The most important price in any economy is the exchange rate. It affects the price of exports and imports directly, and the prices of many other goods indirectly.
If the exchange rate is too low, the result can be inflationary. If the exchange rate is too high, output and jobs will be put at risk as businesses lose competitiveness.
These fundamental reflections are prompted by the call from a leading British economist, Professor Peter Spencer, of Ernst & Young's Item Club, for the Bank of England to take direct action in the foreign exchange market to lower the pound.
Prof Spencer believes, in common with this commentator, that the pound is seriously overvalued, and that the current British approach to macroeconomic policy merely aggravates the problem.
Although Britain is acclaimed for its relatively high growth rate, the balance of that growth is heavily distorted. Imports have been outpacing exports for several years, and the country is experiencing a huge, and growing, trade imbalance.
In days gone by, the macroeconomic response would have been to take measures to lower the pound and make it more competitive. But the brief of the Bank of England's monetary policy committee (MPC) is primarily to achieve an inflation target, not to worry about trade imbalances.
Thus, although the Bank has displayed increasing concern about the performance of exports relative to imports, it has done nothing about it. On the contrary, if anything, it has taken action to make matters worse.
With inflation persistently failing to achieve the official 2.5% target, the MPC has been stoking up consumer demand, thereby accelerating the deterioration in the trade balance, by encouraging even more imports.
The loss of price competitiveness via the overvalued pound has hit British manufacturers badly. Even before the world move towards recession, we had a two-speed economy, with manufacturing stagnating and consumer spending soaring.
With inflation hardly a problem, Prof Spencer says "the time could not be better for the MPC to start talking the pound down, supporting the move by selling sterling in the exchange markets. A lower pound would help retarget inflation and transfer spending power from consumers to producers." In making this plea, the Item Club is echoing the advice given during his membership of the MPC - but rejected by the rest of the Bank - of Professor Charles Goodhart, one of Britain's most internationally distinguished monetary economists.
Prof Goodhart had backing from one or two other temporary members of the MPC, but not from the mainstream Bank itself. Now once again the mainstream of the Bank is dismissing the idea of intervention.
In a speech in Kuala Lumpur today, John Townend, the Bank's director for Europe, said to "artificially" weaken the pound "would be bound to put strong upward pressure on UK inflation, and carry potential implications for UK monetary policy."
Whether the upward pressure would be "strong" in this disinflationary world is open to question. But the Bank's response is classic stuff. The whole point of Prof Spencer's suggestion is that now is the perfect time to risk some inflationary effect from a lower pound - because the Bank is actually failing to achieve its inflation target!
