I wrote a quick essay on the Reasons for the falling value of the Pound
Some are predicting we might see parity between the Euro and Pound in the next few months. That would be bad news for UK tourists travelling to America. However, I think it is unlikely the pound will fall that low – unless the housing price falls turns into a housing slump.
Apologies for getting behind with readers questions
Readers Question: Why do foreigners often hold U.S. dollars? How does the holding of dollars by foreigners affect the welfare of American?
The Dollar still is the world’s reserve currency. With about 67% of the world’s currency reserves held in dollars.
The reason foreigners often hold US dollars
See: Why the US Dollar may lose its place as the world’s reserve currency.
How does the holding of dollars by foreigners affect the welfare of American? – will answer soon.
Readers Question: Identify and explain economic variables that may be affected positively by the economic slowdown.
Does anyone benefit from a recession?
Some people who may do well in a period of a slowdown in economic growth
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Readers Question: A huge current account deficit can seriously affect the economic well being of any country, big or small. Discuss this statement and offer some policy advises to the governments in countries which suffer from this.
Please see: Does a current account deficit matter?
I would add that some countries are better able to finance a current account deficit. E.g. the US could run a current account deficit because Chinese investors were willing to buy US assets. US debt was bought at a relatively low interest rates because of the dollar’s status as the reserve currency.
Some countries like the UK, may be an attractive destination for long term investment (Capital inflows) and this makes a current account deficit easier to finance. So it does depend on the size of the country and also the confidence people have in investing their. E.g. a developing economy may find it more difficult to attract capital flows.
Policies to Reduce Current account deficit
Tomorrow, Monday, I am flying to New York, US. There might be a delay in answering some questions, but, I hope to be back quite soon.
I will be taking lots of dollars to take advantage of the discrepency in the dollar / sterling exchange rate.
Economists, often say there should be no ‘free money on the table’. But, buying a new Mac laptop in the US, could save me £500 due to the weakness of the dollar. I guess someone has to do well out of the declining dollar…
Readers Question: Assess the effectiveness of government policies to increase labour market flexibility in the UK.
It is difficult for the government to effectively increase labour market flexibility. However, this essay offers a few policies and evaluation of how successful they have been
Policies Include:
It is argued that the UK labour market has become more flexible than European counterparts such as France, Germany and Spain. Economists argue that this increased labour market flexibility is a reason why UK unemployment is lower and that the government can make a difference
Readers Question: Evaluate the view that the most effective way to reduce poverty is to increase significantly the state pension.
Pensioners account for a growing % of the population; therefore inequality and poverty amongst pensioners is becoming a significant cause of relative poverty in the UK.
For several years, the state pension has been index linked. This means increased in line with inflation. However, this increase means it has fallen behind average wages and therefore relative poverty between pensioners and workers has increased. Increasing the state pension is a guaranteed way to reduce relative poverty between pensioners and those in work.
Minimum Income Guarantee. Rather than increase the state pension, the government have relied on using means tested benefits to increase the incomes of old people. This means pensioners who rely only on state pensioners can receive a top up benefit. This is cheaper than increasing the universal state pension. However, it has a significant disadvantages. Relying on means tested pensions to reduce poverty creates a disincentive for people to save for a private pension. Therefore, in the long run, it may encourage people to be dependent on state benefits. Continue Reading →
In this essay I looked at why the Dollar may soon be losing its status as the world’s reserve currency. There are actually quite a few arguments against this occurring; but, this essay focuses mainly on why the dollar is weak and why this may lead to the Euro replacing the dollar as the world’s reserve currency.
A fascinating piece of economic history is the hyperinflation of Germany in 1923. I first encountered the hyperinflation whilst studying GCSE history. There are many examples of how inflation can ruin an economy. Stories like people taking a wheelbarrow full of money to buy a loaf of bread. They left the wheel barrow unattended and when they returned the money was still there but, the wheel barrow taken. This essay looks at some of the causes and costs of hyperinflation.
Interestingly the German government of the fledgling Weimar republic were more concerned about unemployment than inflation.
Recommended Book
Readers Question: During 1995 – 1997 in the UK, mortgage equity withdrawal was negative. What does a negative mew value show? and why was there a negative value during this period in the UK?
Mortgage equity withdrawal occurs when people borrow money against the value of their house.
A common way to withdraw equity is to re-mortgage your house. This is especially common when house prices are rising because the house is worth more than the initial mortgage. Mortgage equity withdrawal is thus a way to increase borrowing secured against your rising house value.
Net Mortgage Equity Withdrawal is a way to measure the total amount that people borrow against their house, but, don’t use to invest in housing. i.e. people re-mortgaging to buy a car e.t.c
However, in addition to withdrawing your equity through re-mortgaging. Consumers also inject money through buying houses and improving the condition of existing houses.
A negative value of MEW means that the value of housing stock is increasing faster than the amount of equity taken out by homeowners.
In 1995, we see the following statistics:
(A) Withdrawal by Mortgages £ million 11,519
(B) Other Equity Withdrawals £ million 17,434
(C) Equity Injected through House Purchase £ million 11,721
(D) Financial Equity Injected £ million 13,045
(E) Dwelling Improvement Investment £ million 10,573
(F) Net Equity Withdrawal £ million -6,386
Source Council of Mortgage Lenders CML pdf
Continue Reading →
Readers Question: Asses the impact of a decline in state pensions on income distribution, wages and income inequality for people aged 60 or above?
Firstly, the ‘decline in state pension’ actually means they have fallen relative to wages. For several years, state pensions were index linked – increased in line with inflation. Therefore, in real terms they stayed the same (although, some may argue the inflation rate for pensioners is higher than the official CPI method, therefore they are actually worse off in real terms)
Also pensioners have been entitled to an increased number of means tested benefits.
Having said that. These are the effects of a relative decline in state pensions.
1. Those who rely on state pensions have seen a relative fall in income; leading to an increase in income inequality within society.
Tejvan studied PPE at LMH, Oxford University and works as an economics teacher and writer.
