Monday, 11 August 2014

Scottish Independence Myths: the currency board

The Scottish independence debate is winding up, and Alex Salmond is insisting on going down with his ship clinging tightly to his 'currency board' idea.

A currency board is how you peg your currency to another. It is, essentially, an implementation of the 'Gold Standard' that locks the monetary policy of one country to another and restricts the activities of the central bank to maintaining that peg.

And yes you can do that unilaterally. Scotland can indeed 'keep the pound' if that is what they want to do.

But of course that means that money can simply drain from the country under any period of stress, and the government is powerless to maintain the necessary excess savings ratio in those circumstances. So you quickly go down the tubes like Greece, or Argentina.

At least with Greece they had a formal arrangement with their 'pegged' central bank that eventually forced the ECB to act to stabilise the situation and bring the interest rate on government debt down. The UK has rejected that option, correctly, as not in the UK's interest.

Argentina had no such formal arrangement with the US central bank, and they are still paying for the mistake decades later. This is the route that Salmond proposes.

I'm with Warren Mosler on this idea:

a currency board is an instrument of colonial exploitation, designed to force net exports in exchange for net financial assets via downward adjustment of real wages via 'deflation.'

It's not wrong to call it a crime against humanity.
Scotland is currently a partner in the United Kingdom. Alex Salmond wishes to change that relationship to one of a subjugate colony. A very strange idea of independence.


Anonymous said...

Yes, the currency board is a fantastically stupid idea.
However an independent country can always change its policies, and Alex can certainly turn on a sixpence when he wants.
The referendum is about self determination, not a specific set of policies.

Neil Wilson said...

"The referendum is about self determination, not a specific set of policies."

It might be for you. For most people though it's about a specific set of policies. Hence the lead in the polls of the No campaign and the consensus that Alex lost the TV debate

And frankly hanging yourself over a restricted currency system is a very silly way to lose the vote.

Salmond has no real vision for an independent Scotland, because I don't think he really want independence.

What he wants is devo-max where he can get to play Laird without having to take any actual responsibility for his actions. Retaining the option to blame London is part of his political game for when things go pear shaped.

And he's getting most of that, so you could argue the strategy is working - for him.

paul said...

That's a perfectly reasonable interpretation of the situation.

I have argued the case for true independence quite a few times over the last year, but currencies and issuance are a terrible blind spot for people, which is why it's being hammered by the unionists.

If you can't say anything positive,find something ill understood and sow fear about it.

It is about self determination for me, the tripartite coalition in Westminster is about the most destructive, depressing shower I can imagine.

An independent currency was mooted earlier but all the civil service advice went against it. Scottish Govt economists aren't the most curious, let alone adventurous.

You would think that as most of Europe had transitioned to a new currency (admittedly not one they could call their own or even wanted)in the last decade without the world collapsing, it is not that scary a sell.

Isembard said...

Neil, as a Scot who lives in Scotland and will be voting yes, I am frankly amazed at your ability to read the mind of the First Minister, and divine his true sinister intentions and unworthy thoughts. It's remarkable.
For some reason, you seem to be displaying the same almost instinctive anti-Salmond virulence as the decayed Scottish Labour party and its disappointed supporters. It must be something to do with his wee chubby face?.

I think that the main motivation for the wish for independence in Scotland among the working classes is the desire to escape from the ever-expanding neo-liberal policies of the main parties in Westminster. For the foreseeable future in Scotland, There Is No Alternative to Westminster neo-liberalism except independence. We have that chance, it's possible, so it's certainly worth trying for.
In my opinion, Alec Salmond has made that opportunity possible, so I don't mind his wee chubby face. However, I'm not voting for Alec Salmond or the SNP, I'm voting for self-determination.

As an amateur student of economics and an MMT fan, I know that an independent currency seems the only sane option for a new country. Getting other countries to accept it might prove tricky, though. Maybe no bananas or iPhone's for a few years?

However, it's not about economic facts (if there is such a thing). It's not even about economic theories. It's about propaganda.

Salmond is asking people to take a chance on what seems a very uncertain future, compared to what they are told is a more certain 'stable' future. 'Certainty' here is of course a matter of opinion. In an entertaining parallel with the mainstream vs. heterodox economics arena, 'opinion' is controlled by the mainstream publications. In the case of Scottish independence politics, we're talking about newspapers and the British Broadcasting Corporation. Of the 37 newspapers that serve Scotland, only one weekly is pro-independence. The BBC is also pro-Unionist.

So your average punter
(a) Knows absolutely nothing about economics apart from what the Daily Mail tells him/her (very little about MMT in there, by the way)
(b) Is told to be afraid, be very afraid, of independence for a thousand pseudo-reasons by all the powers of modern propaganda, on at least a daily basis

- and you want Salmond to tell them on the telly the obvious (to you) economic fact that throwing away the UK pound they've used all their life and going for a completely new currency is a great idea?

I hope you're not thinking about going into politics, Neil.

There is another interesting parallel with MMT. If it's such a great idea, why aren't we all doing it? Surely at least some small African country could give it a go, and show us all how it works in practice. We could all then copy their success. The problem is only that nobody believes it to be sensible 'sound finance', as elucidated by the Daily Mail and The Economist. It's so obviously wrong, it's laughable...

Our lives are controlled and ruled by propaganda spewed out by the wealthy elites and their puppets. Economics and Scottish independence are only two examples of many.

Neil Wilson said...

Why do you believe that the objections are raised due to the physical characteristics of anybody?

If that's the independence attitude, then it's hardly surprising that they are losing on the arguments.

Salmond wanted devo max on the referendum form and has argued for it for years.

If Salmond has made the calculation for his argument on the Pound (having dropped the Euro that he loved only a few years ago) in the way that he has, then it has spectacularly backfired.

As for getting 'other countries' to accept it. Tricky? Hardly.

Exactly what are the Oil companies going to use to pay their government imposed levies and their extensive Scottish staff with when all those people need Scottish pounds?

That means that day one the demand for the Scottish Pound is very high indeed - because none have been issued yet, but lots of people need them to keep their businesses going.

The way to sell it is to ignore it - and sell the benefits. A guaranteed job for all at the living wage, a state pension for everybody and health and education genuinely freely available on an as needed basis.

The end of poverty. The end of banks doing what they hell they like and a government operating on a genuine social libertarian basis for the good of the people.

The currency argument is not one that needed to be had. On the run up to independence day, Scottish bank branches would be required to clear via a new Scottish Reserve Bank, which would maintain an account with the Bank of England and offer convertibility. And then on independence day the convertibility is simply suspended.

All existing Liabilities within the Scottish banking system become Scottish pounds automatically on that date. Precisely the same system as used on the Euro switchover.

I agree with you on the propaganda - although Salmond has control of the entire Scottish government machinery - but the problem was that the vision was fudged and undersold. Which meant that the mundane gets in the way.

Its the same mistake that Labour makes. They enslave themselves to what they believe is the Overton window, rather than spending the time to move the Overton window to where it needs to be.

Isembard said...

The face thing was in the nature of a joke. Maybe I should have inserted a smiley to make it clearer.
Salmond is no better or worse than any other politician, apart from a few notable exceptions such as Tony Benn.
I agree with everything you say about MMT, I can even imagine a new Scotland with an MMT economy, but for the figurehead of the independence movement to even suggest it would absolutely guarantee his failure.
This is the world of smoke and mirrors, of lying and fudging and hiding by vested interests and 'think tanks', not logic and valid theory.

Neil Wilson said...

"for the figurehead of the independence movement to even suggest it would absolutely guarantee his failure."

And while that belief exists there can be no progress. Hence my point about moving the Overton window. The belief that you can't move it is the prison in which you are chained.

People will follow a correctly architected vision. But you have to believe it yourself - or be sufficiently two faced to look like you believe it, Tony Blair style.

paul said...

I cam see your point regarding tactics, and why Alec has chosen this crappy path. The trouble is, as Neil states, the strategy has been far too timid.
They have tried to fashion independence as close to devo-max as possible because they thought that was what they could win on.
The problem is that they are not the same thing at all.
This is why they are now on the back foot.
They should be doing some fear mongering of their own re NHS privatisation, bedroom taxes, Johnson Fsrage ,the coal rights beneath the forth and whatever else the vivisectionists down the road have planned.

As for small African countries, The country that was Libya did quite well along independent lines for a good while.

PeterMartin said...

"and you want Salmond to tell them on the telly the obvious (to you) economic fact that throwing away the UK pound they've used all their life and going for a completely new currency is a great idea?"

Well, er, yes. You don't need to understand much, if any, economics to see that small countries which are truly independent and have their own currency, like Iceland,do better than small countries that don't - like Ireland.

Ireland had the its most prosperous period ever, when it had its own floating currency. ie After it had de-linked the Punt from the Pound and before it got mired in the Euro shambles. That's the only time its been truly independent.

Alex Salmond sounds like a politician who doesn't want independence. He's made such a hash of the argument in favour of it. He may shed a few crocodile tears when the electorate decide they want devo-max, but that will suit him nicely. That's what he really wants too.

paul said...

There are people within the SNP that favour an independent currency and try to point out that it is not just the Alex Salmond show.
Jim Sillars debated George Galloway on the BBC (when's the last time they let gorgeous George past the front door, when's the last time the Guardian gave him a full page spread?) and Jim made the point that there were all sorts of options open to an independent country, including its own currency (his favoured option) and supping with a somewhat longer spoon regarding the EU.
However independence is the chicken and all these things are the eggs.

paul said...

Had a canvasser at the door yesterday asking me on a scale of 1-10 where I stood. I said 10 but asses that the SNP only seemed to be at 5.

Neil Wilson said...

Modern politics is personality politics. One person represents all. The ultimate symbol of human prejudice - packaged up for a 24 hour media age.

All political parties represent a range of views, but the only ones that matter are those articulated by the 'leader'.

paul said...

All political parties represent a range of views, but the only ones that matter are those articulated by the 'leader'

That is the bind and, because that is its point, it leads to some very poor outcomes.

I hope you can forgive me for trying to look beyond it.
As I have no political, economic or military power I can only contribute one nano overton.

Neil Wilson said...

I feel your pain.

Scotland had the opportunity here to lead the way with a Social Libertarian government system dedicated to the welfare of its population.

With the back up of oil and close trading neighbours there was next to no risk in pushing forward.

But for some reason nobody wanted to sell the vision.

Now we will all get to pay homage to London as it sucks the life out of the rest of the UK.

paul said...

It's not over yet!

Isembard said...

Paul, 'Its not over yet!.

I agree, there are many apolitical YES-activists working the streets behind or beneath the mainstream propaganda, especially in the 'deprived' area of the big cities where traditionally apathy rules. Their message of hope is very appealing to those crushed by neo-liberal ideology, with further austerity promised no matter who wins the next general election.

I also have to agree with your prediction of our future in the event of a NO vote, apparently entirely caused by the evil Alex Salmond.