by Alex Porter
The world’s industrialised and developing nations are now gripped in a dangerous currency war where major currencies such as the dollar, the pound and the euro are being deliberately devalued.
This is causing volatility in emerging markets and the signs are that more quantative easing (money printing) is predictable. It is an unsettling forecast and so the time has arrived for the Scottish national community to consider what our options are in terms of currency.
There is absolutely no doubt that Britain is following the US’s lead in currency devaluation. In the last three years the value of sterling has fallen against the stagnant Japanese yen by more than 60 per cent. Devaluation happens because the Bank of England and the Westminster government uses quantative easing (money printing) as a monetary tool.
Money printing is dangerous. The policy of money printing in the US has given rise to the following video being circulated by the US National Inflation Association:
Printing money devalues existing pounds and so reduces your purchasing power. Decreasing the value of the British currency does help exporters. However, Gordon Brown’s Labour party policy was to encourage property speculation at the expense of labour and industry. This meant manufacturing jobs left Britain and went to other countries leaving the population to survive on service sector salaries, credit cards and refinancing the family house/home.
As an import economy a devalued pound worsens Britain’s negative account balance with the rest of the world. The only explanation then for depreciating sterling is that Britain needs to print money to pay its debts which technically means bankruptcy. The UK is in a worse position than Ireland but Ireland is in the euro and so can’t print its own currency. A sign that ceding independence is fraught with dangers.
It is difficult to measure how fast the pound is collapsing as the convention is to compare it to rival currencies or a basket. However in a world where most major currencies are devaluing to keep up with the US it is difficult to know exactly how much it has fallen. The best indicator then is the currency ‘safe-havens’ of precious metals (PMs). When currencies fall, investors move out of paper and into gold and silver.
In the last year alone the pound has dropped 25 per cent against gold and 60 per cent against silver. The dollar and the euro have dropped quickly too recording declines against gold of 17 and 35 per cent and silver 51 and 72 per cent respectively.
With quantative easing in the UK now passing £200 billion and set to rise and with government borrowing per month standing at over £15.3 billion per month and climbing there’s clearly more money printing to come. The argument that austerity will help by cutting costs makes sense to an accountant but the evidence is that cutting jobs means less consumption and so a fall in VAT income, more defaulting mortgages and higher social security bills arise. A cut in benefits will hit main street too as expendable income dries up.
There was no need for any of this. Banking fraud caused the financial sector to rack up trillions of dollars of debt worldwide (much of that Britain’s) and when it came time to pay the bill the private debts of wealthy institutional bondholders and shareholders were transferred to the public through bailouts.
The policy of shoring up banks’ balance sheets means the UK now faces simultaneous sovereign debt, currency and financial crises. As austerity bites and the private sector fails to recover there will be a growing discontent and citizens will demand to know why they were shepherded into believing the banks should have been bailed out at all. It is deeply disturbing that the government cuts benefits to the needy whilst their policy of quantative easing sees billions being transferred to private investors and the bill hung around the neck of the people for generations to come.
It is becoming clear, day by day, that the UK economy is going to sink deeper into depression. The loss of manufacturing, debts which can’t be paid and money printing are together a dangerous cocktail and threaten the future of Scottish business and institutions.
It is therefore prudent to plan which currency Scotland would want to adopt. The SNP policy of staying with the pound until alignments permit joining the euro is fast becoming redundant. The entire European experiment is falling apart – monetarily and politically. Spain is teetering on the brink. There is a drop off in capital markets, banks are hiding huge debts off balance sheet, the construction sector which accounted for 40 per cent of government income is dead, unemployment has surged past 20 per cent (50% for young people) and there is a seven year supply of housing on a market which has not yet seen the reduction in prices many believe is coming – perhaps over 50 per cent.
There is simply not enough money to bail out Spain. When the contagion gets to Portugal and then Spain it’s over. The euro-zone, in its current form, will cease to exist. It could happen next month.
Pound or kroner?
For Scotland the choices have narrowed. The pound is sinking fast but the euro life-boat is going to drown with it. The general public have the right to a reasoned debate on a Scottish pound/dollar. The best example there is for an independent Scotland is Norway which has similar size, location and natural resources. Markets will lend money to Norway because it has oil. Norway’s responsible governments have turned that under ground asset into an above ground asset in the form of a pension fund which is the second largest in the world valued at £317 billion – the equivalent of more than 10 years block grant to Scotland from Westminster.
Recently the prestigious Legatum Index ranked public confidence in Britain’s financial system at 101 in the world. This is a statistic normally reserved for third world nations. The same survey shows confidence in job prospects at 98 out 110 nations surveyed.
As it becomes clearer that the UK economy faces a highly uncertain future and deficits and government borrowing set to escalate, the temptation for Cameron’s government to print more money will become overwhelming.
Scotland can choose currency devaluation with the British pound or a secure oil-backed currency like the Norwegian kroner (NOK). The pound has dropped 20 per cent against the kroner in the last 4 years.
With the UK financial system insolvent and being bailed out by heaping debt onto the taxpayer, the time to start the debate about adopting a currency of our own has arrived. An independent Scottish currency backed up with North Sea oil is now a responsible and urgent debate which must be had.