Foreign exchange pitfalls

Anneliese Dodds, Shadow Chancellor, asked on ‘Labour List’ whether she’d read ‘The Deficit Myth’ thinks she’s read bits of it – but promised to double check and go away and read it!

Her concerns about Modern Monetary Theory (MMT) are around the international context.

So she’s obviously aware of MMT, which is certainly a plus, and I suggest, has focussed on its weakest point, which I consider to be its efficacy around foreign exchange.

This is most obvious in the developing world, where some countries, through their own lack of resources, are forced to import energy or food or both and these purchases, either through necessity or ignorance – or even corruption – are usually made in US dollars.

The most beneficial solution to the difficulty is to avoid dollars altogether and get together reciprocal trading with your near neighbours. Mercosur in South America is perhaps the most obvious example of an effective local trade block, but most South American currencies are convertible into foreign currency only via the US dollar – so the payment system is not ideal. There seems to be no reason why, between themselves, they could not entirely avoid the US dollar.

The British situation is likewise, sub-optimal. Not only are we seemingly destined to leave the easy trade with our own near neighbours, who are by force of geography likely to consider sterling usually at least as welcome as dollars, we also need to import about 50% of our food in the year – and more than that at some times in the year – I’ve even seen an estimate of 80% in January – just at the time of Brexit departure. Usually a bit more than half of those food imports come from the EU. Nor is the UK self sufficient in energy. Nor do we manufacture much either. We are always told that services are the British skill – but services are not inherent to the country and, as we’ve seen with ‘Working Form Home’, many of the services can be conducted pretty much anywhere. So, with Britain outside the EU, services could easily be lost to the EU itself or farmed out to any number of countries with cheaper labour costs.

No wonder Rees-Mogg let slip that it could take Britain 50 years to ‘reap the benefits’ from Brexit. That’s two generations plunged into limbo waiting for any ‘benefits’ to appear – or not.

So if a no-deal Brexit awaits us at the end of the year, Anneliese Dodds is right to be especially aware of the ‘international context’.

A country that has undergone more than a decade of austerity with a government that still shows no sign of major investment at home, a country that imports significant amounts of its essential food and energy and also risks having what it does export decimated by the barriers of Brexit, will indeed need to be more than usually aware of the international context. With the pound having already declined in value by about a quarter since the Brexit referendum result and with a no deal Brexit likely to precipitate further decline, the international context is looking more important than ever.

When the foreigners who invest in (and lend to) the UK government, start to notice their holdings declining in value because of the exchange rate and gradually lose confidence, Britain risks finding it is less and less able to pay for imports in Sterling, and so will find it increasingly difficult to finance imports, or will find them very much more expensive. Interest rate rises might result.

Either amounts to an extra tax on us all.

So I’m happy that the new shadow Chancellor realises the international and foreign exchange dangers in her understanding of the monetary system but I do hope that she arrives quickly to the view that, whilst balance of trade deficits in food and energy are things to beware of, the budget deficit is decidedly not.

And that she realises too, that when, as we now do, we have large numbers of unemployed, then we ought to be ensuring they can work in order to secure both clean energy production and energy saving. And also necessary is investment in horticulture to assure an increase in the supply of local food and for as long a season as possible.

Diversification of the economy to encourage import substitution will be important as Brexit causes international trade to be considerably more difficult.

British services will not cut it.

And whoever the Chancellor is they need to use the insights of MMT in order to make certain of a prosperous economy at home.

They will then have to give far less attention to those potential foreign exchange pitfalls.