Modern Monetary Theory and an Independent Scotland

Last week Gordon MacIntyre-Kemp wrote an article in The National on the growing economic support of Modern Monetary Theory (MMT). As a Modern Monetary Theorist I noticed many errors in his piece, some minor and others glaring. Therefore I would like to dedicate some time to setting the record straight and explain what MMT is about.

MMT is not a theory. MMT is a well substantiated body of knowledge based of observable data and facts. It is an economic prism through which to understand a nation’s economy. It has been developing since the growth of Keynesian economics. What it is not is a political ideology that promises to end austerity and pay for anything regardless.

So what is the economic reality?

When a government with its own sovereign currency and central bank purchases goods they merely credit the correct bank account with a keystroke. The government’s money does not spend tax revenue and can never run out of keystrokes. The transaction takes place electronically, with money created as the government spends it into existence. Every pound that the government taxes back is conversely destroyed by a keystroke. A very simple way of looking at it is like recording points in a video game.

MMT explains is that if we have the real resources available (labour, skills, physical capital, technology and natural resources) which can be purchased with our own currency then there is no purely fiscal constraint. For example if we wanted to build a giant statue of Mary Seacole in Dundee then as long as there is labour and resources available for purchase then money can be created with keystrokes.

The key is having our own free-floating currency and central bank.

Gordon wrote that MMT wanted to achieve “deficit cancellation”, but this could not be further from the truth. A deficit is when the government spends more than it taxes; and a surplus occurs when a government taxes more than it spends. What MMT shows us is budget deficits are equivalent to adding net financial assets to the private economy, whereas budget surpluses take out financial assets from the private sector.

We must remember that someone’s liability is another person’s asset. So the national debt is an account of all the currency/gilts/bonds/treasuries that has been issued by the government which has not yet taxed back or will be paid back at a later date. Most of it is our net money supply into the private domestic economy. It is our savings. It is our pensions. It is our financial assets.

MMT advocates want to see the private economy out of a deficit. If the private economy goes into a deficit then people have less disposable income and therefore spend less. This pushes the private economy to cut into their savings, sell their assets or take out loans on credit. This increases private debt, increases unemployment and eventually we hit a recession.

A monetary sovereign government cannot go bankrupt with its own currency, because they are the monopoly supplier of their currency. Advocates of MMT argue sovereign government must avoid as best as possible to borrow in a foreign currency because we cannot create money from another country.

Japan shows us the obvious benefit of a monetary sovereign government running a budget deficit. To counter their growing demographic problem the government have run a government deficit for over 25 years and increased the national debt in the same time. Yet Japan’s interest rates and yields have fallen over time, demand for government bonds remains high, inflation is low (sometimes negative) and unemployment sits at just over 2%. They have overcome orthodox neoclassical thinking.

So why do we need taxes? What MMT shows us is we can’t just, as Gordon incorrectly wrote, spend as much as we want. As I’ve already said the government can spend if there are available resources and labour to purchase. Taxes are not needed to fund government spending. MMT advocates have strict economic discipline. We want to use taxes as a tool to help control inflation and help redistribute wealth from the top 1%. We often specifically advocate for financial regulation, capital controls and qualitative credit controls which consoles the amount of private credit.

In Gordon’s piece he raises the fear of politicians abusing MMT to do whatever they want when it comes to spending plans and the possibility of hyperinflation. He cites Trump building a wall as his example, arguing it would lead to an increase in carbon output when it needs to be reduced. Finally Gordon argues that MMT would allow banks to act recklessly.

First, decisions by politicians have nothing to do with MMT. If you do not want screwballs running the country then do not vote for screwballs.

Secondly, this is a very odd argument because MMT supporters are huge advocates for sustainable green energy and lowering carbon emissions. Our colleagues in the US Democrats, who are leading with the MMT prism, are pushing ahead for a New Green Deal. It is seeing increasing support in Congress. The deal includes a Job Guarantee scheme for all Americans to reshape the economy. This includes creating more solar panels, retrofitting coastal infrastructure and producing more electric cars. It is MMT advocates that are uniting the left in the US to create a radical and realistic strategy to tackle climate change.

Scotland is a world leader when it comes to green energy, so what’s stopping us having our own New Green Deal? We could keep the population fully employed with a job guarantee and sustain a 0 policy interest rate. All of which would promote low inflation, a stable currency, and real GDP growth resulting in a higher standard of living.

Thirdly, Gordon’s fear of hyperinflation is overblown and not supported by the facts. Hyperinflation occurs generally as a result of disasters or major, uncommon events. The Cato Institute looked at every single case of hyperinflation in recorded history and found that none could be attributed to policies seeking full employment. It largely comes down to war, government corruption and natural disasters.

Fourthly, I have already highlighted MMT’s discipline when it comes to regulations. It is the current lack of regulation that is allowing banks to be reckless right now. Just over 10 years ago we had the global financial crisis where American commercial banks handed out home mortgages to risky borrowers due to the fact they had low-income. These very same banks would then sell off these loans to investors. Banks would make money and pass the risk to someone else. This was similarly repeated here in Europe.

MMT is about balancing a healthy economy, not the budget, whilst maintaining full employment. For that to happen we won’t allow free market politics or bankers to control the agenda.

Comments (67)

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  1. Mark Bevis says:

    “…and real GDP growth resulting in a higher standard of living.”

    Oh dear.
    So MMT disregards externalities just as much as classical Keynesian and contemporary neo-liberal economics do?

  2. Block says:

    Venezuela has its own free-floating currency and central bank, and substantial natural resources. We all know what happened when it ramped up the printing presses at the mint. The same thing that has happened in every other known instance of the government debasing the currency.

    “As a Modern Monetary Theorist … ”
    You are a student, are you not?

    As a Modern Monetary Theorist I noticed many errors in his piece, some minor and others glaring. Therefore I would like to dedicate some time to setting the record straight and explain what MMT is about.

    “MMT is not a theory. MMT is a well substantiated body of knowledge…”
    Intelligence-insulting statements such as this do no help your cause.

    1. Tim Rideout says:

      Where do you start with that! Just hopeless – go back to Economics 1 and do it again. Venezuela is in a mess for many reasons but creating money (very little gets printed in this day and age in case you haven’t noticed) is one of the least of them. Firstly it has (like Argentina, Greece, etc) run up large debts in a currency it does not control (US dollars). It can’t create dollars and the collapse of the oil price in 2014 meant it could not pay its debts. Secondly it imports a huge amount as most manufactured goods, much food, etc is imported. That also has to be paid for in dollars. So there is a severe external constraint on productive capacity. The government has also sought to peg the currency to disguise the problems (e.g. price rises that a devaluation would bring) thereby compounding the balance of payments deficit and thus draining yet more foreign currency. What it should have done in 2014 was to drastically cut spending, let the currency devalue in a full float and sought to thereby cut imports and boost exports to generate a dollar surplus. That would not have been popular hence it wasn’t done, but that is the root of the trouble (plus corruption, mismanagement, etc).

      BTW, MMT does accept that there are external constraints (balance of payments, etc) on all countries except one i.e. the USA. Because the dollar is also the international reserve currency then the USA can create dollars ad infinitum (or at least until Saudi, China, etc get fed up with holding T Bills, etc).

      1. Block says:

        Scotland will also have large debts in a foreign currency.

        1. Tim Rideout says:

          There are no debts at the moment since the Scottish Government has not been allowed to borrow. So long as we move ASAP to the Scottish Pound then there won’t be any new debts other than in S£ and to the extent that there are any existing sterling debts the Government can compulsorily redenominate them into S£ at the date of inception of the new currency under existing International Law. If, as I suspect, you are instead referring to Scotland possibly accepting a share of the UK National Debt then that is currently entirely hypothetical and would depend on future negotiations.

          1. Block says:

            In fact the SG does have the power to borrow, up to certain limits; under Sturgeon, the amount has passed £1.5 b.

            But of course the real issue is that there is no way for Scotland to become a sovereign state without an Act passing through Westminster; thus there is no way for Scotland to become sovereign unless it enters into a legally binding recognition that it is obligated to pay Westminster for Scotland’s population share of the national debt.

            Thus I state again: Scotland will have large debts in a foreign currency.

            Unilaterally redenominating those debts into the new currency = default.

          2. John S Warren says:

            It is worth noting that in 2014 the British Government (rUK) made clear that – no matter what – it was going to accept responsibility for the whole of the debt, whatever happened in Scotland. It was very, very easy to take that position because rUK claimed sole possession of the currency. What rUK proposed to do was keep the asset (sterling) while offloading a significant part of the debt to Scotland, which was compelled to accept in the burden, effectively as a foreign currency. This is a good way to retain total control of the Scottish financial system and its economy.

            Debts should follow the asset.

          3. Block says:

            ” to the extent that there are any existing sterling debts the Government can compulsorily redenominate them into S£ at the date of inception of the new currency under existing International Law. ”

            This is a fantastic and, I suspect, deliberate distortion of lex monetae

        2. Tim Rideout says:

          £1.5 billion is trivial as you well know.

          In terms of the UN and International Law Scottish Independence does not require either the consent of or the legislation of rUK. This was very clearly explained by lawyers in respect of Kosovo in an article I read recently. These lawyers were employed by the UK Foreign Office and were stating the official UK position on whether or not Serbia had to consent to Kosovo becoming independent.

          In practice something would probably happen at Westminster which would likely simply see a modification to the Statute of Westminster 1931 that would see Scotland added to the list where Ireland, Canada, etc currently are, i.e. Westminster will no longer have the power to legislate over our territory.

          Of course a state can change the currency of official debts (not private ones). So any debts of the Scottish Government, quangos, local authorities and the like WILL convert into S£ on Day 1 of the establishment of the S£. In terms of any private debts like credit cards, mortgages, and the like then no they will not. That will be up to the lender and borrower to agree. How many D-Mark bunds do you think there are in existence?

          1. Block says:

            The Kosovo precedent says that the ICJ does not prohibit a UDI. It does not therefore follow that all UDIs will be automatically recognised. Especially in cases where there was a free and fair legally binding referendum on the question just 5 years previously.

            There is no route for Scottish Independence that does not run through WM, and there is zero chance that WM will agree that independent Scotland can pay off its debts in the currency of the new Scottish Government’s choosing.

            “How many D-Mark bunds do you think there are in existence?” – You’ve just torpedoed your own argument. The concept of lex monetae as it applies to the Eurozone acknowledges that the currencies that pre-dated the Euro no longer exist anywhere on the planet . However, the £ will still exist.

  3. Tim Rideout says:

    Hi, I think you have a typo and meant to say ‘MMT is a theory’ rather than ‘MMT is not a theory.’ As I am sure you will be aware most science is about disproving theories as in most cases there is no absolute proof of anything. Not many things, especially outside pure maths or physics can be classified as a Law. Of course so far it would seem to be a good theory that has not been disproved by the evidence. The neo-liberal / neo-classical theory has clearly been disproved, indeed as far back as the Great Depression since it had no explanation or any method that worked for getting out of it.

    1. Block says:

      MMT enthusiasts very commonly state that it is not a theory. Because they believe that excuses them from the normal practices of the economic profession, such as producing models that are subjected to peer review.

    2. George Gordon says:

      Hi Tim, I rather agree with Cameron.

      MMT is (to my mind) a misnomer – it might be better named the Fiat Money System, and is a description of what actually happens in nations like the US and UK.

      Governments spend first, and may tax some back to control inflation. There are many examples of proof (if needed): e.g. whenever a government wants to fund a war, they just do it rather than waiting for enough “tax receipts” to accrue.

      1. George Gordon says:

        In the US, during World War II, the government “printed” money by running deficits as large as 25% of GDP, roughly equivalent to $4 trillion today.

        Likewise, it is accepted that the US Fed created the bank bailout money by keystrokes on their computer.

        The question “where will the money come from” only arises in the context of bailing out public services.

      2. Tim Rideout says:

        I was simply making the point that whatever it is called it is still a Theory as opposed to a Law. I am sure it was a typo as to start saying MMT is not a theory (and by implication we are laying down the law and saying everything else is wrong) is just playing into the hands of our opponents. E = MC squared is still a Theory, even if so far all the facts support it. I for one, though, strongly believe we will find a way to travel faster than light speed so it will then be found to be a partial theory with new extensions. MMT will develop in the same way as more research is carried out, etc.

  4. George Anderson says:

    Yes I agree with Cameron, Gordon’s article was not his best, he is usually very clear in his economic analysis.

    The sad thing is that there is not nearly enough attention being given to the currency issue we need to examine this properly before we get involved in a new independence campaign.
    There needs to be a proper debate about currency, because we have not yet had an explanation from many economist as to why the neo-liberal financial scheme collapsed. We even have the stupidity that we should build a new Scottish economy based on the fractional-reserve pound sterling which is heading for disaster.
    It is now time for us to look carefully at how a new Scottish Government should manage our domestic currency and develop our economy in a rational way.

    Andy Anderson

  5. Money Monopolist says:

    Excellent Cameron,

    As Bill Mitchell explains clearly

    There is now widespread understanding among those who have been introduced to MMT that:

    1. There is a fundamental difference between the currency-issuer and the currency-user, such that the former has no intrinsic financial constraints on its spending. Such a government can always meet any liabilities that are denominated in the currency it issues.

    This also means that such a government can purchase anything that is for sale in the currency it issues, including all idle labour.

    Which means that the government chooses the unemployment rate. An elevated unemployment rate is always a political decision rather than anything that is forced on a nation by ‘market forces’ or the choice of individuals/households.

    2. The governments ability to spend is prior to any revenue it might receive in the form of taxation. Taxation revenue comes from funds that the government has already spent into existence.

    3. Central banks are monopoly creators of ‘central bank money’, while commercial banks create ‘bank money’ out of thin air – through “balance sheet extension”.

    Central banks set the interest rate but cannot control the broad money supply or the volume of ‘central bank money’ in circulation.

    This is because the central bank has no choice but to ensure there are enough bank reserves available given its charter is to maintain financial stability.

    If cheques start bouncing because of a shortage of reserves then financial panic would follow.

    This also means that the mainstream economics idea of ‘crowding out’, which posits that government borrowing absorbs scarce funds that would otherwise be available for private firms, is erroneous. Commercial banks will make loans to any credit-worthy borrower on demand. There is no scarcity of credit (loanable funds).

    4. The National Accounts tell us that a government deficit (surplus) is exactly equal to the non-government surplus (deficit).

    The non-government sector is comprised of the external and private domestic sectors. If the external sector is in deficit and the private domestic sector desires to save overall, then the government sector has to be in deficit and national income changes will ensure that occurs.

    Which means that fiscal surpluses squeeze non-government wealth.

    Further, the mainstream concept that fiscal surpluses represent ‘national saving’ is erroneous. A currency-user, such as a household saves (foregoes current consumption) in order to enjoy higher future consumption possibilities (via interest income on the saving).

    A currency-issuing government never has to store up money in order to spend in the future. They can always purchase whatever is for sale in that currency at any time they choose.

    5. The aim of fiscal policy is not to deliver a particular fiscal outcome (surplus or deficit). Rather, it is to ensure that the discretionary government policy position is sufficient to ensure full employment and price stability, given the spending and saving decisions of the non-government sector.

    If from a particular level of national income, the private domestic sector, for example, desires to save more overall and cuts its spending accordingly, then unless there is more net export spending coming in, the government will have to increase its deficit to avoid rising unemployment and a recession.

    There is no particular significance in any fiscal outcome. Context is everything.

    Even mainstream economists are starting to accept many of these propositions in the sense they now claim there is nothing new in MMT.

  6. Money Monopolist says:

    However, there are still disputes about whether the external sector presents a terminal constraint on the government’s ability to maintain full employment and price stability.

    MMT indicates that a flexible exchange rate regime maximises the policy space for government to pursue domestic objectives. Once a nation adopts a currency peg of any description (fixed exchange rate, dollarisation, currency board, etc) it loses its full currency sovereignty and compromises domestic policy aspirations.

    Thus, the MMT preference for floating exchange rates is about removing constraints on policy that compromise the capacity of government to maintain full employment and price stability and deliver equitable outcomes to all.

    To understand that, we must first develop a concept of sustainable policy space.

    The issues raised by MMT critics usually relate to the inflationary effects of exchange rate depreciation including the erosion of living standards via rising import prices and the destabilising impacts of currency speculation. Critics recognise that the depreciation may enhance trade competitiveness but then present elaborate formulae to show why that might not be the case (debates about Marshall-Lerner conditions, etc).

    In effect, they argue that the sustainable policy space is much less than the previous diagram might suggest.

    Taken together these concerns are bundled under a heading – balance of payments constraints.

    So, while MMT proponents argue that the currency-issuing state has no financial constraints, critics argue that the capacity of a nation to increase domestic employment using fiscal deficits is limited by the external sector.

    And they argue that these constraints have become more severe in this age of multinational firms with their global supply chains and the increased volume of global capital flows.

    These critics also, often, erroneously believe that fixed exchange rate regimes provide financial stability and insulate nations from imported inflation, while flexible exchange rates undermine stability. History doesn’t support this preference for fixed exchange rates.

    The Post World War 2, fixed exchange rate system restricted fiscal policy options because monetary policy had to target agreed exchange parities. If the currency was under downward pressure, perhaps because of a balance of payments deficit would manifest as an excess supply of the currency in the foreign exchange markets, then the central bank had to intervene and buy up the local currency with its reserves of foreign currency (principally $USDs).

    This meant that the domestic economy would contract (as the money supply fell) and unemployment would rise. Further, the stock of US dollar reserves held by any particular bank was finite and so countries with weak trading positions were always subject to a recessionary bias in order to defend the agreed exchange parities. The system was politically difficult to maintain because of the social instability arising from unemployment.

    If fiscal policy was used too aggressively to reduce unemployment, it would invoke a monetary contraction to defend the exchange rate as imports rose in response to the rising national income levels engendered by the fiscal expansion. Ultimately, the primacy of monetary policy ruled because countries were bound by the Bretton Woods agreement to maintain the exchange rate parities. They could revalue or devalue (once off realignments) but this was frowned upon and not common.

    This period was characterised by the so-called “stop-go” growth where fiscal policy would stimulate the domestic economy, drive up imports, put pressure on the exchange rate, which would necessitate a monetary contraction and stifle economic growth.

    While the ‘stop-go’ terminology was really born in the period of fixed exchange rates (Bretton Woods period), it is survived into the flexible exchange rate era (post August 1971).

    Ultimately, Bretton Woods collapsed in 1971 because it was politically unsustainable. It was under pressure in the 1960s with a series of “competitive devaluations” by the UK and other countries who were facing chronically high unemployment due to persistent trading problems.

    The fixed exchange rate history of the European Community, in various guises is illustrative of the problems encountered.

  7. Money Monopolist says:

    After the inevitable failure of the Bretton Woods system of fixed exchange rates in 1973, most of the rest of the world decided that floating exchange rates were more desirable as it freed monetary policy from having to defend the agreed parities.

    However, the EEC Member States persisted with various dysfunctional fixed exchange rate arrangements – the Snake in the Tunnel, the Snake, the EMS and then the ultimate ‘fixed exchange rate’ system – the common currency, in no small part due to their decision to introduce the Common Agricultural Policy in 1962.

    The CAP introduced a complex system of cross border price fixes that would have been administratively impossible to manage without relative currency stability. As it was, the currency variations within the Bretton Woods system led the European Commission to introduce a complex system of so-called ‘green exchange rates’ or simply ‘green rates’, which sat underneath the official exchange rates.

    Each one of these arrangements proved to be unworkable in the sense of allowing the governments to unambiguously advance the well-being of their people.

    The Bundesbank historically ran a tight monetary policy because of its obsession with low inflation and this forced its trading partners to endure higher unemployment than they desired because they had to defend weaker currencies.

    The weaker currency EEC nations – France, Italy, the United Kingdom (after 1971) – were forced to accept the restrictive Bundesbank monetary policy settings or else face major capital outflows. But they were continually up against currency pressures to devalue (under the fixed arrangements and with the Bundesbank more or less refusing to intervene symmetrically), so at times they had to push interest rates up well above the German rates to head of impending currency crises.

    The history of the EEC is littered with these episodes.

    The consequences were obvious – a recession bias, elevated levels of unemployment, and ultimately, increased speculative attacks on their currencies necessitating period devaluations following a currency crisis.

    None of that tension has really gone away under the common currency. It is just that ‘internal devaluation’ has replaced the discretionary realignments pre-euro and central bank can no longer control capital flows in the way they did when their governments were sovereign.

    A flexible exchange rate frees monetary policy from having to defend some fixed exchange rate parity. This, in turn, means that fiscal policy can solely target the spending gap to maintain high levels of employment and other desirable policy objectives. External sector imbalances are then adjusted for by daily variations in the exchange rate.

    While there is no such thing as a balance of payments growth constraint in a flexible exchange economy in the same way as exists in a fixed exchange rate world, the external balance still has implications for foreign reserve holdings via the level of external debt held by the public and private sector.

    It is also advisable that a nation facing continual current account deficits, for example, foster conditions that will reduce its dependence on imports. However, the mainstream solution to such deficits actually makes this adjustment process more difficult.

    Indeed, IMF lending and the accompanying conditions that are typically imposed on the debtor nation almost always reduce the capacity of the government to engineer a solution to the problems of inflation and falling foreign currency reserves without increasing unemployment and undermining public services, including health and education.

    Targets to reduce fiscal deficits may help lower inflation, but only because the ‘fiscal drag’ acts as a deflationary mechanism that forces the economy to operate under conditions of excess capacity and unemployment.

    This type of deflationary strategy does not build productive capacity and the related supporting infrastructure and offers no ‘growth solution’. And fiscal restraint may not be successful in lowering fiscal deficits for the simple reason that tax revenue can fall as the taxable base shrinks because economic activity is curtailed.

    Moreover, the lessons of how the international crises of the 1990s and early 2000s were dealt with should not be forgotten: fiscal discipline has not helped developing countries to deal with financial crises, unemployment, or poverty even if they have reduced inflation pressures.

    There are also inherent conflicts between maintaining a strong currency and promoting exports – a conflict that can only be temporarily resolved by reducing domestic wages, often through fiscal and monetary austerity measures that keep unemployment high.

    The best way to stabilise the exchange rate is, within a stable political environment and well-functioning legal system, to build sustainable growth through high employment with stable prices and appropriate productivity improvements.

    A low wage, export-led growth strategy sacrifices domestic policy independence to the exchange rate – a policy stance that at best favours a small segment of the population.

  8. Money monopolist says:

    Critics argue that a nation with flexible exchange rates can ‘import’ inflation from other nations, which negate real income gains made through domestic expansionary policy. In other words, this is a revised version of the ‘balance of payments constraint’ on growth.

    Through its impact on import prices, the exchange rate does influence the real value of the nominal incomes that are produced. The purchasing value of nominal incomes is the volume of real goods and services that an income recipient can purchase with those incomes. That depends on the prices of goods and services, some of which will be more influenced by movements in exchange rates than others.

    Non-tradable goods and services will be much less influenced by exchange rate movements than direct imports. In many cases, these goods and services will have negligible exposure to exchange rate movements. The provision of many services, for example, will have little variability to exchange rate fluctuations.

    The extent to which those movements in domestic prices are influenced by shifts in import prices arising from exchange rate movements depends on the degree of ‘pass through’ and the importance of imported goods and services to the overall basket that determines the workers’ material living standards.

    The research evidence is clear – ‘pass through’ estimates are highly variable and depend on many factors including how much spare capacity there is in the economy, the degree of import competition, etc.

    But that isn’t the end of the matter.

    The second impact depends on how changes in overall consumer price inflation respond to changes in import prices. So ‘pass through’ might be high and rapid but the second impact low and drawn out, making the overall impact inconsequential.

    So if imports are a relatively small proportion of goods and services included in the inflation measure, even if the ‘pass through’ is high, the overall impact on the domestic inflation rate will be small.

    There is also the question of time lags – how long these separate effects take to impact. In many studies, the sum of the two impacts can take years to manifest.

    It is also very difficult to come up with unambiguous estimates of these separate effects.

  9. Money Monopolist says:

    Australia regularly goes through these sorts of exchange rate swings but manages to be classified as among the richest per capita nations in the world. It is simply untrue that a flexible exchange rate system severely compromises the material living standards of workers.

    Second, it is false to think that a flexible exchange rate regime is more prone to speculative attacks on a nation’s currency. If anything, the reverse is true.

    When currency traders form the view that a government will have to eventually devalue a fixed peg parity to stem the consequences that accompany a chronic current account deficit they can easily hasten that decision by short-selling. It becomes a self-fulfilling inevitability.

    And, in this context, the nation state has the capacity to impose capital controls if there are destabilising financial flows present. Iceland has demonstrated the effectiveness of using capital controls to stop the financial sector undermining currency stability through speculative capital outflows. Similarly, unproductive capital inflows can be subjected to direct legislative controls.

    Moreover, the history of fixed exchange rates tell us that costs of defending the exchange parities (the recession-bias) tend to dwarf all other costs including fluctuations in price levels that might be sourced in exchange rate variability.

    This is not to deny that a nation may have to take some hard decisions in relation to its external sector when it experiences a depletion of foreign exchange reserves or its currency depreciates against foreign currencies that it requires to purchase essential imports.

    This is especially so if it the nation is reliant on imported fuel and food products. In these situations, a burgeoning external deficit will threaten the dwindling international currency reserves.

    In some cases, given the particular composition of exports and imports, currency depreciation is unlikely to resolve the external deficit without additional measures.

    As noted above, the depreciation may impart an inflationary bias to the economy. Moreover, depreciation leads to expectations of further depreciation and fuels the run out of the currency. There may be no interest rate that is high enough to counter expectations of losses due to depreciation and possible default.

    The reality is that a nation facing a lack of ability to purchase imports, for whatever reason, has to either increase its exports or reduce its imports.

    For less developed countries faced with currency crises, there is probably no short-run alternative but to urgently restore reserves of foreign currency either through renegotiation of foreign debt obligations, international donor assistance or default.

    For an advanced nation, similar constraints might apply and a sudden shift in international sentiment against the nation or other financial assets denominated in that currency are no longer deemed as desirable, then adjustments in the flow of real goods and services sourced from foreigners are required.

    The limits for a nation are clear – if it cannot command access to real resources owned by foreigners the it must rely on the resource wealth it has for sale in its own currency.

    But none of that reduces the financial capacity of the currency-issuing government to purchase whatever is for sale in that currency.

    Further, it introduces a valid role for an international agency to replace the International Monetary Fund. A new agency could ensure that weak nations were always able to purchase essential energy and food imports.

  10. Money Monopolist says:

    So are current account deficits a problem?

    We continually read claims that nations with current account deficits (CAD) are living beyond their means and are being bailed out by foreign savings.

    In MMT, this sort of claim would never make any sense. A CAD can only occur if the foreign sector desires to accumulate financial (or other) assets denominated in the currency of issue of the country with the CAD. This desire leads the foreign country (whichever it is) to deprive their own citizens of the use of their own resources (goods and services) and net ship them to the country that has the CAD, which, in turn, enjoys a net benefit (imports greater than exports). A CAD means that real benefits (imports) exceed real costs (exports) for the nation in question.

    Giving some real thing away is a cost. Getting some real thing is a benefit. Exports, by definition, involve sacrificing real resources and depriving a nation of their use. Imports on the other hand clearly involve receiving final goods and services where the real resource sacrifice has been made by the exporting nation.

    In a world where we produce to consume receiving goods and services is better (real terms) than sending them elsewhere.

    The only reason a nation would want to export and incur the costs involved is to generate a higher rate of return. Which means that the cost is best considered as an investment in generating benefits, which in this case, might be an increased capacity to purchase imports.

    As noted above, being able to export is clearly particularly important for a nation that cannot feed itself or run electricity systems with the resources it has at its disposal without trade.

    But there is another perspective.

    Nations that export may desire to accumulate financial claims in the currency of the importing nation. A CAD also signifies the willingness of the citizens to ‘finance’ the local currency saving desires of the foreign sector. MMT thus turns the mainstream logic (foreigners finance our CAD) on its head in recognition of the true nature of exports and imports.

    Subsequently, a CAD will persist (expand and contract) as long as the foreign sector desires to accumulate local currency-denominated assets. When they lose that desire, the CAD gets squeezed down to zero. This might be painful to a nation that has grown accustomed to enjoying the excess of imports over exports. It might also happen relatively quickly.

  11. Money Monopolist says:

    But in evaluating whether we should prevent that exposure by minimising CADs, we should understand that for an economy as a whole, imports represent a real benefit while exports are a real cost. Net imports means that a nation gets to enjoy a higher living standard by consuming more goods and services than it produces for foreign consumption.

    Welfare is evaluated on the basis of consumption not production. This ties in with the view that external deficits automatically lead to a hollowing out of the industrial sector and the nation ends up a consumer rather than a producer.

    The logic of the market is that consumers will demand what they think is best. It is true that if local production is lost to foreign nations as a result of trade competition, the consequences can be heart-wrenching for the dying manufacturing towns – as it was as agriculture waned some decades earlier and communities vanished.

    While real living standards are based on access to real goods and services, and, at the macroeconomic level, a nation enjoys a material advantage if its real terms of trade are favourable (exports less than imports), a worker in a rust belt region who has endured unemployment as a result of cheaper imports coming from nations with lower labour costs is unlikely to be among those who benefit.

    But there doesn’t appear to be a valid case to reintroduce widespread industrial protection where the rest of a nation’s consumers subsidise the jobs of a few who can no longer produce attractive enough products in their own right.

    The challenge for nations entering a post-industrial phase is to implement what are called Just Transition frameworks to minimise the costs for the losers of industrial change and build pathways for workers in the declining areas into sectors that are growing. This is a fundamental responsibility for government and the evidence is, that in the neoliberal era, governments are abandoning that responsibility.

    There are also nominal consequences of running CADs that need to be considered.

  12. Money Monopolist says:

    Foreigners (surplus nations) build up financial claims in the currency of the deficit nation. They might, for example, drive up local real estate prices or other strategic assets. Governments introduce foreign investment rules to militate against this propensity, although in many nations, these constraints are weak.

    But the point is that the nation state can legislate whatever restrictions they like in this respect.

    Alternatively, foreigners might sell all their currency holdings in one fell swoop and destroy the currency. They might. But then they would be deliberately creating massive losses for themselves, and history shows that this sort of behaviour is rare.

    And if these funds end up in the hands of speculators the nation state can lock them with capital controls if it so chooses. Even the IMF supports that strategy these days and acknowledges it is effective. We noted above the way in which Iceland invoked effective capital controls during the GFC.

    More problematic is that foreign interests may seek to use their financial clout to manipulate the political system and the public narrative view media domination etc.

    Again, regulations can militate against that sort of trend. Strict campaign funding rules, media ownership rules etc are required to prevent these sorts of complications.

    There is an additional consideration relating to nation-building. CADs tend to reflect underlying economic trends, which may be desirable for a country at a particular point in its development. For example, in a nation building phase, countries with insufficient capital equipment must typically run large trade deficits to ensure they gain access to best-practice technology which underpins the development of productive capacity.

    A current account deficit reflects the fact that a country is building up liabilities to the rest of the world that are reflected in flows in the financial account. While it is commonly believed that these must eventually be paid back, this is obviously false.

    As the global economy grows, there is no reason to believe that the rest of the world’s desire to diversify portfolios will not mean continued accumulation of claims on any particular country. As long as a nation continues to develop and offers a sufficiently stable economic and political environment so that the rest of the world expects it to continue to service its debts, its assets will remain in demand.

    However, if a country’s spending pattern yields no long-term productive gains, then its ability to service debt might come into question.

  13. Money Monopolist says:

    Therefore, the key is whether the private sector and external account deficits are associated with productive investments that increase ability to service the associated debt. Roughly speaking, this means that growth of GNP and national income exceeds the interest rate (and other debt service costs) that the country has to pay on its foreign-held liabilities. Here we need to distinguish between private sector debts and government debts.

    The national government can always service its debts so long as these are denominated in domestic currency. In the case of national government debt it makes no significant difference for solvency whether the debt is held domestically or by foreign holders because it is serviced in the same manner in either case – by crediting bank accounts.

    In the case of private sector debt, this must be serviced out of income, asset sales, or by further borrowing. This is why long-term servicing is enhanced by productive investments and by keeping the interest rate below the overall growth rate. These are rough but useful guides.

    Note, however, that private sector debts are always subject to default risk – and should they be used to fund unwise investments, or if the interest rate is too high, private bankruptcies are the ‘market solution’.

    By introducing a job guarentee a nation attracts FDI which also makes the currency stronger.

  14. Money Monopolist says:

    A national government should always aim to to design its fiscal policy with a view to the economic effects desired, rather than with a deficit or surplus target in mind.

    While fiscal deficits are likely to raise living standards which will increase the CAD it should always be noted that all open economies are susceptible to balance of payments fluctuations. These fluctuations were terminal during the gold standard for deficit countries because they meant the government had to permanently keep the domestic economy is a depressed state to keep the imports down. For a flexible exchange rate economy, the exchange rate does the adjustment.

    Is there evidence that fiscal deficits create catastrophic exchange rate depreciations in flexible exchange rate countries? None at all. There is no clear relationship in the research literature that has been established. If you are worried that rising net spending will push up imports then this worry would apply to any spending that underpins growth including private investment spending. The latter in fact will probably be more ‘import intensive’ because most LDCs import capital.

    Indeed, well targetted government spending can create domestic activity which replaces imports.

    Moreover, a fully employed economy with skill development structures, first-class health and education systems, and political stability, is likely to attract FDI in search of productive labour. So while the current account might move into deficit as the economy grows (which is good because it means the nation is giving less real resources away in return for real imports from abroad) the capital account would move into surplus. The overall net effect is not clear and a surplus is as likely as a deficit.

    Even if ultimately the higher growth is consistent with a lower exchange rate this is not something that we should worry about. Lower currency parities stimulate local employment (via the terms of trade effect) and the distributional consequences tend to be more onerous for higher income earners.

    These exchange rate movements also tend to be once off adjustments to the higher growth path and need not be a source of on-going inflationary pressure.

    Finally, where a dependence on imported food or other essentials exists – then the role of the international agencies should be to buy the local currency to ensure the exchange rate does not price the poor nations out of these goods and services. This is preferable to the current practice of forcing these nations to run austerity campaigns just to keep their exchange rate higher.

  15. Dougie Blackwood says:

    Let me first say that I am not an economist, then that this article sparks my interest.

    One of my hobby horses is that we (whoever we are) should offer everyone meaningful work at a decent living wage. The present problem is that workers are being replaced by machines everywhere you look and those that are employed are paid as little as can be sustained with the government taking up the slack with in work tax credits.

    Carry this across to the MMT theory and we give everyone a job with a real living wage; we reopen the libraries, get the streets cleaned, employ park keepers, beach cleaners, carers, helpers for the old and infirm both in and out of their homes. All the sorts of things that our councils are cutting off as each year goes past. We pay all of these people in our own currency which has no impact on our balance of trade or the value of our currency. But then those people we are paying will want to spend this money we pay them. They buy the sort of things we all want but no longer produce. TVs, white goods, exotic food and all the rest which has to be imported and paid for in the currency of the supplier, be that China, South Korea, the Eurozone and everywhere else.

    Where does MMT balance these payments? Your piece says by taxation which is also raised in our own currency. We, in Scotland, do run a substantial balance of payments surplus but the payments for that mostly go to the owners and producers rather than to the government. Would it be necessary for an independent Scotland to tax it’s exporters in Dollars, Euros and Yen?

    1. Money Monopolist says:

      Dougie a fantastic question.

      However, exporters sell us their goods and services in £’s. When you go to a car dealer you don’t see a VW sold in Euro’s.

      So they get sold in £’s so the exporters now have 3 choices…..

      Spend their £’s on UK goods and services, wages, expansion etc, etc, etc,

      Save their £’s by swapping them for a gilt

      Or exchanging them into their own currency.

      Now if the VW dealer changes their £’s into Euro’s with flexible exchange rates you need a buyer and a seller or the exhange won’t take place.

      So to get this

      £ —————————————-> €

      You need this

      £ <————————————— €

      So the amount of £'s don't actually leave the central bank all that changes is the name on the account at the BOE. The new holder of the £'s now have the same 3 options. Buy, save or exchange.

      Please read these 2 links below for more detail

      http://bilbo.economicoutlook.net/blog/?p=39282

      http://bilbo.economicoutlook.net/blog/?p=39303

  16. Money Monopolist says:

    Regarding the ” sterling ” debt after independence if there actually is any.

    Warren Mosler covered this in detail. How the way you launch the currency, use deficit spending, ZIRP and the Job guarentee all in conjunction with each other
    then it is a non issue.

    MMT economists have spent the last 25 years working on this ackage so that it works. Sterling debt under current institutional arrangements is a drag on its economy and will continue to be a drag with it’s own currency, though it would both be a lesser drag and diminish over time. Scotland would be able to keep the population fully employed and sustain a 0 policy rate all of which would promote low inflation, a stable currency, and real gdp growth that would cause the fx debt to gdp to diminish over time all with a higher standard of living.

    https://twitter.com/wbmosler/status/1065004640360517633

  17. John S Warren says:

    “… there is zero chance that WM will agree that independent Scotland can pay off its debts in the currency of the new Scottish Government’s choosing”.

    First it has to be agreed what the debts are in this agreement, and the assets. Ah, the assets. It seems to be forgotten that Scotland leaving the UK is subject to a negotiation between both sides over around their entitlement to the assets, and responsibility for the liabilities of the UK state. It is not simply a matter of rUK taking 100% of the assets, and passing over a substantial burden of the liabilities (using the population or other share of the National Debt). This is not the EU and this is not Brexit; this is the ‘break-up’ of a unitary state. It is also of relevance that the Union was established as an “incorporating union”, not a federal state. This makes a significant difference to the way the negotiation will be conducted. The Scottish Government last time assumed it would retain an interest in (and not merely use of) the £sterling, but not now. I do not think you have thought through the implications of this.

    1. Block says:

      “It seems to be forgotten that Scotland leaving the UK is subject to a negotiation between both sides over around their entitlement to the assets”

      No one has forgotten this. It is simply understood that the fixed assets will be distributed on a geographic basis and the liquid assets and liabilities will be distributed on a population basis.

      To argue otherwise – to say that Scotland is entitled to a population share of the fixed assets of the rUK – is to accidentally argue that the rUK is entitled to 92% of the the fixed assets of Scotland.

      1. John S Warren says:

        Now you are trying to negotiate; but rather crudely. The British state is not set up in the way you suppose; the centralisation of resources since the early 20th century has skewed assets markedly towards the political centre. The idea that Scotland carries the responsibility for the debts based on your simple formula, which neatly rewards rUK for concentrating fixed assets at the centre, and simultaneously distributes the debts advantageously to rUK does not stand scrutiny; and as I said the currency itself is the key asset – which you propose is kept 100% by rUK, while Scotland takes the debt over which it has no control. I can see why you wish to argue this case, but it is not sound.

        1. Block says:

          That simple formula was endorsed by the 2014 Yes and is also enshrined in GERS, which the Scottish Government produces and is solely responsible for.

          It will obviously be Westminsters baseline assumption. If, in “negotiations”, you expect to move the needle, I’d like to now how, given that Westminster can just keep saying “no”.

          “as I said the currency itself is the key asset – which you propose is kept 100% by rUK”
          By “currency”, do you mean the institution of the BoE-backed £? If so, my answer is of course the rUK keeps it 100%. It is an institution of the state, not an asset that can be shared. This was explained ad naseum in 2014, but Salmond would not listen because he knew that either sterlingisation or a new currency would be a vote killer.

          If by “currency” you mean the foreign currency reserves – Scotland will get a per capita share of them. I’ve never seen anyone on either side say anything different.

          1. John S Warren says:

            I do not subscribe to the view that ‘2014 Yes’ or GERS is proof of infallibility; indeed both fall short. I am not committed to defending the Scottish Government’s position on any of this, although I give them credit of making a better fist of presenting their 2014 case, albeit flawed, than the British Government over Brexit. In my opinion Alex Salmond was wrong to take the approach to the £sterling he adopted.

            With regard to the “BoE-backed £” you have misunderstood my argument or begged the question. This is a negotiation, but as an incorporating union both rUK and Scotland “own” the State. Technically under the terms of Union the break-up should be by dissolution of the British State; but that is in nobody’s interest. There has to be a ‘continuing’ State, and only rUK can take that role. Nevertheless there has to be an equitable division by value of the interest of both rUK and Scotland in the State that is being divided. It is not, nor can it be a ‘one-way street’. Do you really think it is going to be so easy to ‘fob Scotland off’? I repeat, rUK cannot just take all the value of the BoE-backed £, and dump a substantial portion of the liabilities arising (with the penalty of paying back capital and interest in a foreign currency), on Scotland; there has to be an adjustment. In 1707 (they were not as foolish as it appears is assumed now) the adjustment was made in the form of the “Equivalent”. There requires to be a modern “Equivalent”; the simplest method is to follow equity and logic, and let the liabilities follow the asset: rUK takes both the currency asset and the liabilities that go with it – as it should. I repeat, there is a negotiation to be done, with adjustments and give-and-take for the vital interests of both sides, across the board. and although rUK is the larger party, it does not hold all the cards, nor can it (nor do I believe would it) negotiate on a world stage to undermine the prospects of its closest neighbour; nor do I believe that Scotland’s negotiating commissioners would accept, or be allowed to accept, a ‘rip-off’, which in effect is whay you propose. It seems to me your assumptions about the tenor of negotiations are unconvincing.

          2. John S Warren says:

            I should repeat that in 2014 the British Government made transparently clear that it was taking responsibility for all of the National Debt, no matter what. They only did this because they would possess the asset (the BoE-backed £) 100%. They knew the value of what this meant, it was not a risk. In effect the British Government has accepted the substance of my case.

  18. Keith Dyson says:

    A critical analysis of a previous article. The argument is central to mainstream Labour Party thinking and probably has massive support from its’ members, and I suspect, from the majority of SNP supporters. If only more more electors would read this argument prior to the next General UK election, or indeed, the next Scottish Independence election!

  19. Mike Fenwick says:

    Whenever posts arise related to the UK National Debt and Scottish independence, the respective roles, tactics and decisions of the Ruk and Scottish Governments seem to dominate the discussion, with opinions seemingly centred, and centred principally, on those two protagonists, may I suggest however that attention should also be paid to the views that the holders of the debt might have – they may have a keen interest in who owes them the money, and an important, if not pivotal, role in deciding any outcome.

    1. Tim Rideout says:

      Absolutely! All existing UK debt will stay UK debt and will stay in Sterling because you can’t transfer it onto anyone else without the consent of the holders. In any case as the rUK wants to be the continuing state that would apply anyway. No state that has ever left the British Empire has, to my knowledge, ever accepted any share of UK debt nor taken any share of UK assets other than what was within the boundaries of that state. Personally I would expect the same would eventually apply to Scotland. As introducing the S£ means the new Scottish Reserve Bank will end up owning whatever sterling we voluntarily choose to exchange (and Scots own over £100 billion of the stuff so that could be £50 billion if we were a bit canny and only changed half or a bit under), then I am not really interested in fighting over the Tajikistan Embassy or 8% of the BoE net foreign assets. The latter, by the way, are currently about US$45 billion so pretty small and 8% is neither here nor there in the context of the £50 billion reserves the SRB would have from creating the new currency.

      What would happen IF Scotland chose to take some share of UK debt would be an entirely new bond under which the Scottish Government would agree to pay the rUK Government £X amount. Obviously the Scottish Government would be free to argue that the amount to be paid should be fixed in the new S£ rather than Sterling.

    2. Block says:

      There is only one logical position, and it was articulated in 2014 without equivocation: the rUK will continue to be responsible for all the existing debt as far as the debtholders are concerned. HOWEVER, the rUK will require the new Scottish Government to accept that they are obligated to pay the rUK government for a population share of it.

      Not rocket science.

      And, no, the rUK government isn’t going to let the new Scottish Government pay off that obligation in freshly minted currency.

      1. John S Warren says:

        Repetitious use of the terms: the UK Government will “require”; will “continue”; can “just keep saying no”, provide neither argument nor proof, of anything. These are not the expressions I would expect from the well-informed. You have reduced your case to mere, bald assertion; easy to do but entirely lacking substance. What an extraordinary, and naive negotiating psychology your remarks appear to reveal that you inhabit. You are not describing the real world, but a kind of Daily Mail version of reality: lurid and implausible.

        This will be a real negotiation, and a much more complex, interconnected arrangement, full of concessions and compromises on both sides. This is not Brexit, and to the degree that precedent for your seal of approval on British negotiating skills is relevant, the strategies and tactics of the British in the EU have been catastrophic; must try harder. I suggest you read Sir Ivan Rogers professional opinion on negotiations of this kind, before asserting your implausible ‘bully-boy’ theories as the basis for sound, viable and well-conceived agreements. The last deal of the kind you describe that I can think of that fits your epithets, was Versailles in 1919: it didn’t end well.

        First recognise the limits of what is possible for each side to do or concede; the Britsh Government know very well it is possible to concede on Debt, because it has already announced it to the world. Scotland cannot accept your proposal because it is economically extremely destructive and carries quite unacceptable risks to the country’s finances. The real test here is that Scotland is asking nothing of that level of risk, of rUK; and there are ‘quid-pro-quos’ that can be made. It is also simply false to imply that all the cards are on one side (as you implicitly assert); you really should think this whole matter through. It is simply not the nature of an arrangement of this kind between close neighbours, or in either party’s interest; to reduce the issue to your kind of hard-nosed banality.

        1. Block says:

          Salmon also told us repeatedly in 2014 not to worry, he’d bend the rUK to his iron will.

          It is one of the reasons why “No” won.

          1. John S Warren says:

            It seems to me that your argument has nothing to do with the negotiations, or the contents of the negotiations at all. It actually presupposes that there are no negotiations: ever. Yet the basis of the debate just conducted through this thread quite clearly assumed that the two parties were in negotiation, independence having been chosen. The debate was supposed to be about the nature of these negotiations, particularly as it affected the British currency and debt. I thought your position strange, but now I find it is spurious. You have begged the question (the logical fallacy of petitio principii). This is the only way your blustering and posturing about the non-negotiation negotiations actually works. You argument rests on the the proposition that Westminster can simply prevent the eventuality of negotiations ever being required, by blocking an Act in Parliament. Extraordinary.

            This whole discussion has been a complete waste of time.

            Goodnight and goodbye.

          2. Block says:

            There will be negotiations about many things. But they will not include whether Scotland can leave the rUK debt-free. Because such a deal would never pass through Westminster, and therefore Scottish independence would never happen.

            You are doing what Salmond did in 2014: insisting that it is possible to force the rUK into a deal against their interests, and saying that therefore we don’t have to worry about the consequences of voting Yes.

            Didn’t work then and certainly isn’t going to work now that you are adding Magic Money Tree “economics” on top of it.

  20. Block says:

    @ John S Warren
    “It is worth noting that in 2014 the British Government (rUK) made clear that – no matter what – it was going to accept responsibility for the whole of the debt”
    Yes, absolutely, no question about it.

    But it is going to insist that the SG accept new debt instruments, payable to the UK, in £. Or else no independence.

    “What rUK proposed to do was keep the asset (sterling)”
    The BoE-backed sterling is an institution, not an asset.

    Salmond made a fool of himself in 2014 arguing to the contrary.

    “I repeat, rUK cannot just take all the value of the BoE-backed £, and dump a substantial portion of the liabilities arising (with the penalty of paying back capital and interest in a foreign currency), on Scotland; there has to be an adjustment.”
    You are wrong. The only way for Scotland to become independent in our lifetimes is for an Act to pass through Westminster; and Westminster can just keep saying “sorry, your demands are unreasonable”.

    So what are you going to bring to the table to change their minds?

    1. John S Warren says:

      See my responses above. You are beginning to show all the standard negotiating blind-spots and weaknesses of the British Brexit fiasco. You overplay your assumed strengths and are blind to your weaknesses. Everything else, save one, I have covered in my last response.

      Suddenly you have deserted the air of quasi-professional impartiality that you have assumed throughout; and you have abandoned the ‘negotiations’ altogether. Now it depends on something exogenous. Has the mask slipped? Or have you just given up?

      “So what are you going to bring to the table to change their minds?” Me? Nothing. Not my area.

      But if you need help to figure out what comes before negotiation? One word.

      Politics.

    2. Money Monopolist says:

      Warren didn’t even mention the size of the sterling debt once. Wasn’t even interested how much sterling debt there would be. If you take the time to read above.

      This trying to make out Scotland to be a special case because of whatever Sterling debt they hold is a strawman arguement. Many countries have foreign debt it is how you manage it that counts. He even talks how Turkey are going the wrong way about it ( which we all know)

      Scotland’s sterling debt under current institutional arrangements is a drag on our economy now and will continue to be a drag with it’s own currency, though it would both be a lesser drag and diminish over time.

      As Warren showed Scotland would be able to keep the population fully employed and sustain a 0 policy rate all of which would promote low inflation, a stable currency, and real gdp growth that would cause the fx debt to gdp to diminish over time all with a higher standard of living.

      This Scotland can’t be independent because it will have some “sterling debt ” is non sensical and is ideological driven. More like a political statement than a factual one. – Scotland will not be a special case it will manage the debt like everyone else.

      You know that so it is time to stop beating this idological drum.

      1. Block says:

        I did not say that Scotland could not be independent because of sterling debt.

        I said that Scotland is going to have substantial sterling debts.

        When you point out to an MMT enthusiast that there are several countries in the world which demonstrate that their theories don’t work, they always find a reason to claim that such countries were “not monetarily sovereign”.

        Usually, they point to debts denominated in foreign currency as the reason.

        Well, then, it follows that independent Scotland is not going to be monetarily sovereign either, and therefore the MMT enthusiasts have nothing to contribute to the discussion.

        1. Alf Baird says:

          I expect a further key difference between an independent Scotland and RUK will be that the former maintains a trade surplus whilst the latter will have a substantial trade deficit. You can work out the currency and debt implications of that which for RUK will be severe, and this no doubt is at least one reason they need to hold on to Scotland. Like Rep. of Ireland, an independent Scotland will likely further re-orientate much of its trade away from RUK.

          1. Block says:

            Scotland maintains a trade surplus because of its Finance industry, which exports almost all of its output to the rUK. The loss of the BoE-backed £, which is a feature of both the Growth Commission Report and the counter-proposals advocating a new currency, drives that industry to the rUK, and Scotland’s trade surplus goes with it.

        2. Money Monopolist says:

          It doesn’t follow at all because none of these countries follow MMT policies and that’s the issue.

          Are they using fiscal policy to sustain domestic output at full employment levels using a job guarentee?

          Are they using ZIRP ? Their high policy rates are basic income for those who already have “money” so created distributional issues.

          Are govt payments indexed to “inflation”?

          How’s banking regulation and supervision?

          The list goes on and on.

          This is what happens when you don’t read the 25 years that’s gone into the MMT paradigm. We would do it a hell of alot differently.

          1. Block says:

            “It doesn’t follow at all because none of these countries follow MMT policies and that’s the issue.”

            Of course you know that MMT is “only a description” and it doesn’t have any “policies”.

            You also know that it can “only describe” what happens in “monetarily sovereign” countries, and that to qualify as “monetarily sovereign”, the country cannot have debt denominated in a foreign currency.

            Independent Scotland will have SUBSTANTIAL debts in a foreign currency; therefore the descriptions offered by MMT are irrelevant.

        3. Tim Rideout says:

          As I said you should go back to First Year Economics as your knowledge is sadly lacking. Since you are not listening to any commentators on here then try the Bank of England instead as they do actually understand how money is created: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy.

          So far as Scotland leaving the Empire is concerned then I do not believe a single country that has become independent from rUK have ever either taken a share of rUK debt OR attempted to claim any rUK assets other than what was physically within the borders of the new state. I doubt Scotland will prove any different.

          Lastly the idea that Westminster can just go on saying NO is laughable. See India, Malta, Singapore, Malaya, USA, Kenya, Ireland et al. In those days there was actually a large military too, rather than the one now that is so shrunken it would struggle to control a bad Saturday night in a Glasgow nightclub let alone occupy Scotland against the will of the Scottish people.

          1. Neil says:

            Ireland agreed to take a share of UK national debt after leaving. £Ir160 million I believe. The last couple of million was written off in the late sixties.

          2. Block says:

            I understand economics far better than anyone else here, which is why I’m not so gullible as to fall for the fantasies being promoted.

            You separatists are proposing that Scotland should leave the Union – that is different from becoming independent from the UK or the British Empire. Plus, a lot has changed since 1984, which is when the last independence movement succeeded. However, if you want to argue that 1985 is when the clock should start for calculating Scotland’s debt, I’m sure that could feature in negotiations.

            “Lastly the idea that Westminster can just go on saying NO is laughable”
            Really? You should pick up a newspaper, and see what Brussels is doing right now. The key difference is that the UK has the option of unilaterally withdrawing without a deal. Scotland does not.

          3. Tim Rideout says:

            Thanks Neil. With some difficulty in the searching I have finally tracked this down and I believe the £160 million sterling you refer to was actually money provided by the UK government as loans for Irish tenant farmers to buy out their land under the Wyndham Land Act of 1906 (and others later). So the loan repayments were actually made by Irish farmers to the Irish Government who then paid that on to Westminster. The Irish apparently stopped the payments in the 1930s (though still collecting them from the farmers) which led to a trade war with the UK that was eventually settled in 1938 when the Irish paid half as a lump sum and the rest was written off.

            That is nowhere near the same thing as ‘Ireland accepted liability for a share of the UK National Debt’ since it clearly didn’t. Personally I would say it should have been quite reasonable that if the loan was to the farmers and they were paying it back then the money should go to whoever provided the loan, i.e. the UK in this case. However Ireland (the state) was pretty destitute in the early 1930s so that clearly played a big part. It is a bit like somebody in Scotland with a student loan – I don’t think anyone supporting independence would say that would exempt the student from repayment, but equally that would be nothing to do with independence negotiations over debts and assets.

  21. Block says:

    You carry on with your childish personal insults as you wish. I am fairly certain I have better credentials on the top than you, or you + Wikipedia.

    It is because this is not a new subject for me that I am not distracted by the shiny objects.

    Scotland is not leaving the Empire. You separatists want to withdraw from the Union. Two very different things.

    ” I doubt Scotland will prove any different.” – then you didn’t read the 2014 Independence White Paper or the thing that replaces it, the Growth Commission Report.

    “Lastly the idea that Westminster can just go on saying NO is laughable.”
    Then you should pick up a newspaper and read about what Brussels is doing. The main difference is that the UK has the legal option of unilateral withdrawal; Scotland does not.

    1. Tim Rideout says:

      Not sure who you are talking about there but I have degree in Economics and Economic History (for which I got the class medal) from the University of Cape Town, also an MA in Urban Geography and a Ph. D from Edinburgh with a thesis on the Effects of Planning Control on Office Development – a Comparative Study of Edinburgh and Dublin. Then later FRGS and an Honorary Fellow of the British Cartographic Society. I tend to read books such as Richard Murphy’s Joy of Tax as light reading for holidays. Sad, I know.

    2. John S Warren says:

      Brexiteer-Unionist ideologue, posing as The Impartial Spectator, and tested by some gentle challenges to his obvious conceit, goes on hysterical schoolboy rant about his “credentials” and that his knowledge of “economics [is] far better than anyone else here”: or, ‘nah-de-nah-de-nah’, to make my own humble attempt to translate his point back into his chosen language of communication. Thank you, we have the message.

      Incidentally, this is logical fallacy No.2 he has committed – the ‘Argumentum ad Verecundiam’; actually, I confess it may not be a fallacy, only because the pseudonymous authority “Block”, whose academic papers are renowned, eh, where? has provided no evidence whatsoever that he is an “Authority”, save by his mere assertion, his obvious personal narcissism, although perhaps not charm; and on the grounds that no doubt he is considered an authority in his own household; perhaps not even there, for all I know.

      Well, at last we all finally know where you stand, and it is not, even with generous imagination and a big fat approximation, close to impartiality: that at least we can all agree on. It really did not take long for all this windy puff to unravel completely.

      1. Alf Baird says:

        Yes it has become quite tedious dealing with such nonsense John. We know well of Scotland’s assets and resources and opportunities and that is all we need to know. All we await now is Mr. Blackford tearing up the treaty of union in front of the House of Commons and leading the majority of Scotland’s representatives out of Scotland’s joint UK parliament for the last time. I am sure most fair minded people in England will rejoice at that as they clearly seek their own independence also.

        1. Block says:

          Venezuela has 100X the assets. How are things working out for them?

          The SNP got less than 1 million votes at the GE – down to 38% share, and less than 50% in every constituency. So Blackford can lead the SNP MPs out for as many selfies on the lawn as he wants. They aren’t undoing the verdict of “No, Thanks” delivered by over 2 million Scots in 2014.

          1. Money Monopolist says:

            What on earth are you talking about your going round and round in circles until eventually you’ll eat yourself.

            Please stop making a fool of yourself because you haven’t read the MMT paradigm.

            Scotland’s got foreign debt now in the way of “Sterling” and we don’t issue ” sterling ” and has the sky fallen in ? Of course not.

            Turkey is not using their fiscal policy to sustain domestic output at full employment levels. Their high interest rate policy rate is basic income for those who already have Lira so it has created distributional issues. Are Turkish govt payments indexed to “inflation”? How’s banking regulation and supervision in Turkey.? What’s the situation with Turkish state owned enterprise? Lending to SOE’s? Do Turkey Index wages? They are not following the MMT paradigm.

            Turkey’s high interest rate policy is causing lenders to sell their interest payments for FX and that drives down the lira. The inflation looks at lot more like cost push than demand pull inflation.Their high policy rates means equally high forward prices for non perishable goods that continually increase with forward delivery dates. Turkey’s high policy rate is supporting their inflation rate and depreciating the currency continuously over time. They need to drop it to 0.

            Turkey isn’t maintaining high aggregate demand or using under ulitilised resources. It’s increasing the money supply largely from bank lending. Debt to GDP is low so it is not an excessive fiscal expansion story. They have a high number of FX reserves which means the government has directly or indirectly been selling Lira to buy FX which is driving the currency down also probably to drive wages down to support exporters with political clout.

            In general the private sector borrowing has been climbing rapidly probably supported by state controlled banks. So Turkey’s FX depreciation is not coming from attempts to sustain full employment but from issues in the banking system and their high interest rate policy.

            So you can’t compare Turkey with its own sovereign currency with foreign debt and an Independent Scotland with Sterling debt it is comparing apples and pears due to their political choices.

            Scotland’s sterling debt under current institutional arrangements is a drag on its economy and will continue to be a drag with it’s own currency, though it would both be a lesser drag and diminish over time.

            Using MMT understanding of the monetary system and functional finance, ZIRP and introducing a job guarantee. Scotland would be able to keep the population fully employed and sustain a 0 policy rate all of which would promote low inflation, a stable currency, and real GDP growth that would cause the FX debt to GDP to diminish over time all with a higher standard of living.

          2. Money Monopolist says:

            Why would an independent Scotland not end up like Venezuela ?

            For the same reason it wouldn’t end up like Turkey.

            Venezuela is a $ zombie country. What is a $ zombie country ? You normally need two requirements first is you have one main export and in Venezuela case it is oil. They decided to concentrate on oil and send it out to other countries to consume. Second is the vast majority of its debt is in a foreign currency which in Venezuela’s case is in the $. So when oil prices were high it could manage the debt it had in $’s. However, when oil prices fell it didn’t have the $’s to pay off their $ debts. So it started printing its own currency and exchanging them into $’s until it became worthless.

            Like Turkey, Argentina, Venezuela didn’t pursue any MMT type policies whatsoever

            You forget about the numbers they are irrelevant. You look at what skills you have and what real resources you have and then you decide what you are going to do with them.

            Then you look at what’s the best way to do that. Sound finance or functional finance.

            Functional finance ( MMT proposals) MMT economists have provided the most valuable economic lens to allow countries to do what needs to be done.
            Unfortunately, What you are going to do with your skills and real resources are always a political choice. Political choices you seem to be blind to when you throw these names of coutries around like confetti.

            Your throwing them around like you used to throw around Zimbabwe and the Weimar Republic as if you were proving inflation by excess spending. It was non sensical then and even more so now in what you are doing.

            We encourage debate so stop and go and read the MMT Paradigm or you are just wasting everybody’s time.

          3. Alf Baird says:

            Block, MP’s may ignore any referendum ‘verdict’ as they wish, and as the ECJ has confirmed. It looks increasingly likely that Westminster may well make the Brexit referendum result void. The UK’s MP’s will determine now if Brexit happens or not, irrespective of the referendum result, and irrespective of the Government’s wishes. Similarly in the case of Scotland, and as the UK parliament has agreed Scotland’s sovereignty rests ultimately with Scotland’s MP’s a majority of whom can do as they wish as far as Scotland is concerned, and again irrespective of any referendum result. That is the legal and constitutional reality. Even if Scotland had voted Yes in 2014 Westminster could have and probably would have ignored that ‘verdict’, or stalled for years, or watered so-called ‘independence’ down to whatever it wanted. So I would not put too much faith in any referendum result if I were you.

  22. Brian Watson says:

    Well said Cameron , and congrats on a fine performance at conference .Shame about the 6 tests avoiding the axe but Tim Rideout battered them into a cocked hat……from whence they came . B

    1. Tim Rideout says:

      Thank you. They live on in zombie state, but I don’t think anyone will take much notice of the ‘6 Tests’ now. I can suggest 6 proper tests:
      1) Is the Bill to establish a Scottish Reserve Bank drafted and ready to introduce into Holyrood the day after a vote for Independence?
      2) Have we got the arrangements and timetable in place to design and manufacture the new notes and coins?
      3) Have we established a new Scottish Bank payment system (since you can’t use the UK bank payment system), and this should be using the Eurozone standard template to avoid re-inventing the wheel and ensure compatibility with existing bank computer systems.
      4)Have we designed a Public Information Campaign to ensure that the public understand the process and are fully prepared?
      5)Have we identified the requirements for premises, staffing, infrastructure, etc (I prefer using the Royal High School as the Central Bank HQ) and put in place a plan to get them in place?
      6) Have we identified and developed a plan for the financial regulation that will be needed for our financial institutions, etc? This should not be a cut and paste job from the failed London model!

      So lets have some useful Tests rather than ideological nonsense, Catch 22s and irrelevance.

      1. Mike Fenwick says:

        Detailed background archive here: http://www.facebook.com/TheScottishHand/

        Next and major stage will be here: http://www.facebook.com/DoYesHaveTheBottle

        Hope this may be of interest.

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