Last week on Bella I argued that Scotland should reject the Sterlingisation model and instead opt for its own currency (‘Why Scotland should reject the Sterlingisation option and instead create its own currency’). Most of the feedback was positive, but unsurprisingly there came a fair amount of criticism. Some of the critics included economist Richard Marsh from 4 Consulting, Sam Taylor from These Islands and even good old Blair McDougall. I welcome most of these comments, despite some of the more patronising remarks. So this response is not for hardcore unionists, but instead for those undecided who read their responses and take it as the truth.
1) Won’t Scotland just be like Zimbabwe?
No. There is a myth that the reason hyperinflation occurred in Zimbabwe was because the country started printing money. The printing of money alone does not cause inflation, it is when a government attempts to spend beyond the real economy (labour and resources) it becomes a problem. Any suggestion that money in isolation is inflationary is incorrect. Are we seriously lead to believe Zimbabwe was fine until one day it just decided to print money and everything went to hell?
In Zimbabwe hyperinflation preceded printing money. The reason hyperinflation occurred was due to over 70% of its farming productive capacity collapsing. When demand for food remains high but supply has collapsed the end result is, you guessed it, hyperinflation. If you wish to read more on the issues faced by Zimbabwe then you can read the work of economist Professor Bill Mitchell by clicking here. The Cato Institute have also done their own analysis on the causes of hyperinflation. They looked at every single case of hyperinflation in recorded history and found it mostly occurs from “under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy.” You can read their full report by clicking here.
2) Are you seriously saying Scotland could never go bankrupt?
No, I never stated that in my original article. I stated that Scotland cannot go bankrupt “in regards to its own currency.” An independent Scotland could still go bankrupt if it borrowed in a foreign currency and built up too much foreign debt. That’s a risk all countries could face. But Scotland cannot go bankrupt with its own currency, because we essentially have an infinite amount to supply.
Many people are frightened by such an idea. Yet it is a simple fact. I am not saying we can simply spend an infinite amount of money without consequence. In my original article I stated we cannot spend beyond our labour and resources. But a monetary sovereign government can always make their payments, spending is not operationally constrained by revenues
3) You can’t use Japan as an example because they are unique and also have lots of problems.
In my original article I used Japan as an example of a country that owns most of its debt, another benefit of being a monetary sovereign country. Criticism was raised by both Sam Taylor and Richard Marsh, but both lack a deeper understanding on how the Japanese economy works.
Richard Marsh argued “The debt is not a significant problem at the moment due to low interest rates. The government can gobble up its own debt as the risk of pushing up inflation isn’t as fierce (now) because of persistent deflation. Not the case with Scotland.” That makes no sense. What does he mean by “get away with” when Japan control their own interest rates? Because the Japanese government control interest rates in the short term they effectively control them in the long term. The government have kept interest rates low as a deliberate export strategy to suppress the currency and remain competitive. Does Richard honestly believe that one day Japan will wake up and suddenly inflation is magically going to be 50%? Of course not. The ability to control interest rates is another reason why it is important to be a monetary sovereign country.
Sam Taylor argued that Scotland should not be exactly like Japan because GDP has fallen and wages have stagnated. Which is true, but such a criticism is irrelevant. I’m not arguing Scotland should be exactly like Japan and the issues raised were not caused by Japan owning most of their debt. The reason Japan has suffered from falling GDP is due to brain drain, companies moving manufacturing overseas and an aging population. For example by 2020 Japan will be losing 600,000 a year. These are challenges faced by the Japanese economy, but ones not created by the point I raised.
Taylor went on to argue “The structure of Japan’s economy is radically different to Scotland. The same goes for demographics and culture.” This is actually a counter argument to his original point. For example the main reason Japanese wages are stagnating is due to unions refusing significant pay rises, not because the economy is doing poorly. Most workers prefer to negotiate more preferable working conditions like lower work hours and holidays rather than nominal raises. Japan is very much a collectivist culture that would seek prosperity for society over individualist thinking.Taylor should also not be so quick to dismiss Japan’s economy. Their investment spending is growing. There is growing contributions to growth. Consumer and business confidence is rising. Real wages are growing steadily. GDP per head is also growing. Japan’s billionaires only own 3% of the total wealth. The reality is, despite the many challenges they face, Japan is doing well. You can read more on Japanese data by clicking here.
4) You can’t name other examples of countries that managed high deficits, and if you can it doesn’t count because it was under the Bretton Woods system.
I faced further criticism from Sam Taylor when I cited the UK and US as countries that successfully managed high deficits post-WW2 (for example the US ran deficits of up to 27% of GDP during the war). He argued “You’re just embarrassing yourself now. Post WW2 USA and UK were operating under the Bretton Woods system, which is the complete antithesis of MMT. To claim that period is an example of the successful application of MMT is laughable.”
Let’s help Sam out here. First, Bretton Woods was essentially a dollar standard. Gold constraint was not binding at the time. We suspended domestic conversion in 1933, which actually saw large gold inflows from other countries buying weapons and war machines from the US. So this was much less of an issue. Secondly, there is a difference between a fiscal constraint and a limiting factor at any given moment. On a gold standard, the government has to take steps to protect its gold supply. But if the gold supply is not currently in serious danger then the government has more flexibility than usual. Look at China today: they fix to the dollar but they have accumulated an enormous amount of dollars. Is anybody seriously thinking they are on the verge of running out? They can run larger deficits than they might otherwise be able to. Sam is wrong to view it like a light switch from fixed exchange rate to floating. It’s a spectrum. You can read more on the Bretton Woods system by clicking here.
5) What about the fiscal transfer? Doesn’t Scotland need to find the money to cover it if we become independent?
It’s an odd critique, because it would seem obvious why this isn’t a major issue with MMT. If we are using our own currency then why “find money”? You don’t need to raise taxes to raise revenue, tax can primarily be used to tackle inflation. In the case of an independent Scotland the question “Where would Scotland, that has monetary sovereign government, get the money from?” is a lazy one. What we should be asking ourselves is “Does Scotland have the labour and resources to maintain decent deficit spending?” If there are not enough workers, factories, cars, clothes, food, fuel and so on, then the money is junk. Yet if we do have those things, and they are not being used, then the money needed to put them to work can always be created.
I welcome the criticism that has come my way. It has allowed me to write more on my position as a Modern Monetary Theory and also have a better understanding of the worries people may have. Yet one can see why hardcore unionists hate the MMT argument. When you suddenly turn the deficit argument upside down it creates a positive case for independence.