Currency fables and foibles!

Imagine for a moment that all countries in the world are using a single currency, say gold (as was once the case), and there are no separate national currencies.

Do you think that everyone in the world would be equally well off? Would there be a uniform standard of living throughout? Of course not.

But what it would mean is that the vast disparities in wealth could not be blamed on the use of a particular currency, because everyone in the world would be using the same currency. The concept of ‘devaluation’ would be meaningless.

International differences in productivity would still be there. These, rather than the currencies, would be seen more clearly as the reasons for regional wealth disparities, and these reasons would have nothing to do with the currency that everyone is using.

It would also highlight the fallacy underlying comments such as that spotted in the business section of one of last week’s papers: “There is still an enormous gap in competitiveness between EU members. Since this cannot be absorbed by currency revaluations, the only lever available is government spending”. Some observations:

(i)                Since being “competitive” means having the ability to produce goods of acceptable quality at prices your customers are willing to pay, this journalist recognises that differences in competitiveness can never be “absorbed” by currency revaluations if all nations are using the same currency.

(ii)              The writer considers, however, that the only way to reduce the gap in competitiveness is to have recourse to government spending – always the last refuge of a bankrupt economic mindset.

(iii)           He does not address the many substantive reasons that lie behind such comparative lack of competitiveness, and at the same time he misses the remedies (rather than “levers”).

(iv)            Since willingness to produce is a natural human condition, competitiveness problems are far more likely to be concerned with obstacles and restrictions that have been thrust in the way of production, and have nothing to do with the currency.

Well-intentioned but misconceived

Last week’s Conservative Party conference provides us with innumerable examples of (iv) above. Our Chancellor, Philip Hammond, like his Prime Minister, still speaks of using taxpayers’ money to correct imbalances previously created by well-meaning but utterly misconceived political gestures. For instance, both he and Theresa May are making much political capital out of their undertaking to allocate £2 billion to the government’s “affordable housing” budget, and the £10 billion extension to the “Help to Buy” loan scheme.

The road to hell is, indeed, paved with good intentions. The volume of regulatory red tape that attends every such intervention is a nightmare in the making. Why not begin to unwind the red tape that already hobbles housebuilding productivity? For starters, just think of all the pointless local authority pen-pushing it involves.

 Take the overblown “health and safety” minutiae that list factors palpably obvious to every builder, yet add hugely to their box-ticking administrative costs and insurance premiums; all the no-go building areas, the labyrinthine greenfield/brownfield restrictions that facilitate local government corruption; the zoning permits and arcane planning regulations; stamp duty, and all the other pernicious imposts and fees that add no value but collectively create the very conditions that leave millions without homes.

And our government’s solution is to throw still more billions at it? Same with rail services. Same with tuition fees. For some ministerial genius, “capping” of fees seemed like the proverbial “good idea at the time”. Why didn’t anyone tell him or her that “freezing” fees at £9,250 p.a. was another way of guaranteeing that every better managed university with lower fees would unhesitatingly, but stealthily, raise its fees to the level of the cap?

When government ministers believe that they know better than we do how to spend our money, their days in power are surely numbered.

Differential added value – don’t blame the currency

As for the currency, we have seen that any currency will function perfectly well as long as it is trusted by those who use it. Putting it another way, it will function as long as its purchasing power is not debased by inflationary money printing by a profligate government or its central bank - the modern equivalent of “coin clipping”.

Government mismanagement that destroys productivity merely leads to greater dependence on welfare and other state handouts that, in turn, generate a cycle of institutionalised indolence that sucks resources while creating no wealth.

This process of economic descent was all too evident when we visited South Africa last February. It is reflected all too clearly in the South African rand’s slide in purchasing power against the British pound over the past 20 years. Even ignoring the fact that the pound has itself lost 30 percent of its purchasing power over the same period, the rand has slipped from 3 to the pound in the mid-‘nineties to 18 to the pound today – a de facto devaluation against the pound of some 600 per cent.

Its budgetary imbalances have created a culture of institutionalised dependency on state and charity handouts, a rash of begging and petty crime – all the inexorable result of ignoring the most fundamental principles of civil housekeeping. The formal devaluation of the SA rand is hardly an option when the international currency markets are doing it for you anyway – month in, and month out!