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.