. . . my spreadsheet for playing with GDP levels has been updated. UPDATE ON UPDATED NEWS: THE UPLOAD SEEMS TO HAVE FAILED. WILL DO THIS TOMORROW PM. SORRY.
SECOND UPDATE: NOW IT’S THERE. Please have a play.
Now you can add your own scenarios, play with them. If you can be bothered, compare the last two, called “Japan without the exports” and “Grow fast, deal with debt later”. The difference in terms of GDP is the equivalent of having a lost decade or not. It is what I am referring to in the last paragraph of my piece on Comment Is Free today.
I would like to pass on my thanks to Paul on LibCon and Chris on Stumbling and Mumbling for mentioning my paper – it gets it noticed by the intelligent readers I know they have. Chris, as expected, has more research than me, and backs up the intuition that devaluation is not the answer to everything:
For one thing, there are long lags between exchange rate moves and export performance. During these lags, FX markets will question whether sterling is helping, and might therefore sell pound even more. Also, many exporters respond to a lower exchange rate by raising prices more than expanding sales. And even if sales do rise, many UK exports have a high import content – think of all the imported raw materials and components – which mitigates the effect on growth.
He is also too modest to mention his earlier posts that really took apart the “sterling crisis” warnings of George Osborne. Osborne warned a year ago of such a crisis, and by July was clearly wrong. It raises an interesting problem: there is no one model of what determines a currency rate. Osborne last November implied – not unsurprisingly – that having inflationary finance, unsustainable deficits, that sort of thing, weakens currencies. But so too – as Chris points out – does having smaller deficits and lower interest rates. The two models conflict. You can ****up the pound by having huge deficits or by having tiny deficits. He seems to have proposed both mechanisms in the last year.
So a strategy to grow through devaluation – but with no assurance (a) that devaluation will be achieved and (b) that it will produce the very necessary export surge. And if it did produce growth, the pound might soar like it did from 1996 . . . .