Scottish Independence - Hard Talk over the pound

[Mission]

I can't wait to see how this pans out post referendum - just how will they vote I wonder?

[Truth Seeker]

I think some are missing the point when we say Scotland can't use the Pound, Scotland can use any currency it wishes to, Dollars, Yen, Swiss Franc. The problem with that is Scotland won't be allowed to issue bank notes or coins, they could use the Dollar as Oil is sold using the Petrodollar, If they join the EURO Scotland will be allowed to print a limited number of Euros. It should be noted that Paper cash and coin is less than 5% of the money supply, as banks create money out of thin air when someone takes out a loan which is called "Fractional Reserve Banking".

 

Money of Scotland. http://www.scotland.com/currency/

 

Money as Debt - Fractional Reserve Banking.

 

[Albert Tatlock]

I think all this will be academic, with the result being a resounding 'NO'.

[Thomas Jefferson]

I think all this will be academic, with the result being a resounding 'NO'.

 

You should always leave a margin of error of say 99% to adjust for human stupidity.

[Cambon]

 

Scotland's best chance is to piggy back the pound but WITHOUT any attachment to the monetary policy.

Just to emphasize where I disagree with what you are saying.

 

That is like saying Scotland could piggy back on using the channel tunnel, but WITHOUT any attachment to timetabling or the gauge of the railway.

 

It really shows you don't get currencies - without compatible monetary policy (which involves significant monetary attachment) there will be unsustainable capital flows which would break the currency link - ask John Major during the ERM crisis, or Argentina when it thought it could piggy back to the dollar without consideration for monetary policy. You can't do it.

 

Look up the impossible trinity if you disagree, but don't expect a Nobel Prize for economics to turn up.

Chinahand - the problem is that the monetary policy of virtually every currency in the world is morally corrupt and financially bankrupt, that includes englands. Any relatively rich country would be mad to become legally joined to englands monetary policy. However, by continuing to use the currency of its largest trading partner as that partners currency continues to go down the pan can only benefit Scotland as it forms it's own monetary policy based on solid and moral fundamentals. For example, a gold standard, or perhaps look to Iceland for advice.

[carbon selector]

All this talk of independence.

 

There have been many fights for independence and freedom throughout the world over the centuries. Can anyone remind me how many people have died in this particular struggle?

 

The only thing that will die, and deserves to die, is Alex Salmond's ego.

[Chinahand]

Cambon, talk about hyperbole! It is interesting how once people get to a certain age they get convinced that it is the end of the world as we know it, but the younger generation basically continues to feel fine.

 

Physical based currencies, such as a gold standard, don't work - they have a paradox at their core, in that in order to provide growing liquidity to the rest of the world the gold-backed currency has to run a consistent current account deficit. This is not sustainable in the long term - the deficit country will run out of reserves - that is why Nixon closed the Gold Window and Bretton Woods collapsed. It's called the Triffin dilemma in economic circles.

 

Gold standards do not, and cannot work, in the long term - my understanding is that the main microeconomic reason for this is that inflationary and deflationary pressures aren't equal - prices (and wages etc) go up, far more easily than they go down, but a working Gold Standard requires equal adjustment between deficit and surplus countries. This just doesn't happen as prices are sticky downwards and so the standard eventually grinds to a halt as reserves exit the reserve based country.

 

The most interesting contribution to this issue recently has been from the Chinese central bank whose governor, Zhou Xiaochuan, made an important speech on it at the height of the crisis: link.

 

The result was an IMF report which recommended the IMF's Standard Drawing Rights be converted into an international reserve currency called the Bancor, but progress is really slow!

 

Solving this issue is one of the really important challenges to allow the world to continue to trade as the US looses global influence and as the developing world (and especially China) grows in economic power. The world needs a fiat reserve currency which can be expanded appropriately as economies develop - something almost impossible to do with a physically based currency.

 

The pound and the dollar have both filled that role in the past, but because their monetary policy is for the interests of the national economy and not the world's the result was increasing tensions and eventual collapse of the system. The Pound's loss of economic clout, the costs of WWI and the Great Depression destroyed the Pound's link with Gold. The Oil shock did the same for the Dollar, but the resulting system was a Gold Standard light fixed to the fiat dollar.

 

That can only work if the US's monetary policy is appropriate for the world - but it isn't, being too expansionary - the Greenspan put - the result is the huge accumulation of dollar reserves in China etc, and the current threats of currency wars etc.

 

The Chinese are well aware of the problem, read Zhou Xiaochuan's speech linked above. What is very encouraging is that they wish to use the existing international system - the IMF - to solve it, rather than pursuing economic nationalism and trying to replace the Dollar with the RMB - that is a more mature attitude than the American's had in the 1930s and at Bretton Woods.

 

The conspiracy nutters love this sort of thing, but being able to value world trade needs a reserve currency, and it is better it is under a rules-based, mutually agreed international system than the whims of a national central bank with all the political pressures that involves.

 

But giving that up takes political humility - will the US be able to see the advantages to doing it - less power, but for longer, if it negotiates a settlement which binds in the international system to its rules, but then shares the results.

 

Who knows - maybe your right Cambon and it is the end of the world as we know it!

[Donald Trumps]

I'm surprised Gideon Osborne got out of Scotland alive

[Cambon]

Cambon, talk about hyperbole! It is interesting how once people get to a certain age they get convinced that it is the end of the world as we know it, but the younger generation basically continues to feel fine.

 

Physical based currencies, such as a gold standard, don't work - they have a paradox at their core, in that in order to provide growing liquidity to the rest of the world the gold-backed currency has to run a consistent current account deficit. This is not sustainable in the long term - the deficit country will run out of reserves - that is why Nixon closed the Gold Window and Bretton Woods collapsed. It's called the Triffin dilemma in economic circles.

 

Gold standards do not, and cannot work, in the long term - my understanding is that the main microeconomic reason for this is that inflationary and deflationary pressures aren't equal - prices (and wages etc) go up, far more easily than they go down, but a working Gold Standard requires equal adjustment between deficit and surplus countries. This just doesn't happen as prices are sticky downwards and so the standard eventually grinds to a halt as reserves exit the reserve based country.

 

The most interesting contribution to this issue recently has been from the Chinese central bank whose governor, Zhou Xiaochuan, made an important speech on it at the height of the crisis: link.

 

The result was an IMF report which recommended the IMF's Standard Drawing Rights be converted into an international reserve currency called the Bancor, but progress is really slow!

 

Solving this issue is one of the really important challenges to allow the world to continue to trade as the US looses global influence and as the developing world (and especially China) grows in economic power. The world needs a fiat reserve currency which can be expanded appropriately as economies develop - something almost impossible to do with a physically based currency.

 

The pound and the dollar have both filled that role in the past, but because their monetary policy is for the interests of the national economy and not the world's the result was increasing tensions and eventual collapse of the system. The Pound's loss of economic clout, the costs of WWI and the Great Depression destroyed the Pound's link with Gold. The Oil shock did the same for the Dollar, but the resulting system was a Gold Standard light fixed to the fiat dollar.

 

That can only work if the US's monetary policy is appropriate for the world - but it isn't, being too expansionary - the Greenspan put - the result is the huge accumulation of dollar reserves in China etc, and the current threats of currency wars etc.

 

The Chinese are well aware of the problem, read Zhou Xiaochuan's speech linked above. What is very encouraging is that they wish to use the existing international system - the IMF - to solve it, rather than pursuing economic nationalism and trying to replace the Dollar with the RMB - that is a more mature attitude than the American's had in the 1930s and at Bretton Woods.

 

The conspiracy nutters love this sort of thing, but being able to value world trade needs a reserve currency, and it is better it is under a rules-based, mutually agreed international system than the whims of a national central bank with all the political pressures that involves.

 

But giving that up takes political humility - will the US be able to see the advantages to doing it - less power, but for longer, if it negotiates a settlement which binds in the international system to its rules, but then shares the results.

 

Who knows - maybe your right Cambon and it is the end of the world as we know it!

Chinahand - A very good and informative post. However, I have worked in and with finance, mainly banking (with a "B") for over 30 years, and saw and experienced much of what happened before that. I believe that USA abandoned the gold standard because it is does not support the Ponzi systems that were desirable at the time, the ones that are now biting them in the ass.

 

Zhou speech was and is of great importance, partially for the reason you outline above, but more importantly because China are busy buying every scrap of under priced gold they can currently get their hands on, same as the US, but for different reasons. US are desperately trying to depress the price of gold because the are trying to pay Germany back the gold that was on deposit In NYC, but the US (allegedly) cannot seem to find. China, on the other hand, will issue THE new currency based on a new Gold Standard, but only when the US dollar is totally screwed (not long away).

 

It is going to happen.

[Albert Tatlock]

Polls suggest that many people in Scotland do not even know what powers, and there are a few major ones, that have already been devolved to them.

 

Same with technology, most Scots questioned thought an 'App' was the opposite of 'doon'.

[pongo]

Zhou speech was and is of great importance, partially for the reason you outline above, but more importantly because China are busy buying every scrap of under priced gold they can currently get their hands on, same as the US, but for different reasons. US are desperately trying to depress the price of gold because the are trying to pay Germany back the gold that was on deposit In NYC, but the US (allegedly) cannot seem to find. China, on the other hand, will issue THE new currency based on a new Gold Standard, but only when the US dollar is totally screwed (not long away).

 

It is going to happen.

This combines 2 currently popular conspiracy themes: mythical gold worship and the idea that the dastardly Chinas have a secret plan.

 

Lets be clear: The Chinas are not stupid. They know that gold has limited intrinsic value. As a form of money gold is as arbitrary as coal or grain. But less useful in an emergency.

[woolley]

Polls suggest that many people in Scotland do not even know what powers, and there are a few major ones, that have already been devolved to them.

I wouldn't hold that against them. Plenty of people here have no clue about the constitutional relationship between IOM and UK. Even Manx born and bred.

[Cambon]

The Chinese also know that according to official records of the distribution of gold across the world, there is about three times as much in various vaults than has ever been mined. The mining figures are pretty accurate. That is before you start looking at ETFs, etc.

 

Right up until the bail out of RBS and Lloyd's, I too thought banks could not do a thing wrong, even tough I had worked in and with them for decades. One or two things happened then that caused me to question banks' integrity. The subsequent protection insurance, LIBOR, price rigging scandals, etc. have proved me right.

 

What is potentially to come "for the common good" is absolutely frightening. You want some good common sense advice? Buy assets. Houses, Rolex watches, gold coins, whatever. Just don't leave more money in the bank than you need in the near future.

[pongo]

The Chinese also know that according to official records of the distribution of gold across the world, there is about three times as much in various vaults than has ever been mined.

Nobody knows how much has ever been mined.

[woolley]

The Chinese also know that according to official records of the distribution of gold across the world, there is about three times as much in various vaults than has ever been mined. The mining figures are pretty accurate. That is before you start looking at ETFs, etc.

 

That'd be a bit like the amount of assets that world debt is secured on then.