Search topics on this blog

Google+ Badge

Showing posts with label exchange rate mechanism. Show all posts
Showing posts with label exchange rate mechanism. Show all posts

Saturday, 20 April 2013

What is Truth? (Pontius Pilate): Labour’s Truth Team and video

Scottish Labour’s strange little black propaganda video has made its appearance on YouTube, timed for the Scottish Conference. I don’t know who did the voice over, but it is a very strange voice indeed, modelled roughly on the voiceover in trailers for crap American series on repeat channels – a kind of mid-atlantic, pseudo-portentous growl. Impossible to determine the nationality of the perpetrator – could be a Scot trying to expunge all traces of Scottishness. Clearly, Scottish Labour didn’t trust an honest Scots voice to talk about truth …

The graphic mode is funereal, in the BetterTogether style of Repent_End_Union_is_Nigh! All that’s missing is the lugubrious Alistair Darling. Only the first point, on the currency deserves any attention – the rest is beneath any serious analysis. (It says a lot about Scottish Labour’s ideas of the intelligence of Scottish voters –perhaps the most catalysed, sophisticated electorate in the world right now.)

"For many years now, the pound sterling has been a millstone round Scotland's neck" “Sterling is costing jobs and prosperity” Alex Salmond 10th Nov. 1999

These quotes are over 13 years old. It was in the last millennium – the last months of the 20th century.

Since then, we’ve had 9/11, governments have come and gone, dictators have risen and fallen, the disastrous Republican US/Labour UK wars in Afghanistan and Iraq were started with a bang and are now ending with a whimper, and from 2008 onwards, the world economy and the world’s banks have gone into near meltdown, the British economy is a basket case, due in significant part to the Blair/Brown Labour Government’s mismanagement of the economy and the regulation of the banks, and the Tory/LibDem Coalition Government’s misconceived attempts to handle the shambles left by Labour, Europe has major problems with monetary policy, and the Arab Spring continues, creating major uncertainties for the Middle East and the world.

Economist, bankers, political theorists, academics and governments across the globe have hastily revised just about everything they thought they knew about monetary and fiscal management and investment.

But Scottish Labour relies on 13-year-old last century, last millennium quotes by Scotland’s First Minister to allege a contradiction over the SNP’s present policy over Scotland’s currency after independence!

It is a measure of Scottish Labour’s failure of imagination, failure of basic economic or political understanding and failure to adapt to the world we now live in that they are reduced to such Fox News-type negative campaigning and propaganda.

Political leaders failing to change their minds in the light of the vast changes to political and economic circumstances over this turbulent period would truly remarkable, branding them as dinosaurs, doomed to extinction by forces beyond their understanding or control.

That would be a fair description of the Scottish Labour Party, as exemplified by this misconceived initiative and video, dragging the very concept of Truth into their gutter.

Let’s look then at Alex Salmond’s current position on a Scottish currency, and the quote that encapsulates that pragmatic position -

Retaining the pound under independence is something that I believe is in the interests of Scotland.”

A fuller discussion of the issues can be seen in this June 2012 video. (The FM also discussed this issue at the Brooking Institution very recently.)

Here’s what I said last year on the currency question, as a rebuttal to criticisms advanced of the FM’s position.. The essence of the argument is still much the same, but heavyweight economic commentators have since then suggested revisiting the commitment to sterling and reconsidering a Scottish currency launch, in the light of rapidly the changing economic climate. -

MY REBUTTAL OF ARGUMENTS – June 2012

This is an attempt to talk the language that the average voter might begin to understand, so a warning shot to the ravening hordes of PPE graduates and professional economists – don’t try to bury me alive in complex conflicting arguments and academic references which have more to do with the political axe you are grinding than economic facts – haul your wagon to one of the many learned journals who publish this kind of thing, and have fun quarrelling with your peers over arcane theories.

1. Scotland is not going to be become independent, but if it does, it won’t really be independent if it still has sterling as its currency.

The idea that there is some pure, unalloyed version of independence in the complex interdependent world we live in is fantasy, as it is in individual life. Independence includes the right to decide with whom we cooperate, with whom we form alliances, when we cooperate and when we walk away, and whether that cooperation and those alliances are on trade, on economic controls, on defence, or in cultural, social, humanitarian and sporting policies and joint ventures.

And to forestall yet another ludicrous unionist old chestnut, our present membership of the UK does not already give us such sovereignty – it involves the surrender of the right to decide, the surrender of the sovereignty of the Scottish people on all but the few devolved matters the sovereign UK deigns to permit us to exercise some control over.

It might be nice at some point in the future to have an independent Scottish currency, Equally it might be appropriate to remain in sterling, or to join the euro, or join some other currency union as yet unknown. What will be even nicer is that the sovereign Scottish people will make that decision – nobody else.

2. Alex Salmond really wanted to join the euro: he was wrong on that, therefore he is wrong on this.

Resisting the urge to laugh at the utter naivety of this argument, I will simply say that what anybody said about the euro, about economics, about international banking and finance over four years ago is now almost completely irrelevant in the light of the economic and financial chaos that has engulfed the world. With the exception of a few prophetic voices crying in the wilderness, nobody foresaw it in any meaningful sense, least of all the economic and political theorists. Great fun can be had by selectively picking quotes of yesteryear, but it contributes nothing to an adult debate.

3. An independent Scotland would not have any influence in a currency union with the UK, much less a seat on the MPC, and would be wholly at the mercy of the Bank of England on monetary policy, and since the B of E is invisibly controlled by the UK (sic) Government and the Treasury, Scotland’s financial independence would be an illusion – the control of fiscal levers and policy would make no difference.

First, a few facts -

Currency unions exists all over the world, and can be one of three kinds – informal, formal, or formal with additional rules. They are entered into to maximise economic efficiency in a geographical region.

Scotland doesn’t need permission to use sterling – it is an internationally tradable currency, like the dollar, and if an independent Scotland continues to use it, it de facto has entered into an informal currency union with rUK.

To take the arrangement beyond the informal would require negotiated agreement with rUK. Such an agreement could only be reached during the wide-ranging negotiations that will take place after the YES vote in autumn 2014. The present UK Government is not going to enter into such negotiations, formally or informally, in the lead-up to the referendum when it is fighting for a NO vote. To do so would be to admit, de facto, that Scotland was likely to become independent. (Johann Lamont more or less did just that at FMQs.)

(If sensible politics and diplomacy were a feature of the present UK Coalition Government and Opposition, there would probably be confidential discussions taking place right now. Regrettably, there is little evidence of anyone in the Coalition Cabinet, or in the Scottish Office, or the Holyrood Opposition capable of the sophisticated approach that this would demand. There are undoubtedly such people in the diplomatic services. But to use diplomats would involve acknowledging that Scotland is likely to become an independent country.)

The Bank of England is the Central Bank of the United Kingdom. Gordon Brown gave the Bank of England operational independence in monetary policy in 1997, and it became responsible for setting interest rates through the Bank's Monetary Policy Committee, independent of Government.

The members of the MPC are the Governor of the Bank of England, two deputy governors, the Bank's Chief Economist, the Executive Director for Markets and four external members with financial expertise directly appointed by the Chancellor. A representative from the Treasury also sits with the Committee at its meetings. The Treasury representative can discuss policy issues but is not allowed to vote.

Its role is to set interest rates, to issue banknotes (Scotland still issues its own) and to contribute to “protecting and enhancing” the financial system. It has the right to use a process called quantitative easing to ‘print money’ (which is not printing more banknotes!) usually in crisis situations such as the recent banking collapse. The MPC does this by electronically creating new money to purchase assets, thus increasing the national debt. (Between March 2009 and January 2010, the MPC authorised the purchase of £200 billion worth of assets, mostly gilts – UK Government debt) This injects more money into the economy.

An independent Scotland will have full control of every aspect of the financial measure – fiscal levers – necessary to run the Scottish economy, raise taxes, etc.

If it uses a currency other than its own - e.g. the euro, sterling, the dollar – its interest rates would be set by the central bank of that currency. Scotland would therefore be subject to the monetary controls and monetary policy of that central bank.

The strength of a currency depends on the economic performance of the country issuing it, and the perception of that country, its currency and its economic performance by other countries. This determines the exchange rate, normally defined against the dollar.

For a newly independent Scotland to launch its own currency in a favourable world economy would have been a bit of a gamble: for it to launch its own currency in the current chaotic economic climate, or to join the euro would be lunacy. Sticking with sterling is the prudent, sensible option, either informally or within a currency union with rUK. This is not the time for macho posturing, indeed there is never such a time …

For the Bank of England and rUK not to accept the reality of an independent Scotland, with full fiscal control, using sterling, without having an observer equivalent to the present UK Treasury advisers would be illogical. Lyndon Johnson’s memorable phrase of “better inside the tent pissing out than outside pissing in” comes to mind. Since the criteria the chancellor uses for selecting the four independent special advisers is unknown to me, I can offer no advice other than to say that a special adviser with an insight into, and special knowledge of Scotland’s finances would make sense.

A currency union beyond the informal also makes sense to any objective adviser.

As for Johann Lamont’s nonsense about consulting the Bank of England or the UK Treasury in advance, I refer to my comments above. Expect no objectivity from them until we have a decisive YES vote and negotiations have commenced.