Letter: Hard currencies, soft arguments

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The Independent Online
Sir: The arguments against devaluing within the ERM to the level at which we should have entered in the first place are hard to follow. Far from squeezing inflation out of the system, our present policies lead inexorably to hyper-


John Forsyth (Letters, 7 August) shares the Rees-Mogg confidence in hard currencies, but their arguments rest on assumptions that are difficult to test and are poor explicators of recent history. For example, we know the US has devalued massively but enjoys lower inflation and lower interest rates than we do.

The success stories for a hard currency strategy do not support present policies. Japan and Germany started with no multinationals, grossly undervalued currency and developed massive profitable export sectors. Hardening a currency in these circumstances imposes price discipline on a major part of the economy and may indeed stimulate investment in efficiency. Unfortunately, the UK exhibits none of these necessary conditions. It has a large number of multinationals with offshore production options, an overvalued currency, a chronic trade deficit and poor profitability in export sectors. In these circumstances an overvalued currency undermines our small remaining export capability while at the same time creating an inflationary bonanza in the dominant import dependent sector.

The pounds 80 high street price tag on a silk jacket for sale in Hong Kong for pounds 15 underlines the problem. The lavish import profits made by retailers in the Eighties made a signal contribution to the property price explosion. It is ironic that the overvalued pound leaves us with some of the most overpriced land, industrial and commercial property and housing in Europe. I have yet to see anyone opposing devaluation admitting a further large fall in property values will be required to equalise costs. Whether the financial system can absorb this is an interesting question.

The assumption by the leaner and fitter school that hard currencies force beleaguered exporters to become more competitive is not credible when it is so easy and profitable to opt out. Manufacturing exporters can simply transfer production from the UK to China, Indonesia or India to transform unprofitable exports into lucrative imports.

The resulting UK unemployment further erodes a tax base already incapable of meeting the Government's election pledges and sets us firmly on the road to gross underfunding, monetary expansion and massive inflation.

Victory over inflation is a prize that can only be claimed when prices are stable under normal growth and with a balance of payments near equilibrium. It is a delusion that falling inflation in a situation of negative growth, massive and growing internal and external deficits and declining industrial and export capacity provides any proof of improvement in normal inflationary performance.

Yours faithfully,


Director, International Centre for Banking and Financial Services

Manchester Business School


7 August