How could one devalue the pound?

A new Civitas report suggests devaluing the pound to boost exports. But can it work?

With fascinating timing, Civitas has released a report calling for the UK to devalue the pound. The author, John Mills, argues that Bank of England policy has been too heavily focused on keeping inflation at two per cent, and has instead lost sight of the more important priority, which is to promote full employment and a trade surplus (or at least balanced trade). He thinks that the best way to achieve those goals would be for the bank to chart a course which will reduce the value of the pound.

Mills argues that Britain should: sell sterling and buy foreign currencies; introduce more QE; lend directly to organisations capable of paying the money back from income flows, such as local authorities and housing associations; and "deliberately increase its spending in relation to its revenues to widen the foreign payments deficit temporarily, to assist in making the parity of the currency fall."

To call his argument balshy would be an understatement. He also steers clear of the msot important distinction, which is that between a floating and fixed currency. Most talk of "devalutions" occurs in the context of a fixed currency, like that which Britain had under the Bretton Woods system. Then, devaluations were real government policy; a decision was made to peg the pound to a certain number of dollars (for instance, in 1949, £1=$2.80), and the Bank of England guaranteed that rate. If the government decided it was too high, it would change the rate the Bank paid out at.

With a floating currency, the situation is very different. The bank can still spend pounds buying up dollars, and if it does so the exchange rate will indeed drop. But without a committment to keep the rate at the new devalued level, exports will briefly rocket, dollars will become pounds, and the whole thing will return to the market determined rate.

It is possible to enact that committment in a slightly different way; the bank could commit to buying a certain amount of foreign currency each month, for instance. This would certainly devalue the pound slightly, but it would also leave the nation open to the sort of extremely damaging speculation that caused Black Friday. A speculator has to be brave or foolish to take on a central bank committed to maintaining a fixed rate, but if the bank has already put a maximum on the amount of foreign currency it will buy, then it's a lot easier to enter a face-off. It's like having a staring competition with someone who has told you they blink every ten seconds no matter what.

Of course, it may be that Mills is suggesting a whole return to a fixed currency. If he is, then apart from the obvious question – fixed to what? – it does also feel rather like he's buried the lede. The return to a fixed currency would be a far bigger decision than the subsequent choice of what level to fix it at.

Mills claims that those who are opposed to his idea are people who value low inflation over high quality of life. Be that as it may, it does feel like he values his heterodoxity over quality. Or, to put it another way: Stop trying to be different, and start trying to be right.

Mount Washington Hotel, Bretton Woods, where the pound was fixed to the dollar in 1940.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Donald Trump's threats give North Korea every reason it needs to keep nuclear weapons

The US president's warning that he may “totally destroy” the country is a gift to Kim Jong-un's regime. 

Even by Donald Trump's undiplomatic standards, his speech at the UN general assembly was remarkably reckless. To gasps from his audience, Trump vowed to "totally destroy" North Korea if it persisted with its threats and branded Kim Jong-un "rocket man". In an apparent resurrection of George W Bush's "axis of evil", the US president also declared: “If the righteous many do not confront the wicked few, then evil will triumph". 

For North Korea, Trump's words merely provide further justification for its nuclear weapons programme. Though the regime is typically depicted as crazed (and in some respects it is), its nuclear project rests on rational foundations. For Kim, the lesson from the fall of Saddam Hussein and Muammar Gaddafi was that tyrants pay a price for relinquishing their arms. The persistent threats from the US strengthen the regime's domestic position and reinforce a siege mentality. Though North Korea must be deterred from a pre-emptive strike, it must also be offered incentives to pursue a different path. 

As Trump's Secretary of State Rex Tillerson remarked last month: "We do not seek a regime change, we do not seek a collapse of the regime, we do not seek an accelerated reunification of the peninsula, we do not seek an excuse to send our military north of the 38th Parallel. We are not your enemy... but you are presenting an unacceptable threat to us, and we have to respond. And we hope that at some point they will begin to understand that and we would like to sit and have a dialogue with them."

The present nadir reflects the failures of the past. In 1994, the Clinton administration persuaded North Korea to freeze its nuclear programme in return for economic and diplomatic concessions. A communique declared that neither state had "hostile intent" towards the other. But this progress was undone by the Bush administration, which branded North Korea a member of the "axis of evil" and refused to renew the communique.

The subsequent six-party talks (also including China, Russia South Korea and Japan) were similarly undermined by the US. As Korea expert Mike Chinoy records in the Washington Post in 2005, the Bush administration provocatively "designated Macau's Banco Delta Asia, where North Korea maintained dozens of accounts, as a 'suspected money-laundering concern.'" When a new agreement was reached in 2007, "Washington hard-liners demanded that Pyongyang accept inspections of its nuclear facilities so intrusive one American official described them a 'national proctologic exam'".

For North Korea, the benefits of nuclear weapons (a "treasured sword of justice" in Kim's words) continue to outweigh the costs. Even the toughened UN sanctions (which will ban one third of the country's $3bn exports) will not deter Pyongyang from this course. As Tillerson recognised, diplomacy may succeed where punishment has failed. But Trump's apocalyptic rhetoric will merely inflate North Korea's self-righteousness. 

George Eaton is political editor of the New Statesman.