The Twitter thread is by Ben Wray of Common Space and is worth sharing in my view.
And I know there is supposedly software to do this but I have not got time to find it this morning...
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CommonWeal’s thesis is that instead of sterlingisation Scotland could, relatively easily and quickly, start its own currency, using the reserves inherited from the BoE.
But doesn’t the example of Denmark demonstrate that is not the case?
Denmark is very similar to Scotland in many respects. It is a Northern European democracy of about the same size and level of prosperity. Scotland and Denmark have many major trade partners in common. That plus the geographic proximity indicate that they are probably exposed to broadly similar risks of exogenic shocks.
Most importantly, Denmark has one major trade partner that is considerably more important than all the others, with which it shares a border. Just like Scotland vis a vis the rUK.
Denmark’s central bank finds that in order to manage its currency, it needs more the equivalent of more than £55 billion in reserves. Even the most rosy projection of how the divorce settlement might turn out leaves Scotland with only about 1/5th that amount available for the new central bank.
If it doesn’t need these reserves, why is it holding them, letting them be frittered away by inflation instead of serving some productive purpose?
So why do you think that Scotland could do what Denmark does?
I know that the U.K. does not find any such proportionate need. But the UK is in a different peer group. (1) it is one of the few reserve currencies in the world; (2) it doesn’t try to manage its exchange rates; (3) it is one of the worlds 10 largest economies; and (4) it has a long track record. The international markets know what they are going to get.
Independent Scotland will have none of these characteristics. So I don’t know why anyone would look to the UK to estimate what Scotland would need. Why no instead look to another small northern European country that maintain a peg with a larger neighbour.
I’ve already asked the question, what does Denmark do with these reserves?
Unless, and until, you can prove why Denmark needs the reserves, rather than simply has them, then your observation makes no sense at all.
“Unless, and until, you can prove why Denmark needs the reserves, rather than simply has them, ….”
It’s part of the tyranny of the orthodoxy I suspect. A hangover from the age of gold reserves.
The figures I looked at the other day indicated that the US has about the smallest reserves in the world (as proportion of..?…GDP probably). And why ? Because if they need cash they’ll ‘print’ some. Why have it lying around going mouldy. Not that cash reserves are actually real heaps of money anyway….. not beyond what is necessary to keep the ATMs functioning. (Oh, and the illicit drugs trade of course)
We’re in fantasy land. It has its own rules.
Richard,
I am interested to hear what you would think would happen to Scotland’s new currency and it’s interest rates on independence. It is key for people to understand the realities of the choice they make, and the risks they take doing so. You are making a lot of commentary, so I assume you must have done some economic analysis for the case of an independent Scotland on it’s currency and rates.
I ask this in part because we can see hat is happening in Italy right now. The threat of a populist government (like the SNP) advocating increased spending and larger budget deficits (again, like SNP policy) and a potential exit from the Euro (though firstly in parallel with the mini-BoT new currency) has sent Italian interest rates flying higher.
Italy does have a larger debt stock than Scotland (130% as opposed to 90% or so) but is running a much smaller budget deficit (2% as opposed to 6%) and actually runs a primary surplus.
If investors are running for the hills at the threat of larger deficits and a new currency in Italy, why wouldn’t the same be the case for Scotland?
It would be illuminating to see the data and analysis you are working from to make your pronouncements on the subject.
Let me ask you a question instead: what is Italy doing now that its reserves impact?
Please explain, or your question is inconsequential
“what is Italy doing now that its reserves impact?”
I’m not sure what question you are asking here. The sentence doesn’t really make any sense. Is it how many FX reserves Italy has? In that case the answer is approx 125Bn Euro. Scotland would inherit about 10bn GBP of FX reserves from the Bank of England, which wouldn’t cover their trade deficit, so they would be dramatically short which would put massive downward pressure on the value of a new Scottish currency.
Could you please answer the questions I have put to you?
You must have done some serious economic analysis to come to the conclusions you have, so for the benefit of the people who are listening to you could you please show the details of it to explain what you think would happen to a new Scottish currency and interest rates (and I suppose by extension, inflation rates).
It is all well and good to say an independent Scotland needs it’s own currency, but people might not be so keen if they find that currency devalues heavily and interest rates and inflation go much higher.
If you are making the case of an independent Scotland, and then making the case for various economic policies they should follow, you really ought to show the data and analysis that have led you to these conclusions. At the moment you have written articles which are really just opinion pieces which ignore the potential risks, costs and downside for an independent Scotland with it’s own currency.
Your assumption is that having reserves prevents devaluation
Would you like to present your evidence?
I would suggest that is simply not true: markets price a currency based on fundamentals, not based n currency interventions (which almost invariably fail)
So I repeat my question, What do these countries do with these reserves? Unless you can show why they are required and what the benefit is your argument is pointless.
Reserves are not typically used for currency market intervention, unless the currency is pegged to another one. I assume a new Scottish currency would not be pegged.
Reserves are used for import cover. So how much a country needs will be dependent on it’s trade balance and where that balance is generated.
Which is why the US has relatively small reserves (most of it’s imports are also priced in US Dollars, the benefit of having the global reserve currency) but also why Scotland would have a massively problem (none of it’s imports would be priced in a new Scottish Currency, and they would have reserves sufficient for only a few months import cover. I already mentioned this when I said Scotland’s reserves would not cover their trade deficit for very long.
Once those reserves are exhausted typically it means that the country, both private sector and government, need to start selling the local currency (Scottish) to buy the foreign currency to pay for imports.
Without reserves a local currency will start to devalue, nothing to do with any central bank intervention
This is basic and well understood economics. I would have assumed you knew this given your position.
Could you now answer the questions I have put to you? It seems that you are trying your hardest to avoid answering them. The reserves question is a bit of a sidetrack at best.
I asked you what would happen to a Scottish currency, interest rates and inflation if Scotland is running a large budget deficit, with little in terms of reserves (as a additional weakness compared to Italy, not the only one).
My guess is that a Scottish currency would devalue heavily against the UK pound and other major currencies, and that would send inflation in Scotland higher. I also guess that running large budget deficits would send interest rates higher still as the market would price this risk in. So interest rates in Scotland would me much higher than in the UK. Italy’s 10y bonds are already 250bp higher than Germany’s, for example, on the risk that Italy will run a large deficit and potentially introduce a new currency – neither of which has actually happened yet – with likely worse to come if they do.
So, if this happening to Italy, why would anything different happen in Scotland? If you think it would somehow be different, could you show us the analysis you have done to make your case? If it would not be different, you should be honest and tell the people listening to you that the cost for an Independent Scotland with it’s own currency is higher inflation and higher interest rates.
You assume Scotland will run a trade deficit
Why?
Please explain
Your argument is all ‘I assume’
The result is you assume there will be a crisis
Now give me facts if you want to make a case
Common Weal have: here http://allofusfirst.org/tasks/render/file/?fileID=2DD7825A-AE28-C5F2-CC8A1EE4822E2CCE
I am not assuming Scotland runs a trade deficit – it already has a large one. About £12bn. Or 7.5% of GDP.
This might change over time, but a newly independent Scotland won’t suddenly inherit a net positive trade balance.
You seem unwilling to answer some basic questions. I am not making the case for a new Scottish currency. You are. I am asking what could go wrong, and using the example of Italy. Instead every time I point something out you come back with more questions for me, and more rhetoric.
It is up to you, given that you are arguing for a new Scottish currency, to show why it would be a good idea. It is also up to you to be honest and show what the possible downside and risks to such a thing would be. I am assuming here you have actually done such work and analysis before making the broad, sweeping announcements you have.
I am not sure you have read the Common Weal paper. If you had you would know that they list various reasons a country needs foreign exchange reserves – and therefore you would not need to ask me and would not make statements like:
“So I repeat my question, What do these countries do with these reserves? Unless you can show why they are required and what the benefit is your argument is pointless”
You would also know that Common Weal suggest Scotland would need about 40bn of reserves – far less than they would inherit from the UK on separation. Common Weal acknowledge the risk of too small reserves, and the need for them. Why don’t you?
And again, please answer the questions I have asked you.
You have no idea what the Scottish trade deficit is. No one is sure of it
It may have surplus.
So please answer my questions: why does Scotland need reserves? Common Weal show ti could have £40bn
I doubt the need for that sum: there will be no currency peg and I do not see a trading risk as I think Scotland may have a trade surplus
But you can’t answer any question
I will not be responding again unless you actually supply relevant facts: comments without them will be deleted
Serge says:
“I am interested to hear what you would think would happen to Scotland’s new currency and it’s interest rates on independence.”
I don’t believe your motive in asking this question.
There is hardly any equivalence between the Italian situation as part of a currency union and the position of a sovereign currency in Scotland.
You’ve got all these numbers to hand so to pretend ignorance is disingenuous.
If it was my site I wouldn’t posted such inane trolling.
Andy,
No, I am not ignorant, but the numbers I am simply getting via a quick google search.
There is quite a lot of equivalence between Italy and Scotland. Both have large debt piles. Both are looking to implement high spending, high budget deficit policies (Italy with it’s new government, Scotland on Independence). Both are part of a currency block at the moment but both are potentially looking to leave – Scotland with a new currency and Italy is threatening to issue a parallel currency, which would be a stepping stone to leaving the Euro.
In Italy just the threat of the new government’s policies has sent interest rates soaring. Why would similar policies in a newly independent Scotland have a different effect?
Is it wrong to ask Richard what a new Scotttish currency would mean in terms of the basic economics, and the effect that would have on the people of Scotland? If he is promoting a new currency and it’s benefits, what drawbacks would there also be and what analysis has he done to quantify or estimate the positives and negatives?
If asking Richard Murphy difficult but important questions, or not agreeing blindly with his articles is trolling…….
You are wrong: Scotland has no debt at all
And the high interest rate in Italy is on its Euro notes
And you have still not answered my question: what does Denmark use its reserves for? Can you explain?
Scotland would inherit a share of the UK national debt on independence. So it would have about 85% debt to GDP, much like the UK as a whole.
“And the high interest rate in Italy is on its Euro notes”
I’m not sure what your point is. The yields on Italian bonds have risen dramatically because of governments plans to run large deficits, and potentially introduce a parallel currency. Not because of the currency the bonds are in. I am drawing a parallel here to what could be the Scottish situation on independence.
Do you think the interest rate on Scottish government bonds in a new currency would be higher or lower than UK gilts?
Maybe you should re-read the Common Weal paper you link to, which explains what reserves are used for. Denmark is a slightly different case as they need much larger reserves as they run a currency peg. But again, I would have though an economist as experienced as you would know this.
Scotland cannot inherit UK national debt on independence
It is not legally possible to assign national debt in this way
UK national debt is not 85% of GDP: you ignore QE
It is acknowledged that Scottish national debt will run at a premium
You have still not answered what Denmark actually uses its reserves for
Without a peg what reserves will Scotland need? Much less, I suggest
So far you have not made a single relevant point
People seem fairly sure about Scotland’s trade deficit:
http://www.heraldscotland.com/news/15095140.Scottish_trade_deficit_is_forecast_to_widen/
or for a more complete picture:
https://www.statista.com/statistics/348544/net-trade-scotland-exports-imports/
Scotland has been running a net trade deficit for a very long time.
Common Weal says Scotland would NEED 40bn reserves. Not that it already has it.
Scotland would need reserves as most other countries do, for the reasons Common Weal lay out. Assuming a free floating exchange rate, those reserves would primarily be need for import cover.
Trade deficits mean you need to buy that amount of foreign currency every year in the open market, which means selling your local currency. Selling 7.5% of GDP of new Scottish Currency on the open market is very likely to lead to significant devaluation – and that is only the first year. And as we know, significant currency devaluations make the local inhabitants poorer, tends to lead to much higher inflation and then much higher interest rates.
Which is why I am asking you to show your analysis regarding a free floating Scottish Currency. You must have done this analysis so please let us see the bad news as well as the good news you are so keen to talk about.
I am actually becoming astounded by your total inability to answer my questions with anything other than abrupt rudeness. I have been providing you with information and data, and you provide us with:
“I think Scotland may have a trade surplus”
Do you have evidence for this? The (freely available) data shows otherwise.
And then you follow it up with:
“I will not be responding again unless you actually supply relevant facts”
Will you provide us with some relevant facts, or is your opinion the only thing that counts?
No one knows what the Scottish balance of trade is because no one has ever measured it. That is because there has been no way to do so.
The reality is that Scotland may well run a trade surplus unlike the rest of the UK. Energy would suggest that is likely.
All I’m doing is looking at available facts, saying there is no trade data, there is no Scottish debt, there is no reason why Scotland will peg against sterling, and therefore there is very little obvious reason why Scotland needs reserves of the level that Denmark has. But you have presented no evidence to the contrary, or any reasoning. You simply reproduce unionist propaganda, and I’m not interested in that. This is a place for argument on the basis of logic and facts, not your biases.
You have made your last contribution.
I addressed that in my first post. If Denmark is setting on a mountain of reserves it does not need, it is permitting them to be eaten away by inflation when they could instead be serving a productive purpose. Which would be a very curious thing to do.
The Danish Central Bank says it has them because experience has taught them it is was they need.
“Developments during the financial crisis in the autumn of 2008, when the Danish krone came under pressure, showed that at times substantial purchases may be required in order to support the krone. Based on the lessons learned in that connection, the foreign-exchange reserve was increased from the end of 2008, cf. Chart 1, in order to have sufficient funds to support the fixed-exchange-rate policy against the euro.”
http://www.nationalbanken.dk/en/monetarypolicy/foreign_exchange_reserve/Pages/Default.aspx
So, the people of Scotland must suffer according to this analaysis to ensure the country can play in the currency markets when those markets have decided to revalue the currency come what may, with all the upside of any intervention going to the speculators. In other words, these reserves only exist to encourage trades against the currency deliberately designed to extract the reserves from the country for the ebenefit of market players. Their absence, then, would ensure that the trades do not take place and would be advantageous.
You have hardly made a case.
How successful have central bank currency interventions ever been? Would you like to evidence that? And did they ever gain from thes trades? Again, would you like to evidence that?
I’m going to toss in what seems to be an unpopular idea.
The UK is better together than apart.
I’d venture to suggest that Ecuador should start their own paralell currency.
But clearly much of Scotland has some desire for independence. Even without an independant currency it could http://www.progressivepulse.org/brexit/has-the-time-has-come-for-a-federal-britain
still have its own currency, but it would be exchangable one for one with the £ sterling and exchangable locally for taxes payable. This would, nonetheless, still give some considerable financial independence, (and also help to demistify money).
Even a Norwegian agrees with me!
https://folk.ntnu.no/tronda/econ/keynes-bancor-euro.pdf
Peter
I have to say that you are quite simply wrong here.
You have not proposed separate currencies. You have proposed the local printing of sterling. This already happens in Scotland and NÃ as well as the CDs. And of course, banks can create sterling at will. But it does not make those issues a separate currency. They are sterling.
The proposal you make is a red herring, at best, and just show for no economic gain, as these existing arrangements in Scotland etc are.
Richard
Thanks, Richard
I agree that the banks’ local printing of sterling is no more than a private label for UK sterling. But banks are creating sterling as debt at interest.
I agree, too, if Scotland wanted complete independence they would probably be wise to go for a new currency. But that is likely to engender significant short term commercial disruption.
What I’m suggesting is that devolved Assemblies/Parliaments become currency issuers and not simple currency users, albeit with an own label aspect to it. That is really a marketing job much the same as, say, a Scottish fiver is. My suggestion would mean that the devolved ‘governments’ in effect share the privelege of currency issuance with central government – just with a local wrapper.
Did the euro create disruption when it was created? I don’t recall it
I am not sure I get the rest of your reasoning, if I am honest. Sorry Peter
As Ben Wray pointed out above, “a Scottish state would be robbed of the power of money creation” if it adopts sterlingisation. I assume therefore that Ben, like me, believes in MMT.
For most people, unfortunately, MMT stands for Magic Money Tree.
I would be entirely in favour of a swift move to an independent currency, and would like the SNP to agree and promote MMT (once we are independent). However, if the Growth Commission (GC) had even hinted at the “power of money creation”, the media and all the opposition parties in Scotland would have used it to trash the SNP’s credibility. The UK Labour party have not adopted Professor Murphy’s Corbynomics, and I have no doubt that the more Blairite branch party in Scotland would say that there is no magic money tree. Clearly the Tories would treat the idea as a joke. Vince Cable has repeatedly talked as if the economy is like a household budget, so the LibDems in Scotland would follow suit. I have not noticed the Green Parties in Scotland or the UK paying any attention to MMT. The Scottish media is probably more economically illiterate than the English media.
To point this up, we are living in a fantasy world where Ruth Davidson continues to be lauded as a potential UK Prime Minister, and the media are reporting she has had a “sweeping vision” and has demanded that the UK government “Stop cutting taxes and save the NHS”. Her premise is that there should be no further tax cuts beyond those already planned by the Tory government, and that will somehow save the NHS. Nobody in the mainstream media, and no politician, has queried the fact that her proposal produces NO EXTRA revenue (and you can be assured she is not proposing MMT!).
I don’t think you can assume Scotland to be a fertile ground for MMT concepts when the wider UK remains so far away from acceptance of the truth. I’m also surprised that Ben Wray thought it a good idea to bring Venezuela into his thesis – OK for an academic discussion, but again likely to frighten the horses.
There are other good arguments against the GC report, many of which have been highlighted in Common Space and by others. I am sure they will be raised at the SNP’s National Assemblies in due course.
I think you will find he discussed Ecuador.
And I cannot see the political gain of lying about a currency when the truth is known.
Apologies, I was feeling gloomy which might explain the transposition of Ecuador to Venezuela. However, I still think a better example than Ecuador would be preferable – perhaps Japan.
Ecuador has a currency peg – which was why it was used
George S Gordon says:
“For most people, unfortunately, MMT stands for Magic Money Tree.”
I don’t see that as disastrous. The challenge is to explain how the ‘Magic Money Tree’ works, not to pretend that it doesn’t exist.
And that explanation includes a discussion of how it’s possible to apply MMT badly. How it can create inflation if it isn’t implemented properly. We have lived through it. The past ten years is living proof that MMT can save the economy from total meltdown, but if you don’t carry the process through you strangle the economy you just rescued.
I accept the problem of presentation and the MSM power to pillory any thing and anyone it chooses to disapprove of, but the media ‘shitstorm’ is so much more damaging if you allow it to control the agenda of an election campaign.
I’ve mentioned them before on this site, but the ‘Garden Tax’ and ‘Dementia Tax’ are entirely refutable/defensible by reasoned discussion and that cannot, and does not, happen within the confined and rarefied, febrile atmosphere of a campaign period.
That the Labour Party is …frightened(?)…. to have the discussion about MMT is no reason why it must be kept under wraps. It’s lying there like a time-bomb waiting to explode in the next GE campaign and again destroy the Party’s chances of government. That’s their problem, and I don’t think it a good template for the debate (or lack of it) in Scotland. If Scots were approving of the Labour Party position on this we’d have a Labour majority in Holyrood and in the Scottish contingent of Westminster MPs.
The whole underlying reason for wanting to be an independent nation is to be in a position to do things differently. The methodology needs to be explained.
The time (if there ever was one) for trying to win elections by stealth – by slipping under the wire quietly so as not to frighten the horses is not now.
What is needed is a bold visionary manifesto and for those who can see the vision to get behind it and actively promote it.
What’s not there in the manifesto cannot be said to have a mandate for implementation.
There’s little point winning an election with no mandate to act.
Without control of its currency an independent Scotland will be stuffed.
Andy Crow: I agree with most of what you say, but the GC report is not a manifesto. I fully expect the issues you raise, and I agree with, to feature in the discussion of what the GC has said, which will take place within the SNP at our National Assemblies. There will then be a shitstorm.
My comments were not in praise of lying about this – just pointing out what would happen. Please send help.
George S Gordon says:
“…but the GC report is not a manifesto…..”
Quite so, George. Very important we don’t lose sight of that. The discussion has barely begun.
“My comments were not in praise of lying about this ” [But, we need to be careful to avoid ‘lying by omission’.] “— just pointing out what would happen. ”
I think that’s now widely understood to be a given. A great deal was learned about, to put it mildly….. disingenuous media coverage surrounding Indyref1. I think a lot of Indy supporters were genuinely shocked at media malevolence and particularly so the BBC coverage. The BBC is widely despised now in Scotland.
“Please send help.” ….Well ….There’s a lot of talent in Scotland already, and I was greatly cheered to see so much on display in the discussions at The Gathering in Stirling at the weekend. A lot of people singing from a ‘hymnsheet’ I recognise the tune of and know a lot of the words to. I didn’t pick up many ‘bum’ notes.
But all help and support is gratefully received, and I think there’s a lot of it to be had if we ask nicely.
Is it not the case that the bout of QE money creation proved both aspects of the arguement about money printing ie the QE does not automatically create inflation and that if used in the wrong way it can create inflation?
Until the folly of Brexit loomed, our inflation rate was well below the official BoE 2% target despite the creation of some £500bn through QE. It was external input cost changes that pushed inflation up due to the devaluation of sterling.
However at the same time as there was little inflation in the ‘real’economy, what we also saw was significant asset price inflation eg in property because that was where so much of that QE money went, driven by too much cash chasing a scarce resource.
If this is the case, as I believe, the dreadful Osbourne has managed to prove Richard’s premise from both sides. What we need to do is turn the magic money tree arguement back on its propagators.
When I turn arguments back on their propagators they never answer
“Your assumption is that having reserves prevents devaluation
Would you like to present your evidence?
I would suggest that is simply not true: markets price a currency based on fundamentals, not based n currency interventions (which almost invariably fail)”
Soros pushed the UK out of the ERM, killed the Thai Baht and started the Asian economic crisis in the the late 90s. Only Hong Kong’s massive reserves (today 2.7x that of the UK) beat his attempts to profit at killing the HKD/USD peg. So yes reserves work, but you need a ton of them to beat the hedge funds today.
And that was a long time ago
My point is, there is no defence using reserves now
And the only winner of an attempt to do so would be the hedge fund – or a net transfer to wealth, in other words
Jennifer Allen says:
“Soros pushed the UK out of the ERM, …”
Indeed. (?) But the important question is how, and even why. I suspect the ‘why’ is simple opportunism: the speculator’s instinct for the set-up which is going to offer huge returns.
So the ‘how’, becomes moot. The opportunity presented itself because the Government was trying to hold it’s currency at an unsustainable value. In order to do that it shovelled ‘reserves’ into the furnace.
The ERM experiment was clearly misbegotten, and the result of political manoeuvring, and motives, that were not economically/financially sound and one has to conclude that Soros did not so much ‘push’, as went with an inevitable flow that was invisible to those wishing to join the ERM at the wrong valuation and quite possibly for the wrong reasons.
So we do injustice in ‘blaming’ Soros, and rather should accuse our polity of ineptitude or worse. Possibly much worse.
And having reserves encouraged the states to gamble, expensively, inappropriately, and at gain to those with wealth
I think we’ve gotten off track here. I’m hoping you could explain how Scotland could start its own currency with only £10 – 15 bn in reserves, given that we know that Denmark, which is remarkably similar in many important respects, says their real-world experience has taught them that they need 4-5X that amount. You are challenging me to defend their history of interventions, or possibly the history of central bank interventions globally, which I cannot do. Is that your way of saying that Scotland would not peg its currency, it would freely float against the £, and that is why it could operate with a fraction of the reserves that Denmark holds?
This issue has been addressed by Common Weal
See here http://allofusfirst.org/tasks/render/file/?fileID=2DD7825A-AE28-C5F2-CC8A1EE4822E2CCE
I practice I remain unconvinced that this level of funds is needed
Scotland will float its currency.
What would be much more worrying is if it did not: then it would need very large reserves to beat speculators.
I am familiar with the publication. It asserts that Scotland could do the same as Denmark for a fraction of the cost, but it does not explain why. I was hoping that you could better.
“Scotland will float its currency.”
Scotland does more trade with the rUK than it does with the rest of the world combined. Right now that trade is seamless and, obviously, free from any exchange-rate risks or related costs. If the new Scottish currency floats freely vs the pound, that entire dynamic is changed – for the worse. Regardless of which direction the new currency moves – up or down – Scotland’s private sector will suffer negative consequences.
I am well aware that you appear all over the Scottish media making the same points as you are here – but whilst always making the sort of wild claim that you do here, which is that Scotland would do much worse from trade with the rest of the UK after independence than it does now. In fact, given the relative balance of quite literal power generation capacity between the two I suggest to you that it is the other way round
What is apparent is that you are not willing to consider possibilities, fax, or even the actual use of reserves, which you have not shown any understanding of, or explanation for. in that case you’re wasting my time, as you have done many others.