Domestic Bonds

A look at Unionist myths of borrowing in an independent Scottish mint

Last week, The Times senior political columnist Kenny Farquharson tried to criticize the SNP’s monetary policy after independence, but in doing so he filled his article with misinformation. One of his assertions was the common myth that an independent Scotland would be forced to pay a premium when issuing government bonds in the financial markets. This claim was made as readers were misled about the monetary policy of the Scottish National Party (SNP). Let’s set the clocks straight.

The policy of the SNP is to introduce a new currency during the first post-independence legislature. The institutions of a new currency would be built during the period of transition to independence. This leaves a window to implement a new currency from the first to the last day of that term. At the SNP’s 87th National Conference, delegates passed a motion noting the preference for an earlier currency, while supporting the drafting of a bill to establish a Scottish Reserve Bank. Any suggestion that it is the policy of the SNP to hold the pound for the medium to long term is simply wrong.

Kenny also mentions the SNP’s six monetary tests, pointing out that their design is essentially an obstacle to building institutions for a new currency. I agree with this point, however, it should be noted that SNP members have also changed the six tests so that a Scottish Reserve Bank is no longer required to follow their advice. Only SNP MSPs are expected to take these tests, which are completely voluntary. Overall, it is clear that the SNP has moved radically away from the vision of Andrew Wilson’s Sustainable Growth Commission (above) to the more progressive vision of the Social Justice Commission.

Let us come to the question of borrowing after independence. What we describe as “borrowing” for countries with their own (monetarily sovereign) currency and central bank is misleading. A better description of these monetary transactions is “asset trading”. When a monetaryly sovereign government issues bonds, it simply transforms normal money into interest-bearing money. This interest-bearing currency will sit in a savings account at the central bank and does not finance any government spending program.

There are two markets for the sale of bonds: the primary market and the secondary market. The first market is that of large capital institutions (multinational banks) while the second market focuses on pension funds, hedge funds, local government pensions and foreign investors.

READ MORE: Why an independent Scotland must reject the euro and use its own currency

There are a few points to consider. First, a monetary sovereign Scottish government would be the boss when setting the terms of bond issuance. The primary bond market is established by the Scottish Government, which sets the overnight interest rate on the bonds it issues. Because bond bidders want access to “Triple A” savings accounts at the Scottish Reserve Bank, they will offer rates close to the government’s target. Those who offer unreasonable rates will lose out on these accounts.

On the monetary side, sovereign governments could go further by fixing long-term interest rates by simply selling bonds directly to their central banks. That’s what the Japanese government did in 2019, selling 6.9 trillion yen in government bonds directly to the Bank of Japan. Japan has achieved this by simply using its monetary levers – something all monetary sovereign countries can do.

Any suggestion that free markets can force a premium on Scottish bonds, as Kenny Farquharson is doing, must be dismissed. Most global bond markets don’t offer low rates out of the goodness of their hearts, but because central banks say so. Also, for bond bidders to put their currency in a savings account at the Scottish Reserve Bank, they would first need to receive it. Therefore, countries that spend in their own currency are effectively self-financing.

READ MORE: How long would it take independent Scotland to implement a new currency?

Opponents of independence will further argue that bond vigilantes will sell their Scottish assets in order to drive up the interest rate on bonds. Not only are there very few such instances in history, let alone a developed and stable economy like Scotland’s, but it makes little sense from a bondholder’s point of view. . They would take the loss and hurt their own portfolios.

Other independence opponents will point out that Scotland is a net importer – which in real terms of trade is positive – meaning there is a ‘leakage’ of Scottish currency to the UK. United. Therefore, if the UK holds Scottish financial assets, we would be forced to borrow from them with a weaker exchange rate and increased levels of inflation.

We now know that is not true. The Scottish Reserve Bank will simply subtract the figures from UK current accounts and add these figures to its savings accounts. It is a simple accounting adjustment using a keyboard and a spreadsheet. The only thing we would need in the UK would be a bank statement. If the UK did not want to put Scottish assets in savings accounts, it would be free to reinvest in the economy or keep the currency in its foreign exchange reserves.

A floating Scottish currency would have no measurable effect on domestic inflation. Canada, a small, open and developed economy with a floating currency, has experienced wild exchange rate fluctuations of 20% over the past twenty years, while the national economy has experienced stable inflation, growth and decline. progressive unemployment. Another case study is Australia, which ran a trade deficit of 20% of GDP (twice the size of Scotland) for almost thirty years, but experienced declining and stable inflation.

A new Scottish currency will not storm the markets, nor will it crash and burn. Instead, it will simply work like most floating currencies – which is disappointing.