This is the video of Dr Tim Rideout's talk on why the six tests for a Scottish currency proposed by the Growth Commission have to be replaced with seven better tests, made this week:
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
I was at the Mitchell on Thursday, all thanks to reading about MMT on this blog, Richard. It was excellent and, thanks to the excellent speakers and their clear descriptions, something I was able to grasp…most of the time.
Tim Rideout’s arguments are diminished by simply dismissing the Scotland’s fiscal situation, and making some huge errors along the way.
He claims Scotland has no debt (it will do if it leaves the UK as it will have to take a share of UK debt) and then tries to claim that Scotland doesn’t run a budget deficit (it does, not only according to GERS figures, but by SNP figures as well). He brushes over Scotland’s trade as well, where it runs a large trade deficit (which leads on to needing foreign exchange reserves).
Then he says Scotland will have reserves, and I quote, “coming out if it’s ears”. This is a huge error. He says that when Scotland replaces it’s pounds with Scottish currency, those old pounds will go to the central bank and act as reserves.
This is simply incorrect. When you REPLACE a currency, you replace it, not issue another currency in addition to it. The old currency is removed totally from circulation, including at the central bank, and the equivalent amount of a new currency is entered into circulation.
Saying that those replaced pounds become reserves is double counting. You don’t get to keep both. Scotland will have no reserves other than the reserves it inherits from the UK or borrows.
He also makes several errors when saying the new Scottish currency will strengthen. This is unlikely at best, with Scotland’s large twin deficits, which have been shown to weaken real effective exchange rates over term. He is entirely wrong saying that speculators will not be able to short the new Scottish currency (because they don’t have access to it).
Any FX speculator will be easily able to short the new Scottish currency. Most speculators roll their currency trades through FX forwards so never settle them until the trade is eventually closed. This means you don’t need access to the currency you are shorting (you just pay the interest as if borrowing it, which is why countries defending their currencies end up having to raise rates). You can also do it via non-deliverable forwards or options if you chose. The small relative size of Scotland’s economy makes it particularly vulnerable – hedge funds can easily take positions of a magnitude which would wipe out Scotland’s reserves (which aren’t going to be as large as he claims) overnight.
What he says is designed to appeal to his pro-independence audience, but unfortunately doesn’t stand up to any real scrutiny.
This is almost ludicrous, there are so many errors in it
Legally Scotland will have no debt on independence; that is a matter of fact
No one actually knows what Scotland’s trade surplus is – VAT data simply does not tell us. The assumptions in GERS look implausible
And as a matter of fact currencies will be traded
And FX shorting lasts a few days: fundamentals count and Scotland has exceptional fundamentals
The only person not standing up here is you
Alex Salmond and then Nicola Sturgeon have both stated that Scotland would accept a share of UK national debt, or make payments to the UK in lieu of it. Nor would the UK simply allow Scotland to leave without some contribution. Not to mention it is running a large budget deficit of around 8%.
Saying Scotland will suddenly emerge debt free on independence is simply not true or realistic – even the SNP understand this.
Scotland has a trade deficit – a large one. Around 10% of GDP. There are several sources for this, all of which roughly agree. Nobody is realistically saying that Scotland has a trade surplus. You would literally have to be insane to be making such a case in the face of all the evidence to the contrary.
FX shorting doesn’t typically last a few days. Months and years, maybe. I doubt you have any experience in the FX markets, given that statement.
Scotland has exceptional fundamentals – if you want to short a new Scottish currency. Small country, small nominal GDP, few if any reserves, 10% current account deficit and 8% budget deficit. No internal stock market (so pension investment flows will be forced offshore), no individual credit rating and no independent track record of sound fiscal management (so no meaningful buyers of new Scottish debt).
It is the perfect short. You couldn’t wish for a better one. Even if Scotland had the £50bn of reserves that Tim Rideout claims (they won’t), between the current account deficit and a few hedge funds shorting it, that will be gone post haste. Leaving nothing but higher interest rates to defend a Scottish currency – and we would be talking much higher.
I object to people, including yourself it seems, who are being fundamentally dishonest in saying to people that Scotland can leave the UK with no hard choices to make, it will cost people nothing and spending won’t have to be cut. By all means vote to leave the UK and campaign for it for the sake of self-determination and governance, but lying to people about what this means for them and their finances is disgusting.
All these issues have been addressed in Common Weal publications
I really cannot be bothered to re-write excellent material for you
Especially as you are clearly intent on not engaging
And are candidly simply peddling lies about what might happen simply to scare people
Common Weal have published that Scotland has budget and current account deficits, and will need about $40bn of reserves, which it currently does not have. Those Common Weal publications?
I am engaging with you. or at least trying to. I have made various points and you are unwilling or unable to answer them – and are dismissing them out of hand as Tim Ridout dismisses the problems with a new Scottish currency.
Nothing I have said is a lie. Scotland manifestly has a large budget and trade deficit. It has little or no reserves and will be forced to cut spending to manage this on independence. A new Scottish currency will more than likely weaken, and will be vulnerable to speculative attack. There is nothing new about this – the SNP themselves recognize these risks, as do Common Weal.
If anyone is peddling lies, it is the people like yourself. You are deliberately lying when you deny the fact that Scotland has a budget or trade deficit. The SNP are aware of this, and at least have been mildly realistic about the need for spending restraint on independence, even if they are loathe to use the word “cuts”.
It is perfectly reasonable to argue that independence is a worthy goal unto itself, but it is a lie to say that it will come without costs, and that instantly Scots will be richer and happier when the truth is the Scottish government will have to cut spending and the Scottish currency will weaken and make people poorer.
Thank heaven: Scotland has a deficit. I’d be worried if it hadn’t. How else can a government inject its money into its economy?
And thank heavens some realise the importance of continuing it – that was the issue with the Growth Commission
But a current account deficit? Who knows? The data is uncertain. It may have. It may not. But there again, on average a lot of the world’s countries do: no one can run a surplus otherwise. Is Scotland going to continue with that? I suggest not. You assume ceterus paribus. I do not. I suggest Scotland has a lot more added value than you think. Being freed from London and recording its own finance sector is a major part of that. Not all. But a part. The current Uk data is simply implausible for this reason. But you ignore that I suggest it has much more value to add, particularly from energy. You ignore that.
And will it have debt? Who knows? That is to be negotiated. It is not fact. And what currency will it be due in? Who knows? I suggest it will be Scottish pounds. And why nit when Scotland does not have to assume the liability, at all.
And why such large reserves? You tell me. Not all small countries have them.
And Tim’s logic on reserve transfers seems logical to me. If people buy Scottish pounds from the Scottish government with sterling might you tell me why the Scottish government does not end up with sterling?
So I’m sorry, but the problem is mine is just wrong. I do not deny there are issues. Of course there are. But not as you pose them, which is why I treat your comments with the contempt they deserve.
Now I suggest you stop wasting my time.
Quite.
To believe Scotland “will have to take a share of UK debt” is like saying we have this UK Football Association and the majority of Scottish teams decide half way through the season they want to go and form their own independent Scottish FA but somehow believe the new SFA has to ‘take on the debt’ of the points hitherto issued to the Scottish teams by the UK FA.
This has nothing whatsoever to do with the SFA, which would simply go about the business of issuing its own ‘debt’ (aka points) when the new Scottish league gets up and running.
If individual Scottish teams wished to still play in the UK league – i.e. hold onto ‘UK’ points – that would be entirely up to them. The UK points of the remaining teams that wanted to leave would be zeroed (thus reducing the UK FA’s debt accordingly).
PS I’m aware there are some simplifying factors, with this football point model but the principle holds equally to currency and national debt.
CW have come a long way over the past few years, in no small part to Richard’s input, however they still cling to rather dated ‘fixed exchange rate’ thinking that posits currency issuing governments must hold foreign reserves in order to defend the currency in FX markets. As stated above, they put this sum at $40bn for a future independent Scotland.
MMT on the other hand strongly advises against such a policy and instead to let the currency float. Warren Mosler and Bill Mitchell, unsurprisingly, both reiterated this point at their Edinburgh presentation this week, which I attended.
Moreover, as Tim pointed out at the the event in Glasgow the following evening and Richard agrees with above, there will be very strong demand for the new Scottish currency at its inception that virtually guarantees foreign reserves will build up in any case.
Foreign reserves are not a pre-condition for a new currency, but a by-product.
I think you will find CW do realise floating is essential
I do….
Good, then there’s no need to raise any $ whatsoever (never mind 40bn of them!)…
https://www.thenational.scot/news/15366130.new-report-outlines-how-indy-scotland-could-comfortably-raise-40bn-to-set-up-a-new-currency/
I suggest you go back and note what Tim Rideout had to say
And allow for a floating currency
@ Richard Murphy
Ah yes, you must come from the limitless deficits are OK school of economic lunacy. You can run a deficit, but not ad infinitum. Besides, I thought you wanted Scotland to join the EU, which limits budget deficits to 3% by treaty.
Scotland definitely has a trade deficit according to the SNP (I’ve posted a link to Steve below). That in itself isn’t a bad or a good thing, but running large trade deficits tends to weaken your currency – which is something Tim Rideout says won’t happen. And when your currency weakens, imports get more expensive, inflation goes up and people get poorer in real terms.
Scotland will also definitely have debt, or be making a payment to the UK in lieu of debt. Both Alex Salmond and Nicola Sturgeon have accepted this, as has the SNP.
Apart from that, do you think the UK will simply let Scotland leave without paying it’s fair share? Especially if it expects to receive assets from the split as well? I know you like your cake and eat it scenarios when it comes to Scottish independence but you are being totally unrealistic.
Why such large reserves? Because large current account deficit, primarily, and the new Scottish currency will not be in any demand externally (unlike reserves currencies) so you are forced to have larger reserves. Common Weal wrote a good piece on why.
If you think Tim’s logic is…logical….I think you need to sit down and carefully think about it.
You and Tim Rideout are suggesting the new Scottish Central Bank buy £50bn of Sterling in exchange for new Scottish currency. What do you think that will do to the value of the new Scottish currency? When you are selling the equivalent of 25% of GDP of a new currency into the open market. The value of that currency will implode. Who do you think will buy it if everyone knows there is a massive (and I mean massive) forced seller. Nobody with a brain, for sure – everyone will just keep selling it as fast as they get it until Scotland’s Central Bank is done selling. It would be a perfect scenario for every speculator out there.
Not withstanding the fact that by doing so you will be printing the equivalent of £50bn of new currency, dramatically increasing the base money supply which will have a large effect on inflation.
You don’t get to keep both sets of currency. It’s double counting – which is your logical error.
The SNP/Common Weal aren’t suggesting this – they talk about replacement. Which means you would re-denominate but it also means the Scottish Central Bank wouldn’t suddenly have all those reserves you claim they would have.
I suggest you rally do need to go and learn how currency is created
There is little point discussing this on the basis of your obvious belief that currency is not created at will
Or your misunderstanding of why decifits are required -as they are
What have I said which is difficult for you, in terms of currency creation?
When creating a new currency you have two options: replace or repurchase.
If you replace the currency, the transaction is sterilized – there is net no new money created. One currency appears in the place of the other. This is the best way to create a new currency as it means the new currency isn’t under immediate selling pressure. The central bank doesn’t suddenly have lots of the old currency though. Which means no reserves.
Repurchase means the central bank buys the old currency with newly printed new currency (electronically printed or otherwise). The central bank does get all those lovely reserves, but at the cost of essentially doubling the money supply (with all the problems of inflation and devaluation of the new currency it entails) and at the same time is a massive forced seller of the new currency, forced buyer of the old.
Anyone with half a brain will simply not convert their old currency into the new one under this regime, as you know until the central bank is done selling the new currency into the market the new currency will be under constant downwards pressure. Add to this that any speculator knows that the new currency is on a one way ticket lower for the foreseeable future and you are looking at the new currency losing a lot of it’s value very quickly.
For the scale you and Tim Rideout are talking about (25% of GDP) the fallout would be simply enormous.
There is nothing controversial about this.
Tim has dealt with this
And actually they will convert – because they will have to pay their taxes in Scottish currency – and nothing else
@ Richard
You have to pay your taxes in S£ (I’ll use Tim’s shorthand going forward) but that doesn’t mean you have to hold any until you pay those taxes. If you think the S£ is going to devalue you will hold your cash in £, then convert at the last minute. In addition, most individuals get paid PAYE so don’t have to “hold” S£, they just have an amount deducted from their payslips.
This isn’t a strong argument for demand for a currency. At all.
@ Tim
You really haven’t understood. Let me try and break it down for you:
“We are then going to sell that new currency on an entirely VOLUNTARY basis to people in Scotland that want it. It is blindingly obvious that since you have to hand in £10 sterling to get a new S£10 then the handed in notes, coins and digital currency all end up being the property of the Scottish Reserve Bank. ”
By doing so you are increasing the money supply. Which will increase inflation. Not to mention that you will still have a forced seller of S£. So the S£ will weaken against £ until the Scottish Central Bank has stopped selling S£.
“So we have a new currency that at the outset has 100% foreign reserves”
if and only if the SCB sells £50bn worth of S£ into the market. Till then it has no reserves, yet Scotland will be burning through reserves at around £10bn a year. Which means there will be even more downwards pressure on the S£
“At the start the only people who will have the S£ are those who have voluntarily asked for it. There will therefore be few people other than the Central Bank trying to sell any S£. As many people will have kept all or part of their cash in Sterling there is also a long tail of up to around £80 billion that gradually get converted as folk realise it is becoming inconvenient not to have the local currency. ”
Many elephants in this room. Few people are going to voluntarily ask for it, given your plan. And everyone will know the SCB is a large, long term net seller. The long tail may take many years to clear because of this, all whilst Scotland runs a large trade deficit – weakening the currency.
You also forget that a large portion of savings and investment in Scotland will be forced offshore. With no local Stock market, 50% of pension investments will immediately be forced offshore (with the associated S£ selling) and any local bond market will not be interesting to foreigners for years, given a lack of a credit rating, track record or inclusion in bond indices. So few inflows there in the near term.
“As for your speculators then at the outset they have exactly nil S£. Yes they can enter forward contracts, but I suspect that would be foolish. It does not matter how far forward you go but you do ultimately have to deliver the S£ that you agreed to sell.”
You suspect it would be foolish? I’m sure that will make all the difference. This would be the easist short for years and speculators would climb all over it. You do eventually have to deliver the S£, but thankfully the forwards markets lets you roll any trade ad infinitum, so you only have to deliver when you finally close the trade. So that is not a problem for short sellers at all – the only thing they would worry about are interest rates. But seeing as you subscribe to MMT they would also be kept low, so making the short trade easy to carry for the long term.
“Anyone venturing down that route is at risk of getting caught in a classic bear trap.”
Don’t think you really understand FX markets. The only bear traps in FX markets would be currency controls and massive hikes in interest rates. There is no finite supply of a free floating currency to be short squeezed.
“MMT assessments”
Oh dear. I assume you also think you can run such large deficits forever, and just print money to finance it.
“Government should run an 8-10% deficit simply to cater for the savings desires of the private sector”
Care to back this up with actual data?
“On the Balance of Payments front then we don’t have a very accurate picture as most of the stats are guesses”
Pretty good guesses. Guesses which a broad range of people on different ends of the political and economic spectrum seem to roughly agree with – except you that it. We know the trade deficit is +/-10% of GDP for Scotland. Which is massive for a small country with no reserves.
“Scotland is much closer to balance than the worst ever deficit (nearly £150 billion pa) that the UK is currently running”
UK current account deficit is 3.9%, the record being 5.2%. According to the ONS at least. So Scotland’s is MUCH worse that the UK’s deficit has ever been. Fortunately the UK receives a lot of FDI, which Scotland is unlikely to, as it doesn’t have the financial assets available for sale (no stock market, bond market will be unlikely to attract much FDI for years).
“Sterling should be in a free fall just now.”
Sterling has been on a downward trend since 2014.
“The average central bank has less than 5% of their foreign reserves in Sterling and that percentage has been falling steadily”
Really? Because the data says it has been growing steadily since the BoE became independent according to the IMF. Almost doubled since 200 as a percentage.
http://data.imf.org/regular.aspx?key=41175
So basically, you will have lots of sellers for a new S£, and no real buyers. Despite all this, your plan is to flood the market with newly printed M0 S£, print even more (because MMT) to pay for the large budget deficit (which you don’t think should ever be closed) and then somehow, at the end of it all you think the S£ will not only hold it’s value – you think it will increase!
Like I said earlier, what you are saying is simply dishonest. Your are trying to sell people on independence based on a lie.
Sam
Let’s conclude that you have not a clue
35% of all transactions end up in tax paid
Tax paid gives a fiat currency its value
And you are not aware of that…
That’s beyond incompetence
The answer to this is actually given by you. Unless you have some unpleasant surprise in store that you might wish to let the Bank of England know about, then we are NOT replacing Sterling. It is going to continue to exist. We are introducing an entirely new currency, so it has no effect on existing Sterling. We are then going to sell that new currency on an entirely VOLUNTARY basis to people in Scotland that want it. It is blindingly obvious that since you have to hand in £10 sterling to get a new S£10 then the handed in notes, coins and digital currency all end up being the property of the Scottish Reserve Bank. That is no different to you buying US dollars at the Post Office, or indeed somebody buying Bitcoin. This has nothing to do with any double entry book keeping and there is no double counting. So we have a new currency that at the outset has 100% foreign reserves, unlike the UK which has 2% foreign reserves.
At the start the only people who will have the S£ are those who have voluntarily asked for it. There will therefore be few people other than the Central Bank trying to sell any S£. As many people will have kept all or part of their cash in Sterling there is also a long tail of up to around £80 billion that gradually get converted as folk realise it is becoming inconvenient not to have the local currency. Where is your mythical army of people trying to dump the currency coming from? It simply does not exist. As for your speculators then at the outset they have exactly nil S£. Yes they can enter forward contracts, but I suspect that would be foolish. It does not matter how far forward you go but you do ultimately have to deliver the S£ that you agreed to sell. Where are they going to get them from at the big discount they need to make their trade worthwhile? Anyone venturing down that route is at risk of getting caught in a classic bear trap. So far as the SRB is concerned the currency is floating so they would have no intention at all of spending reserves to maintain any particular value.
In terms of your point on a state deficit, then so what? MMT assessments suggest an independent Scottish Government should run an 8-10% deficit simply to cater for the savings desires of the private sector. A Government Deficit = Private Savings while the National Debt = the National Savings because that is double-entry book keeping. Trying to cut the state deficit to the GC 3% level would wreck the economy and probably cause deflation and mass unemployment.
pro
On the Balance of Payments front then we don’t have a very accurate picture as most of the stats are guesses. But Scotland does a lot more trade proportionately than England does, and proportionately exports a lot more goods (one third of Food and Drink exports of the UK are Scottish, for example). Estimates I have seen are that Scotland is much closer to balance than the worst ever deficit (nearly £150 billion pa) that the UK is currently running. If what you say is true then Sterling should be in a free fall just now.
Sorry to disillusion you but Sterling is no longer a major reserve currency. The average central bank has less than 5% of their foreign reserves in Sterling and that percentage has been falling steadily. Central banks have been net sellers of sterling for many years, and Brexit accelerated that.
Thanks Tim
The obvious is very hard for some people to handle
Hi Sam,
In the interests of transparency could you provide links to the sources you mention so people can assess their credibility and impartiality for themselves please?
@ Steve
Sure, I’ll give you several:
GERS
https://www.gov.scot/publications/government-expenditure-revenue-scotland-2017-18/pages/1/
Sustainable Growth Commission report (SNP)
https://www.sustainablegrowthcommission.scot/report
Scotland trade statistics
https://www2.gov.scot/Topics/Statistics/Browse/Economy/Exports/ESSFAQ#_How_are_the
Scotland Balance of payments (for SNP growth commission)
http://scottishtrends.co.uk/wp-content/uploads/2018/05/SNP-Growth-Commission-on-BoP-revised-May2018-II.pdf
Fullfact.org
https://fullfact.org/economy/tax-and-spending-scotland/
Common Weal on a new currency and reserves
https://commonweal.scot/policy-library/backing-scotlands-currency-foreign-exchange-reserves-independent-scotland
University of Glasgow on currency options for independence
https://www.gla.ac.uk/media/media_358421_en.pdf
IFS on the Sustainable Growth Commission report
https://www.ifs.org.uk/publications/13072
These Islands on currency options for an independent Scotland
https://www.these-islands.co.uk/publications/i330/choose_your_poison_the_snps_currency_headache.aspx
The Economist
https://www.economist.com/britain/2014/07/10/a-costly-solitude
And finally, Deutsche Bank (via coffee house – link to piece within article).
https://blogs.spectator.co.uk/2014/09/deutsche-banks-devastating-analysis-scottish-independence-would-bring-austerity-on-a-scale-never-seen-before/
These are just a few. There are plenty more. I’ve tried to give you a range of pro and anti independence authors and “left” and “right” wing ones as well. Read and enjoy.
Nobody is really disputing that Scotland has a large budget and trade deficits on either side.
But what you entirely ignore is the fact that, as GERS says, an indeoendent Scotland may well be very different from Scotland as part of the U.K., and you really must recall Scottish data now reflects the fact that a) there is no data for Scotland in many cases, just U.K. extrapolations and b) there is massive south-east bias in oractice and in data in the U.K.
You can produce as much data as you like now but independence is a massive discontinuity you are ignoring
And I regret that you are not disclosing that you are ignoring it for a reason.
Scotland may run a deficit – but GERS definitely gets it wrong
What we do know it is no guide to what happens after independence
How wrong does GERS get the Scottish deficit? Do you have better data or are you just making unvalidated claims?
The Scottish budget deficit is one of the most accurate pieces of data within GERS as it is simply the difference between Scottish government spending (well defined) and revenues (also well defined).
Trade figures are also relatively well understood, though not to the same degree of accuracy as the budget deficit. Even then, the margin of error (around +/-5% last I checked) won’t make dent in the overall picture – there isn’t a material difference between a 10% current account deficit or one of 9.5%.
You are right when you say that we don’t know what will happen after independence. But that is not a reason or excuse to ignore the possibilities or planning for it. Given that you do have to plan, the data we do have at the moment is the best starting point – and is not likely to materially change the moment after independence. Scotland isn’t suddenly going to wake up one morning with no budget or current account deficits, just because they are now independent.
By the same argument you use though, and given you are always claiming that Scotland’s “real” budget deficit and current account are better than the published data (with no evidence to prove this) how do you know it won’t be a lot worse?
After all, the independence campaign makes some heroic assumptions about how little it will cost to set up new government infrastructure and departments and makes no account for the possible downside to GDP of leaving the UK in terms of trade and investment, or how many firms would likely relocate to the UK from Scotland (and we know many will as they had plans in place to do so before the last referendum).
So it’s all good and well saying things will be better than the data suggests, but you need real evidence to back it up – not just unsubstantiated claims – and there is also a lot of evidence to say things might be worse as well.
Let’s deal with just your first claim
You do realise Scotland does not collect all revenue or incur all government spending in Scotland, don’t you
And that it spends what Westminster permits
And most GERS spending data is just U.K. appurtioned data? In fact about 90% of all variables are extrapolations?
In which case you realise that you are clqim8ng things that are not true?
For which reason I have had enough of your time wasting now
I find it incredible that Salmond and Sturgeon have accepted that in becoming an independent country they would also take on some historical debt from the UK.
So do I
Warren Mosler said in Edinburgh last week that it makes no sense to even ask the question. That Salmond and Sturgeon answered it, shows how out of their depth they are.
The UK tried to pull this one before with the Irish.
It didn’t work out so good…
“As part of the Treaty in December 1921 establishing the Irish Free State, Ireland had a very
large contingent debt liability due to the commitment in the Treaty to accept a share of the
UK national debt, which would have represented between 80% and 90% of GNP (FitzGerald
and Kenny, 2017). However, as a result of a further agreement with the UK government in
December 1925, the UK wrote off Ireland’s liability for its share of the UK debt. ”
https://www.tcd.ie/Economics/TEP/2018/tep0118.pdf
…unfortunately Ireland – probably as it was the days of the gold standard – pegged the Punt to the £ 1:1 for many decades thereafter virtually guaranteeing their economy struggled for all that time.
You are right Stephen
I would guess two things:
1. These negative storylines from Sam will play well in the UK mainstream press whenever Scotland is to be shown in a negative light.
2. As a neophyte observer of the economic discussion(s) here I hope I will very soon have the chance to make a decision to purchace S£ using present £ bank deposits. But will that be sensible financially – I know it will make sense as a Scots resident.
My guess is many Scots are watching this debate. I hope few are put off independence by fallacious financial theorising – if it is fallacious.
Well I guess we should be grateful for small steps towards progress in that Sam is now accepting that the Sterling, and indeed any other currency, that people use to purchase the S£ from the Scottish Reserve Bank will end up belonging to the SRB and will thus be in the vaults of the SRB as the new Foreign Reserves of Scotland. There is £2 trillion of Sterling so 8% is about £140 billion, but London has the most money so lets say £100 billion belongs to Scots. Only 40%, say, gets voluntarily exchanged on Currency Day (I think Sam has a problem with the fact that asking for S£ is 100% voluntary). So that is £40 billion initially and probably most of the rest over the next two years or so. So the supply of S£ is 40 billion to start with and pent-up demand sitting in the wings for at least the same again. There is no double entry anything and this is not increasing the money supply in Scotland. The £40 billion sitting in the SRB vaults is now foreign. That means you can’t (easily) use it in Scotland. Yes you can still use Sterling in Jenners, but the Scottish Government will after Currency Day only use S£ for all purchases, wages, benefits, pensions, etc. It will not be spending any Sterling in Scotland and the £40 billion belongs to the Government. You could use it to buy an embassy abroad, or military equipment, but that is about all. So lets put this very simply – the foreign reserves of the SRB are no more part of the Scottish money supply than are US dollars in the BoE a part of the UK money supply.
Every person, company, council, pension fund or whatever that buys S£ at the start is only doing so because they want to and have asked to do so. None of those will then be rushing to sell them, especially if that was at a loss. They simply would not ask for them in the first place if they don’t want them. A Scottish Pension Fund probably will, though, be looking to sell any holdings of UK government bonds and to replace those with Scottish Government bonds. That is to avoid having an exchange rate risk when their liabilities (pensions) are now in S£ while the investments are in a foreign currency, i.e. Sterling. After the first month Sterling will cease to be legal tender in Scotland and while you will be able to spend Sterling e.g. at shops, doing so will incur the usual 2% foreign exchange surcharge from your bank. So pension funds will, if anything, be repatriating funds into the local currency rather than the other way.
Investments such as shares are of course not money and they will remain unaltered and priced in the currency of whatever market they are quoted in. For that reason a Shares ISA would stay in Sterling as it would be mad to have your shares priced in Sterling, your cash in S£ and then pay a foreign exchange fee on top of the dealing commission any time you buy or sell.
So far as any Balance of Payments deficit is concerned, this is not paid for by the Central Bank, and nor is it of any relevance to the official Foreign Reserves. Just as well as the US$55 billion in the BoE would barely last 6 months for the UK payments deficit. If there is a deficit it is because the private sector is importing more than it exports. That will be handled as it always is by either foreigners being happy to hold S£, by foreigners buying Scottish assets or investing, or by adjustments in the exchange rate. It is of no relevance to the official reserves because the SRB is not intervening in the FX market.
There is one seller, Sam will be pleased to hear, in that the SRB will be offloading 80% of the Sterling Foreign Reserves and replacing them with dollars, Euro, Yen, gold, etc. So over two years or so we might dispose of £80 billion of Sterling into the FX market. Over that period the SRB will have to keep feeding new S£ into the FX market to prevent the S£ appreciating too much as the tail of late exchangers works through the system. The supposed army of distressed sellers of S£ is entirely a figment of Sam’s imagination. They will not exist and he has failed to provide any evidence for where they are going to appear from.
You are right Tim
At 3:54 pm on the 13th Sam was making assertions about the adverse impacts of Scotland not having its own stock market. For the sake of clarity, plans to create a Scottish Stock Exchange were announced in 2018 and finance has been obtained but I couldn’t find an expected opening date.