Independent or not, Scotland will still be vulnerable to monetary
manipulation by other nations, writes Peter Jones
While we in Scotland have been engaged in our own little currency
fisticuffs over post-independence sterling unions and the like, the rest of the
world has been worrying about the next round of what some fear is a global
currency war. Regardless of how our domestic currency debate pans out (I’ll
give my view on that at the end of this column), the real world currency
battle could radically re-shape the global economy in which the Scottish
Government wants to be a new player in 2016.
What is a currency war? The term was coined by Guido Mantega, Brazil’s
finance minister, in 2010. He was concerned that other countries – mainly the
United States – were manipulating their currencies to reduce their value, which
would make Brazil’s exports to them more expensive, damaging Brazil’s growth
and employment prospects.
On the other hand, American exports would get cheaper, boosting world
demand for them, increasing US output and jobs. So Brazil, Mantega fretted,
would be the loser and America the gainer, just through a bit of currency
Cynics note that American policy-makers call what they are doing
“monetary policy” (intended to achieve good things for the US economy), but
when others do it, Americans call it “currency manipulation”, ie, other people
doing bad things.
In Britain and Europe, the Bank of England and the European Central Bank
(ECB) have been doing it too, except that in our snooty old world way, we call
it “quantitative easing” (QE) or “unconventional monetary policy”. The intended
effects, however, add up to the same thing.
How is it done? The conventional way is for a central bank to reduce
short-term interest rates, making the currency less attractive to overseas
investors, which reduces demand for it, so causing it to fall in value. But
these days interest rates are already close to zero.
The next stage is unconventional: increasing the amount of money
available. This, in domestic terms, is intended to have virtuous effects. The
process gives commercial banks more money to lend, which should make more
mortgages and more business loans available, so stimulating activity.
But two secondary, or spillover effects, may not be so virtuous. If the
supply of money increases faster than real wealth in the economy does, then
inflation should occur. This means that the real interest rate paid to
investors becomes lower than the nominal interest rate and can even be negative
– ie that money put in a supposedly safe place loses value even when the
interest paid is taken into account.
Currency investors, being smart people, know this, so they stop buying a
currency until it reaches a lower value where expected future increases in its
worth (caused by its economy improving) are better than the predicted loss in
value caused by inflation.
These two, potentially negative, spillovers may be counterbalanced by a
third, potentially positive, spillover effect. This is that the economic
stimulus caused by monetary expansion may be so big as to stimulate other
economies. Consumers may become so buoyant that they increase their spending on
not just domestically produced goods (which may have a lot of imported
components) but also in imported goods.
Complicated, I know, but if you are still with me, we have now reached
the point where there is a big debate – is quantitative easing having overall
good or bad effects? And are policy-makers – in concentrating on short-term
benefits – ignoring the long-term problem of inflation?
The short answer is that nobody really knows; debate on the topic is
fierce. And despite there being lots of analysis done on the QE that has
occurred over the last five years, and on when it happened in the 1930s (when
countries devalued by abandoning the gold standard) the evidence is pretty
Tomorrow, we will learn whether the US Federal Reserve will carry on
with its QE programme of expanding the money supply by about $85 billion a
month (the expectations are that it will), and on Thursday whether the ECB will
cut its interest rate (market folk reckon it will, but not until June). The
Bank of England is thought likely to indulge in more QE sometime this year, but
probably not at next week’s meeting of the monetary policy
Meanwhile, Japan’s central bank is aggressively using QE, having
announced this month it will try to end two decades of economic stagnation by
pumping a massive $1.4 trillion into the economy.
Amongst QE practitioners, the Bank of Japan is unusual in that it has
quite explicitly said its aim is to cause inflation. The reason is that the
cause of the stagnant economy has been deflation, causing consumers and
companies to hoard money rather than spend it. The prospect of inflation, it is
hoped, will cause people to go out and spend.
The immediate effect of QE has been to cause the Japanese yen to fall in
value, prompting Japanese investors to bring back money held overseas, yielding
a profit, and to invest it in the Japanese stock market, where there ought to
be still more profits to come from a stimulated economy.
To me, what this adds up to is that the proof of the QE pudding will
only come in a few years, when we will know whether the desired outcome – more
economic growth – has happened. I side with the doubters. Growth is not
happening in Britain or Europe, and while it is occurring weakly in the US,
that is arguably because of cheap energy prices rather than QE.
It is too soon to know the outcome in Japan, and meantime there are
ominous signs of slowing growth in China. And if global economic growth does
not match monetary growth, we will be stuck with inflation, meaning declining
real incomes and savings, plus asset price bubbles.
This is not a pretty prospect, whatever your position on independence.
In the union with sterling, or independent and still with sterling, there is no
escaping it. There is a case for a separate Scottish currency, but that also
has other costs and, as any QE-caused inflation will be global, a Scottish
poond doesn’t escape that either.
On this debate, my view is that it would be in the UK’s interest to
accept a sterling union with an independent Scotland, though the inhibitions on
Scottish fiscal freedom would be pretty severe. I suspect, however, that by
September 2014, what to do about inflation caused by currency wars will be a
more pressing question.
Vista School District in rural Michigan cannot guarantee parents that students
will be able to return to school to finish the rest of the school year. A school district in
Buena Vista Township in rural Michigan has laid off its teachers and is not
sure whether students will be able to finish the current school year. Buena Vista School District in
Saginaw, Mich., has run out of money and won't be able to pay its teachers
anymore, prompting anger and concern from parents whose children are currently
enrolled at the school – especially those who will be graduating this year.
this point I don't know – I don't know what's going to happen to them,"
board member Randy Jackson told Michigan's WNEM.com.
The school continued to be closed
Thursday and there is no guarantee as to when students will be able to return,
either for the current school year or the 2013-2014 school year.
"Front doors are still
locked … the superintendent couldn't even get into the high school ... Is
the school year ever, ever, ever going to resume?" asked a WNEM reporter
standing outside Buena Vista High School.
Michigan Senate Democratic Leader
Gretchen Whitmer called on Gov. Rick Snyder to provide emergency funding to
the district, saying that "Michigan's Constitution guarantees each and
every child in Michigan the right to a free education."
More than 300 parents and
teachers showed up at a special meeting Tuesday night, but left with more
questions than answers, WNEM reported. The district is holding a school board
meeting tonight to ask the state for emergency funding and talk about
consolidation plans, a move that has been witnessed in other school districts –
most recently in Chicago – struggling to cope with budget cuts and declining
Chicago Public Schools announced in April that they plan to close 54 schools next
year and shut down 61 school buildings.
Besides budget woes, Buena Vista
School District's enrollment has also been shrinking and is currently down to
The state cut off funding to the
district after it was discovered that the district was mismanaging funds.
According to the state, the school district, which serves a poor, mostly
African-American community, continued to receive money for an alternate
education program from the state even after severing ties with it in 2012.
Buena Vista School District
Superintendent Deborah Hunter-Harvill – who is reportedly looking for another
job herself – did not immediately return calls for comment. Her office told MSN
News that she was busy preparing for tonight's meeting.
Angry parents are lashing out on
Facebook about why the 27 teachers, who agreed to work for free until May 10,
were let go.
"The people of BV... need to
go wake these people up … bang on their doors, show up at the schools, their
homes, park in their driveways, whatever it takes, to make these people
accountable for this. Sitting on the sidelines would not work for me,"
wrote Michigan resident Peggy Mikac on WNEM's Facebook
The district said on its
website that they couldn't allow the teachers to work without paying them:
"We thank the teaching staff for their dedication, and understand their
frustration. However, we must follow the law."
The district's statement says
that it will continue to work with state officials to try and come up with a
plan to continue educating its students, but does not go into any specifics.