Keynes suggested a means to restoring equilibrium between nations after the Great Depression and it may be an idea whose time has come.
We owe a debt to China. We also owe Germany. The question is, should we pay them back? And just as importantly, should we continue to buy their stuff at current prices when they just stick the profits in a vast bank account in the sky and hoard the lot?
They get richer and we get poorer. Not because they are somehow fantastically efficient at making things, though there is an element of that, but because they have artificially low exchange rates.
The Germans have profited vastly from a lower euro than they would have enjoyed had the Deutschmark remained valid currency. The Chinese keep pumping out goods at a dollar-pegged rate. Should the yuan be floated freely, we would all be paying much more for our flat-screen TVs.
Britain, it has to be said, has taken a different attitude to debt repayment than mainland Europe. We have allowed inflation to rip, something that devalues our currency. We have also allowed our exchange rate to fall in relation to other major currencies.
So anyone who has lent money to Britain has already suffered something like a 30% cut in the repayment value of the debt following a 25% fall in the rate of exchange and 5% rise in inflation.
The euro has followed suit in recent months.
In September last year it was worth $1.45. Today it is down to $1.29. But the adjustment only takes the euro back to where it was this time last year when it stood at $1.31. Inflation has remained low, thanks to the stubbornly orthodox European Central Bank (ECB) and its high interest rate policy (something that also contributed to the high exchange rate in the first half of last year).
Paying back debt
For some reason, the ratings agencies refuse to punish countries that devalue through exchange rates and inflation. Downgrades only apply to those countries that fail to honour 100% of debt repayments when they come up for renewal.
Poor old Spain, Italy, Greece, Portugal, Ireland and even France must live with higher exchange rates than is realistic given the poor state of their economies. They must also live with the ECB’s tight monetary policy. They are stuck paying back massive debts at full price.
In 1945, the last time Europeans looked at each other with massive debts tied round their necks, the chief creditor country, the US, refused to support a plan that taxed surpluses and declared them worthless after a set period. Instead, it embarked on a spending spree of its own until by the early 1960s it was also a debtor nation.
In the process it underwrote European debt and in a piecemeal, voluntary process, wrote most of it off. Britain, Germany and France all benefited from huge debt write-offs in a series of agreements thrashed out in the 1950s.
Britain’s sovereign debts are too high for the government to help out households, banks and companies, which collectively have the biggest debts in relation to GDP in the world. A devalued currency and a bit of inflation is not enough.
Like other indebted European nations, we need a huge write-off. The Germans must admit that surpluses cause as many problems as debts. Without surpluses, there are no debts.
Floating exchange rates
Obviously, we need some economic disciplines in place or people would not work and save at all. They would just spend in the expectation that debts would be written off. But floating exchange rates and a tax on surpluses would help adjust the imbalances.
Robert Skidelsky, the eminent economist and historian, has documented how John Maynard Keynes, who wrestled with this problem in the depression of the 1930s, put forward just such a solution.
“Keynes sought to secure creditor adjustment without renouncing debtor discipline. To this end, his scheme aimed to bring a simultaneous pressure on both surplus and deficit countries to ‘clear’ their accounts.
“Persistent creditor countries would be allowed or required to revalue their currencies, unblock any foreign-owned investments and be charged rising rates of interest (up to 10%) on credits running above a quarter of their quota. Any credit balances exceeding quotas at the end of a year would be confiscated and transferred to a reserve fund.
“Persistent deficit countries would be allowed or required to depreciate their currencies, to sell the ICB [ie Keynes’ proposal for an International Clearing Bank] any free gold, and prohibit capital exports. They would also be charged interest on excessive debits. If all countries were in perfect balance at the year’s end, the sum of bancor [Keynes’ proposal for a global proxy currency] balances would be exactly zero,” he wrote last year.
China will not write off anyone’s debts - it is hooked on being a surplus country. The Germans should know better. And if they refuse to write off other nations’ debts, it is they and not the Greeks who should be thrown out of the euro.—