Tim Worstall

Nigel Dawson says:
September 19 2021 at 1:38 pm
Surely even the most basic economist must know that FX rates are primarily driven by interest rates in different currencies, not productivity?

Reply
Richard Murphy says:
September 19 2021 at 2:40 pm
They’re not

That’s why no one knows that

Reply

Oh.

11.1 INTRODUCTION
It is conventional in macroeconomics textbooks to see the interest rate
as the price of money and to consider it in the context of the supply of
and demand for money. Here, however, we consider the interest rate
alongside the exchange rate. The reason for this is that because capital
can move freely into and out of the country, UK interest rates are
closely linked to interest rates in international markets, particularly
those in the USA, Europe and Japan. Because investors, in deciding
where to place their funds, are choosing between assets denominated in
different currencies, this leads to a close connection (explored in detail
later in this chapter) between interest rates and exchange rates. In an
open economy such as the UK, the link between interest rates and
exchange rates is stronger and more direct than the link between
interest rates and the money supply. We start with interest rates, and
then consider exchange rates.

It’s astonishing what he doesn’t know, isn’t it? And yet he attempts to advise governments?

And we’ve the international Fisher effect, and interest rate parity to think about as well.

Ho Hum.

It’s also unnecessary. Given that exchange rates are largely set by relative productivity rates after hot money flows are taken out of account

Err, no. They’re – largely – set by differences in inflation rates/interest rates, those two being rather intimately combined. The FX rate is a monetary phenomenon, thus influenced by monetary factors.

We can indeed look at the real exchange rate and productivity, but not really the nominal.

And last, there is the rather odd assumption that the Scottish people would not be willing to lend their own government money after independence. As in the rest of the UK there are substantial savings owned by Scottish people. My research has shown that maybe 80% of UK savings are tax driven as to their location. This is likely to be true in Scotland, therefore. If the Scottish government decided that it wished to change tax incentives in ISAs, pensions and its own range of savings accounts to encourage people to save with it then that would very likely be successful in raising significant funds for it. The dependence on foreign money markets could be eliminated.

Better still, my solution puts Scottish savings to work, when at present few of those savings will actually fulfil any useful function within the economy. Much will be lying dormant in bank accounts earning almost nothing. And by Saving for Scotland what people will also do is provide the capital for the solid foundation of their new state – and in the process help build it for the generations to come. As a move towards national solidarity little could work better.

And that hot money he talks about is oft referred to, more correctly, as portfolio investment, which is exactly what those savings he’s talking about are. So, we’re to solve that FX problem of portfolio investment by portfolio investment. Hmm….

Accountancy does always require double entry. Tett is worrying about the size of the credit – as is so commonplace, based on government debt obsession – but the consequences of the debit – which represents the asset that ownership of debt represents – is just as significant.

Growing debt represents increasing wealth inequality. There is no widespread ownership of this debt, and nor is there widespread ownership of the legal entities that own that debt, such as banks. Pension entitlement is, for example, very concentrated.

Borrowing is required to provide access to funding for those without it. But that creates increasing wealth for a smaller number. In my opinion the issue here is not the debt as such. It is the increase in inequality that really matters here, I think, because that is the real cause of the stress Gillian Tett is worrying about.

How to tackle that? Additional taxes on wealth are one very obvious way to do this, not because we need the money to fund anything, but because inequality has to be reduced. It is time we recognised that.

So we tax folks more, reducing the debit, which means – ineluctably – reducing the credit which is that borrowing that is required.

This works how then?

We have short term price pressure because of Brexit, Covid and climate change, but when iron ore prices can fall by 20% in a week, as they gave done in the last week, this can be seen as the price of disrupted markets and not the consequence of any underlying monetary trend that can be tackled by central banks.

All monetary explanations of inflation are wrong because the iron ore price can fall. Good to have that sorted out then, eh?

What is the way forward? With this post already 1,000 words long this is not the moment to address that in detail. But there is one over-riding message, which is that nothing will change until it is accepted that what we have had is broken, irreparably. Whilst we hanker for what was, and the idea that we can ‘get back to normal’ remains a dominant narrative, we remain in trouble.

What was has, I rather strongly suspect, gone. What we have to do now is build what comes next. It does not matter whether we want to or not. We have no option. The way we were was not sustainable in any sense, whether politically, economically or socially. When that is recognised we can move forward. My big concern is that I doubt that we are there yet. At the same time, I also think that awareness is coming. And that’s my basis for hope.

We must do something different though I know not what. A useful guide that, eh?

The allegation is that the process was corrupted.

There is much fury in the development community about this, and those who have always seen the World Bank as a neoliberal enemy are having a field day.

I admit I see things slightly differently. I am delighted by the demise of the Doing Business report. It has always promoted a profoundly inappropriate view of the world concentrating as it did on light regulation and low tax as the basis for prosperity when quite clearly what was not true. This report was part of the old Washington Consensus which the world can most definitely do without.

The background here is that the World Banks’ “Doing Business” report ended up with some governments putting the pressure on to get better results. They’ve thus cancelled the report.

Hmm, well, that just never does happen in other international bodies, not at all. The WHO is not, in any manner, beholden to China over ‘rona for example. Nope. Therefore we should not take this as an example of why we should be leery of international bodies and law. Nope.

But rather more interesting is the insistence that the WB is on the side of low tax and light regulation. And that this report measured that. Not really, no:

The reference to tax rates is here. It’s not even a majority of the ease of paying taxes measure.

It’s not even about light regulation. It doesn’t ask anything at all about gaining permission to operate in a particular sector or anything. It is about effective regulation – rule of law, contracts, courts, property rights and so on. But then those are ease of doing business, not predelictions for light regs and low taxes.

But the P³s opposition isn’t based on knowledge of what the measurements actually are anyway. As with his opposition to the Washington Consensus itself – merely a list of 10 stupid things you shouldn’t do to an economy – it’s just that there’s a vague lefty unease at anyone measuring bad government therefore the measuring should be opposed.

How to tackle that issue remains very largely unknown, but acknowledgement of the issue is a key first step.

Third, in that case what this suggests is that better data on many aspects of employment is required from employers. Gender, class, and race and ethnicity pay gaps are all required now by that most important of stakeholders of all corporations, which is what employees are.

There is no accounting standard on this issue. There should be. It’s on my list.

We’ve no idea what to do about this but someone should pay me to write some blather about it.

Cool!