Friday, 14 February 2014

Scotland and Sterling

From City AM:

If Scotland left the UK but kept the pound, and was cut off in every other way, it would end up like Ecuador, El Salvador and Panama.

These economies are dollarised (Scotland would be sterlingised); they use the greenback but don’t benefit from a banking union or any other kind of assistance from Washington or the Fed.

In the event of a banking or sovereign crisis, they wouldn’t be bailed out by anybody; and they wouldn’t be able to print any money themselves as they don’t control the currency.

If you have a banking or "sovereign" crisis (whatever that is), you are doomed anyway, this is an opportunity to chuck everything in the bin and start again.

See for example Germany in 1948, they just started all over again with the DM, which was a resounding success. If you are stuck in a currency union, this gets a whole lot nastier/trickier, as the PIIGS have found out.

And as he goes on to explain, the lack of a safety net/moral hazard has led to all-round better outcomes in those named countries anyway.

The point is though, anybody can "print" any amount of any currency he likes, because "printing" ultimately means "borrowing". When you take out a loan, you are "printing money". Bank notes, cheques, IOUs are ultimately all the same thing.

The only limiting factor is your credit rating and people's willingness to lend to you, and the fact that you are not in a formal currency union with a Bank of England safety net (which is purely for the benefit of banks and not the country as a whole) is no particular barrier to using Sterling or something bloody close to it - see for example Isle of Man or The Republic of Ireland until 1978.


Pablo said...

Max Keiser recently suggested that they should change to somethying like Bit Coin.

H said...

The inability to bail your banks out could be tricky for a country with a significant financial services sector. But I don't suppose that, in practical terms, it would really matter that much if RBS or HBoS chose to headquarter themselves elsewhere.

Lola said...

@H. Would it though? If they embraced 'free' banking and applied the MW (Copyright) 'bank asset tax' along with Carswell's rules that reform the current (IMHO) fraudulent FRB model, then they would end up with the intrinsically safest banks in the world. Of course Salmon won't go for this as he needs a central bank to print and borrow for his looney tunes lefty policies.

Mark Wadsworth said...

P, yes, but he's a bit mad sometimes.

H, inability to bail out banks is a HUGE PLUS, that means that you just don't do it - see Iceland.

It appears that simple inability to do so is the only thing which will stop governments committing economic hari kiri.

L, yes, agreed.

If the SNP government insists on running huge deficits, then they are doomed anyway, it doesn't matter what currency he chooses, it's rearranging sunloungers on the deck of a submarine.

Kj said...

MW: the richest example of not having a proper central bank, and linked to USD is Hong Kong. They have a currency board, and some extras (base money entirely consists of USD reserves) and regulations, but same principle.

Kj said...

Lola: what are the Carswell rules exactly?

Bayard said...

I've noticed the Unionists are keeping very quiet about Ireland.

I've now realised the answer to something that has been puzzling me for ages: the turkeys-voting-for-Christmas aspect of the Tory support for the Union. Of course it's their masters, the banks, who are behind it. They fear that Scotland would end up in a currency union that would mean they can never be bailed out again.