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Free Money
Aug. 16th, 2005 01:09 pmNever tell a chancellor of the exchequer that there is no such thing as a free lunch. For a start, it isn't true, either physically or metaphorically. Chancellors get free lunches all the time. Granted, many of them verge on inedibility (I've yet to find a hotel that can serve 1,000 people a decent meal), but you get what you pay for.
The same might be said of the popularity of your currency. In the third-greatest comeback in history (after England at Headingly in 1981 and Lazarus at Bethany in about 31 AD) sterling is once again becoming a currency of choice at foreign central banks. According to the IMF, 4.4% of the world's foreign currency reserves are in sterling, up 0.6% in the past four years. What this seemingly innocuous number hides is that the absolute size of the world's foreign currency reserves have gone up from $1.68tn to $3.73tn. That means that while in 2000 about £42.5bn was held abroad, now there is about £83.8bn. That works out at £8bn a year for five years, equal to £160 a year for every man, woman and child in the country. Not a massive sum, but it's not something to be sneezed at either. We all have had an extra three quid a week to spend because of the increased popularity of sterling as a reserve currency.
And, for Gordon Brown, this is indeed a free lunch. It helps to keep interest rates low (because foreigners are buying our gilts) and the economy moving.
But, as the UK found out to its cost from 1919 through to 1985, and as the US will find out to an even greater cost when its T-bonds cease to be the destination for every bit of other countries' loose change, there is a horrible downside potential. Because when countries start selling your currency, you are in a mess, and it's a mess you can do nothing about. We haven't actually sold these people anything, apart from a "promise to pay the bearer on demand". What we've done is borrowed consumption now in return for paying it back later. That's what America has been doing for the past 25 years. This kind of thing can go on for a lot longer than people expect, even longer than Warren Buffett expects. But that does not mean that it is never going to happen.
You can't really stop countries investing in your currency (and chancellors of the exchequer have an intrinsic self-interest in encouraging it), but what you should do is realize what is happening and plan accordingly. Spend that extra money on something which will last and which will be useful.
How about a massively revamped railway network and restored underground water system? After all, that's part of what the Victorians spent the first wave of extra money on.
The same might be said of the popularity of your currency. In the third-greatest comeback in history (after England at Headingly in 1981 and Lazarus at Bethany in about 31 AD) sterling is once again becoming a currency of choice at foreign central banks. According to the IMF, 4.4% of the world's foreign currency reserves are in sterling, up 0.6% in the past four years. What this seemingly innocuous number hides is that the absolute size of the world's foreign currency reserves have gone up from $1.68tn to $3.73tn. That means that while in 2000 about £42.5bn was held abroad, now there is about £83.8bn. That works out at £8bn a year for five years, equal to £160 a year for every man, woman and child in the country. Not a massive sum, but it's not something to be sneezed at either. We all have had an extra three quid a week to spend because of the increased popularity of sterling as a reserve currency.
And, for Gordon Brown, this is indeed a free lunch. It helps to keep interest rates low (because foreigners are buying our gilts) and the economy moving.
But, as the UK found out to its cost from 1919 through to 1985, and as the US will find out to an even greater cost when its T-bonds cease to be the destination for every bit of other countries' loose change, there is a horrible downside potential. Because when countries start selling your currency, you are in a mess, and it's a mess you can do nothing about. We haven't actually sold these people anything, apart from a "promise to pay the bearer on demand". What we've done is borrowed consumption now in return for paying it back later. That's what America has been doing for the past 25 years. This kind of thing can go on for a lot longer than people expect, even longer than Warren Buffett expects. But that does not mean that it is never going to happen.
You can't really stop countries investing in your currency (and chancellors of the exchequer have an intrinsic self-interest in encouraging it), but what you should do is realize what is happening and plan accordingly. Spend that extra money on something which will last and which will be useful.
How about a massively revamped railway network and restored underground water system? After all, that's part of what the Victorians spent the first wave of extra money on.
