He never quite does get the effects of his musings, does he

Spudda tells Scotland how to do it. Then explains some more:

Let me unpack that a bit. The two things that a government may want to hold fixed with regard to its currency are its value, reflected in the exchange rate, and it is interest rate. The third dependent variable is the amount of debt in circulation, which used to be considered a matter largely beyond its control. I’ll return to this third point in a moment and stick with the first two for now.

A government might want to fix an exchange rate for three reasons. First is the old fashioned one of national pride. This departed the scene with floating exchange rates in the 70s. The second is because it has agreed to do so. This was why the UK was vulnerable to attack 1992: it had agreed semi-fixed exchange rates with Europe that speculators knew were economically unsustainable on the basis of trade fundamentals. It laid itself wide open to attack as a result. The third reason is to control inflation. This is pretty much a forlorn hope in exchange rate management: if trade indicates that the currency needs to fall in value come what may it will. A government needs to let that happen and address the domestic issues that necessitated the move in value (lack of investment, poor products, poor productivity) instead of wasting money supporting the currency. It would also better tackle inflation with changes in domestic tax rates than intervene in international markets. The important point is that if it agrees on all these three things it cannot be held to ransom on the exchange rate. The risk disappears.

On interest rates the threat is from the bond markets that might refuse to buy new bonds issues unless the rate rises. This threat was possible when it was thought a government had to sell its bonds come what may – effectively the third, uncontrolled, variable noted above. But this risk no longer exists because QE now eliminates it. If there was now a market based attack on interest rates it would require the sale of bonds already in existence to force their price up. And the answer to that now is that a government would just buy those bonds back and so neuter the attack using QE. The weapon the attackers used – that there was no other buyer for debt and so governments were beholden to markets – has gone because the government can itself be a buyer. The interest rate weapon is history.

To put it another way, Scotland will not be beholden to markets if it chooses not to be so. But it has to have its own central bank and currency to achieve that. Nothing less will do.

So, exchange rate starts falling for whatever reason. Thus there is import led inflation. Hmm. So, as said, the interest asked for by the markets (ie, the price at which they will buy newly issued debt falls) rises. We’re going to solve this by printing more money into an inflationary environment, are we?

Is’t this what Zimbabwe did?

17 thoughts on “He never quite does get the effects of his musings, does he”

  1. Apparently Scotland can thrive being independent and with its own central bank. But the UK has to be in the EU. Playing to the crowd as always.

    Amusing to see him saying Greece is fucked, despite being in the EU. And despite him saying when it all started going down the pan that there was no crisis in Greece.

  2. Very tempting for me now to change my position and agitate for an indy Scotland now the Godhead Murphy has told me we might have a magic money tree to pay for anything.

    PS Tim, would be grateful if you would stop linking to The National (the newspaper of choice for the Buckfast, Irn Bru and deep fried Mars Bar brigade here).

  3. In order to fight the depreciation of the sterling, increase the supply of sterlings. This will work

  4. To put it another way, Scotland will not be beholden to markets if it chooses not to be so.

    Oh, OK then.

    I can imagine a Scotsman standing tall and proud on Arthur’s Seat and shouting “I will not be beholden to markets!”, then descending and having to deal with another financial crisis.

    Anyway, Tuesday was Green Tuesday, excess consumption, etc. I think we are back to Flatter the SNP Thursday and the race for Vermine.

  5. ‘Let me unpack that a bit.’

    Brings to mind a mental image of a drunk tramp rummaging through an old sports holdall throwing out old pairs of pants, empty baked bean tins, a busted alarm clock.

  6. It would also better tackle inflation with changes in domestic tax rates than intervene in international markets

    Does he mean domestic tax cuts to offset those inflationary pressures? Most unlikely, given the source.

  7. To put it another way, Scotland will not be beholden to markets if it chooses not to be so.

    To put it another way, my bridge will not be beholden to the laws of physics if it chooses not to be so.

  8. Andrew M
    ‘Does he mean domestic tax cuts to offset those inflationary pressures? Most unlikely, given the source.’

    I suspect the good residents of Scotland would be served a nice round of tax rises as a means to stopping all that nasty inflation, as the value of their currency plunges. Ok if you live on Scotch and Haggis (which I’m sure the good professor’s Gauleiter’s would step in to control the price of, to stop those evil profiteers) ,but a bit of a pisser if you have to import anything else.

    But that’ll learn them, carelessly paying all those higher prices for everything.

  9. Worzel

    The tax rises are to prevent the extra currency leading to inflation. Which is the Golgafrinchan burning down forests to increase the value of money.

  10. Looks like he is lobbying for a peerage from the SNP. He must really have burnt his bridges with Labour.

  11. @Sam Jones – I think he’s actually searching for relevance and to be taken seriously. As you say he’s burnt his bridges with labour so he’s looking to regain the prominence he had when author of corbynomics was all the rage. Prior to that it was the tax gap – but that was only of minority interest. Now he’s sees that the only people who might give him the spotlight he craves are the scot nats so he’s soft soaping them in the hope he can be back in the spotlight again.I’ve said it before but i bet he’s got a scrapbook with all his mentions in the press – national and local. The man’s ego knows no bounds as does he lack of knowledge.

  12. In fairness to him he is right that Scotland need not be beholden to the Markets if it chooses not to be, and indeed it can have its own currency and Central Bank if it so chooses. If you look at the closest economy to his vision in the real world, both the DPRK Central Bank and the North Korean won exist, and I don’t think anyone would suggest North Korea is ‘beholden to the Markets’. Indeed Given the Staunchly illiberal SNP agenda they may be rather closer to them than they think…

  13. The knuckle-dragging Indy cult still look to him as a saviour but the more reasonable independence supporters have ditched him after Kevin Hague gave him a proper kicking.

    He’s rapidly running out of fools to fleece, at least here in the UK.

  14. GlenDorran

    That was brutal – Kevin Hague seems like a tough cookie (I presume you have to be to deal with the ‘Cybernats’) and a fat oaf from Huntingdonshire who is wholly ignorant of politics, economics , history and indeed any topic of import is not going to fare too well in a debate….

  15. @V_P: yep, Kevin deals exclusively in sourced, referenced facts.

    He was once getting grief off a flag-waving SNP local councillor along the lines of “who are you and what do you know”. Eventually he snapped and posted his CV and list of achievements academically and in business. Seriously impressive track record and a very impressive guy all round.

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