Cover of MoneyWeek magazine issue no 625

Currency wars

1 February 2013 / Issue 625

Don't bet on sterling


  • Is it time to take a bite out of Apple?
  • The bond funds that could survive inflation
  • The man who foretold the euro crisis in 1995


Froth paid for with debt

In this week’s interview with Bernard Connolly, we talk a good deal about the horrors of “internal devaluation”. This is a euphemism for pushing down wages inside a country until its products are competitively priced enough to sell abroad in quantities sufficient to eliminate a trade deficit.

A euphemism is required because the consequences of internal devaluation are nasty. Falling wages mean falling domestic demand, and by extension high unemployment. They also mean rising relative levels of debt (your wages fall but the interest due on your mortgage does not) and an inevitable rise in bankruptcies and foreclosures. It is nasty stuff.

It also isn’t guaranteed to work. You can read more on this in the interview, but the upshot, says Connolly, is that even in theory “there may be no economic solution” to the underlying problems of European monetary union.

This isn’t the kind of thing that many economists say. Mostly they have an answer for everything. Just look at the many prescriptions for Britain and its hopelessly bad growth numbers (the economy has now contracted in 12 out of the last 18 months).

• Read the full editor’s letter here: Froth paid for with debt?