This was bound to happen.....
The pound’s losses came as Brian Lenihan, Ireland’s finance minister, accused the UK authorities of in effect devaluing the pound by expanding money supply, action that was causing “immense difficulties“ in the Irish economy. “It is a question for all of us in the EU as to the extent to which a competitive devaluation can be used as any kind of weapon.” The Irish economy has been hit hard by the economic slowdown, with Dell, the US computer manufacturer, pulling production out of the country last week.
(from today's FT)
Mr. Lenihan, of course, is absolutely right. The recent slide of sterling has made UK exports more competitive, while at the same time, raising prices of Irish imports here in the UK.
What if every country pulled this trick? Suppose every country reduced interest rates, allowed their money supply to grow at around 16 percent a year (like the UK right now), and let their exchange rate sink like a stone, where would we end up? We would see a series of self defeating competitive devaluations that would only serve to raise world inflation and do nothing to resolve the world wide financial crisis.