Global currency

Readers Question:  Should The World Adopt A Unified Currency?


I haven’t given it much thought; given the great difficulties of the Euro single currency within parts of the European Union, the idea of extending this to include even more disparate countries seems a non-starter.

From a philosophic point of view, I think the world is heading towards greater integration, and perhaps in a thousands of years we will global governments, global fiscal transfers and we could move towards a global single currency. But, this would require a completely different mindset of selflessness, breaking down parochial self-interest and seeing the world as one world-family.

Alas, I can’t see this spiritual evolution happening quickly. Some issues to consider in a single currency.

What happens when countries have different inflation rates, but the same currency? In Europe, countries with higher inflation rates (e.g. Greece, Spain, Portugal) were left with large current account deficits, lower exports and lower growth. A global currency, would see even bigger disparities in relative costs and competitiveness.

Single monetary policy. For a single currency to be practical, the assumption would be that you need a single monetary policy. That would be highly impractical and could be devastating for some economies who have different rates of economic growth. For example, we might have very low interest rates, but countries with fast rates of growth could see inflation. It might be more practical to have a single currency, but have regional variations in interest rates. I’m not quite sure how this would work or what the consequences would be. But, with a single global currency you would see a lot of capital flows from less prosperous countries – especially with any variation in interest rate. Continue Reading →


Money Supply, M0, M3, M4 and Inflation

The money supply measures the total amount of money in the economy at a particular time. It includes actual notes and coins and also any deposits which can be quickly converted into cash.

Narrow Money e.g. M0 = This is the level of notes and coins in circulation + banks operational balances at the Bank of England.

Broad money e.g. M4 money supply is defined as a measure of notes and coins in circulation (M0) + bank accounts. It is a broader definition because it includes bank accounts, and not just notes and coins in circulation

(Technical definition of M4 includes private-sector retail bank and building society deposits + Private-sector wholesale bank and building society deposits and Certificate of Deposit.  [link])

M4 Money Supply


click to enlarge –  Source: Money databases LPMVQJU at Bank of England | see also (HM Treasury databank)

M4 is a key statistic because it can illustrate the underlying strength of economic activity. When the economy went into recession, we see a sharp fall in M4 growth from 15% a year to negative growth in mid 2008.

The negative M4 growth during 2011 and 2012 was a sign that economic activity was falling and unsurprisingly the economy went into a double dip recession.

The past governor of the Bank of England, Mervyn King has said that M4 remains an important variable for influencing monetary policy. Negative M4 growth is a key factor in the justification for more quantitative easing, keeping interest rates low and attempts to bolster bank lending.

Quantitative easing

Quantitative easing involves the creation of electronic money by the Bank of England to purchase gilts from the financial sector. In theory, this should increase the money supply.


See also: Quantitative easing and inflation

At the start of quantitative easing, M.King said:

“the unprecedented actions of the Monetary Policy Committee to inject £200bn directly into the economy…have averted a potentially disastrous monetary squeeze” Bank of England pdf)

Therefore, without quantitative easing, we may have seen a bigger fall in the money supply and a deeper recession.

However, the relatively weak money supply growth figures also suggest that quantitative easing was limited in its ability to stimulate bank lending and get money to the real economy.

Money Supply and inflation

Monetarists believe there is a link between money supply and inflation – basically an increase in the money supply can cause inflation. However, in practise, this link is often weak and inflation can be determined by several factors other than inflation.


Still M4 money supply growth can give a guide to underlying inflation and economic activity. For example, in 2011, 2012, the UK experienced cost push inflation. But, the Bank of England didn’t increase interest rates, they felt the economy was still weak. Later CPI inflation fell, and in late 2014 is 1.5% – below the government’s target.

A resurgence in M4 will be a key factor in ending quantitative easing and increasing interest rates.

Continue Reading →

Price regulation / restrictions

Readers question: Please tell me some products for which equilibrium price is not favourable for some producers and consumers which invite the state to impose price restriction.

The equilibrium price is the price determined in a free market; the price determined by the interaction of supply and demand.


Under what conditions could this market price be unfavourable?

Volatile prices. Some agricultural markets could see very volatile prices due to changes in the weather and inelastic demand. The government could attempt to maintain an average / target price, which avoids these short term fluctuations.


For example, a very good harvest could reduce the price of a food item. This low price (p2) would reduce incomes of farmers and could leave them with insufficient money for that year. In this case, the government could use a minimum price (perhaps buying some of the surplus and storing, e.g. see Buffer Stock)

In this case of a minimum price, consumers don’t lose out too much. If price of potatoes falls or rises 20%, it doesn’t make much difference to our living standards, but a fall in income of 20% for farmers could.

On the other hand, if prices rose too much because of a shortage, the government may be concerned that prices were too high and low income consumers might not be able to afford. In this case the government may use a maximum price to prevent prices going too high. The motivation for this is to ensure that all consumers can still afford the good. In developing economies, we may see maximum prices for food, in the developed world perhaps maximum prices for renting or transport. However the problem is that a maximum price may lead to shortages, queues and a black market.


Maximum price of Max P leads to shortage D (Q2) greater than Supply (Q1)

Very inelastic supply

If we have a good with a very inelastic supply, it gives firms / owners the potential to increase price significantly. But if the good is very important, the government may again use maximum prices. One example is rents. Supply of rented accommodation is inelastic, at least in short term. Landlords could use this shortage of accommodation to increase the price of rents and make more profit. In the First World War, the UK government introduced it’s first rent controls to prevent landlords increasing rents above a certain amount. The 1915 rent act restricted how much rents could rise during a period of zero house building during the war.

Continue Reading →


Economic growth with falling real wages

The UK recovery paints an unusual situation. We have both positive economic growth and falling real wages. How can we have economic growth with falling real wages?

Real wages are not the only source of economic growth. We can see growth from other components of AD –

I (Investment), G (Government spending) plus net exports (X-M)

Also, it is possible for consumer spending to rise despite falling real wages (at least in the short term). For example, if spending is financed by borrowing or declining savings ratio. Consumer spending could also be financed through re mortgaging houses (equity withdrawal) against the backdrop of rising house prices.

Economic growth in the UK


Since 2013 Q1, we have seen a decent rate of economic recovery. In the past 12 months – between Q2 2013 and Q2 2014, GDP in volume terms increased by 3.2%

Real wages


Real wages have been falling since the start of the great recession in mid 2008. In a recessing falling real wages are to be expected, but since the recovery, we might have expected real wages to match the growth in real GDP.

Why are real wages falling despite economic growth?

1. Flexible labour markets creating low paid employment. In this recovery, unemployment has fallen more rapidly than previous recessions. Evidence suggests the economy has been successful in creating new employment (often temporary / part-time/ self-employment). These new jobs are not particularly well paid. The recovery is good for job-seekers, but less good for those already in work. The relatively elastic supply of labour willing to take low paid jobs is keeping any wage growth low. Continue Reading →


UK wage growth

Wage growth is a key factor in determining living standards, aggregate demand and inflation. Since the great recession of 2008, nominal wage growth has fallen behind the headline inflation rate causing a significant drop in real wages.

Research from the ONS, stated that in 2012 real wages have fallen back to 2003 levels. (real wages fall) Between 2010-12, there has been an annual average drop in real pay of nearly 3%. Unfortunately, this trend looks to be continuing in 2014.

Recent wage growth in UK


Source: wages KAC3 – ONS (average weekly earnings) – | CPI inflation (D7G7) ONS

Until May 2008, wage growth was above inflation, causing positive real wage growth. But, since 2008, the UK has seen negative real wage growth.

Wage growth since 2000


During the great moderation, we saw a steady period of rising real wages. This has been reversed since the prolonged recession of 2008 onwards.

Real wage growth


Economic implications of recent wage trends

1. Muted inflationary potential. Some economists have worried that there is a risk of inflation from ultra low interest rates. During the great depression, we saw cost push inflation, but this has evaporated because they were just temporary factors, such as rising oil prices, higher taxes e.t.c.

This shows the importance of wage growth for determining underlying inflationary trends. Whilst wage growth remains low, there is muted potential for any inflation.

Continue Reading →

Economic Growth UK

  • Economic growth measures the change in real GDP (national income adjusted for inflation; ONS call it chained volume measure of GDP)
  • In 2013 – annual GDP in volume terms increased by 1.7% in 2013.
  • In the past 12 months – between Q2 2013 and Q2 2014, GDP in volume terms increased by 3.2%
  • The peak to trough fall of the economic downturn in 2008/2009 is now estimated to be 6.0%
  • In 2013, GDP at market prices was £1,713,302 million (£1.7 trillion)
  • Updated October 6th, 2014

Recent UK Economic Growth


Source: ONS IHYQ

Raw data:  National income accounts | real GDP | % change quarterly

Recent history of economic growth

  • Since the recession of 1992 ended, the UK experienced a long period of economic growth – it was the longest period of economic growth on expansion. Also, the growth avoided the inflationary booms of the previous decades. However, the credit crunch of 2007-08 hit the UK economy hard and caused a steeper drop in real GDP than even the great depression of the 1930s. Helped by a loosening of monetary and fiscal policy, the UK experienced a partial recovery in 2010 and 2011. But, by Q1 2012, the UK was back in recession.
  • The second double dip recession was caused by a variety of factors including European recession, lower confidence caused by austerity measures, continued weakness of bank lending and falling real incomes.
  • Since the start of 2013, the UK economy has experienced positive economic growth – one of the relatively best performances in Europe. However, real GDP is still fractionally below it’s pre-crisis peak of 2007.
  • The recovery has been stronger in the service sector than manufacturing and industrial output. There are fears the UK recovery is still unbalanced – relying on government spending, service sector and ultra-loose monetary policy.

It is worth bearing in mind that sometimes economic growth statistics get revised at a later stage.

Continue Reading →


Economic impact of welfare freezes

Readers Question: What is the economic impact of proposed welfare benefit freezes proposed by Chancellor, Mr Osborne?

Mr Osborne has proposed a welfare freeze, worth £3 billion of savings over two years. This benefit freeze includes Jobseeker’s Allowance, Income Support, Child Tax Credit and Working Tax Credit, Child Benefit and Employment Support Allowance (paid to those judged capable of work). It does not include pensions, disability benefits and maternity pay.

The Treasury said that about 10 million households would be affected, roughly half of which are working.

The freeze will raise around £1.6bn in 2016/17, rising to around £3.2bn a year in 2017/18.

An argument for freezing welfare benefits is that it will help reduce the budget deficit and also – since 2007, average earnings (+17%) have been rising at a slower rate than working-age benefits (+22%.)

Economic effects

Aggregate Demand (AD) / economic growth. Welfare freezes will (ceteris paribus) reduce consumer spending, and lead to lower aggregate demand. It is an example of deflationary fiscal policy. It will be quite significant because people receiving welfare benefits have a high marginal propensity to consume because, on low incomes, they don’t have the luxury of saving – therefore, lower welfare benefits will directly lead to less spending in the economy.  Welfare freezes will also contribute to a decline in consumer confidence because it will be a visible reminder of economic hardship. Combined with other spending cuts of up to £24bn, there is still scope for these planned spending cuts to derail the economic recovery and cause lower growth or even a future recession.

However, the strength of the recent recovery suggests the UK may be in a better position to absorb austerity than a few years ago. Also, the chancellor can rely on the Bank of England to maintain a very loose monetary policy, which will help to offset the impact of this deflationary fiscal policy.

However, we still don’t know the position of the economy in a couple of years. there is evidence that the recovery still is unbalanced with low productivity growth and low real wage growth making the economy still vulnerable. Continued recession in Europe could  also act as a drag on the UK economy; it is possible that these commitments to spending cuts could hold back economic growth, that even monetary policy can’t overcome.

Deficit reduction. The spending cuts will contribute £3bn to saved spending, helping to reduce the budget deficit. However, it is still a small % of the current budget deficit (£93bn). Also, the reduction in deficit may be less than planned because it will cause a fall in tax revenues (e.g. less VAT receipts from lower spending) and also lower economic growth from the austerity measures.

Some economists argue that deficit reduction is essential and there is no alternative but to cut spending. They hope that cutting the deficit will reassure markets and business about the long-term strength of the economy. Other economists argue that recent evidence suggests people don’t gain confidence from austerity – but actually the opposite. (see: Confidence fairy)

Continue Reading →


UK Budget Deficit

  • The budget deficit is the annual amount the government has to borrow to meet the shortfall between current receipts (tax) and government spending. (Forecast for UK 2013/14 is £105bn or 6.5% of GDP)
  • National debt or public sector net debt –  is the total amount the government owes. This is accumulated over many years. See: UK national debt (currently £1,400 bn77% of GDP)

UK Borrowing

  • In 2012/13 net borrowing was £80.7bn (5.2%). (Excluding Royal mail and transfers, net borrowing was £115bn (7.4%)
  • In 2013/14 net borrowing is forecast at £93.7bn (5.7%). Excluding Royal Mail and transfers £105.5bn or 6.5% of GDP
  • Government net borrowing was £121 billion (7.9% of GDP)
  • In 2012/13 public sector net receipts (mostly tax revenue) was £593.5bn
  • Public sector total managed spending was £ 674.2 billion.

UK Net borrowing


Latest statistics at OBR

Note this graph excludes sale of Royal Mail which temporarily reduced actual borrowing in 2012-13


Figures for 2013-14 onwards are forecasts. Latest statistics at OBR

Continue Reading →

UK Labour Productivity

Labour productivity measures the output per worker in a period of time. Labour productivity is an important factor in determining the productive potential of the economy. Countries with strong labour productivity growth tend to benefit from high rates of growth, strong export demand and low inflation. Increased labour productivity can enable a higher long run trend rate of growth.

Since the start of the great recession in early 2008, UK labour productivity growth has remained very low – well below the historical average. in Q2 2014 output per hour was some 16% lower than would have been the case had the pre-downturn trend continued.

This is a problem for long term economic growth and is one factor explaining the weak growth of real wages in the UK.

Recent UK Labour Productivity


ONS Labour productivity

Annual Growth in Productivity


Source: OECD – labour productivity growth | data set: PDYGTH. | 2012 est from ONS

In the post war period, UK labour productivity growth was averaging roughly 2-3% a year. However, since the start of the recession in 2008, UK labour productivity has fallen and is at a level close to the rate at the start of 2008 recession.


Labour Productivity since 1987


ONS – data: A4YM

Factors affecting labour productivity

  • Skills and qualifications of workers. If workers become more skilled with relevant training, then this can increase labour productivity.
  • Morale of workers. In a period of industrial unrest and low worker morale, productivity is likely to fall. If workers are motivated and happy, productivity is likely to be higher. Morale of workers could be affected by wages, industrial relations, whether they feel they have a stake in the company, non-monetary benefits, e.g. do they enjoy the job?
  • Technological progress. The implementation of new technology is one of biggest factors in improving productivity. For example, the assembly line introduced from the 1920s made huge strides in productivity. In recent years, the development of micro computers and the internet have also enabled improvements in productivity.
  • Substitution of capital to labour. If labour becomes cheap and freely available, firms may have less incentive to spend money on capital and use labour intensive methods rather than capital intensive methods. Labour intensive processes are likely to have lower levels of productivity.
  • Rules and regulations. If it is very hard to fire lazy workers, then productivity growth may  be constrained. Though the absence of any labour market regulations could lead to high turnover and poor worker morale, which could also diminish labour productivity.
  • Capacity utilisation. In a boom, firms may squeeze more output out of existing capacity through encouraging people to work overtime – this increases labour productivity. In a recession, firms may hold onto workers, rather than let them go – even if they are just working at 80% capacity – therefore labour productivity falls.

Why has UK labour productivity fallen during the 2008-14 Recession?

You might expect workers to work harder in a recession because they fear unemployment, but labour productivity has fallen. Some reasons could include:

  1. Labour hoarding. (When firms hold onto workers). Unemployment has risen by a smaller amount in the ’08-’12 recession – compared to previous recessions in 1981 and 1991, and now unemployment has fallen to 6.2% . This could support the theory that firms are preferring to hang onto workers, despite lower demand. Firms may feel this prevents having to rehire and retrain workers after the recession ends. Though the length of this current recession makes this surprising, and it’s uncertain why it’s happening in 2008-12 more than previous recessions.
  2. Low levels of investment. The credit crunch has held back investment because firms struggle to gain finance or don’t have the confidence to invest in new capital. This could hold back labour productivity growth.
  3. Rising employment / dodgy data.  A strange feature of this recession, is that despite record falls in GDP, employment levels have been rising. Some query whether output figures are understated and employment figures overstated. But, this is unlikely to be happening. The downward trend in unemployment, suggests firms are keen to rehire workers.


    Graph showing negative real wages since 2008

  4. Falling real wages. During the recession, the UK has seen falls in real wage growth. If real wages are lower, firms may  be more willing to employ labour rather than capital. In other words low wage growth means labour is relatively more attractive than usual. Therefore with lower labour costs, firms are willing to employ more workers and labour intensive production methods.
  5. More flexible labour markets. In recent years, UK labour markets have become more flexible, with more part-time, temporary contracts (e.g. zero hour contracts) This has helped reduce the cost of labour to firms, and therefore, they are more willing to employ workers, without rising productivity.
  6. European wide fall. The graph below shows that labour productivity has also fallen in other Eurozone economies.

Continue Reading →

List of National Debt by Country

  • This is a list of the gross National debt that countries have. National debt refers to the amount of total government debt a country has. This is also referred to as ‘public sector debt’.
  • It is compiled using data from the IMF, Eurostat and CIA agencies.
  • Note: National debt is different to ‘External debt‘ – External debt includes all the debts a country (both private and public sector) owe to foreigners.
  • Note: You may see slightly different figures for government debt levels, depending how it is measured. For example,
    •  In Q1 2014 – Net US debt was 74% (debt held by private sector). Gross US debt was 103% (this includes intra-governmental holdings
  • Updated October, 2014

List of National Debt by Country

General gross government debt. Mostly using CIA from April 2014.

Debt levels for 2013.

Continue Reading →

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