Our Common Home – Imagining a Post-Oil Scotland

BREAKING SCOTLAND’S CARBON BONDS

IN my last article I began to examine the logic of the current Scottish Government economic plan, published in 2015. This strategy document prioritises six key growth sectors: food & drink, creative Industries, tourism, energy, financial services, and life sciences. The rationale given is that these are sectors are where Scotland “has…the potential to be internationally successful”.

This is hardly a focused short list as it encompasses a sizeable chunk of the entire economy. But my real worry is that this selection of industries reflects the existing, subservient role Scotland plays within a global division of labour decided by the big imperialist powers, particularly the USA and EU. Far from developing Scottish economic independence, the plan reinforces our dependence on capital accumulation, investment and technology choices made elsewhere.

Worse, the plan is tailing an unsustainable, neoliberal world order that is starting to fragment. Last week I gave the example of farming and aquaculture, where the ScotGov plan centres on doubling Scottish output. However, this can only be achieved through ruinous additional energy inputs, which are at odds with any attempt to reduce greenhouse gas emission to net-zero by 2045.

THE SNP’S ENERGY CONUNDRUM

This week I want to examine another sector where the ScotGov “growth” plan exposes its irrational basis – the energy sector. Including the continental shelf operations and onshore chemicals, this industry represents a good 15 to 20 per cent of GDP, depending on prevailing market prices. Also, it is largely not Scottish owned. Along with the financial sector (also a ScotGov priority) this sector is a key determinant in locking Scotland into externally determined supply chains.

The SNP party website is unequivocal:

“We will press the UK government to deliver a strong deal for the oil and gas sector. This must include targeted incentives to develop small pool discoveries, as well as further support to stimulate exploration activity and loan guarantees for critical infrastructure”.

In other words, produce more oil and gas.

Of course, ScotGov and the party are committed to decommissioning initiatives and the development of renewable energy sources. I don’t doubt this. But the SNP is also and simultaneously committed to extracting the last drop of oil and gas from the North Sea and Atlantic fields. This is a glaring contradiction.

Party policy also states:

“The SNP Scottish Government has welcomed the confirmation from analysts that production of gas at the newly opened gas fields at Laggan and Tormore is expected to meet 100% of Scotland’s average gas demand… The fields will have a lifespan of 20 years”.

That gets us to at least 2040 – I suspect longer.

I have some sympathies – to a degree – with ScotGov. We can’t close down the world’s oil and gas fields overnight. We need gas to power our homes till we convert to renewables. Oil and gas workers have to be re-trained. Also, gas and oil tax revenues remain significant. With sales running in excess of £30bn per annum even at today’s low international prices, a canny independent Scotland can easily increase its tax take from the North Sea and Atlantic fields.

However, none of this is a justification for extending the life of the gas and oil industry, or its attendant petrochemical sector, indefinitely. Given the climate emergency, we require a detailed conversion strategy to eliminate production as soon as possible. To date, that detail is conspicuous by its absence. Instead, the tenor of the SNP’s energy policy statements suggest the party’s leadership is committed to running the oil and gas production sector for as long as technically possible, and extracting the maximum output achievable.

Last year, the SNP sponsored a debate at Westminster on the future of the domestic oil and gas industry, led by my friend John McNally (SNP Falkirk). The debate was squarely aimed at getting the Tory Government to provide more support for the sector. Here’s what John said: “The UK Government must… provide the political certainty and financial support [the oil sector] needs now, or risk undermining North sea oil and gas by once again using it as a cash cow, this time to pay for Brexit Britain.” He then called on “the UK Government to support and encourage investment in this vital asset…”

Alan Brown (SNP Kilmarnock and Loudoun) then piled in:

“Overall, the North sea holds significant potential, with the equivalent of up to 20 billion barrels of oil remaining. That could sustain production for the next 20 years… the UK Government must introduce measures to improve the exploration and attract fresh investment. They need to support the industry in its ambitions to increase the total economic value of the North Sea.”

Such productivist sentiments are always paired with references to renewable energy and decarbonisation. But such pairing leads you into dangerous political territory. Alan Brown went on: “Scotland’s energy strategy recognises that a strong domestic oil and gas industry can play a positive role in supporting the low carbon transition”. I find the notion that expanding current oil and gas production to the maximum can “play a positive role in supporting low carbon transition” somewhat breath-taking as a concept.

What Alan really meant – as is clear in the rest of his speech – is that we need to link oil and gas extraction to carbon capture and storage (CCS) at the point of industrial energy burning – if we go on burning the hydrocarbons as fuel. However, CCS remains an unproven technology at scale, and (so far) is hideously expensive. The cost and technical issues are reduced when burning gas rather than coal, I admit. But you are still is bolting on a second factory to your power generation system to get rid of the effluent gases and pollutants. Inevitably that adds extra cost. With wind and solar power dropping in price, I can’t see that even successful CCS-enabled gas generation will ever be cost effective. Which means that my friend Alan Brown is (unfortunately) talking baloney.

WILL BIG OIL GIVE UP ITS NORTH SEA PROFITS?

Which brings us to my key point: we need to stop burning gas and close down the North Sea and Atlantic fields as soon as possible – the very opposite of trying to extend their lives ad infinitum through tax incentives (the current SNP policy). The constraint is obvious: around 80 per cent of UK and Scots homes use gas for heat and power.

Fortunately, last week, the Common Weal think tank published a first draft of a detailed, full costed carbon reduction and energy conversion plan. It will take 25 years to complete and cost £170bn. The Common Home Plan, as it is christened, will create 100,000 jobs and so increase the amount of tax collected in Scotland by circa £4bn per year – roughly 80 per cent of the cost of borrowing the cash to finance the plan’s implementation. (You can find the details of the plan in glorious technicolour detain on the Common weal website.)

The Common Home plan is a good start. Begun today, it would allow us to escape fossil fuel dependence by 2045. The gains are front-loaded and cumulative, so I think we could de-carbonise in nearer 15 years if we had a state of our own and the will to do so. But there are two problems with implementing the Common Weal blueprint as it stands.

First, we have to convert the SNP leadership away from its pro-oil strategy. That is something SNP members will have to confront. Second, we have to brace ourselves for resistance from Big Oil and petrochemical companies such as Ineos. The latter extract huge profits from Scotland. The have invested vast amounts of capital in their existing assets which need decades to valorise. Expect political resistance on a grand scale.

Let me give you some numbers. Much of the Scottish economy, oil and gas included, is foreign owned. For over 70 years, the primary economic policy pursued by governments of all stripes in Scotland is to boost foreign direct investment. The latest SNP economic strategy continues this approach. But foreign manufacturers, banks, oil companies and agribusiness only invest in Scotland in order to make profits – and to send those profits back to their shareholders abroad. If we decide to close down the oil and gas industry, Big Oil will retaliate.

We can put numbers on the stake foreign capital has in Scotland, courtesy of the Scottish Government. At the end of last year, ScotGov published estimates of Gross National Income (GNI). This is different from our old friend GDP, Gross Domestic Product. The latter, familiar statistic measures the output of (marketed) goods and services created in Scotland in a single year. It is a crude measure of economic activity. But this activity is produced by both domestically owned and foreign owned companies (from rUK and abroad). But external owners repatriate their profits. So GDP over-estimates the amount of revenues that stay in Scotland. You might have a big GDP (i.e. manufacture a lot) but the benefits could disappear as foreign companies send their earnings back home.

We now have Scotland’s GNI figures up to 2017. They show that Scottish GNI was £159.3bn (£29,357 per head) compared to Scottish GDP of £168.5bn (£31,055 per head). So, Scottish GNI was 94.5 per cent of GDP. The difference represents the net outflow of profits/income from Scotland to owners and investors abroad. Note: these numbers include our share of North Sea oil and gas.

The discrepancy between GNI and GDP has varied greatly depending on the point in the global economic cycle. In 2007, at the top of the global oil and commodity boom, the gap was about 13 per cent of Scottish GDP. In other words, a net £13 out of every £100 of output created in Scotland was repatriated to external investors. That’s not 13 per cent of profits made, that the equivalent of 13 per cent of total output created (which is massively more).

Oil, by the way, is not the only syphon on Scottish output creation. Banks send their profits to London or abroad while Scottish based pension funds pay out to policy holders living outside of Scotland. In 2017 (the last year for which we have data) foreign investors of all kinds earned a staggering £34bn from Scotland, and Scottish brains and brawn. The next time anyone says Scotland has a financial deficit or can’t pay its way, ask for your £34bn back. In 2007, that number was £50bn. In fact, since the Millennium, the total taken out of the Scottish economy by rUK and foreign investors is a staggering £602bn. We are a veritable cash machine. And they say Scotland is too poor and too small to be independent.

Do you think that Big Oil wants to give up this Scottish largesse? In the end, that may be the red line when it comes to closing down North Sea oil.

Comments (14)

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  1. Mark Bevis says:

    I imagine that the only way a future independent Scotland is going to decarbonise is to nationalise the companies that are using you as a free cash point, forceably at bayonet (or more likely, computer hacking) point, then shut them down at the rate required to retrain the work force in agreoforestry, permaculture and the like.

    If you’ve done your maths (or peeled back yet another layer of the onion in the doomosphere) you’ll know that it’s mathematically impossible to replace fossil fuels one-to-one with renewables. Sure, you can replace much of our current electricity generation with all the turbines, solar panels, tidal barrages, electric buses you can make before the minerals run out and become too expensive to extract, but you can’t make them without fossil fuels. But electricity accounts for only about 15% or our energy use.

    So for decarbonise, replace with the word de-energise, ie we have to look to living with a lot less energy use than currently. All whilst reducing inequality, elitism, patriarchy, bio-diversity loss and pollution.
    Now that would be a post-oil report worth reading.
    But don’t worry, if no-one can write such a report, Mother Nature is going to do it for us, brutally, randomly, chaotically and incessantly.

    1. Charles L. Gallagher says:

      Mark,

      There is a lot of truth in what you say but while we slide back to the ‘stone-age’, what is the point if the big polluters, US, India, Russia, China, etc continue we will still suffer the global effects. The real question is how do persuade/coerce people like Trump to acknowledge the problem, any positive ideas?

      1. robert wilson says:

        I doubt if Trump can be coerced into acknowledging the problem, but he wont be in power for ever. We can but set an example. Invest and develop the new technology today and hopefully that’ll give a head start in a new energy market.

    2. It’s very true we need a rapid energy descent plan, but I’m not sure why that is so impossible?

    3. Wul says:

      Readers…….continue scrolling down for around 2 metres to read comments other than Derek’s.

      (there are some)

  2. Derek Henry says:

    Are you saying taxes fund government spending George ?

    It sounds like it and if that is the case this piece is nonsensical.

    Why should the monopoly issuer of the new Scottish currency borrow that currency. It is like saying the monopoly issuer of widgets has to borrow widgets.

    The Scottish treasury can just credit bank accounts instead with no need to borrow anything at all.

    Let’s get this straight George as it is very clear you do not understand the government accounts. Please start studying them.

    Taxes don’t really have any effect on demand for a currency once the system has got going. Just like a starter motor has no impact on a car engine once it is running.

    Once the engine is running taxes are really there solely to stop the system over spending itself because households and businesses are borrowing too much and not saving enough, and to correct failures in the distribution system that give some people too much money and others not enough.

    But really we should address the root causes. Excessive borrowing by households. Insufficient savings and the ineffectiveness of competition in the market part of the economy.

    The reason ‘tax the rich’ wins is because it goes for the visceral disgust the hard left have for the wealthy. Nobody ever discusses the detail of ‘how much’.

    Half the problem is discussing tax rates, when the amount of tax at a tax rate is variable by virtue of the auto-stabilisers. In other words it just pays for itself automatically.

    So all that happens is somebody gets a tax bill – the same as anybody does. To pay a tax bill you run down your Sterling savings, borrow some Sterling from a bank, or sell something to raise Sterling.

    After that it is the usual transfer of a Sterling deposit to HM Treasury.

    If HM Treasury is not in an increase spending mood (and HMRC is taxing excess savings) then it just builds up in the Consolidated Fund.

    Since the Consolidated fund has a positive balance, the DMO has no need to issue new Gilts, or rollover existing Gilts. So the amount of Gilts naturally starts to shrink. These are term Gilts, not the overnight interbank.

    Seriously the numbers don’t matter. And that’s because they are thinking about *distribution* when we’re really concerned with the *total tax take*.

    The distribution is in the gift of the chancellor and the government, whereas the total tax take isn’t. That is determined by how much people save over how much they borrow..

    So probably the best approach is to turn it around and say “what do you think taxes should be” and then say “yeah that sounds about right” regardless of what they say. You’ve then just agreed with them and can get onto the next bit of persuasion. Plus it works with Labour, Green or Tory.

    You want to get acknowledgement that there is no fiscal constraint and get people talking about real resources rather than numbers. In particular you need to get across that taxing people is about freeing up real resources for use somewhere, and that taxing isn’t necessarily the best way of doing that. For example banning private practice of dentistry would free up dentists for the NHS. Banning private healthcare to stop the rich jumping the queue and stealing the skills and real resources the NHS needs.

    If the Scottish government maintains a peg with the UK then there isn’t really such a thing as a ‘trade deficit’. It’s a work of accounting fiction as the Scottish government has then decided to remain a county of the UK within the UK currency zone.

    The reality is based around the function of the government account, and where it is based. Let’s say they have it at the Royal Bank in the same way that the Finnish government has theirs with Danske Bank.

    The Royal Bank can then provide the Scottish government with an overdraft (since the restriction in Article 123 of the EU treaty only apply to central banks, not commercial ones) and charge the Scottish government an overdraft interest rate. That interest payment is then given to Royal Bank shareholders. The overdraft is reduced by the sales of Scottish fixed interest debt – but that is nothing more than a transfer from RBS shareholders to holders of Scottish debt. The payment is still the same, and still in Sterling.

    As ever you have to forget about the numbers and look at the reality of the situation. Find the people who are able to say ‘no’, and how they can enforce that. The no happens when commercial banks refuse overdrafts and people refuse to buy the state debt which then means government cheques bounce. At that point the purchases are not purchased and real output collapses – including the supply chain that relies on that circulation.

    For the transfer of Sterling into England to happen, somebody somewhere has to do the ‘borrowing’ that allows the saving – or the import sales into Scotland cannot happen in the first place.

    The way of looking at it is that foreigners have to take Scottish pounds or they won’t be able to sell anything to Scotland. Those that find a way of taking Scottish pounds (by discounting them into their own currency via their own banking system) will get the trade. Those that don’t will lose the exports to Scotland.

    A Scottish government should refuse to operate in anything other than Scottish pounds and should offer import opportunities to those foreign salespeople prepared to take Scottish pounds over anybody else. You open up your country to exporters to your nation. If there are no takers then you cut your coat to your cloth based upon the current terms of trade.

    The solution is the same as within any country. You euthanise the rentier by removing their passive income.

    I have yet to see a convincing argument as to why a hoarder with a foreign address is a different problem from a local one. The problem seems to be that people are fixated on national borders rather than seeing the currency area as a dynamic thing that has people popping in and out of it (which covers global currencies and dollarisation in the same viewpoint).

    That’s why I like the Scottish question, because the separation of Scotland from the UK is just a division within the same set of people. Why would the separation of Scotland from the UK change the problem of wealthy Londoners owning Scottish buildings and extracting rent from them?

    Consider what the Norwegian Sovereign Wealth fund owns – just as an example. Shares, property, bonds in Sterling. When it receives the coupons, dividends and rent it then buys more Sterling assets with them. What does that do? It just forces up asset prices in the UK focussing the economy on producing assets, rather than actual goods and services.

    So the profit outputs go to those who trade assets to those who hoard assets. Also known as ‘rich people’.

    If you want to encourage saving,

    (i) why do it with an instrument that is permanently tradable in an infinitely liquid market backed by HM Treasury as buyer of last resort?

    (ii) why do it with an instrument that can be held by business and banks and gives them a risk free income for doing nothing?

    Surely if you wanted to encourage saving for whatever reason you’d do it with five year Granny bonds at National Savings that can only be held by individuals?

    Gilts are there so that government can pretend private pensions are private and not a state pension/tax collection system in disguise. Index linked gilts were specifically brought in at the request of the pension industry.

    The rest are used as collateralisation instruments in the finance industry which is why, as Bill mentioned in one of his many blog posts, the Australian finance industry begged the government to continue issuing government bonds when Australia was running a surplus. Again this is so that we can pretend that the banking system is private and not a state franchise.

    There is, and remains, no need for government bonds. It is just a corporate welfare payment.

  3. Derek Henry says:

    The difference is that the bank account the Scottish government uses will bounce cheques when they reach their overdraft limit. Payment authorisation would be refused without HM Treasury permission. Just like any other local county council area in the UK.

    Nicola thinks she’s running something other than a glorified county council.

    She isn’t.

    Remember that savings is essentially voluntary taxation. It frees up resources to purchase. Which is why you don’t worry about the numbers, you worry about the unemployment and you worry about the level of capital investment in productive capacity.

    Which are the first two rules of “functional finance ” George.

    The UK does the tax collection across the UK. Scotland is nothing more than a glorified county council. If you did the accounts for North Yorks County Council you would find it too has a ‘deficit’ that is filled by the block grant and whatever ‘borrowing’ HM Treasury permits.

    Here’s the gory details:

    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/479717/statement_of_funding_2015_print.pdf

    So the leakage out of the arbitrary line of the Scottish border within the Sterling currency zone is to anywhere else in the world (including the rest of the UK) – and the rest of the UK saves a lot of Sterling. That leakage, plus any net savings within Scotland, is what causes the Scottish government sector deficit.

    Ultimately in the same way that Greece needs to tax German savers, Scotland needs to tax UK savers. To have the power to do that you need UK savers saving in Scotland’s own currency which the Scottish government can control and if need be tax. Otherwise Scotland will run out of money as it all drains to the rest of the UK. The

    Foreigners save your currency if they want to sell you more things than they want to buy from you. The floating rate would make sure that

    export+foreign savings = imports in terms of the Scottish currency.

    You can tax it because it is the Scottish currency, and therefore to transfer it to anywhere where it is anything other than inert it would have to go through banks that are licensed by the Scottish authorities to deal in that currency. They will do as they are told if they want to retain their licence.

    Oil is a hug red herring. An enormous canard. It becomes important because although all the dealings are essentially in US dollars and most of the balance sheet is in US dollars, when it is reported in the national accounts it is declared in the reporting currency – which is the Scottish currency. So it’s an accounting trick mostly to make the figures look ‘good’ superficially. The actual Scottish effect is just the fraction of the oil income that has to be physically exchanged for the Scottish currency – to pay staff, suppliers and of course the licence fee and other taxation for the resource.

    Spending only comes back if you have your own currency. If you use somebody else’s then it leaks into a different banking system. Greece spending ends up under the control of the Bundesbank. Similarly Scottish spending ends up under the control of the Bank of England, which is owned and directed by the UK government. As long as that arrangement stays in place, Scotland is owned and directed by the UK government – like any other county council.

    That is the key issue with fixed exchange rates. You end up with control of the money under some other entity which you have to follow the directions of.

    If Scotland became independent then what happens depends upon whether it floats its own currency or not. That is the only way to ensure that Scottish money doesn’t leak anywhere. What the size of the government deficit is will still depend upon how many people want to net save in that currency.

  4. Derek Henry says:

    Important factor on this discussion is that Common Weal don’t understand trade. It is no big secret, Both Craig Dalzell and Craig Berry will admit it if you ask them. Well in private anyways. At the moment they can’t grasp the government accounts when it comes to trade. They both have a fetish along with Robin that Scotland should export its way to growth.

    You’ll never hear these 3 talking about what really matters and that is the “real terms of trade”

    Here’s a breakdown of the basics pages 59-62

    http://moslereconomics-kg5winhhtut.stackpathdns.com/wp-content/powerpoints/7DIF.pdf

    What does that actually mean ?

    The real wealth of Scotland is. Think of it as your pile of stuff. That’s your real wealth. Goods and services. Everything from Haggis to healthcare. Goods and services. That’s your real wealth. So your real wealth is everything you can produce when everybody’s working. That’s how you get the most real wealth.

    Plus whatever you import adds to your pile of stuff. Whatever you export subtracts from your pile of real stuff. Now I did not say that exports don’t help the exporters. Yeah, it helps those people. But it is a subtraction of real wealth from the entire economy. The exports are your cost of imports.

    Back in the old days we called that ‘real terms of trade’. So to optimise your prosperity, you make everything you can with everybody working, and then you add to that with imports, what people export to you. Then whatever you must export, you try and get as many imports as you can.

    If you can export 100 tonnes of Salmon and get a tonne of something you can’t produce yourself, that’s good. If you can export 100 tonnes of salmon and get 2 tonnes of something you can’t produce yourself, that’s better. Real terms of trade, that’s the important thing.

    The United States doesn’t even publish the trade deficit or surplus between the states.

    An Indy Scotland needs to look at what I call “Key real resources” or “Key goods and services” that we can’t produce ourselves. Then we must export what we can produce ourselves to get the currency we need to buy those “key” products from other countries. Get as many as we can for from what we export real terms of trade.

    Anything above and beyond that is a complete waste of time. Both Craig’s should realise that in a world with diminishing real resources. It is a pointless excercise a dumb idea.

    Otherwise, you just keep using up your own skills and real resources to send goods and services away and after you have bought the imports you need you just end up hoarding foreign currency at a foreign central bank somewhere. Blips on a foreign central bank spreadsheet that you will never use. As these countries have found out the hard way after using up their skills and real resources and shipping goods and services to the United states. They just end up hoarding US treasuries.

    https://ticdata.treasury.gov/Publish/mfh.txt

    It would be pointless for an Indy Scotland to just hoard Euro’s at the ECB, Yen at the bank of Japan, Pounds at the BOE and dollars at the FED. Hoarding is dumb idea you get what imports you can’t produce yourselves and that should be the end of it. Run a balanced trade policy.

    An Indy Scotland should also start thinking of import substitution and we should start looking seriousley at what exports we can cut back on and instead of using those exports to get the imports we need. We start making those goods and services ourselves.

    At the end of the day in a world of diminishing real resources it boils down to this. What does an Indy Scotland want “our” skills and real resources doing.

    a) Making goods and services to send abroad that allows other countries to free up their skills and resources to do something worthwhile with their time ?

    b) Make goods and services for “public purpose” in Scotland improving everyone’s well being at home ?

    I know why the common weal can’t quite grasp it yet. They’ve been indoctrinated by universities they studied in and can’t get their head around the dynamics of floating rate exchange systems and still stick to fixed exchange analysis based around apparent Kaldorian views. Views they were taught at University.

    The Kaldorian viewpoint was debunked years ago.

    http://bilbo.economicoutlook.net/blog/?p=32931

    The key point is that if a currency moves down so that imports become ‘more expensive’, then the ‘inflation’ that goes off is a distributional response that tries to eliminate some of those imports so that the exchange demands equalise. That also eliminates somebody else’s exports.

    The important thing to remember is that when a currency goes down, all the others in the world go up in relation to it and nations that rely upon exports (export led nations) start to lose trade – which depresses their own economy.

    Any one of those other economies can intervene in the foreign exchange markets, purchase the ‘spare’ currency and that will halt the slide for everybody. And all exporters to an import nation have a central bank with infinite capacity to do that.

    Export-led nations have to constantly provide liquidity into the rest of the world to allow others to buy their goods. Otherwise the rest of the world runs out of the particular money that is needed for the export transaction to complete and the export never happens (UK buyers buy Chinese goods with GBP, but Chinese workers are paid in Yuan. The relative shortage of Yuan due to the export differential has to be provided by the Chinese or Chinese goods become, in absurdum, infinitely expensive).

    So the important insight, is that exporters need to export and the central banks that support that policy with ‘liquidity operations’ will ultimately halt any slide for any important export destination – either explicitly or implicitly through their own banking system.

    Every analysis I’ve seen analyses the situation from the point of view of the currency that is being depressed. Almost none look at it from the exporter’s point of view. So where are the goods they no longer can sell to the importer going to go in a world where overall export growth is fundamentally limited by the increase in world income? In a world where ‘export led growth’ is the insane mantra, that is a mistake and leads to a mistaken view and mistaken policy recommendations.

    So its a bit like borrowing from a bank. If you import a little then the exporters own you. If you import a lot then you own the exporters – because they then have nowhere else to go.

    The shift to manufacturing in the 3rd world has generated a huge export overhang with the West. They *need* to export to the West or their economies collapse. And that is one of the reasons why the Western currencies have remained valuable – because the Eastern countries are forced to run up huge stockpiles of the stuff to enable their economies to work.

    And that will continue until they realise they are being had, eliminate the export overhang and move to domestic consumption. You’ll note that the Japanese have only just done that, so it ain’t something that is going to happen overnight. China has talked about running a trade deficit instead of a surplus for 5 years now.

    For me the policy response to sliding currencies is to control the distributional inflation by temporarily banning the import of ‘luxury’ items. That forces the problem onto the exporters, which they can relieve by systemically intervening and fixing the currency imbalance. Forcing them to do what they normally do through the course of trade.

    No country has an automatic right to import any more than it exports. The corollary to that is that no country has an automatic right to export more than it imports. It has to buy that right – either by stockpiling foreign financial assets or by convincing a bunch of dumb countries into a monetary union so that it can export its unemployment to them – Ecuador vs. USA, Greece vs. Germany and arguably Scotland, Wales and Northern Ireland vs. England.

    So let’s stop looking at this problem from the wrong end.

    It’s the exporters stupid.

  5. Derek Henry says:

    The UK is an island economy that exports demand to the rest of the world. In a world short of demand that means the rest of the world has to retain access to that demand somehow — or they have to take the economic impact on their own export led strategies.

    For a country to have excess exports it has no choice but to save other currency denominations to excess. Otherwise its own currency goes sky high and kills the excess exports. This is why there are ‘sovereign wealth funds’ and huge hoards of currency and financial assets held by offshore entities. They are a consequence of excess export policies across the world and the currency management that enables them to exist.

    If you ban UK exports to your nation, or you refuse to take them, or you put extra taxes on them, or you refuse to buy Sterling assets then that means you have to save more Sterling if you want to continue to export to excess to the UK.

    What economists and George always gets wrong is the idea of funding. A current account deficit isn’t funded. For it to exists at all it must already have been funded. Every short has to have a corresponding long. Similarly for every excess import of goods and services into a currency zone there has to be a corresponding external sector held asset denominated in the currency of the import zone. One cannot exist without the other. It is a simultaneous requirement in a floating system. If any step along the way fails the whole deal falls through, eliminating both sides instantly.

    Why they still stick to fixed exchange analysis based around apparent Kaldorian views.

    By focussing on a country, with fixed borders and a consolidated ‘Rest of World’, they appear to miss the subtleties in play that become apparent when you look at the issue from a different point of view.

    The classic one is believing that “foreign” is quite different from “domestic”. It really isn’t that different at all.

    Once you take the MMT view of the situation and study the government accounts, you see that there is little difference between somebody holding, say, Sterling Savings in Birmingham, Alabama from somebody holding Sterling Savings in Birmingham, England.

    Both are a drain from circulation in the Sterling currency area and free up capacity in the real economy within that area, because saving denies somebody an income further down the spending chain. Both may provide capacity to buy something in the future and, outside of cash or a basic deposit account, both are likely to provide some sort of income in Sterling.

    Both can be taxed. Sterling accounts are all transitively linked to the Bank of England via chains of other Sterling accounts. That’s what makes them Sterling. (Yes that applies to Euro currency deposits as well — ultimately they have to clear via the Sterling banking system to be worth anything and that allows authorities to collect back taxes on a remittance basis).

    Foreign entities are holding your currency as savings. Similarly, financial products denominated in your currency are held as savings. Savings are, in effect, an export product of your currency area.

    If your country relies upon oil exports and people stop wanting oil then you may have a problem. If you rely on aircraft engine exports and there are no orders for new aircraft, you may have a problem. If you rely upon people taking your savings (because they had an export-led policy — which implies a savings-import policy) and that changes (the export-led policy moves to a domestic-led policy, as we’re starting to see in China) then you may have a problem.

    To mitigate, you would make sure your exports are sufficiently diversified and decoupled — including the level and global distribution of exported savings. In other words you take a portfolio approach as a matter of policy. Make sure you have your eggs in as many baskets as possible and don’t keep the baskets all in one continent.

    Sovereign wealth funds rely upon your export of savings to exist. The Norwegian Wealth Fund allows Norway to supply oil (and the odd salmon) in exchange for savings products. The Wealth Fund has no policy other than to accumulate savings products over time — which gives it a huge amount on the asset side of its national balance sheet. Norges Bank can then discount this asset into Krone for its domestic money supply purposes.

    And that is the first brake on the ‘what happens if they spend it all’ fear. Foreign financial assets are the balancing asset for the country’s own money supply. It makes the numbers at the national level look good. They won’t be getting rid of it in a hurry until that view changes. And that view is unlikely to change if the country is running an export-led policy since the two are part of the same ideology.

    But let’s say the central bank purges its neo-liberal types and hires some people who realise central banks can’t go bust in their own denomination. They ignore the sovereign wealth fund, say it is a silly waste of time, and stop worrying about the inevitable mark up to ‘Other Assets’.

    And let’s say the Norwegians elect the Hedonistic party that promises to swap their huge hoard of savings for actual stuff and blow it all on imports. What is all that spending going to do to your economy?

    It is going to cause an export boom. (Which everybody is desperate for in the present, but apparently is a terrible thing in the future. Answers on a postcard…)

    Will that stop or reduce domestic spending in your currency area?

    Probably not, because if your investment expansion caused by the boom is insufficient to handle the load, you can always rely on that circuit breaker — more imports.

    It goes something like this:

    The Norwegians order stuff from your currency area backed with their hoard of savings.
    Your economy ships stuff to the Norwegians in return for their savings in your currency.
    Exporters have an income and pay people.

    Those people then start to buy stuff, but everybody is working for exporters and there is nobody to make anything (allegedly).
    Other nations on the planet — running export led policies — spot the wealth in your nation and turn up in droves to sell their wares.
    You buy imports and they keep the profits as savings (possibly in their own sovereign wealth fund).

    The net effect is that the Norwegians reduce their savings in your currency and other export-led economies run up savings in your currency. So you spread the Norwegian demand around the planet to the extent that you can’t satisfy it yourself.

    But let’s say that, for some reason, nobody wants your savings — even though there is a boom on and everybody is making loads of money. So you can’t rely on imports, or foreign direct investment, because the rest of the world has developed ‘mainstream economics’ disease and desperately wants to preserve a dying model they fervently believe in even though it makes no rational sense whatsoever to expect multiple independent nations to behave in unison this way.

    Surely now your domestic consumers are going to suffer under the relentless demands of hard partying Norwegians!

    But what political party is going to favour foreigners over residents who actually vote for them? Only those no hopers who have zero chance of ever getting elected.

    A party in government — having encouraged the private sector to automate, innovate and invest as much as it can — would put in place export restrictions. One such approach would be a volume restriction. You would issue Norwegian export licences to a set value in Sterling and auction them off to the highest bidder. That makes servicing export orders more expensive than servicing domestic orders and firms will start to take that into account when they decide to accept an order. There are many other approaches, including: restricting withdrawals from Sterling accounts owned by foreign entities, large fees for exports, and randomly delaying exports in customs so firms don’t know when they’ll get paid (this one may already be in place).

    You’ll note that you could swap out Hedonistic Norwegian Foreigners and replace them with Wealthy Domestic Cotswolders and the results would be pretty much the same (slightly less Viking, slightly more Saxon perhaps). Rich people with lots of money might decide to spend everything as well. So should we ban pensions — just in case?

    What about the currency effects, you might ask. Well if an economy is in boom time, exporting like crazy and making profit hand over fist, is the currency going to be strong or weak at that point?

    Now that the ‘bond market vigilantes myth’ has been slain, the ‘foreign debt holders’ myth has sprung up in its place. It’s just another excuse to maintain the globalist, creditor first viewpoint and to try and stop politicians being elected that put the public good of the domestic population first.

  6. Derek Henry says:

    They used to tell the story about a guy who claimed he could make cars out of wood, and he started a company in Inverness that brought trees into one door of his giant building with new cars coming out of another door, and he wouldn’t let anyone inside to see how it was done.

    He was given a award for innovation and widely acclaimed, until one day someone got inside and saw he was shipping the trees out the back to Japan and bringing in new South Korean cars. He was then arrested and jailed.

    Point is, for the macro economy it didn’t make any difference what was going on behind those closed doors, and that for purposes of understanding one can think of foreign trade as a company that takes in all that they can export aand delivers back whatever is imported.

    This model also promotes the understanding of how, in real terms, exports are the costs of imports, and optimising real terms of trade is about getting the most cars for the fewest trees, which is likewise what productivity is all about for the domestic economy.

    What about the jobs lost due to increased productivity? Well, history shows it used to take 99% of the workforce to grow the food they needed to eat to live, and today it takes maybe 1% of the workforce to grow enough food to eat with a lot left over to export. Yet, unemployment isn’t necessarily any higher today than it was back then.

    Why? Because there’s always a lot more we think needs to get done than their are people to do it, and unemployment comes from a lack of funding, and not a lack of things to do. Today the service sector dominates, and more so every day, with services we’d like to have done as far as the eye can see. And unemployment, as currently defined, is necessarily the evidence that for a given level of govt expenditure the economy is over taxed, as a simple point of logic. Not that policy makers understand that, of course.

    Now let’s add a Trump border tax to the model, for the purpose of creating jobs and bringing them back home. A border tax would put a tax on importing the cars to attempt to keep us from buying them so we would have more jobs building cars domestically, and reduce the tax on exporting the trees so we would have more jobs cutting down and shipping out trees.

    Let’s assume that’s what happened and look at those consequences. First, we would be shipping out more trees and getting fewer cars. This makes the nation as a whole worse off due to those reduced real terms of trade. The next step is to identify the winners and losers, recognising the losses to our standard of living are higher than the gains.

    Best case scenario is we put more people to work growing more trees so we have just as many trees for ourselves, and we’d put more people to work building cars so we’d have just is many cars as before. So what we accomplished is that we are working more to be left with the same amount for ourselves.

    That’s called a drop in productivity, and a decline in our standard of living, as work is an input and a real cost of production. Work itself is not an economic benefit. The economic benefits of work is the output produced. And the whole point of producing output is consumption of some type, either for immediate use or for future use. That is, makes no economic sense to work and produce output for the purpose of immediately throwing it away.

    So with the above ‘best case’ assumptions, the border tax does work to create jobs, and unemployment is a political problem, which is why the border tax has that element of political appeal.

    However, surely a better choice for job creation would be a fiscal adjustment, either a tax cut or spending increase, large enough to promote sufficient spending to increase sales, output, and employment to produce that additional output. That way we have that much more domestic output to consume plus all the imported cars we were buying before the border tax, and we don’t have to give away the extra trees due to the border tax proposal.

    And how does it look from the government’s point of view?

    First, the government expects extra revenue (not) from the tax on the imported cars, net of the revenue lost from tax benefits for exporters. This means less spending power for consumers paying the tax, presumably offset by new tax cuts, making it all revenue neutral, which through some presumed channels in theory is to to have its own positive consequences.

    So in this ‘best case’ scenario we would work more and get less, while consumer taxes go up while other taxes go down. But that is only the economic best case scenario. All kinds of other things can happen, with the same model used for purposes of analysis.

    Tariffs Won’t Make America Great Again

    https://www.pragcap.com/tariffs-wont-make-america-great/

  7. Derek Henry says:

    To understand the sort of logic that George is using in this piece, mainstream economics tries to draw an analogy between the household and the sovereign government such that any excess in government spending over taxation receipts have to be “financed” in two ways:

    (a) by borrowing from the public; and

    (b) by printing money.

    Of-course, the analogy is flawed at its most elemental level. The household must work out the financing before it can spend. The household cannot spend first. The government can spend first and ultimately does not have to worry about financing such expenditure. The mainstream framework the George uses in all of his blog posts and media articles for analysing these choices is called the government budget constraint (GBC).

    The GBC says that the budget deficit in year t is equal to the change in government debt over year t plus the change in high powered money over year t. So in mathematical terms it is written as:

    https://i0.wp.com/bilbo.economicoutlook.net/blog/wp-content/uploads/2009/03/gbc.gif?resize=210%2C24

    Which you can read in English as saying that Budget deficit = Government spending + Government interest payments –Tax receipts must equal (be “financed” by) a change in Bonds (B) and/or a change in high powered money (H). The triangle sign (delta) is just shorthand for the change in a variable.

    However, this is merely an accounting statement. In a stock-flow consistent macroeconomics, this statement will always hold. That is, it has to be true if all the transactions between the government and non-government sector have been corrected added and subtracted. So in terms of Modern Monetary Theory, the previous equation is just an ex post accounting identity that has to be true by definition and has not real economic importance.

    Money creation is erroneously depicted as the government asking the central bank to buy treasury bonds which the central bank in return then prints money. The government then spends this money. This is called debt monetisation which is deeply flawed. George claims that if the government is willing to increase the money growth rate it can finance a growing deficit but also inflation because there will be too much money chasing too few goods!

    The money base changes every time the government spends because bank reserves rise. But the dominant paradigm argues that this will be inflationary and thus demands that institutional arrangements be set in place so that the governments match the deficits £-for-£ with bond sales. They even go so far in some countries as forcing the government to issue the debt first and then spend out of the account the debt sales accumulate.

    All of this is a total smokescreen. But the point is that the change in high powered money (H) will be zero and the change in Bonds (B) will equal (G-T) in any period.

    The Truth being “deficits are our saving”

    http://bilbo.economicoutlook.net/blog/?p=10384

    This link makes a mockery of the mathematical model used by the mainstream that George seems to follow each and every time. For whatever reason refuses to get passed it.

    And Joe public just can’t get passed the 15 min soundbites repeated ad nasuem framing of ” deficits ” bad ” surpluses ” good narrative. Which is why they also in the main vote against their own best interest.

    Here’s the neoliberal framing used on radio and TV over the last 50 years that have turned sheeps brains into mush. Please tick the ones that have caught you out.

    https://i1.wp.com/bilbo.economicoutlook.net/blog/wp-content/uploads/2017/05/Table_8.1.png

    And this what they really mean

    https://i1.wp.com/bilbo.economicoutlook.net/blog/wp-content/uploads/2017/05/Table_8.2.png?resize=640%2C901

  8. Derek Henry says:

    To complete the full picture

    If you have ever asked yourself ” what are reserves in the monetary system ? ”

    Want to know the answer

    JD Alt is putting together a wonderful series for the layman.

    The People’s Money (Part 1)

    http://neweconomicperspectives.org/2019/10/the-peoples-money-part-1.html

    The People’s Money (Part 2)

    http://neweconomicperspectives.org/2019/10/the-peoples-money-part-2.html#more-11606

    The People’s Money (Part 3)

    http://neweconomicperspectives.org/2019/11/the-peoples-money-part-3.html#more-11612

    You really need to learn this so that you do not get fooled by the neoliberal language and framing on the BBC.

    Or choose to stay in the dark it is up to you. If you want to still believe we use the gold standard well more fool you.

  9. SleepingDog says:

    I am pretty sure Big Oil is already pretaliating, even as a cultural movement to end fossil industry sponsorship grows, and a movement to divest clashes with the agents of darkness. It’ll all be in their five-year plans waiting for someone to leak them (or should that be spill them?). But what happens if oil demand should fall off a cliff? If ecocide legislation is enacted with confiscation-of-proceeds-of-crime and corporacide clauses? If, that is, states and financial insurers no longer underwrite fossil fuel investments?

  10. Wul says:

    There’s an interesting comment in a Radio 4 programme this week about Oil*. It suggest that very few nations (apart from Norway and maybe Saudi Arabia) actually benefit financially from being oil exporters.

    Oil appears to make the countries that export it, poorer and more unstable.

    https://www.bbc.co.uk/programmes/m000bg3p

    * “50 Things That Made the Modern Economy” BBC Radio 4, Thursday 14th Nov.’19

    PS: Totally agree about the need to “de-energise”. A much more resilient and achievable strategy than endless energy consumption growth, whatever the energy source. It’s never mentioned in anyone’s manifesto though. Why? “Bad for business” perhaps?

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