One reason that the Fed's action should be irrelevant is that rates of interest are determined by the market, by the demand and supply of money-capital, not by the diktat of central banks. In Capital III, Marx discusses the way very large finance houses were able to move the market by their action, and he goes on, the biggest of these players was the bank of England itself. In the same way, there is a saying in the US, “don't fight the Fed.”
Yet, the fact is that, in proportion to global financial markets, even central banks are small players. If you total up all of the global financial assets, including all of the over the counter derivatives, you get to a figure of around $1,000 trillion, or about 14 times the total annual global product. Around $15 trillion dollars of finance flows around the US financial system alone, each and every day.
When financial markets, in the past, decided that interest rates were too low, the so called “Bond Vigilantes” sold bonds, refused to buy new ones, and thereby drove bond prices lower, and sent yields on bonds higher, which in turn causes interest rates to rise. In 1992, when global financial markets decided that the Pound's exchange rate, within the ERM, was too high, they attacked it in a similar way to their attacks, in 2010, on the sovereign bonds of Greece, Spain, Portugal, Ireland and Italy. The UK government wasted £5 billion of its reserves, trying to defend the currency, like Canute trying to hold back the waves, and hiked its own bank rate to 15%, even threatening to raise it to 18% before ultimately admitting defeat and pulling out of the ERM. George Soros made £1 billion in a single day, by betting against the Pound.
The Tories and supporters of Brexit often use that experience to argue against the Euro. In fact, their argument is fallacious, and exposes some of the problems they will now face as a result of Brexit. Some of those problems are already being seen before Brexit, as the Pound has sunk in value by around 20%, and is set to sink by at least as much again, after Brexit. Given Britain's dependence on foreign imports, both for consumption, and as raw materials and energy for production, the sinking Pound means that British inflation rises sharply, as already seen in the shops, and its costs of production rise sharply, undermining its global competitiveness, and reducing British workers' living standards.
There were three basic problems that the Pound faced during the ERM crisis. Firstly, it had been taken into the ERM at much too high an exchange rate against the Deutsch-mark. This reflects the hubris of Tories who are still dominated by that old colonial mindset by which Britain is still a dominant global power, ruling the waves. That same mindset can be seen today with Brexit, and the way they think they can dictate terms to the EU. In a different form, it can also be seen in the approach of Donald Trump, but with a greater justification.
Had the Pound entered the ERM at a much lower exchange rate, it would have made it much more difficult for speculators to attack it. The UK authorities would not have had to have such high interest rates to defend it, and the economy would have grown more strongly. But, a high value of the Pound was taken as a virility symbol by the British government.
The main reason that the Pound was grossly over valued related to the second problem for it within the ERM. That is that, during the 1980's, the Tory government had pursued a policy of creating a low wage-high private debt economy. The Tories sought to defeat the British working-class, as they had set out in the Ridley Plan. Part of the process involved allowing unemployment to rise to very high levels.
But, also the Tories are historically the party of the landed and financial oligarchy that obtains its revenue from rents – either the rent obtained on land itself, or the rent obtained on the loan of money-capital, i.e. interest. And, these oligarchies also hold the vast majority of their wealth in these forms of property – land and loanable money-capital (bonds, shares, mortgages) – in other words, as fictitious capital, whose price is determined on the basis of the capitalisation of these revenues.
The consequence was that, during the 1980's, the British economy was being allowed to rot, by the Tories. Large swathes of its industry closed down or relocated abroad, which the Tories were happy to see, as it undermined the strength of British workers. That was in clear contrast to other countries like Germany or France, where high domestic wage costs were responded to with increased levels of productive investment to raise productivity. Today, for example, the average French worker produces as much in four days as a British worker produces in five days.
The high initial exchange rate of the Pound, inside the ERM, could only have been justified if the British economy was becoming more efficient and productive than its European counterparts, but the opposite was the case. A Sterling crisis was then inevitable, and flowed directly from the economic policies that Thatcher pursued through the 1980's, and that Major continued in the 1990's.
Finally, the other problem that the Pound faced with the ERM, and which does not exist with the Euro, is that, under the ERM, the individual European currencies continued to exist. The fact that the Pound continued to exist, alongside the Deutsch-mark, enabled currency markets to speculate against both, driving the Deutsch-mark higher, and Pound lower. Within a single currency, like the Euro, it is impossible for currency markets to speculate against the German currency, as opposed to the Greek currency, for example, because they are one and the same.
Rather than the ERM crisis illustrating an objection to the Euro, and for Sterling remaining outside it, it shows the opposite. It shows how an individual national currency, such as Sterling, can be attacked by global financial markets and speculators, and is thereby more vulnerable than the single currency of a large economy, comprising the union of many states, such as the USA, or EU.
Forward To Part 2
Forward To Part 2
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