The Economy: Exploring The Answers 3: Currency and Financial Levers

Money is what any economy is about. Because who has it and what it is used for shapes not only the social structure but also the destiny of the nation. Some countries exercise control of all the financial levers which determine the shape of their economic model and, as already discussed in a previous post, they must have a sovereign currency to make that happen. Those in currency groupings have less control, but are better protected from rash ill informed local decisions.

This post will explore two key elements. The first is the integrity of a currency and what that means in practice. The second is to identify the levers of financial power.  It will not explore how moving them  could set us on a better path. That will come in a later post.

Fiat currencies, as paper and electronic money is known, depend for their value on the market view of their reliability long term. As none of the major western currencies is backed by gold and all are floating, the value band within which they are traded, depends on the market having confidence that the management of the  national economies  which issue them, is in safe hands. That means doing what is in the interests of those markets. If they have doubts, they sell off the offending currency and demand a much higher coupon on any borrowing by that country. As the UK discovered during the wild Lis Truss experience.

This proved how market awareness is now the most significant driver in determining the limits within which governments can take political decisions and put them successfully into effect. This is politically disastrous because it causes the democracy itself to become dysfunctional. People vote for stuff which is promised but not delivered. And that undermines  faith in public institutions  and pushes people to extremism.

It is possible to tinker with the existing model and to improve its balance, through taxation and investment. But because the government has no accumulated wealth and no surplus income, it would have to increase personal and business taxes and also borrow.  The model must be changed if there is to be a reversal from almost continuous decline, so that the economy can be shaped for expansion over the long term. For this the government has to take control of all the economic levers.

These are all interest rates, including bank rate, a new minimum saving rate, a new mortgage rate. Terms of borrowing, including minimum deposits, repayment periods and qualifying income multiples. Control of the money supply, up and down, including a halt to quantitative easing by the Bank of England and instead responsibility for so called printing money returning to the Treasury. A more aggressive management of the currency trading value band.

The next  post will look at how using these levers wisely could open a new road to prosperity. It is important to remember that economics is not a fixed discipline. An economic model which works in one set of circumstances will fail in another. Indeed the changes which bring prosperity can also lead to downfall. So called Thatcherism is a recent example of this.

This blog series is concerned with the times we live in, here and now, because we are sleepwalking through a crisis and we have to wake up.