The pound fell to a record low on Monday morning in Asia, following last week’s announcement by the new UK government that it would implement tax cuts and investment incentives to boost growth. .
Steve Forbes, president of Forbes Media, said that in focusing on raising interest rates to cool inflation, central banks and governments have overlooked the importance of maintaining a stable currency.
The GBP briefly fell 4% to an all-time low of $1.0382 on Monday in Asiafollowing the announcement by the new UK government last week that it will implement tax cuts and encourage investment to spur growth.
The currency is weakening against the US dollar as interest rates in the US continue to rise. Both the Chinese yuan and the Japanese yen also fell sharply as the two economies maintained a more accommodative monetary policy than the United States.
“There’s no central bank these days – almost none – that talks about stable currency. It’s about slowing down the economy to fight inflation,” Forbes said at the CEO Conference Forbes Global in Singapore on Monday.
He said many economists and policymakers have stuck to a standard “dogma” or inflation-targeting mindset by raising interest rates and not looking beyond, such as by implementing steps to strengthen the currency.
Forbes favorably cites an example from the 1980s: After Fed Chairman Paul Volcker was engulfed in inflation with a substantial interest rate hike of more than 20%, US President Ronald Reagan stabilized the economy and increase output by cutting taxes and introducing deregulation.
The Reagan administration also coordinated global efforts to sell dollars and buy other currencies.
“Unfortunately, today it’s not just the Biden administration that is posing obstacles to solving supply-side problems, but the Federal Reserve and other central banks think you have to deplete the economy.” economy to drag on inflation,” he countered the idea that a recession is the only solution to inflation.
“They do it by artificially raising interest rates. So they have fewer people employed… that’s not the real cure.”
“The real cure is monetary stabilization. You don’t have to make everyone poor to conquer inflation.”
Currency imbalances can create many problems for economies. A higher US dollar means more expensive exports, while a weaker currency can mean problems like lower foreign exchange reserves.
Forbes suggests using gold to stabilize currencies – for example, tying the US dollar to gold so that the dollar has a fixed value.
“Gold holds its intrinsic value better than anything else on earth… gold isn’t perfect as a stable value but it’s better than anything we’ve found in over 4000 years,” he said. .
“With volatile currencies, you get less productive long-term investments, which is key to economic growth.”
Forbes said that after the Bretton Woods gold standard introduced in the 1940s – whereby the US dollar was pegged to gold and other currencies were pegged to the dollar – the rate of economic growth was much higher.
Separately, HSBC’s chief global economist Janet Henry said at a panel at the same conference that she would not be surprised if the pound continued to fall below as low as $1.0382 on Monday, but she didn’t expect it to be to that extent.
“I don’t think there will be any monetary intervention in the pound… but the central bank has to do more to tighten policies to stabilize the situation,” Henry said.
“I think unless we’re in serious financial trouble, they [bank] will wait until the next meeting to take decisive action to raise rates drastically in the next few meetings. “