Free Money
Aug. 16th, 2005 01:09 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksNever 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.
Spending on railways - don't make me laugh
Date: 2005-08-16 06:21 pm (UTC)Yes, spend £160 billion on railways, we may get a capacity increase of a few % at a cost of £'s per passenger mile it all makes sense.
Water I can see a point in revamping! Railways - maybe spend £16 billion to tarmac over some of the lines :-)
JG
Re: Spending on railways - don't make me laugh
Date: 2005-08-16 07:54 pm (UTC)Re: Spending on railways - don't make me laugh
Date: 2005-08-17 06:39 am (UTC)it would have made great sense in the victorian era to build railways - it was the only mass-transit system avbailable then. It also probably cost less (in real terms) than the ridiculous cost these days of new railways in the UK.
Re: Spending on railways - don't make me laugh
Date: 2005-08-17 11:41 am (UTC)And the obvious area where this is the case is where the car is not a practical mass-transit option — the cities. Rail travel is growing in London, apace. Now one could argue that the best solution to this would be to shut down London and make everyone work in smaller, more manageable conurbations. But we know that that ain't going to happen. There are rail options that can be developed in a cost-efficient way (look at the Docklands Light Railway) and there are others where I think that we have to bite the bullet and spend a hell of a lot (viz, the London Underground).
I'm not suggesting that we should re-open the Ipswich to Felixtowe line, or other white elephants that no-one would use. But longer platforms for longer trains, more efficient signalling systems, more tram systems such as those in Manchester and being developed in Nottingham, all make sense to me.
The one tram system that they came up with in London (The Croydon arterial route from nowhere to nowhere) was an awful mistake. Monorails can be built if there is the political will. Tram systems into the centre can be built as well. We could knock down a lot of those shops that are no longer needed now because of the Internet.
Re: Spending on railways - don't make me laugh
Date: 2005-08-17 07:30 pm (UTC)Are the Manchester trams that good? I was up at the 2002 Commonwealth games and the Altrincham branch was not up to the job as a mass-transit system.
The problem is that nobody in government follows through ideas, like the national cycle network! I live in Wokingham, worked in Bracknell 5 miles door to door. I cycled in summer, but the roads are not that safe. One route involves a dual carriageway section that is a feed off a motorway, the other is a narrow back road that is a rat run at peak times even to HGV's. the other gripe is where they "build cycle lanes" they are often on pavements giving way to every side road, or go from A to B via C,D and E.
I do like the idea of knocking down shops for tram lanes. I still think we do too little flexible/home working too.
I hope to solve my commuting problems by getting a job just over a mile from where I live - 15-20 minutes walking suits me fine.
John