Posturing over the pound

The debate about what currency Scotland could, would or should have has sprung into life now that the SNP's white paper proposal for 'keeping the pound' has been rejected by all of the major Westminster parties, and the Liberal Democrats too.

This represents a new stage in the debate, with the stakes ramped up for both sides. But if we sweep aside the political posturing, the debate over the last few days has revealed - to this disinterested observer - some interesting truths:

1. The establishment is worried by the prospect of a 'Yes' vote

The unity among the leaderships of the Tories, Labour and Liberal Democrats (and UKIP incidentally) reinforced by the unusual decision to publish the advice of a senior civil servant is a clear indication that the establishment is concerned about the prospect of Scotland seceding from the union.

You might argue that this consensus is a reflection that currency union is a bad idea (especially for Scotland), but Sir Nicholas MacPherson's letter and the statements of the three parties (working together for a No vote under the Better Together banner) go further than criticising currency union and contain some ridiculous scaremongering. The 'no' side - ahead in all the polls - is obviously worried though.

And it has good reason. If Scotland votes to leave and is refused currency union, it could quite legitimately reject the UK debt (a possibility acknowledged in MacPherson's paper). However, even if Scotland took a share of the national debt (based on population size) it would have a debt to GDP ratio of 81%, compared with 104% for the rest of the UK (according to an NIESR paper).

The Treasury paper implicitly acknowledges these possibilities but implicitly says the UK would get its way because "an extensive wrangle about [Scotland's] share of the debt would increase uncertainty and hence its funding costs". What it doesn't say is that is true too for the remaining UK ... and that's why they're worried.

2. HM Treasury believes the Euro is still bad for the UK

It believes that economic union is problematic without political union - and that economic independence is incompatible with currency union. In this it is right: witness how a technocrat was imposed in Italy and government policy imposed in Greece (and elsewhere) under Eurozone orthodoxy.

3. The SNP is economically bankrupt

The SNP clearly lacks the confidence to argue for an independent currency under a central bank of Scotland. Instead it wants a more familiar and convenient currency union with the UK, knowing that it will inevitably mean that Scotland would not be economically independent.

At best Scotland might get one seat on the Monetary Policy Committee of the Bank of England (given size of economy or population), and the interests of the Scottish economy would be totally marginalised (it is arguable that is the case now since the Bank of England largely operates in the interests of the City of London's square mile, but then why vote for independence only to accept the situation of pre-independence?)

As such an 'independent' Scotland under the SNP's vision would leave Scotland as a crown dependency, similar to the Isle of Man or Jersey. Given that Salmond's economic vision has previously been to turn Scotland into a tax haven, maybe that's the aim. Scotland as an outpost of the City of London?

4. The UK banks are still fragile, and if they crash again the establishment will bail them out again

The Treasury paper states "Scotland's banking sector is far too big in relation to its national income, which means that there is a very real risk that the continuing UK would end up bearing most of the liquidity and solvency risk". So the Westminster consensus still believes if banks fail they should be bailed out exactly as before. They have learned nothing from the greatest crash in over a century - their neoliberal ideology remains unshaken. The SNP does not demur from this, nor suggest the Icelandic route.

Conclusion

These points do not make the case for either a yes or no vote in the referendum. What they point out is that however Scotland votes, it will be governed by people unable to govern in their economic interests.

What is also reveals is that the referendum debate is likely to step up, with more vitriol and posturing, that will make independence negotiations more difficult if Scotland does vote yes.

International currency war under way

The Bank of Japan’s decision yesterday to further reduce its close to zero interest rate looks suspiciously like one of the opening shots in an exchange rate war that will intensify the problems besieging the already weakened major economies.

In dropping below its lower limit of 0.1%, and looking at a small programme of quantitative easing (QE) (aka printing more money), Japan managed to get the yen to fall on currency markets. This has the effect of making its exports cheaper.

But Tokyo didn’t start it. They just followed Brazil’s finance minister who, on Monday, took measures to hold down the value of the real. Guido Mantega warned:

'We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.'

Both Japan and Brazil pre-empted the widely expected “return to QE2” – a sequel to the fading effects of the previous programme of money creation by the now struggling Obama administration. Washington wants the lower dollar to fall to give its exports an edge.

So the alarm bells are ringing at the International Monetary Fund, which is warning that the “recovery” has run out of steam. IMF head Dominique Strauss-Kahn told the Financial Times:

'There is clearly the idea beginning to circulate that currencies can be used as a policy weapon. Translated into action, such an idea would represent a very serious risk to the global recovery.'

It’s not long since world’s leaders in government, banking and finance came together to hammer out the agreements that enabled at least the semblance of a co-ordinated programme of measures designed to restart lending and bring about a return to growth.

Whilst the previous concerted action is credited with averting a financial and economic Armageddon, its effects are best described as a phony recovery. And that is now over. The optimism induced by unprecedented measures couldn’t and didn’t overcome the uncontrollable logic of the capitalist system of production.

The global crisis may have erupted in the financial system but its roots are elsewhere.

Throughout its short period of existence on the planet, the capitalist system has been racked by contradictory forces. Competitive pressures have obliged companies to invest in productivity enhancements which, whilst giving the front runners a temporary advantage, inevitably reduce costs, prices and profits for all.

To offset the tendency for profits to fall, greater volumes of every product have to be cranked out and sold, and the pressure for even more productivity accelerates and accentuates the growing economy.

This irresistible objective logic created the globalising corporations that came to dominate the world. And when the surging millions of cars, computers and mobile phones overwhelmed the market, a house of (credit) cards and mountains of debt were created so that consumers could buy them up. At least until we, and the rest of the economy found ourselves drowning in that very same debt.

Optimism is now being replaced with realism. Cuts in government spending to reduce the budget deficits they’ve accumulated over years of trying to keep growth on track are just one part of the story.

The phony recovery allowed manufacturers to restock their warehouses and showrooms, but there’s still not, and won’t be enough buyers. So the factories that restarted production after the 2008 collapse will go back onto short time and no time.

Competition for the remaining market will sharpen, and the intensification in the rate of exploitation will prove truly shocking, sparking social unrest to match. These are the objective laws which shape the decisions in the boardrooms and in government buildings.

Successful resistance will depend on individuals and communities creating new forms of democracy – People’s Assemblies with the power to terminate the web of contracts and property relationships that tie workers to capitalist employers and ensnare us all in debt. The system of profit-chasing growth must be torn up at its roots. Let’s compost capitalism!

Gerry Gold
Economics editor
A World to Win
http://www.aworldtowin.net/
6 October 2010