Sell the reserves

Alan Beattie in the FT defends Gordon Brown’s sell-off of gold reserves. He says:

The function of British foreign exchange reserves is not for the government to manage wealth on behalf of the country. British citizens do that themselves. The UK does not have a sovereign wealth fund that aims to maximise returns, and nor should it.

This raises the question. If it was right to get rid of our gold reserves, why have foreign exchange reserves?
Alan says their purpose is to “stop a run on sterling or to pursue monetary policy objectives.” I’m not sure. Our reserves did nothing to stop sterling falling in late 2008 - and nor should they have, given that a weaker pound had a (marginally) useful expansionary effect. And monetary policy can be conducted through interest rates or quantitative policies, in isolation from FX reserves.
Our reserves are a barbarous relic - a legacy of the dark days when governments tried to manage exchnage rates. Such a job is neither possible nor desireable.  So, why not sell them off and return the money to the people? Doing so would have three advantages:
1. It would stimulate the economy and cut the deficit. Our net FX reserves stand at $42.8bn (pdf), or just under £26bn. Selling half of these would be enough to give every household almost £500 - which would go a long way to offsetting the squeeze on household incomes. Insofar as this money is spent, VAT revenues would rise, thus cutting the deficit by a few billion. And if the move weakens the pound, so what? Exporters could use the (slight) benefit.
2. It would steal the thunder of Ed Miliband’s talk of a “squeezed middle”. Osborne could argue that he is doing something to address the problem. And given that Brown sold off gold reserves (cheaply), Labour would be in no position to complain.
3. It would be a libertarian gesture which would placate some of the Tory right. Osborne could say: “The government takes on too many jobs. In selling reserves, I’m ending its function as a wealth manager, and returning money to the people. This is a step towards smaller government.”
Of course, there are practical problems here. Even in a market as liquid as the FX one, an explicit policy of dumping reserves would move prices against us. But if Treasury civil servants are as smart as they think they (which, admittedly, is unlikely as no-one’s that clever) this problem shouldn’t be insuperable.

Comments

[astateofdenmark]

Maybe I'm just too (small c) conservative, but I like the idea of the government having a rainy day fund.

So, interesting idea, but does the treasury have other reserves that are not classed FX?

Using the household analogy the government likes, it makes sense to pay of the credit card first, rather than use spare cash to build up a savings account.

[chris]

It has a contigency reserve in public spending - which is spending that's budgeted for but not allocated to a department.
But it's main reserves are the power to tax and the power to borrow.

[Alan Beattie]

"Our reserves did nothing to stop sterling falling in late 2008 - and nor should they have".

Agreed. The UK mercifully hasn't targeted the exchange rate since Sept 92. Combating or ameliorating a destabilising panicked run on sterling, though, would be something different and used only as a last resort.

Your suggestion isn't bonkers, but having fx reserves does allow the UK to take part in international coordinated currency operations such as the recent G7 yen intervention. (Not sure of the mechanics of that operation, but presume it would have involved using the reserves in some way).

The rainy day fund argument doesn't really stand up as the amounts involved are too small to be useful.

[chris]

Alan - if the strongest argument for having FX reserves is that they contribute to knocking a few per cent off the yen every now and then, then there's no overwhelming argument for having them, surely?

[Keith]

So you see no role for smoothing the speed of exchange rate rinses or falls?

Is the speed of appreciation or depreciation irrelevant in your view? Or are you arguing the size of reserves are too small to matter?

[dsquared]

Our reserves are a barbarous relic - a legacy of the dark days when governments tried to manage exchnage rates. Such a job is neither possible nor desireable

It is sometimes possible and sometimes desirable. In any case, the foreign exchange reserve is a natural consequence of current and capital account transactions. Unless we are sure that it's a good idea to let our money supply be driven by the residual of the capital account flows in any given period, there's always going to be a balance in the central bank.

By the way, anyone who wants to yah-boo at Brown over his trades in gold really ought to be giving him credit for making the country a much bigger profit in trading mobile phone spectrum.

[Matthew]

It wouldn't placate the Tory libertarian right - they're the constituency most keen on holding huge gold reserves.

[Recusant]

"the Tory libertarian right"

How is it possible to be both Tory and libertarian?

[Graeme]

dsquared - the profit on selling mobile phone spectrum was surely at the expense of the mobile phone industry and therefore, in the end, the consumer, in terms of delayed 3G roll-outs and higher charges, plus the fact that most of the industry is now in foreign ownership. Were these good consequences?

[Hair systems]

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