First published in The Herald
What is really going on with the British economy during this current financial crisis and how could Scottish independence be a solution?
The very broad answer to this is that the British economy has for a long time now lacked enough genuinely productive investment opportunities and has covered this up through a complex process of ‘financialising’ the economy effectively to hide the fact that it’s all a bit of a Ponzi scheme. It seems that the UK Government has now pushed this one step too far and confidence is therefore collapsing.
The reason Scottish independence is a viable solution to this is exactly because Scotland’s economy is woefully under-developed, so it contains absolutely loads of genuinely productive investment opportunities. This would enable Scotland to build precisely the open, transparent national accounts which would enable markets to have real confidence in our economy and particularly our currency.
It is this underlying productive investment capacity which means that Scotland, as an independent country, could escape the downwards spiral that the UK is currently in and create an upwards spiral instead.
The Thatcher revolution largely dismantled the UK’s manufacturing and much of its primary production base and replaced the economic activity through a pivot to the service sector. Rather than ‘making things’, Britain ‘did things’, or most specifically ‘served people’.
The things it ‘did’ were largely to provide business services support (advertising, branding, accounting, legal, financial and consultancy services) and to monetise assets to facilitate financial speculation activity (property trading and the complex range of financial products based on debt or collateralisation).
These are not productive in and off themselves – but so long as markets believe that London’s property is actually worth what it sells for and that it will keep being worth more, so long as your business services are in demand, so long as your financial products have a value markets believe in, you can generate profits.
And so long as you’re generating profits it looks productive, even though often no obvious real value has been added. But this holds true only for as long as the markets retain confidence in your monetised assets and the value of your services.
Many UK asset are over-valued and markets know it, consumers are over-leveraged (in too much debt) and markets know it
This is how the UK has had ‘growth without productivity’. The knock-on effect is that, since these aren’t fundamentally productive activities, they don’t really base their value on labour, which in turn is why 25 years of economic growth in the UK have not been matched with wage growth.
Stagnant wages lead to decreasing demand in the economy, so to overcome that the New Labour government deregulated the rules around bank credit to stimulate the ‘debt economy’ – demand came from households borrowing more money rather than them earning more money. Again, that’s fine for as long as the market is confident it can lend and get returns.
Where we are now is that we have reached the end of the road for much of this activity. Many asset are over-valued and markets know it, consumers are over-leveraged (in too much debt) and markets know it, and a lot of the business service sector is only really strong when the economy is buoyant, and it’s not.
Too many of the financial assets the UK economy no longer have a genuine value that realistically underpin the giant financial schemes built on top of them. Underneath the debt-and-finance pyramid there just aren’t enough clearly productive investment opportunities offering long-term real returns for investors, like a classic Ponzi scheme.
A reckless Tory Government has pushed the world’s financial markets past the point of credulity. Its tax cuts were supposed to increase household demand and incentivise investors to invest. But households are in too much debt and investors are already cash-rich.
Markets realised that these tax cuts won’t cause households to spend or create new real investment opportunities, so they called the UK’s bluff. That is why markets are reacting as they are – they’ve been directed down a path they don’t want to go down because they don’t believe in it.
Scotland’s physical and human assets are as strong as ever and ripe for serious investment
This is made worse because the UK’s national accounts are opaque, disguising where money in the economy is coming from or going to, decreasing market confidence further when crisis hits. This means there is not enough real underpinning for the value of Sterling, not enough underneath it to hold up its value, no ‘there’ there.
But why would an independent Scotland be different? Scotland’s economy has been dragged around by ‘hot money’ which was designed to boost that finacialised London economy and to facilitate the debt economy. This disincentivises patient investment in genuinely productive activity.
Put that another way – if Scotland can deliver real, solid three per cent returns on your investment year after year through productive activity but throwing the same money into property in London can return you ten per cent in one year, what are you going to do?
This means that Scotland is woefully under-developed, economically speaking. The upside is that the potential has never gone away – our physical and human assets are as strong as ever and ripe for serious investment.
This means energy infrastructure (especially if we can capture supply chains), secondary energy technologies, attracting energy-intensive businesses, green hydrogen, manufacturing businesses based on our wide range of natural resources, pioneering in bioplastics, new organic fabrics, wood-based construction materials, food ‘import substitution’, engineering strategies to rebuild green-based engineering capacity in Scotland and much more.
This would be very attractive to global investors at a time when government bonds are still returning very low yields. And productive investment is the raw material which underpins the value of a currency (as the current decline of the pound demonstrates).
Plus because Scotland’s economy wouldn’t be reliant on the ‘black magic’ of complicated financial chicanery it would be much easier just to publish an honest ten-year national business plan and clear, transparent national accounts. Both would let markets have the confidence to invest into the economy.
What all of this means is that an independent Scotland which had a wide range of genuinely productive investment opportunities and its own currency could overnight begin to escape the depreciating-currency, low-productivity, hight-interest-rates death spiral in which the UK finds itself.