There is something of a fog wafting through international affairs at the moment; the US election, Brexit, Syria, Globalization, Debt mountains, low growth etc. etc. What shines brightly in the gloom is the fall in sterling. Although this is causing anxiety among some parts of the global investment community, it is very good news for the UK. The former governor of the Bank of England, Mervyn (Lord) King gave a ringing endorsement from New York today. Of course there will be tears, because there has to be profound change in the shape of the UK economic model. The biggest argument in favour of Brexit (I voted Remain not for economic but for historical and political reasons) is that it forces major changes in economic policy. We are getting hints of these and will know more after the chancellor’s November Statement, but they are unlikely to go far enough. To gain the main benefit of the fall in sterling requires a radical overhaul in fiscal and monetary policy as well as in the governance of both.
The money supply to the base of the economy should be expanded by Dynamic Quantitative Easing, the government must take back control of the levers of control of interest rates, the money supply and the means to influence the range within which sterling is traded, to make sure the devaluation is longer lasting. These are decisions with big political consequences and must be taken by elected politicians. There has to be huge public investment (£1trillion over a parliament) in the infrastructure weaknesses in transport, power generation and supply, information technology and social housing, to expand the ability of the private sector to generate new wealth rather than inflate fixed assets.
The financial sector is far too big, the taxation base is too small leading to starvation of essential public services, borrowing is far too high and too little real wealth is being created. Imports have to be cut, home manufacture of everything we use increased and exports expanded. A much more proactive approach to interest rates must boost saving, cut personal borrowing and control house prices so that they inflate in line with general inflation and not on a turbo charge of their own. The taxation structure is overdue for modernisation and reform, a process made easier by Brexit. The whole transformation will not be without pain, some wealth which was never really there will vanish, but in the end the result will be a game changer and the younger generation will at last have a decent future to look forward to.
We will know in November whether May’s new chancellor, Philip Hammond, is up to the challenge, or whether he will be a forecasting junkie who gets it all wrong like his predecessor.