I’m sorry I’ve not been writing in the last week – I was in London much of last week and am hard against other deadlines for the next couple of weeks. That is my excuse for being a bit absent at this most crucial moment for the cause of independence – what excuse does the SNP leadership have?
What I want to do in this article is to set out as simply and clearly as I can why this is such a crucial moment for the cause of independence, why this is the best moment for building a case for independence since the oil boom and why mainstream economics will be on our side if we get it right.
What I will do very soon is raise the biggest alarm I can to suggest that the fact that the Scottish Government and the SNP leadership appears clueless and paralysed at this moment raises very significant questions about whether they have the capability to lead anyone anywhere.
But for now, some economics (though this shouldn’t be too hard to follow). All this is about the it-wasn’t-a-budget and the crash in Sterling in its aftermath – and what it tells us about the relative positions of Scotland and the rest of the UK.
When a UK Government proposed radical tax cuts the economy tanked. Why? The usual theory goes that when you cut tax for people on ordinary incomes they spend more in the shops and create growth and that when you cut taxes for the rich they invest it into the economy creating both growth and (in theory) increased productivity.
That should cause money markets to feel increased confidence and so the various economic and monetary indicators should get better. The opposite has happened. The reason is that those with serious money are already cash-rich. The rock-bottom returns on gilts (government bonds, or the ‘IOU notes’ governments use to borrow money) show that big investors were happy to accept even very modest returns on investment.
That’s because investors cannot find productive investment opportunities in the UK economy as it is. They have the money – there just isn’t a large productive industry sector to invest it in so they get a decent return. Giving them more cash doesn’t create more investment opportunities, it just strips demand out from the economy.
We got here in three phases. Thatcher ran down the industry base in the UK (places where you can make productive investment) and released the financial industries. Then Gordon Brown hyped up the financial markets to finance tax giveaways. Then the over-valued financial markets crashed in 2007 and crazy money was thrown at them to stop them imploding.
Each of these interventions repriced assets upwards. Which is to say that the value of the UK economy and its currency have been underpinned not by productive industry but by an economy which has been trading in financial assets (property, stock, CDOs and all the rest). So to be successful, that economy had to keep inflating the price of assets. But that can only go so far – and we appear to have reached a kind of ceiling.
Sterling has been on a long, slow decline in comparison to other currencies because the economic realities underpinning its value are a bit of a mirage
Meanwhile because the UK was investing in speculation rather than productive enterprise, its productivity was very poor by international standards. This in return means that the kind of productive work that creates good jobs wasn’t available, hence stagnating wages.
To make up for that the UK created incredibly ‘cheap money’. People couldn’t spend from wages so they were encouraged to borrow at rock-bottom interest and instead spend from borrowing. But as everyone knows, that particularly wheeze has now hit its limit as households start to pull back their spending.
Money markets know all of this. They know that transferring money to the wealthy will not result in redirecting money flows into productive business in the UK and they know that cutting tax for households will not send them on another borrow-to-spend spree because they are too far in debt.
So money markets did what they do – they realised that they could make more money betting against themselves than they could from backing themselves. So they did, they bet against themselves. Then everyone noticed they were doing it so they all started betting against Britain.
This is a perfect example of ‘slowly, then quickly’. Sterling has been on a long, slow decline in comparison to other currencies because the economic realities underpinning its value are a bit of a mirage. The shock intervention of the Truss government exposed that mirage by pressing a button that didn’t work any more and the sound of the button not working caused a panic spiral.
There is no coming back from this for the UK. Of course there will be a rally from the current crash, but ask yourself this – what is it that you think makes Sterling twice as valuable than the US Dollar? In your head it is, but that hasn’t been true for a long time. The days of a dominant UK economy are over, at least for the foreseeable future. This is our new reality.
The position of an independent Scotland is quite different. What I’m describing above is ‘over-development’, a process of boosting an economy beyond what it can really sustain. The Scottish economy is the opposite – we’re woefully underdeveloped. Scotland is choc-a-block with potential productive investments.
Our energy, land, potential for materials manufacture, engineering capacity and much more are all running way below the capacity Scotland could sustain. Its the inverse of all those UK economic stats. London has absorbed so much of Scotland’s wealth it has overheated and can’t absorb more successfully. But you could reverse that flow very easily and Scotland would have no difficulty absorbing it.
There is a fundamental condition for all of this of course – Scotland would have to have its own currency. The ability to produce viable returns on investment inside your currency area is one of the key factors in sustaining the value of a currency and Scotland could do that no problem. Scotland’s real economic foundations are sound in a way the UK’s aren’t.
An independent Scotland would be a large net attractor of investment in a UK context. That investment would be in the productive economy and so would create a virtuous wealth cycle and that in turn would keep the value of our currency strong. In fact, there is a risk it could be too strong and that monetary policy would need to ‘cool down’ the value of a Scottish currency for the sake of exporters.
It is crucial, absolutely crucial, that we succeed in framing what is happening in the UK not as the result of ‘mad Tories’ but of its entire economic model running out of road
I hope that all makes basic sense. A currency has as much value as investing and using that currency adds for the investor (at least in part), and if an investor can’t make money in your currency they will bet against it. The UK has few viable productive investment opportunities and Scotland is loaded with them.
Put it another way, the UK economy is a bit of a Ponzi scheme which has been propped up of late by massive amounts of ‘quantitative easing’ cash which reflated the value of things which would otherwise have deflated. Truss and Kwarteng gambled on being able to inflate that same bubble one more time and the failure of the gamble caused a crisis of confidence in the fundamentals of the UK economy.
The Scottish economy is more like a doer-upper, a stunning opportunity which has been neglected for years by government rule that was only interested in London. It’s ability to move forward and build real things is what means its currency will be valuable. The UK’s inability to move out from under the mountain of inflated asset prices means its currency will never regain its full strength.
You can explain this in lots of ways. The UK has been a casino and now the bankers are chipping out because they know the game’s up, while Scotland is a sleeping giant waiting to emerge. Or you could say that London is overdeveloped and that is unsustainable and is leading to a market correction, while Scotland is underdeveloped and ripe for a productivity boom
You could say that Sterling is a currency without productive investment opportunities and a Scottish currency would be rich with productive investment opportunities. You could call the UK economic model a busted flush and the Scottish economy a great hand that hasn’t been played.
There are dozens of ways to describe this without using too much economic jargon. But there is one thing I want to get across more than anything – this UK multi-crisis is a City of London crisis, not a Scottish crisis. It not only makes the case for leaving the UK, it shows exactly how Scotland could succeed if it escaped that daft economic model.
We are living in a country facing a fundamental, structural crisis and everyone knows it. We could be living in a country with so much emergent productive economic activity that it would easily outstrip the economic performance of the one we were leaving behind. This could be as big a moment as the discovery of oil in the North Sea.
It is crucial, absolutely crucial, that we succeed in framing what is happening in the UK not as the result of ‘mad Tories’ but of its entire economic model running out of road. It is first-order important that Scotland in Union is pinned down on the collapsing UK, that Labour is not permitted to frame this as ‘a short term problem we can fix’.
This is the case for independence. We need to win that case now. If independence can’t be explained as a solution to this crisis, what is it all about? This is our moment, our chance to outline our broad monetary, fiscal and economic strategy for an independent Scotland with its own currency. This is existential for the UK – and for us. Please share this and make sure people understand that.
And then, if I can find time, tomorrow I will write to ask why in the name of god the SNP looks like a rabbit caught in a headlight. That a week later it has failed utterly to link this crisis to the case for independence or develop a story about it which helps the case for independence must surely fuel serious doubts that they are within touching distance of knowing what they’re doing.