Gary North’s Reality Check (Jan. 24, 2013)
The governor of the bank of England is Mervyn King. He is about to be replaced by the man who is presently the governor of the Bank of Canada, Mark Carney.
This replacement is unprecedented. A man who is not a British citizen is being brought in to run the most important economic institution in the United Kingdom. Even more amazing, Carney still has two years to go in his term of office in Canada. He is a very heavy hitter. He is a member of the Board of Directors of the Bank for International Settlements (BIS). He is a member of the Foundation Board of the World Economic Forum, which is meeting this week in Davos, Switzerland. For 13 years, he was a high level employee of Goldman Sachs. Surprise, surprise!
On December 10, King gave a speech at the Economic Club of New York. In his speech, he revealed a great deal about the operations of the bank of England. He also said what we should expect in 2013. Because he is about to leave the position, he was far more forthright than could be expected from the head of any major central bank.
In his introductory remarks, King mentioned that 30 years ago, he and Ben Bernanke occupied offices next door to each other at the Massachusetts Institute of Technology. He said that as young men, they believed that economics had solved the problems of the Great Depression. He added this: “Well, we were wrong.”
He then went on to say that central banks this time avoided the worst of the problems of the 1930s, “because of the stimulatory policies injected into the world economy by central banks and governments around the world, although it is fair to say that a recovery of a durable kind is proving elusive.” It surely is. He went on to describe the problems facing the present economy.
BEGGAR THY NEIGHBOR
He pointed out the obvious. First, in Great Britain the government adopted massive deficits, meaning it adopted what Keynesians call a stimulus. Second, the central bank expanded the money supply in order to fund this fiscal deficit. He pointed out something most of us did not notice, namely, that this created a 25% decline in the average exchange rate of the pound sterling against all other currencies. This was a very large decline, he said, the largest since the Second World War. He specifically called this “a gain in competitiveness.” Better put, it was a return to the policies of the Great Depression known as “beggar thy neighbor.” He knows it, and he went on to discuss it later in his speech.
It did not work. There has been no gradual recovery of the economy. Output has been flat. He called it a zigzag pattern. But the policy of debasement did increase British exports. He said: as far as the depreciation went, it was “very effective in stimulating exports of goods to the rest of the world, exports to the Euro area have now fallen back.” The reason why exports have fallen back has been the crisis of the eurozone. He discussed that. But there is no question that he knows exactly what the benefits were for the domestic economy of Great Britain: a subsidy to the export sector.
This is mercantilism, and he made it clear in the early part of his speech that this was beneficial to Great Britain. But it was not beneficial to Great Britain. It meant that most British citizens had to pay more for the goods and services they purchased, because they were facing competition from foreign purchasers of these goods and services. Goods and services were shipped abroad, leaving citizens in Great Britain with a smaller pie to compete for. Adam Smith warned against this in 1776, but the very smart fellows who used to teach economics at the Massachusetts Institute of Technology have yet to understand the argument.
Here is the bottom line. The central bank monetary policy of currency depreciation, which is adopted in order to beggar their neighbors, in fact beggars the general population that is not employed by the export sector of the national economy.
(For the rest of my article, click the link.)