2007 - 2022

Black Swans in a Scotch Mist


A Black Swan is a term coined by former Wall Street Trader Nassim Nicholas Taleb to describe an event which is so unlikely or unpredictable that no one has assessed what the consequences might be. It is the unthinkable happening. On the Donald Rumsfield scale of knowability, it would be something “we don’t know we don’t know”. Nothing strikes more fear into the heart of bankers and fund managers.

Some saw Scottish independence as just such an event. Until a fateful opinion poll in September, few had seriously contemplated the consequences of a UK break up. When they did, all they could see were black swans in a Scotch mist. In the panic that ensued, there was only one certainty: it must not be allowed to happen.

A barrage of negative stories was unleashed to change Scottish hearts and minds which had been strangely impervious to effusive declarations of undying love and affection and bleak prognostications about a separate future. The gloves came off, objectivity was thrown to the winds and a grim, forbidding picture of life outside UK painted. Leaving Britannia’s sanctuary would lead to a brain drain, a barren land without shipyards, banks, scientific institutions, pensions, housing market, hospitals, supermarkets and almost everything else that civilised states have come to expect.

At the heart of the media onslaught was a report by Deutsche Bank entitled, “Scotland: Wrong turn”. The foreword was penned by chief economist David Folkerts-Landau, whose qualifications for the task included attendance at a Scottish boarding school as a teenager – he had local knowledge but there was little danger of him having gone native.

The economist scoured history for devastating errors of judgement. He found two examples whose dramatic effect upstaged any lack of relevance to the situation in Scotland. “A Yes vote for Scottish Independence on Thursday would go down in history as a political and economic mistake as large as Winston Churchill’s decision in 1925 to return the pound to the Gold Standard in 1925 or the failure of the Federal Reserve to provide sufficient liquidity to the US banking system, which we now know brought on the Great Depression,” he wrote.

Folkerts-Landau’s continued his analysis by peering into the murk of the eurozone for “stark examples of what can happen to countries seen to be on the brink of breaking away from a strong union.” He found Ireland, Portugal and Spain had all suffered recessions, higher taxes, lower public spending and higher interest rates after risking an exit.

How three countries staying in a union was comparable to Scotland’s leaving one was not explained. The banker studiously overlooked the fact that the crises in these states was mostly caused by the conditions imposed on their continuing membership in the single currency not because they were on the verge of cancelling it.

In any case, analysis by another investment bank, Bank of America, in 2012 provided an alternative interpretation. Ireland was predicted to have better growth, lower borrowing costs and a healthier balance sheet outside the euro, especially if it could orchestrate an orderly exit. Greece and Portugal might also benefit although less markedly. The countries which would suffer most from leaving the euro, according to Bank of America, were Germany, Austria and Finland, the most stable economically.

Folkerts-Landau ended his diatribe with a haughty dismissal of the whole independence idea. “Why anyone would want to exit a successful economic and political union with a G-5 country – a union which another part of Europe so desperately seeks to emulate – to go it alone for the benefit of… what exactly, is incomprehensible to this author,” he said.

Below his introduction, two Deutsche Bank strategists, Bilal Hafeez and Oliver Harvey, cited “overwhelming” economic and financial arguments against independence. They summarised them as five wrong turns. The first two were underwhelming arguments that philosopher David Hume came after the union and Scotland is not a Nordic country. The other three were the shortcomings of currency plans, the prospect of less trade and “twin deficits”, all problems which had been profusely aired and debated in previous weeks and months.

Deutsche Bank itself had already commented on the currency issues earlier in the year. In a May report, whimsically entitled “Should auld acquaintance be forgot”, Oliver Harvey took a more measured view. He did warn of the risks, including a flight of capital, of a Yes vote but suggested agreement and cooperation between Scotland and rUK might mitigate the worst effects of a break up.

Harvey even offered qualified support to Alex Salmond’s sterling plan. “Our bilateral option would be for Scotland and the rUK to form a currency union. While this has its own set of risks, it would not be impossible,” he wrote. The strategist suggested setting up a Scottish currency was not out of the question either. “Interestingly, Scotland is not only one of the more productive regions in the UK, it also has the lowest unit labour costs. Using this approach, Scotland’s currency may appreciate in value relative to sterling.”

In May, rUK was deemed to be a potential loser in a union break up. “It is also difficult to argue that GBP would be ‘better off’ without Scotland. It would likely increase the UK’s debt to GDP ratio and also deprive the country of one of its most productive regions. We therefore see risks to sterling as tilted to the downside,” Harvey.

It was made clear that Scotland’s destiny would be in its own hands just like any other independent nation. “Much would depend on the future economic policy of a Scottish government,” Harvey wrote.

By September though, the Deutsche Bank team could only see toil and trouble in an independent Scotland. In interviews after the publication of their analysis, the strategists ratcheted up the hyperbole. When asked by BBC News to explain what independence might mean, Hafeez replied: “It would be quite catastrophic economically for Scotland bordering on the possibility of a depression in Scotland that would last for a number of years.” Scottish financial institutions would lose access to borrowing from the Bank of England which would be “very debilitating.”

More worryingly, everyone would stop shopping.

Deutsche Bank’s lack of objectivity was mirrored by the media which trumpeted the cataclysmic conclusions across the globe without questioning the premise for them. Fraser Nelson was especially triumphant in his blog for The Spectator. He hailed the messenger as a messiah in the factual wilderness of the referendum campaign.

“Many voters in Scotland moan about the media: half of the country wants separation, according to the polls, but almost all newspapers are against it. So where to turn, for dispassionate analysis? As James Forsyth says in his brilliant political column this week, there’s no one left to tell the truth,” he wrote.

And in case there were any doubts about a banker and veritas, Nelson quickly dismissed them. He continued: “Private advice, issued by financial analysts to their clients, is interesting: these guys have no interest in spin, only accuracy. If they issue duff advice, their career is over.”

The Spectator blogger was not the only one enchanted by money talking. In Nick Robinson’s infamous on-air spat with Alex Salmond, the BBC correspondent asked: “John Lewis’ boss says prices could go up, Standard Life’s boss says money would move out of Scotland, BP’s boss says oil will run out. Why should a Scottish voter believe you, a politician, against men who are responsible for billions of pounds of profits?”

Who should the people trust, Big Business or Wee Eck? It was this question which Robinson believed Salmond hadn’t answered. Maybe the first minister thought it was rhetorical.

So what now? George Osborne’s autumn statement has sent shivers down the spine of the union. The Institute of Fiscal Studies predicts there will need to be “colossal” UK spending cuts to fill a £55 billon hole. That would shrink public spending by 35% of GDP in 2019-2020, according to the Office of Budget Responsibility. The BBC’s political correspondent Norman Smith described it as an extraordinary prospect, a return to the land of George Orwell’s Road to Wigan Pier, which documented the poverty, strife and inequality of pre-war working class life.

So, it looks like Scotland will be heading back to the 1930s anyway, just not in the way imagined by Folkerts-Landau and others.

Comments (30)

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  1. John Tracey says:

    While campaigning on the streets of Inverness, I chatted to a man on holiday from London. He worked for a firm of actuaries (declined to name them!) and as you can imagine they had been looking at all eventualities. He said there was absolutely no doubt the best financial outcome for Scotland was a large Yes majority. This was the second best option for the UK after a large No majority.
    However, as we know, it was not the benefit of Scotland at the top of the agenda for Westminster.

    1. stephen p says:

      hehe. cause actuaries work in certainties. they give absolutes as you suggest.


      thier entire profession is is to do with probabilities and statistics and your comment is baws.

      cant decide which

  2. Les Wilson says:

    The arms of Westminster embrace anyone who will support them, the more prominent the better.
    It does not matter if they are right or wrong, it does not matter what tricks, partial lies they say, if they support the Union they must be right. Westminster is knowingly corrupt, so what does that say about their supporters?

  3. muttley79 says:

    In hindsight we really got hit hard in the last week or so of the referendum campaign. The amount of power unleashed against us was immense. We can moan forever about Nick Robinson’s antics, but the most important thing going into the future is coming up with plans to counter it better. There is no doubt that the No campaign overpowered us in the closing stages.

    1. david steel says:

      im not usually a conspiracy theorist – but it does not strike me as beyond the pale that a poll from a polling company that always showed YES further behind the rest suddenly finds YES with a 1% lead. is it beyond the pale that the establishment had a word and did this to jolt the BT side into the prospect of losing and that led to the kitchen sink treatment?

      1. Maxi kerr says:

        You are 100% correct in in your theory,they kick started a middle class,working class,lower working class,underclass,and bloody back o the class war.Divide and conquer,and let’s frighten the “its mine and i want to keep it large section of the middle class” into supporting a no vote.
        They also had their orange card to play late in the game, and they were unleashed on The Scottish people to rally the intellectually challenged into a marching no vote. These are evil creatures in charge at Westminster and believe me when i say we are in a war for our very existence.

      2. John says:

        First Osborne repeats on the Marr show Scotland can’t share the pound, then the poll showing YES ahead, then the value of the pound drops. Next we get the threat of headquarters being moved out of Scotland, and supermarket prices will go up if Scotland is independent. More love bombing and then another poll showing NO is ahead. Results in the value of the pound going back up right on queue. This was all to soften us up before the vow was finally unleashed. Don’t tell me the establishment didn’t orchestrate the whole thing.

    2. Ian Vallance says:

      The Yes campaign appears to be terminally unable to accept any responsibility for its failure to deliver the Yes outcome.
      Sure the No campaign played dirty but did anyone expect anything else. They only had to not loose, the Yes campaign actually had to win. And to win they needed to attract voters from across the entire political spectrum. The Yes campaign appeared to forget this about 6 -9 months out from the vote and transformed a vote about the transfer of power from Westminster into a promise of some kind of scando-socialist utopia. This alienated a large part of the middle class (a fact testified to by the pattern of No majorities in Scotland. Shout the odds about bullying and conspiracy theories but it doesnt explain the vote at all. A failure to appeal to wide enough constituency was the real cause and no amount of hand ringing nonsense can change this. I voted Yes to move power nothing else, that’s what the vote asked about No?
      What happened after that was surely for the now purely Scottish voting public to decide at subsequent elections? Campaigning for a future state was for me not within remit of the Yes campaign since it wasnt in their gift to deliver anything other than the transfer of power.

  4. Monty says:

    Deutche bank report was widely regarded as a bit of an outlier at the time of publication and dismissed by the yes side and ignored by the no side in the main as I recall. I think this overstates the role it played it was seen as well off the mark by almost all commentators

  5. old highlander says:

    Trust Westminster??

    NO WAY.

    Every trick in the book was used to deceive the voter, do you really think that those overfed smug turds in London would just let us go with a simple yes vote, they shat themselves when they woke up and realised what was really happening hence the deluge of deceit from all directions.

    It’s all very well for us to sit at a keyboard grumbling but it will take a monumental effort to gain our independence.

  6. MBC says:

    But Muttley’s point about The Terror unleashed in the final stages is a valid point.

    I’ve recently come to a slightly different view.

    I think that what most terrified No voters was that when they thought about independence they felt they were staring into an abyss. The fact that we lacked much of the machinery of an independent state like a tax collection office or pensions system meant that they couldn’t physically imagine the concrete reality.

    1. Mr T says:

      Not quite. In my view we looked into the abyss and saw that there were no credible plans.

      HMRC have spent £10bn on the Aspire UPGRADE to the UK Tax System, but Yes didn’t think that they needed to work out how much it would cost to write one from scratch. When I questioned Yes supporters about this they couldn’t imagine how East Kilbride & Cumbernauld wouldn’t be able to collect taxes. In their minds they just needed the concrete buildings and the warm bodies, but not the computer systems.

      When ever it came to the big ‘risk’ questions – Currency, Euro, Financial Services to name 3, there weren’t any big answers and not even any evidence of big thinking. For example – what would the effect be on the financial services companies when 90% of their previously domestic customers found themselves dealing with a company that they now deemed to be foreign. Would 5% of Standard Life’s customers decide to move to an rUK provider? 10%? 20%? When I talked to the pension administrators at my England-based employer – who have pots with two Scottish companies – they said that they would have to move them if independence happened.

      Yes made a choice to downplay the difficulties, but it was a double edged sword. Some people were attracted by the view that everything would be great and that little would change, however, this approach also served to alienate many who felt that there were big costs and risks that had not been considered.

      1. muttley79 says:

        You would think when you talk about risk that Scotland was not governed by a block grant, which has been cut, and will continue to be reduced as long as we are part of the austerity agenda of the British state. I can see from your post that you appear not to be personally affected by austerity. That you automatically view independence as the major risk says it all. That you appear to have no concerns about the rise of UKIP, nor the affects of a withdrawal from the EU by the British state, again seems not to feature in your arguments. In fact, you appear to honestly believe that independence only means risk. You mention pensions, can you give an answer as to the future of pensions as part of the UK because I do not see one myself.

        Tens of thousands of people in Scotland are looking into the abyss, and that is because of the austerity agenda supported by the Liberal Democrats, Labour and the Tories. You might like being governed by a right wing political party we almost never elect, but I for one am sick and tired of the lack of democracy in the UK. You should get the government that the largest number of people in Scotland vote for. This is the massive risk that being part of the British state entails.

      2. david steel says:

        What you say is pretty true – I think the YES movement need to be working on policy from now right to the next referendum whenever that is. Their plans must be as bombproof as possible and backed up and updated by ongoing studies and independent comment – so that they can refute the scare stories that will inevitably challenge them.
        Their plans also must NOT rest on the goodwill or commonsense of others (e.g shared currency) and their must be an alternative available to the plan A and it explained why plan B is not as good as plan A but it is there if required as a contingency.
        They must use the devolved powers that they do get as an example of how they would use the full gambit of powers in an independent Scotland and how it improves the lives of the citizens – The stamp duty land tax and land reform are good examples of the scots being progressive.
        They must not be frightened of taking radical and progressive policy decisions – the people don’t want to tinker round the edges of what we currently have – they want to make our country different, radically different (with small r) , with a fairer more equal society with a strong economy and home grown businesses.
        All this work needs done NOW so that we are not taken from behind again by BT in the next indyref.

  7. douglas clark says:

    Sort of agree with what MBC has to say, although the degree of spin is perhaps unnecessary. Whilst we could see a future, they couldn’t. Don’t know what can be done about it. Bar free flights to Scandanavia for undecided voters.

  8. MBC says:

    When I canvassed I came across a type of older No voter who had little imagination. It wasn’t that they were totally opposed to independence, they just couldn’t imagine it. They were aware that a lot of systems would need to be set up that we currently lacked and the vacuum terrified them. For me that wasn’t an issue. I was able to imagine that a system – say tax collection of VAT – would be set up first. Then when the structure was in place, the power would be transferred and the system would become active. Transfer of powers would be one tranche at a time until all powers were transferred. It would be a phased and orderly transfer. I could imagine this, but they couldn’t.

    1. Mr T says:

      As per my comment above – you might have been able to imagine it, but the Scotland’s Future whitepaper said nothing about it – except that the realistic date for independence was 24 March 2016. Nobody I know thought that we could even have identified what we needed by then, let alone created the missing bits.

      In my job I persuade large organisations to switch from working, but maybe sub-optimal systems to higher performing ones. The easy bit is to show that B is better than A. The difficult bit is to persuade your audience that the can manage the costs and risks of transition and that was where Yes simply didn’t show up.

      1. Jim Daly says:

        Good points. The ‘transition’, ahead of the next referendum, starts now. Join a relevant political party 🙂 and contribute towards finding these answers?

  9. Perhaps what really frightened people was the thought that rUK would be so offended by Scotland choosing to leave, that they would deliberately make it as difficult as possible politically and economically. Rationally, I know that doesn’t make sense, but Westminster’s actions since the Referendum indicates they are unable to plan long term for the benefit of the maority of the voting public. Ironically I think Westminster believes independence is inevitable, and asset stripping Scotland will be the name of the game.

    1. Maxi kerr says:

      Yes Sheena,you are right on the money, they will take everything they can and destroy and pollute everything they leave. The first thing will be fracking across the populated Central belt to destroy the aquifers and guess who will have control of the pure water?
      I suggest that people look up the group called -common purpose-and have a think about their role in the future of the UK as a whole.

  10. George Gunn says:

    I would suggest that even if there had been a large majority for Yes in the referendum the British State would have found a way of denying it.

  11. At the outset 70% of Scotland wanted Devo Max but Westminster refused a triple-option referendum. Project Fear was unleashed backed by the might of the British state, the three parties of government, the Crown, BBC, the print media, financial institutions, the oil industry, supermarkets, Washington, NATO and the EU. The Deutsche Bank contribution was part of this but its role should not be overestimated. Worried that even the terrors thrown up against independence were not enough to win the vote the establishment offered Devo Max in the final days.

    It is quite astonishing the result was so close. The meager Smith proposals for further devolution and the ad-hoc measures to quell English political resentment will not secure a stable future for the UK. Independence will be ours.

    The last of the faint Scotch mist will lift. The black swans have only flown south for the winter.

  12. muttley79 says:

    The documentary on Salmond was interesting, in that he admitted that the plan was for the Yes campaign to go into the lead with a day or two to go till the vote. To me that strongly suggests that the Yes campaign was hoping rather than expecting to get a Yes vote. Given that support for independence went from the mid 20 per cent/30 per cent mark to 45 per cent, it was probably hoping too much for Yes to peak at exactly the right time.

  13. Darien says:

    Deutsche Bank has many investments in UK/Scotland – mostly in former privatised utilities and easy money monopolies – great for millionaire investment bankers (e.g. Lord Smith etc), attracted by the hands-off anglo-style semi-regulation (energy, airports, rail, mail), and even self-regulation (ports) using the less transparent/offshore zero tax paying private equity model. They would not have appreciated having to deal with a left of centre Scottish Government assuming full powers over regulating essential utilities more in an EU style, pursuing an agenda of ‘social justice’ and looking out for the public interest. Ditto most other big banks and financial institutions who collectively own much of ‘privatised’ Scotland and who opposed independence.Lord Smith has a long association with Deutsche Bank and was vice chair of Deutsche Asset Mgmt…………..so I guess he knows all about this.

  14. Elaine Black says:

    I still believe the majority of No voters decided how they were going to vote the day the referendum was announced. They did not want to engage in debate, public or otherwise. Were defensive and angry with friends and relatives trying to persuade them otherwise. A fair chunk of the newspaper reading older generation are still not that convinced that the Scottish Parliament actually does anything. Their fingers were in their ears and they were shouting, very loudly, I DONT WANT TO THINK ABOUT THIS !

    Remember the snicker Chris Hoy gave at the Commonwealth Games ceremony when Flower of Scotland was sung? The media, Better Together, Standard Life-esque establishment simply provided No voters with sound bites that allowed them to convince themselves that they were doing the right thing.

    The last minute vow was either a well-thought out plan by Tories to filet Labour on English Votes for English Laws or a miscalculation because it has never understood Scotland. Either way, it will come back to bite them.

    The key to winning another referendum must be to ensure that we are not in that position again, where half the country is not interested at the start ! But I don’t think that will happen. Demographics favour YES and ’79 has shown that looking into the abyss makes it less scary next time. Devolution in the way it is conceived is going to make the Union more unbalanced.

    Will Labour still hold lots of seats in Scotland next year? Possibly. Will Westminster try to engineer a Scotland with less economic strengths and cultural differences. Almost certainly. Will the Union prevail? Definitely not.

    1. muttley79 says:

      I agree Elaine. I think a lot of No voters made their minds up very early, and did not shift. I am still not sure of the end game though.

      1. Elaine Black says:

        I know what you mean Muttley79. But in the cool light of day the direction of travel since the war has been in one direction. Historically, 70 years is nothing when the game of countries is played. Sadly, a lifetime for most of us.

    2. Ian Vallance says:

      I don’t think their fingers were in their ears at all Elaine. Its more that they heard nothing to make them want to move away from the Status quo. Mr T put it well their were simply no answers for settled middle class only increasingly loud promises of a new socialist Scotland post a Yes Vote, not something likely to make them feel all cuddly about an independent Scotland?

      1. maxii kerr says:

        Well you know what happens when you think all in the garden is rosie,there is too many people in our country who have nothing,and and its certainly not their own doing.When austerity hits the middle classes”and it will happen” you will see a totally different scenario emerging from a previously safe position.

      2. Darien says:

        Nationhood is priceless. Being a region of another country is to be nothing. The status quo is the latter. Proud scot?

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