Bonkers '£ campaign' back again


Nutty import-exporter and top Labour party donor John Mills is back with 'the £ campaign'—his wacky attempt to try and ignore all we know about economics and magically devalue the pound to make the UK wealthier. I enjoyed the email he sent me this morning:

The reason why we have such a large government deficit is not because of government extravagance but because we have a balance of payments deficit of approximately the same size. As the Bulletin explains, one is very largely a mirror image of the other. In these circumstances, cutting expenditure or increasing taxation will not reduce the deficit. Instead the impact will be to tip the economy into recession, while welfare expenditure goes up, the tax take falls, and the deficit stays the same size as it was before.

The solution to getting government finances in order is to get the balance of payments deficit down by rebalancing the economy towards export and import substitution led growth. Nothing else will work, which is why we ask you to support the policy changes which we need make to ensure that we can pay our way in the world. As the attached Bulletin explains, When we no longer have a huge foreign payments deficit the government’s financing problems will simply melt away without the need for any austerity policies.

John Mills fits the mould of a rich businessman that gets ahold of one economic concept and just runs with it. Thankfully the Treasury and Bank of England, for all of their faults, are not crazy and Mills is unlikely to actually affect policy.

Devaluation does sometimes work—John Mills is not completely wrong—but not at all for the reasons he suggests. Devaluation works because it's a good way of generating inflation when you're in a slump to clear markets held up by sticky wages. That's in a world of fixed exchange rates.

But in a world of floating exchange rates you can't just decide to change your exchange rate, you have to do something to get there. We could get the Bank of England to target a cheaper pound, but this is exactly the same as getting it to target higher inflation. The way it will get to a cheaper pound is by buying up loads of foreign currency with newly-printed pounds.

This is just quantitative easing where you buy foreign currency not government bonds! And since buying up a given asset doesn't actually signal different investor preferences, market actors are just going to 'portfolio balance'—try and hold the same real portfolio they held before. This means that it doesn't matter what asset the Bank of England buys, really! Buying dollars is the same as buying gilts.

So if John Mills is calling for a bit more QE, maybe that's not a terrible idea—but devaluation will not do what he thinks it will do.