controversial idea.

The only restriction on what a sovereign nation can or cannot do is determined by the available resources, rather than some made-up limit on the amount of money (which can be created at will).

Fear of currency wars is, like, so 2009

February 6 2013 Leave a comment

I responded to a comment underneath this article: Currency Wars, What Are They Good For? Absolutely Ending Depressions – Matthew O’Brien – The Atlantic.


There seems to be one big problem with this argument. Unlike in the 30s, trade has not collapsed. Thus, the likelihood of a trade war, and consequent ill effects, are quite a bit higher. The effects on the American consumer of sudden price increases on Chinese imports, or their disappearance altogether due to a collapse in trade, could be quite severe.


This comment (and article) would have been timely in about December 2008, when there were some legitimate reasons to fear a trade war (however irrational it might have been). Today, we already know the answer. It didn’t happen.

Instead, China printed massive amounts in 2009, as did most other large economies. And, after considerable strengthening of the yen, Japan is now benefiting from unorthodox monetary policy through Abenomics, and even India seems to be joining the party. But none of these countries are doing it to beggar their neighbours, which is the key point to understand. They are addressing problems in their domestic economies, which happens to have an effect on exchange rates (or not, in a world where everyone is doing the same thing).

Talk of “currency wars” is just marketing for a book of the same name. And best ignored.

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