This news item is the Scottish expression of the National and Regional Economic Councils that Gordon Brown MP announced in London as “new governance” is supposedly required.
Scotland’s C.E.A. in need of advice
In “The Scotsman” of Saturday 6th December 2008 we were introduced to the 11 members of Scotland’s ‘Council of Economic Advisers’ – an august body of Economics Professors, three business men and a former Bank Chairman, who were putting forward their plans to lift Scotland out of the economic mire and on to the road to recovery. The headline “Let’s build our way out of this”, flattered to deceive, because it was followed immediately by the panel’s recommendation that “the Scottish Government should BORROW money to fund a recession-beating public works programme”.
Whether, as an individual or a Nation which is already in debt, you don’t become solvent by borrowing more and going deeper into debt. The type of debt we are mainly talking about is that put out by Banks, on which a further charge of interest has also to be paid. So the principal + the interest charge has, at some time, to be paid ‘back’ to Banks, who themselves did not have real money to lend in the first place. They would in most cases have made a book-keeping entry on a computer screen in order to lend out this ‘debt’ which they call ‘credit’. Even all this so-called ‘liquidity’ which is pumped/injected into Banks black holes by the Federal Reserve in America and the B of E in the UK are officially loans. So our Government’s debt borrowing, we are told, will be going up to over one hundred Billion pounds, which we are warned will have to be paid back by our tax payers. Well not exactly; the taxpayers will never be able to pay this off; it goes on our National Debt. What they will be asked to pay, each year, is the interest which will be some £50 Billion, and this has to be paid out to those who supplied the credit/debt, before any spending on hospitals, schools, roads and associated infrastructure can be ‘funded’ with what is left. Little wonder then that ‘Prudence’ has accompanied the bath water down the drain. Indeed Gordon Brown, prior to the abandonment of the Stability and Growth Pact, had wedged it sideways by saying instead of keeping to yearly rules it made more sense to take it over the 7 year business cycle.
The ghost of the oft-misunderstood J.M. Keynes is resurrected to justify our present erroneous Political Economy of pouring debt money into consumer retail spending which is supposed to make everything right in our own little financial world. Sitting in the middle of the world’s financial black hole are derivatives. For a full definition of what they are, look it up on the internet. Suffice to say they are financial bets which in themselves have no intrinsic vale. Indeed, Warren Buffet called them “weapons of financial mass destruction”. [Derivatives trading was legitimized some years ago by the then Fed chairman, Alan Greenspan; the same person who was giving away money at 1% interest.] To give some idea why this metaphorical hole is also insatiable, I ask you to assimilate the following: in 2005, derivatives were 5 times all Bank assets of the world; 6 times world GDP; 7.5 times all stock market valuations in the world; and then in 2007, only 2 years later, the derivatives figure itself has increased another fourfold.
What we are currently doing both in the UK and in the USA is akin to putting a ‘Band Aid’ (sticking plaster) on the patient’s open wound after open heart surgery instead of wiring up the rib cage, carefully stitching inside and outside wounds, giving over a place in intensive care prior to being released into ward care, and then, and only then, being monitored on the path to recovery in the outside world. The financial diseases which cause us to come out in painful bubbles on an ever-recurring basis are symptomatic of Financial Capitalism, lurching to extremes in a manic-depressive, illogical manner.
There are many historical instances of people, in worse circumstances than we are in right now, pulling themselves up by their own bootstraps. I will give but two examples.
Germany just after the Second World War was left with Reich Marks, which were so devalued as to be almost worthless. One of the main players in creating a new currency, Deutsche Mark, was a Bavarian politician named Ludwig Erhard – an avuncular, portly, experienced politician who would not tolerate opposition to his ideas because he knew he was right. He had to convince not only those in power in other political parties but had to deal with the three overlords of the American, British, and French sectors – the Russian sector always went its own way. While the Russians ripped out all the machinery they could get their hands on and sent it back to Russia, the more sensible ‘West’, especially the British, saw that the path to recovery was to help the West Germans to help themselves. So the British Army actually were the ones who started car production again of Volkswagen cars, at a time in Britain when only doctors and essential others could apply for a rationed motor car. Production of real assets was the first priority. They stopped the black market in food, clothing, rent, and raw materials. Electricity, gas, water, coal, house rents, and public transport were controlled. Anti cartel and anti monopoly legislation was enacted, and debt was discredited in such times. This was 1948. The new West Germany was born and so was the rise of the new German mark. It was possible to exchange old currency for new, but the old elite had lost almost everything and they too had to start again. There was limited social credit. The young and old were set to work and paid a wage in the new currency, removing them from the black market by also putting previously horded goods into the shops to be sold on a legitimate basis. Some of the most likely higher earners had additional money put in a bank account for them, which could not be accessed until a future date. Even today, the now united Germany is more astute in times of turbulence, as many of them remember their history of a worse financial crisis during the Weimar republic.
The second example is the little island of Guernsey after the Napoleonic war in 1815. As a Crown Peculiar or Dependency, its cri de Coeur fell on the stony ground of the British Parliament. All wars devour money and this one was no exception. Even before that, Guernsey had a crippling public debt on which it was paying 12% interest annually, trying to balance this with an income barely in excess of the interest payments. The sea wall defences were in danger of crumbling and a mini Katrina beckoned. They had a ready and willing labour force and plenty natural stone and other materials, but there was no money. More borrowing was not an option. Do they just sit there until the sea washes over them? A body of citizens realised that money was not wealth; their wealth was in their community’s assets. The citizenry were consulted and the States Parliament agreed to a monetization of a certain number of their real assets. They issued an amount of their own currency notes limited to their required public works programme and spent directly to that. All people involved were paid in these notes, with the result that they circulated in the community and were accepted, as they were seen to have real purchasing power. The money was to be redeemed after a few years through taxation to allow an issue to be cancelled. This was redeeming a CREDIT, not paying off a DEBT with its concomitant Interest. It was so successful that many other future note issues were thus put into circulation. Sadly in the present day, the Channel Islands, particularly Jersey, are looked upon as tax havens for wealthy outsiders, to the detriment of the indigenous population.
So the recommendation of the C.E.A. is for the Scottish Government to borrow money in order to fund a recession-beating public works programme. Like the second bit: hate the hackneyed idea of going into yet more debt. Where is the ersatz ‘money’ to come from?
The UK Treasury/Bank of England is already tuckered out trying to save the whole of the UK and the world. The National Debt will be rising to over a Trillion pounds shortly. There is little hope of going to what were Scotland’s two greatest Banks: one is dead and the other is almost terminally ill. PFI was an old labour ruse to keep expenditure off Balance Sheet and instead saddle forthcoming generations with payback of principal + interest + other costs and in many cases the public won’t own the asset, even at the end of 30 years. PFI currently stands at abut £50 Billion. PFI has been seen for what it is and our SNP majority doesn’t like it, both financially, and politically because it was prescribed by the previous Labour majority. SNP is floundering about trying to find an alternative slot where they can jump onto this carousel of debt. Scottish Futures Trust is just that: something for the future where the hope is that someone somewhere will buy bonds or otherwise finance projects. Public sector pensions provisions will be unaffordable and therefore unsustainable in their present form. All of our Local Authorities are so heavily in debt themselves, it is no use looking in their piggy banks. The SNP could invoke the so-called Tartan Tax, which could be political suicide. Scotland is a Nation but within the true governance of the Westminster parliament. We can have our own police but not our own army. [We cannot even keep many of our own Scottish Regiments.] We can’t have our own money as that would contravene UK and EU laws. We cannot in Scotland’s name cry out to the IMF. We seem to be at the end of the road, where as one door closes another one is slammed in our face.
The Scottish Assembly/Parliament/Government can change its name, but like a toddler in reins it is limited in how far it is allowed to run. There is a way to fund our public works programme without borrowing debt from banks, and that is effectively to monetize our public assets. Tokens can be defined as a type of currency circulating as a means of exchange. The Scottish Government could issue SCOTs, where a SCOT is defined as “Scottish Currency Official Token”. Such paper tokens, backed by the Scottish Government, could be issued for example to build the new Forth Bridge. The contractors in receipt of these could pay their men with the same SCOTs paper, which in turn would have full acceptance in Scotland. The cash strapped Councils could accept SCOTs in payment of Council Tax and a further round of circulation would take place. The broad principle is not new, nor novel, as it has been successfully effected throughout history in many places. Each case is different and the detail has to be tailored to the specific circumstances of the time. While there will be many who will bring up reasons why it cannot be done, we and they should be thinking how it can be done.
Ronald J. Rankin [email@example.com] December 2008