Cock-Up versus Conspiracy

I’m assured by Lynn Henderson, president of the Scottish Trades Union Congress and a Labour Yes supporter, that the STUC was not approached by the SNP’s Sustainable Growth Commission for discussion and input, before the publication of the Commission’s report last May. Equally, I’ve been assured by Keith Brown, the SNP’s depute leader, that the Growth Commission did approach the STUC for comment.

I think we are in cock-up territory here, which is very regrettable given the importance of the Growth Report. Regardless of where any culpability lies, can I suggest that someone involved with the Commission do some serious fence-mending; especially so because the Report is so deficient regarding the operation and reform of local labour markets.

October Blues

October has an eerie reputation for bringing meltdowns in global stock markets. The infamous Wall Street Crash of 1929 began on ‘Black Thursday’, October 24. Then there was the global stock market crash of 19 October 1987. This saw the largest ever one-day decline in the US Dow Jones, of nearly 25 per cent. The one-day drop in the UK FTSE 100 in October 1987 was even bigger, at 26.45 per cent.

Which might explain why this week’s jitters on global bourses have set aflutter the hearts of traders and investors – particularly after a whole decade of absurdly high stock values driven to crazy heights by central banks printing money (aka Quantitative Easing). The good news (if you’re a stock holder) is that the October 2018 drop is nowhere near as precipitous as those earlier massacres.

By lunchtime this Thursday, the FTSE was down 1.7 per cent – significant but hardly a crisis. Ditto markets in Asia which dropped to a 19-month low. US shares also suffered their worst losses in eight months. What gives?

A number of factors are making sellers trigger-happy. For starters, no-one believes share prices can stay this high for so long. Buying shares is a form of gambling, even if folk pretend otherwise. If everyone buys, the price rises. But someday the tide will turn and the last equity fund to purchase will be left holding a worthless parcel of stock.

Secondly, there is the Trump factor. A fear of trade wars – not to mention possible hot wars following in their wake – is making global markets very jumpy. Stir in some Brexit and the political situation is dire.

Third, central banks want to raise interest rates back to their historic norm, to kill inflation and ease companies and consumers away from acquiring yet more unsustainable debt. But raising rates brings a tsunami of unintended consequences. It increases the real burden of company debt, threatening profitability. Plus it kills consumer confidence. Result: on Tuesday, the IMF cut its global growth forecast from 3.9 to 3.7 per cent in both 2018 and 2019, triggering the share selling.

I don’t think the ultimate sell-off will come this October. China is doing a reverse-ferret and easing credit to stoke up growth. And Trump is brow-beating the US central bank to going easy on those interest rate rises. My bet would be on 2020 for all hell breaking lose. By then the US economy will be overheating to the point of meltdown, the trade wars will be vicious, and interest rates will really take off. Let’s hope Scotland is independent by then and able to control its own economic destiny.

More on Money and Banks

Speaking of which, I’ve noticed a new argument being manufactured by those folk who back the Growth Commission’s conservative resistance to creating a Scottish currency. They claim that setting monetary policy (i.e. interest rates) in Scotland is no longer important in a globalised world, especially if you are a small country. Fiscal policy (i.e. borrowing and spending) is much more strategically crucial.

It’s true monetary policy is less important than it was a decade ago. But only because interest rates are at near zero. But the era of low interest rates is about to end. One reason central banks want to raise interest rates is precisely to restore monetary policy as a tool in the face of a coming global recession. Leaving Scotland’s economy to the mercy of a Bank of England set on raising rates is not independence.

Suppose we do have independence without a Scottish currency. I have news for currency sceptics: your room for fiscal manoeuvre will disappear along with monetary policy. Having a domestic currency means a Scottish central bank can pump liquidity into the local banking system at will, boosting lending in a recession. But without a domestic currency, a Scottish government will have to squeeze the taxpayer directly, to refinance any local bank that gets into liquidity problems.

A Scottish government trying to spend its way out of a global recession, if it has to borrow in sterling from the City of London, will be ordered to implement austerity by its foreign creditors. Be warned: independence without a currency is independence without power.

Comments (10)

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  1. KityMcKiltKilt says:

    Excellent article. Thank you for your continued insights into this important area.

  2. John McGowan says:

    These comments on the currency are elementary common sense but I fear they will cut little ice with many in the independence movement who have either no understanding of economics or no interest in them.They want “freedom” at any price and do not care if an independent Scotland meant massive cuts in living standards for ordinary people. All they want is to be able to boast of “taking back power” of “taking decisions here at home” as if they would ever get anywhere near taking any kind of decision that would have any real impact on their social and economic well being. For power will reside in the hand of the same wealthy elite who run things now, independence or none, isn’t that right? Or am I missing something here?

    1. Graeme Purves says:

      You may have overlooked the fact that you don’t really know what other people care about. I suspect they care about a great variety of things. What evidence have you that independence supporters “do not care if an independent Scotland meant massive cuts in living standards for ordinary people”? I think the available evidence is that the majority of independence supporters take a communitarian view of things and are concerned to improve the living standards of ordinary people.

  3. SleepingDog says:

    “investors”? Clearly the meaning here is speculators, so why not just say “speculators”? Especially when spelling out this activity as gambling? And as I assume the point is that an independent Scotland will need investors rather than speculators, surely the distinction is non-trivial?

    1. Willie says:

      Are not all investors speculators ?

      To varying degrees they are and therein lies the issues. What part the currency speculators, or the short shellers, or the derivative dealers play in investing is far removed from an enterprise seeking to grow through raising capital in an IPO

      The free market, or should I say the greed of human nature, has unleashed a financial animal where what could initially be understood to be investment slides remorselessly into a speculative universe that few understand,

      So where did the finance sector get all the money to ” invest ” in the ubiquitous PFI / PPP funded schools, roads, hospital and just about every piece of infrastructure that the country ” owns”

      Or what about Gordon Brown’s investment in RBS to facilitate a new golden age that we now call austerity.

      Seems to me that having less tools, like your own currency, would be more of a disadvantage than a help in an independent Scotland.

      Something doesn’t gel! Mnnn? – must consult with Merlin and the Magic Circle.

      1. SleepingDog says:

        @Willie, regarding “Are not all investors speculators?”, in terms of financial return on investment, investors and speculators may be behaviours clustered along the same spectrum, balancing risk and reward. Which term you use will suggest one end or the other.

        However, there can be non-financial reasons for investment that don’t apply to speculation. For example, an employee with substantial shares in their own company may view this as an opportunity for workplace democracy. Someone investing in green energy may do so for environmental reasons. Someone investing in local agriculture may be primarily interested in supporting local food security. Someone investing in microfinance projects may be ideologically inclined to help people out of poverty. A nation investing taxpayer money in infrastructure or education may be looking to social benefits beyond increasing future tax revenue.

        While I do agree with the broad sweep of your points, there could be forms of investment (based on ancient agricultural practices or modern theory) that are tied to desired social and environmental outcomes, rather than supporting irresponsible and selfish speculation and wealth-skimming.

  4. Mathew says:

    So nothing on the IPCC report. No viable planet means no viable Scottish economy or currency. With 3/4/5 degrees of warming do any nation states and their currencies survive?

  5. Derek c says:

    ditto ??you provincial putz….(copyright blazing saddles 1974)

  6. Jamsie says:

    Ah. Independence.
    We all know that now is not the time.
    Theresa told wee Nicola and wee Nicola has told everyone.
    As I’ve said so many times the questions on the economy which need to be answered are still being ignored.
    Indy economic expert argues with Indy economic expert.
    Currency, banking, debt and deficit are the issues and the Indy movement as a whole needs to understand that the moderate majority will not consider Indy as viable in the current deficit of leadership on these issues.
    Democracy demands the moderate majority be heard, understood and heeded.
    On the subject of printing money as the article promotes to ward off the effect of any crash which may or indeed may not occur have we not been there before?
    Is this not one of the failed policies of Brown and of Osborne?
    But back to Indy and as someone else mentioned we currently enjoy a high standard of living which I repeat has increased progressively since 1979.
    The prospectus for Indy on offer threatens that which is why a majority of the electorate do not favour it.
    Nothing has happened since 2014 to change that.
    Hopefully now that wee Nicola has finally acknowledged that now is not the time for another referendum she will put some effort into sorting out the shambles across the spectrum her “government” controls.
    Does anyone remember the Bifab Crisis last year?
    It would be a great idea to have a look back and to consider what has resulted from all of the shenanigans.
    It is not what you might think!

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