The only test

moneyWhile not taking a position either for or against immediate implementation of an independent currency, I am obliged to note a rather obvious flaw in Richard Murphy’s criticism of ‘sterlingisation’ as a transitional option. His analysis appears to assume that the rUK government will invariably follow a path on monetary policy which is detrimental to Scotland’s economy. At the very least, he seems to anticipate that the rUK government will tend to act against, or in reckless disregard of, Scotland’s economic interests. How realistic is this?

Until such time as the economies of Scotland and rUK diverge significantly, it is likely that the same monetary policy will accommodate considerable difference in fiscal policy. One might wonder what is the point of rushing to set up an independent currency and all the accompanying institutions and apparatus if the monetary policy choices, being constrained by broadly the same internal and external circumstances, turn out to be identical.

One might well ask what monetary policy choices the rUK government might make which would be detrimental to Scotland but not to rUK. What scope might there be for decisions on interest rates, for example, which would harm Scotland’s economy but have no negative impact on the economy of rUK?

It is easy to see how this might come to be the case in the longer term. But there is no way of knowing in advance to what extent and at what pace the economies might diverge. That would depend very much on the fiscal and social policies followed in each and how these affect the economy as a whole. Initially, and in the short term, monetary policy is likely to be of little importance. And the governments of both nations will know well in advance that the point is approaching when differences in the shape and performance of their economies render a common monetary policy untenable.

That is why what actually matters is, not what currency arrangements Scotland has immediately upon independence being restored, but that the democratically elected government has the power to alter those arrangement as it sees fit, acting in Scotland’s interests.

So-called ‘sterlingisation’, or even full currency union, are both viable options. As, of course, is an independent currency. There is no single currency arrangement which is absolutely guaranteed to be the best arrangement in all circumstances and for all time. All options have pros and cons; political as well as economic; now and, potentially, in the future. What is absolutely crucial is that the government of independent Scotland should have the capacity to manage the nation’s currency arrangements according to the circumstances which prevail and the best information available about how those circumstances are going to change.

Even more crucial, perhaps, is that the people of Scotland have full confidence in our ability to manage our currency arrangements and every other aspect of our nation’s affairs. For, if we lack that confidence, how can we even contemplate independence?

It is essential, also, to realise that we are under no obligation to satisfy the British state that we have the ‘correct’ currency arrangements worked out in advance in order to ‘qualify’ for independence. If that were the case, than independence would never happen. If we afford the British state the authority to set tests that we must pass, they will never allow that Scotland has qualified.

Only one test matters. Only one test is relevant. Only one test is legitimate. And that is a test of the will of the sovereign people of Scotland.


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36 thoughts on “The only test

  1. I think you have misinterpreted Murphy’s argument. He is not saying that the “rUK government will invariably follow a path on monetary policy which is detrimental to Scotland’s economy. At the very least, he seems to anticipate that the rUK government will tend to act against, or in reckless disregard of, Scotland’s economic interests”. He is saying that Scotland will have no say in the rUK’s monetary (or fiscal) policy, whether it is benign or malign in its effect. Scotland will have no representation on the MPC or in the BoE or in the rUK Treasury, and like Mundell at present, will be unable to press Scotland’s case and therefore the rUK’s policy will not take into consideration Scotland’s economic interests. They will act entirely in the interests of the rUK, which really means in the interests of the City and the South East of England.

    Sterlingisation will mean we have access to the same economic levers we have at present: none. We might as well stay in the UK in that case. Yes, it’s that bad.

    I have been extremely disappointed and disillusioned by the GC’s proposals on currency and taxation, though it is not surprising given the chairmanship of the panel. They are economically illiterate and if adopted by the SNP may ruin the chances of independence and will most certainly place an independent Scotland in an economic and fiscal straitjacket for many years.

    Scotland needs huge amounts of public investment – in infrastructure, NHS, housing, tackling fuel poverty, inequality, transport etc etc – none of this will be possible under Sterlingisation, but will be possible with our own currency and central bank, as Murphy explains in many of his blogs on TRUK.

    A new currency may not be possible on day one, although if we started planning now it could be, but will be possible very soon thereafter, as Robin McAlpine has explained. For me, this is a red line.

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  2. @broadbield. Mr Bell does not misinterpret, he just doesn’t understand anything economic.
    “That is why what actually matters is, not what currency arrangements Scotland has immediately upon independence being restored, but that the democratically elected government has the power to alter those arrangement as it sees fit, acting in Scotland’s interests.” There we have it there. He is of the opinion that Scotland will have the power to “alter” when it is blindingly obvious that there is nothing, not a thing that an iScotland could do.

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  3. Something that Richard Murphy’s article ignores is that whether it’s a formal currency union, or an informal currency union such as sterlingisation is, it is still effectively a currency union. This means that whatever happens in one part of the union, can affect the other part. Clearly the major effect would be from the rUK on iScotland, but at around 8-9%, an effect on Scotland still affects the rUK.

    For instance if iScotland’s economy booms, and that 8-9% becomes 10% or more, then it tends to put an upwards pressure on the £ sterling, a pressure which might not be in the rUK’s interest. In theory there would be no input from Scotland in the policies of the BoE, BUT the reverse would also be true. There would also be no formal mechanism between the parliaments. Basically Scotland does what it wants – and to hell with the consequences for the rUK, as well as vice versa.

    iScotland with our own currency, it would be a petro-currency. But a steringised iScotland makes the rUK £ sterling currency a petro-currency, with the rUK having absolutely no control over iScotland’s fiscal or oil policy. Personally I think Scotland being sterlingised is a nightmare scenario for the BoE, and perhaps Mark Carney agrees, indirectly. Here’s his mostly mis-quoted Edinburgh speech, so misquoted in fact the BoE quickly put it on its website, plus the press conference afterwards.

    https://www.bankofengland.co.uk/-/media/boe/files/speech/2014/the-economics-of-currency-unions

    Liked by 1 person

    1. Very good point. And one that can be applied more generally to consideration of post-independence scenarios. Too often, these scenarios regard Scotland as ineffectual pawn in the hands of an all-powerful rUK. As you point out, this is a fallacy. Scotland will be an effective actor. Scotland will have considerable political and economic clout.

      You might even say we will be ‘punching above our weight’.

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      1. Yes we would. Carney doesn’t like currency unions, doesn’t like the eurozone – though it has survived tests intact. But his opinion of an optimal currency union is that the central government needs to control a minimum of 25% of the spending – which is why we Scotland are currently in an optimal union with the rUK according to him. Clearly the converse to this is that since the rUK would control 0% of iScotland’s spending, bar transition time when we might “share” services, iScotland would NOT be an OCU for the rUK.

        For me the problem with our side is that it is polarised, So either we’re for sterlingisation or for our own currency. Similar to MMT and the “neoliberal” approach. But I don’t see any reason we can’t do both currencies at the same time, in parallel, and introduce MMT in terms of issuing our own currency for spending in a controlled and gentle fashion. Sadly there’s no prominent exponent of this idea, it’s one or the other!

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  4. What’s interesting by the way is that after the GC was rumoured to be recommending sterlingisation (if I have my timings right), Carney was straight out saying that a formal currency union could be made economically, but it was a political decision. Which is of course what he said in Edinburgh. But it seems to me from his timing that as my above posting, he’d prefer a formal one to an informal one.

    And that, of course, is a strength in itself of the GC recommendation – it almost forces the BoE and rUK Government to the negotiating table, whether for a formal currency union, or, as Common Weal suggested, some sort of currency exchange with the Central Bank of Scotland for our own currency to head off uncontrolled from the POV of the rUK, sterlingisation.

    Interestng times, and the eye doesn’t always see what the hand is up to!

    Liked by 1 person

  5. I think you are living on Fantasy Island. AND you don’t understand this or how it would work. Pray tell how on earth a floundering iScotland would have any detrimental effect on rUK? it would have practically zero effect. None.
    “In theory there would be no input from Scotland in the policies of the BoE, BUT the reverse would also be true.” Nonsense, absolute gibberish. Scotland would have no LOLR, no ability to create money, no control over interest rates… does that not count as “input, influence?” Sterlingisation will just take money out of the Scottish economy to finance our trade deficit with rUK which will be a disaster…. trying to paint that it will be somehow a positive for an iScotland and negative for rUK is just stupid.

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  6. @Geacher. Yes, there’s a lot of confusion and misunderstanding on economic issues. I don’t claim to be an expert, but I’ve read enough to know that Sterlingisation or a currency union would be deny Scotland all the economic powers, monetary & fiscal, that we complain about not having at present. Scotland will only boom if we have these powers, have our own currency, can create money to invest in public projects like the NHS, renewable energy, transport and so on. And don’t forget the Multiplier effect – for every pound of government investment several more pounds of economic activity and hence, tax receipts, are created. The investment pays for itself. But only if we have our own currency and central bank.

    Yes, Scotland will boom if we make the right decisions. I doubt if it will boom under sterlingisation, but if it did it will have about as much effect on the rUK, a much bigger economy, as the present UK has on the USA, a much bigger economy.

    Perhaps some of those who advocate sterlingisation could list the successful economies who use another country’s currency and at the same time have no say in how that currency is managed. (which rules out the Euro) Or alternatively, give me the names of serious economists who agree with the GC’s recommendations on currency, monetary and fiscal matters.

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    1. “Yes, Scotland will boom if we make the right decisions.” You should also include having the right government. I cannot argue with much of what you said and I’m glad that you also recognise that depite what is said above whether we go boom or bust, sterlingisation would have no impact onto the fiscal situation of rUK, but a currency union would… obviously a positive one if we flourished as an i-nation, but a negative one if we struggled. Which is why WM would NEVER take the risk of a currency union.
      It staggers me that some people who would consider themselves serious political commentators glibly say that it doesn’t matter which currency we use, we trust our government to make it work anyway. You are as well giving someone a car with no wheels or petrol or steering wheel and saying “I trust the driver to get us from A to B.”

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    2. Basically speaking the two powers that would be missing would the the one to set the interest rate, which with Scotland being roughly an equivalent economy to London and the South-East, isn’t too much of a problem in the short term, and the other is the ability to issue money which is more problematic, though of course one which Scotland already suffers from. Seigniorage is a potential loss, but the US for instance is considering sharing the profits of that because it’s in its interest to have countries use the US Dollar but not spend them in the US (for obvious reaons). That would be up to negotiators to achieve for Scotland – I’d guess by agreeing to consultations (not restrictions).

      On the other hand with Scottish banknotes backed 100% by sterling in the BoE because of the banking act of 1844, before which Scotland totally successfully ran its own currency via banks, Independence could if it wanted, relax that 100% requirement, even as low as the 30% holdings which is recognised as generally being prudential – as long as there’s a Scottish regulator.

      As for the economic multiplier that relates to WHERE the spending is done, not what currency it’s in.

      For sterlingisation there’s a whole series of artlcles you can find via https://web.archive.org/web/20140805081845/http://www.wealthynation.org:80/category/our-currency/

      you might have to click the currency tab. You’ll also find other articles elsewhere under such headings as dollarisation, euroisation. Well worth a read with an open mind.

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      1. “Scotland being roughly an equivalent economy to London and the South-East,”
        C’mon now, you are having a laugh here…. I mean you are, aren’t you? Please tell me you ain’t serious? Taking GDP alone, Scotland’s is less than one third than that of London, never mind including the South East…. the GV is something similar…. London’s tax take alone (and again I’m not counting the SE) is 22% of the UK total, Scotland’s is less 8%. And you ask me to do research? This is basic stuff, it really is.
        And as forn countries using two currencies? Guernsey, Isle of Man? Bhatu?

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  7. @ yesindyref2: “But I don’t see any reason we can’t do both currencies at the same time.”
    What? How the Hell could/would that work?
    “Sadly there’s no prominent exponent of this idea”
    Wonder why that is……..

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    1. “What? How the Hell could/would that work?”

      Well geacher, if you do a bit of research before posting, you’d find that a few countries do precisely that, so perhaps you could look up how they manage it. Quite well seems to be the answer.

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      1. My apologies. Should have warned you that ‘geacher’ is a BritNat troll. It’s been following me around for a while now. I keep it as a sort of mascot.

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      2. No worries Peter, I saw your posting and also gathered it from its first posting. I should apologise for playing with a troll (helps to pass the time at sea as they say), on your blog!

        Trolls can be useful. But they’re not very good at reading and research, they think ‘tinernet is a write only medium.

        Liked by 1 person

  8. @ indyref2… interesting that neither you nor Mr Bell even attempt to refute anything I put up, but it was ever thus.
    “Scotland being roughly an equivalent economy to London and the South-East,”
    Not very good at reading and research it seems.
    Dearie me

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    1. I don’t know about anybody else, but I quickly learned that British Nationalist fanatics such as yourself are incapable of taking in new information. So why bother with you? You’re just a small, unidentified but horribly persistent stain on the great canvas of Scotland’s constitutional debate.

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    2. geacher, you could try the FoAI for one (if you have a clue who they are), for instance: “Scotland now sits 3rd behind London and the South East”, and consider the context, which was interest rate for the whole of the UK.

      Next.

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      1. I know who Fraser Of Allendar are, but that was not what you said. You said ” Scotland being roughly an equivalent economy to London and the South-East, ”
        Not even close, fella. 2016 (latest that I can find) figures for GVA:
        London: £408,000
        South East: £258,000
        Scotland: £134,000
        How is that roughly equivalent? Not even in the same post code.
        And we sit 5th, not third….the fall in the oil income scuppered that….. tho’ we have been third at times.
        So………wriggle all you want, you were wrong.
        AND two currencies…. what modern, developed nation operates on two currencies then?

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    1. I’ve given you so many chances to do some genuine research it’s like that advert “I can’t believe it’s not butter”.

      The “Scotland now sits 3rd behind London and the South East” quote was from the FoAI in January 2018 based on ONS date from December 2017. That’s AFTER the “the fall in the oil income scuppered that” as you put it. You’re as out of date as the case for the Union.

      Anyway I’m done, you’re just going to have to feed youself from now on.

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      1. You are making that up and you are running away… if you can prove it feel free, but you can’t, can you. Anyway it does not matter whether Scotland is third or not (EY UK Economic projections has Scotland falling to 7th next year…go SNP run ScotGov!), you were wrong wrong wrong when you asserted that Scotland’s economy was “roughly… equivalent” to London. If you believed that when you wrote that, you should really be considering abstaining from political and economic forums.

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      2. You don’t seem to have a clue how to use google geacher, so let me give you one, a clue that is:

        https://www.google.com/search?client=firefox-b-ab&ei=RpVDW4fEG4_DwQK1mIDAAg&q=Scotland+now+sits+3rd+behind+London+and+the+South+East&oq=Scotland+now+sits+3rd+behind+London+and+the+South+East&gs_l=psy-ab.12…4806.6314.0.8042.2.2.0.0.0.0.230.344.0j1j1.2.0….0…1c.1.64.psy-ab..0.0.0….0.DVnICiudAX8

        From your past performance I won’t be surprised if you still fail the test, miserably. But keep being trying!

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  9. Thanks for that… I know how to google, but I couldn’t find any link, but now I have it, and I see where you are getting confused. You are quoting the *per capita* GVA as proof to validate your statement that Scotland has the third biggest economy in the UK. It doesn’t prove that at all. Per capita figures (and Scotland’s is good) do not equate to gross figures…. you should know this.
    Look at your link again and look at the bit highlighted in red. Click on the *ONS published updated statistics* link THEN download the ONS *dataset* then look at table one on there. Just as I have said, on gross economic performance Scotland lies fifth, behind London, South East, North West & England East.
    Nice try, no cigar.
    Interestingly -using your link- on per capita performance, Scotland’s figure is 55% of London’s and on gross, it is 40% How did you equate that to that being “roughly equivalent”?

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    1. “You are quoting the *per capita* GVA ”

      I didn’t quote ANY GVA. Not even once. That was you. Can’t you even remember your own comments? I quoted FoAI stating that Scotland was third behind London and the South-East.

      For the sake of anyone left, and I doubt there’s anyone, my point is that the BoE interest rates and other measures would be fine for Scotland until we diverge, as we have a similar economy to London and the South-East – and as 3rd behind them out of 12 “regions” as they call us, that is correct.

      Now the thing is this, any monetary policy of the BoE would or should be aimed at the UK as a whole, and looking at the table (Chart 1) on the FoAI page, you can see we’re closest of all the 12 regions to that UK average. Scotland is the red column for the benefit of geacher, with the UK at the end.

      https://fraserofallander.org/scottish-economy/uk-regional-performance-an-increasingly-unbalanced-picture/

      Now, presuming the BoE does aim its policy towards the UK average rather than weighting it [1] towards London (and the South-East), the region best suited to the BoE policy is – Scotland.

      Which means that at the point of Independence with sterlingisation, the BoE would be setting its interest rates and monetary policy – in Scotland’s favour – quite accidentally at that point. It would only diverge when Scotland’s economy rose above the UK average, above the South-East value, and headed towards the London value. If that happens within a year or two, then so be it!

      [1] Statisticians will tell you that there are several different “averages” used for different purposes, and that they can be weighted or even deliberately skewed, or top and tailed.

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  10. “I quoted FoAI stating that Scotland was third behind London and the South-East.” Yes you did, but that is only the case if one is referencing PC GVA… what OTHER measurement are you referencing? I cannot see any other.
    “as we have a similar economy to London and the South-East ” We don’t! That is the whole point! London has 22% of the UK’s total GDP, Scotland has just over 7%!!!! How is that remotely similar? You posted up a link…. have you actually read it or just skimmed thought it?
    YOU supplied the link…
    GVA London £395,857mill
    GVA Scotland £134,445 mill
    Similar? Please……. stop it now.
    “Now the thing is this, any monetary policy of the BoE would or should be aimed at the UK as a whole, ”
    Yep true… but upon indy we would not be part of the UK… you are shooting yourself in the foot again and again!
    “Now, presuming the BoE does aim its policy towards the UK average rather than weighting it [1] towards London (and the South-East), the region best suited to the BoE policy is – Scotland.”
    Except that we would not be in, no longer be part of…. you can guess the rest?
    “Which means that at the point of Independence with sterlingisation, the BoE would be setting its interest rates and monetary policy – in Scotland’s favour ”
    Why? Why? Why? Why would BoE set its interest rates to benefit a foreign country? This is stupid stupid stupid.
    “It would only diverge when Scotland’s economy rose above the UK average, above the South-East value, and headed towards the London value. If that happens within a year or two, then so be it”
    To reach parity with the South East (never mind London!) we would have almost double our GDP over the course of two years?
    Please….
    We would also have to grow our economy by some 70% per year over two years.
    The forecast for growth next year is 0.3%
    Where would we find the short fall of erm 69.3%??????????
    Handy Hint: When you find yourself in a hole, throw away your shovel.

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  11. You have a very strange way of saying you agree with me that with sterlingisation the BoE setting interest rates and monetary policy is not a problem for some time. As I said at the very beginning:

    “Basically speaking the two powers that would be missing would the the one to set the interest rate, which with Scotland being roughly an equivalent economy to London and the South-East, isn’t too much of a problem in the short term [and money supply]”

    Loop …

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  12. You are going round and round and round in circles:
    Basically speaking the two powers that would be missing would the the one to set the interest rate, which with Scotland being roughly an equivalent economy to London and the South-East, isn’t too much of a problem in the short term [and money supply]”
    But we know that it is a problem because you are posting up…erm… rubbish?
    I’m getting bored now.
    Show one link that says that “Scotland being roughly an equivalent economy to London….”
    Be aware that being third in per capita GVA does not equate to being equivalent….. it just means that Scotland is….erm third.
    No more, no less.

    Like

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