No-one can stop us!

"No-one can stop us using the pound!"

That is true. No-one could stop us using the dollar or the yen either, if we chose to do so. It just wouldn't be smart. Neither would using the pound outside the UK currency union.

No-one can stop Panama and Ecuador using the dollar, so they do use it. But the dollar is a foreign currency, controlled by a foreign country. These two Latin American countries allow the USA to enforce fiscal and monetary discipline upon them because they can't easily do it themselves. They have to generate trade surpluses in order to accumulate domestic spending power. Their governments are not masters of their own economies.

So if Scotland wants to wrest control of monetary policy away from London only to hand it straight back again, this time with no influence over it whatsoever, then yes, no-one can stop us.

On the other hand, good luck generating the trade surplus needed to pay for the promised fairer society after the financial services industry has been forced to move south of the border in order to stay in the same jurisdiction as its lender of last resort. Most Scottish financial products are exported to the UK.

Good luck obtaining a fair share of The Bank of England's foreign currency reserves after you've refused to take a fair share of the UK national debt.

Good luck finding people to purchase Scottish government bonds when you've shown yourself likely to default whenever you don't get what you want.

But we can always console ourselves with the thought that no-one could stop us!

Scotland's Future

Imagine that you are a banker. (If you are not already a banker this may be hard, but please try.) On a certain day you have appointments with each of a newly divorced couple, both of whom require loans to help them on their separate ways. The divorce has been acrimonious and reported in the press. Partner A has repeatedly threatened to accept no responsibility for the debts incurred on their joint account, not even those incurred in making purchases on his own behalf. He has now changed his mind. Partner B has gone on settling all debts as usual. Bearing in mind that, as a banker, your first responsibility is the security of your own funds, to which of the couple will you be more inclined to lend?

Amongst all the sound and fury surrounding the launch of the White Paper 'Scotland's Future', one figure has received surprisingly little attention. It is projected that in the first year of independence the Scottish Government will require to borrow £4.4 billion.

This is the same Scottish Government that:

1. has repeatedly threatened not to accept a share of the UK national debt,
2. denies Scotland's responsibility for the actions of a Scottish Chancellor in raising the UK national debt in order to bail out failing Scottish banks,
3. is already spending beyond its means,
4. has promised yet more spending in pursuit of a fairer society,
5. is about to destroy Trident-related jobs by the thousand,
6. is committed to a currency union and thus will not be able to set its own monetary policy.

Are you still imagining that you are a banker? You are not of course a Scottish banker, since the major Scottish banks are no longer Scottish owned. You are a foreigner and this Scottish Government is asking you for £4.4 billion. This year.  Alternatively you could lend to the RUK government which also needs a loan.

Bearing in mind that, as a banker, your first responsibility is the security of your own funds, what will you do?

Scotland and The National Debt

Alex Salmond has once again (19 November) threatened that non-compliance by the rest of the UK with his demands to 'share' sterling and The Bank of England after Scottish independence could lead to Scotland refusing to accept its share of the UK national debt. I realise that this is campaign rhetoric. It is nevertheless misguided.

The markets are listening.  They want to know what to do if they have to deal with an independent Scotland in the future.  The more likely a ‘Yes’ vote becomes the more they will trawl through the backlog of such remarks for guidance on future Scottish financial policies.  They will not like what they find.

Let us be clear. There are three important reasons why this demand is misguided.

1. Firstly, sterling is not an asset it is a national currency.  A currency is a claim on goods and services within an economy; it is not itself a good or a service. I have already explained in an earlier article the problems that are likely to face an independent Scotland that seeks to share a currency with its much larger neighbour.
2. Secondly, The Bank of England is the official banker to the UK government and an instrument of UK monetary policy.   Although its terms of reference are laid down by UK law, its independence from direct UK government control has been guaranteed since 1997.   Scotland is seeking to leave the UK. SNP ministers claim to want control of the economic levers for themselves. In what way would this purpose be served by 'sharing' an institution that does not take orders from government?
3. Thirdly, and most importantly, governments must never suggest defaulting on debt.  They must not imply it, or hint at it, or say anything that may be misinterpreted as an implication or a hint.  Everything that a First Minister or Finance Minister says is market sensitive.

The reason is that governments always need to borrow money.  Even governments running a surplus on the budget need to borrow money, because, just like you and me, the timing of their income does not coincide with the timing of their payments.  People who lend money to governments are sensitive to anything that makes them the tiniest bit afraid they might not get it back.  Every such unguarded remark could add half a per cent or so the Scottish Government's borrowing costs after independence.

We may end up with a Scottish currency whether we like it or not, for reasons outlined in my earlier article.  In any case, foreigners will have to hold Scottish paper with confidence.  The more suggestions there are that Scottish ministers don’t understand the markets and are careless or glib with financial pronouncements, the more reluctant foreigners will be to hold Scottish currency or bonds.  Scottish interest rates will have to rise to compensate for this perceived increase of risk.  In consequence, Scottish investment will become more expensive and therefore Scottish economic growth will fall. 

Is a point or two in the opinion polls today worth a point or two on the Scottish government's borrowing rate for years to come?