It’s been said before but seldom as graphically. And I don't think any serious commentator would consider for a moment the idea of Britain joining the euro. (Just look at the Irish figures below!)
The thing that comes across most strongly to me from all I read is that there is little consensus about what we should do but complete agreement that it is extremely urgent and that we should do it now!
Christina
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TELEGRAPH 19.10.09
A sterling crash is a godsend
Britain has twice averted disaster over the past century by a timely – if humiliating – crash in sterling. In neither case was it obvious that this would lead to a decade-long revival in British fortunes.
By Ambrose Evans-Pritchard
Commentators told us in 1992 that exit from Europe's Exchange Mechanism would ignite inflation. They misjudged the slack in the UK economy, and the M3 monetary collapse. Cheap Asian exports were, in any case, starting to cap global goods prices.
It opened the way for 14 years of low-inflation growth, the longest stretch of unbroken expansion in UK history. The last phase was bogus, driven by 120pc mortgages and Gordon Brown's fiscal blow-off – too loose by 5pc of GDP, adjusted for the cycle. But the first decade was real.
The ERM error was not the exchange rate as such. What mattered was the constraint on monetary policy. It forced us to import German rates designed to crush a boom while Britain was in a property slump.
Today's events have no parallel, though it is worth looking back at Britain's forced retreat from the Gold Standard in September 1931. The event was calamitous. Gold had been the monetary anchor of the imperial era.
Failure to cut spending triggered the final denouement. The Labour government collapsed. Naval ratings at Invergordon refused to set sail in protest over pay cuts. Events were reported in screaming headlines as a "mutiny". Bolsheviks sang the Red Flag around bonfires. Those reading newspapers in New York, Berlin, and Paris were led to think that the British Empire was crumbling.
Keynes was triumphant, "chuckling like a boy who has just exploded a firework under someone he doesn't like", wrote Skildelsky. Treasury fears of inflation proved wrong. What followed was an industrial resurgence in the Midlands. The 1930s was a rare decade when Britain greatly outperformed the US and Europe. It is why the mood of defeatism in France never quite took hold over here.
France was a mirror image. It had reserves to tough it out on gold, but by doing so forfeited recovery. The social cost rose year after year. Pierre Laval resorted to dictatorial powers to enforce his "500 deflation decrees". Machine guns were deployed against strikers in Toulon. By 1936 the country was ungovernable. Communists took power in the Popular Front. Investors withdrew funds. France was forced off gold anyway. By then it was a broken nation.
There are such echoes today on the fringes of euroland. Countries trapped in debt deflation with an over-mighty currency – or euro pegs/dirty floats – are receiving the Laval treatment. Latvia is more or less re-enacting the 500 deflation decrees.
Greek conservatives have paid the price for attempting austerity. Hellenic Socialists won a landslide with pie-in-the-sky spending pledges. Portugal is limping on with a minority government after voters defected to Maoists and Trotskyists. Romania's government has collapsed, unable to enforce IMF retrenchment.
Irish deflation has reached 6.5pc. "We have never seen price falls on such a scale: the illusion that money cannot gain in value is something that must be seriously addressed," said central bank chief Patrick Honohan. Good luck.
Politically, these countries face what options traders call "time decay". The longer it lasts, the worse it gets.
Jean-Claude Trichet, European Central Bank president, said this week that "the euro was not created to be a global reserve currency." Trop tard, monsieur. China and fellow export states increased foreign reserves by $413bn in the third quarter. Barclays Capital says 63pc went into euro and yen assets.
So the euro trades at 10 yuan, or $1.49 against the dollar, and near parity against sterling. As long as Asian states hold down their currencies to gain export share, this slow torture can continue – regardless of the underlying health of the eurozone. "The euro is doomed to be strong, unfortunately for them," said HSBC strategist David Bloom.
This is not to underplay the gravity of Britain's crisis. We are in a worse state today than in 1992 or 1931. Our budget deficit is 13pc of GDP. We are living £175bn a year beyond our means.
Sterling's slide may overshoot so badly this time that it triggers a run on the gilts market. But there are risks whatever we do. My (unpopular) view is that the Bank of England has saved this country from depression by printing money a l'outrance, and inviting markets to sell sterling.
David Cameron should not have questioned the Bank's strategy so lightly. The only way out is to cut spending as Canada did in the early 1990s and to offset the effects by printing as much money as it takes, for as long as it takes. The greatest error would be to repeat the loose fiscal/tight money policies of Japan in the first part of its Lost Decade, a mix that has driven public debt to 215pc of GDP. That way lies ruin.
A crashing currency is not a pretty sight. Yet the iron rule is that once you have debauched your economy, you must let the exchange rate reflect reality. To pretend otherwise is to dig your nation deeper into a hole.
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