March 12, 2009

An Effective Tactic Indeed

The British government is worried about economic deflation. Deflation, as in money becoming too valuable as compared to the goods and services for which it is exchanged. And damn, did they find an effective way to fight that.

The Bank of England, the UK equivalent of the Federal Reserve, is going to simply print £2 billion and buy back some government debt at auction. (FYI, the British Pound is trading for a smidge over USD 1.39, so this works out to $2.79 billion.) Pure currency devaluation. Not a lot of it from a macroeconomic perspective, but still, there you go.

Word is, if the British do not see any ill effects from this, the U.S. Federal Reserve will follow suit. Economic historians, I ask of you -- when in human history can you point to an example of currency devaluation working out well? I don't think you'll come up with a single example. But maybe you'll surprise me.

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