New Currency for a new Country

Generali

I thought I'd try to expand out a bit on what I was saying on the [STRIKE]Horrid People Being Mean[/STRIKE] Scottish Independence thread.

IMHO, the best outcome for an independent Scotland would be to go for Option biii, 'The Scottish Groat'. Why? I hear you cry.

Simple. If Scotland goes for Sterling, they lose control of interest rates, assuming they don't want wildly swinging inflation and deflation. There is a truism in economics that there are 3 things in an economy: interest rates, inflation and FX rates. You can choose to control 2 out of 3 but you can't control all 3 in a normal economy due to the links between them.

An Independent Scotland would, for better or worse, be hugely reliant on oil and gas for the exporting part of their foreign trade and also for Government revenues. Oil and gas are sold in US Dollars.

If Scotland were to adopt The Groat (SCG) as a currency, as oil prices rose (priced in US Dollars or USD), The Groat would likely also rise in value. As they fell, The Groat would be likely to fall. Imagine the scenario, the SCG is floated at SCG1 = USD2. Oil prices are $100bbl.

Thus a barrel of oil sells for SCG50. That goes into the current account surplus to be spent on imports.

Now imagine the oil price rises to $200bbl. The value of that oil is now SCG100. However, the market realises that Scotland is now posting a current account surplus and so starts buying SCG pushing the price of the Groat up so that SCG1 = USD2.50. The barrel of oil now sells for SCG80 having gone up by 60% vs the 100% rise in oil prices. The same thing is likely to happen to reverse as oil prices fall too.

A free floating currency would absorb a part of the pretty wild swings in price observed in commodity markets.

If the Groat was pegged to the Pound (GBP) either formally through Sterlingisation or informally via fixed exchange rates or worse Scotland was in a currency union then as oil prices rose, the UK would want to cut interest rates. Why? Because a rise in the oil price effectively acts as a tax on non-oil producing nations without a rise in Government spending. That means the Government/BoE is going to look to stimulate the economy.

At the same time, Scotland would be looking to increase rates as oil dollars washed through the economy, increase the money supply and pushing up inflation. Unless the BoE is going to entirely cede monetary policy to Edinburgh, any large change in the oil price will mean that by definition, Scotland and England will simultaneously require opposite monetary policy responses.

System

The name of the new currency could be shortened from Scottish Groat to Sgroat or even Scrote

Voyager2002

Scotland could open its own oil and gas trading market, priced in another major currency (Euro, for instance).

Alternatively, there is nothing to stop Scotland simply using the US dollar in the same way that other countries do (Ecuador, Liberia, in practice Panama...) That would mean giving up control of monetary policy, something that would also happen if Scotland were to continue using the pound without a formal agreement with London.

CLAPTON

Voyager2002 wrote: »

Scotland could open its own oil and gas trading market, priced in another major currency (Euro, for instance).

Alternatively, there is nothing to stop Scotland simply using the US dollar in the same way that other countries do (Ecuador, Liberia, in practice Panama...) That would mean giving up control of monetary policy, something that would also happen if Scotland were to continue using the pound without a formal agreement with London.

there can only be one effective world price of oil/gas on any given grade irrespective if it trades in groats , dollar, euros or pounds

michaels

If Scotland used sterling but not as part of a formal arrangement how would things like Scottish govt bonds, o under of last resort for Scottish banks and the issue of notes and coins work. For example wouldn't Scottish issued notes effectively be counterfeit?

Generali

michaels wrote: »

If Scotland used sterling but not as part of a formal arrangement how would things like Scottish govt bonds, o under of last resort for Scottish banks and the issue of notes and coins work. For example wouldn't Scottish issued notes effectively be counterfeit?

If option biii is adopted, there is no problem with being a lender of last resort as if Scotland runs out of money she can simply print more, just like normal countries do.

Under an informal Sterling policy (bi/Sterlingisation/Panama Solution), that route would not be open to Scotland. If a bank ran out of cash, either Scotland's Government would have the cash to prop it up or it would not. In the latter case, the Scottish Government could dig the begging bowl out or let the bank fail.

Under a formal currency union, there would have to be some negotiation but I find it hard to believe that the BoE would agree that British holders of Sterling could have their holdings diluted at the whim of a foreign government.

purch

michaels wrote: »

If Scotland used sterling but not as part of a formal arrangement how would things like Scottish govt bonds, o under of last resort for Scottish banks and the issue of notes and coins work. For example wouldn't Scottish issued notes effectively be counterfeit?

If Scootland decided to unilaterally use the currency of another nation, then GBP would be the best choice for millions of reasons, most of all the millions of £ in circulation.

I am sure the toilet paper issued by RBS/BoS and Clydesdale could still be used for exchange within the borders of Scotland, but it would be worthless anywhere else without agreement, and we would be spared the embarrassment of Scots yelling at shop assistants and bus drivers when in England that their note is "Legal Tender".................cos it won't be anymore.

Under a formal agreement for currency union things could continue as now, depending on what is actually agreed and who has the most bargaining chips, but as Gen says it is hard to imagine the Bank or the UK Gov allowing the Edinburgh Gov as much autonomy as they would want on matters that could directly influence GBP.

Overall I think Gen is spot on. If Yes win, then ultimately having their own currency under their own control must be the most logical aim in the long run.

michaels

So under bi wouldn't sco tish bonds be much more risky than uk sterling ones due to the same risk that if Scotland couldn't reborrow to fund redemption there is no printing money route to meet their debts?

And I agree all these risks are.reasons why rUK would not want to enter into a formal currency arrangement unless perhaps if Scotland paid a fee for the privilege?

IveSeenTheLight

Generali wrote: »

New Currency for a new Country

Just a pedantic point, but Scotland is not a new country.
We have been a country for 1,000's of years.

Anyway, back to your main points of your posts.

Generali

michaels wrote: »

So under bi wouldn't sco tish bonds be much more risky than uk sterling ones due to the same risk that if Scotland couldn't reborrow to fund redemption there is no printing money route to meet their debts?

There would be that risk: if you lend to the current British Government in Sterling then you are basically guaranteed to get your money back, albeit possibly devalued a bit by inflation.

michaels wrote: »

And I agree all these risks are.reasons why rUK would not want to enter into a formal currency arrangement unless perhaps if Scotland paid a fee for the privilege?

I guess that's a consideration. Valuing the risk is a job that I wouldn't fancy unless, like most jobs valuing risk, they paid me a whole heap of cash regardless of whether or not the answer I gave was accurate.

IveSeenTheLight wrote: »

Just a pedantic point, but Scotland is not a new country.
We have been a country for 1,000's of years.

Anyway, back to your main points of your posts.

IveSeenTheLight has been successfully added to your ignore list

IveSeenTheLight

Generali wrote: »

Really? Your first post on what is meant to be a constructive thread is to pick a pathetic hole. Don't want to or can't debate the points in hand? I suspect the latter.

I'm more than happy for you guys to be as constructive as possible in your discussions.

For me, the currency issue is largely irrelevant as the worlds population has very little say in which currency they use.

The UK uses the Pound, Europe mainly uses the Euro, US uses the Dollar and when you emigrated to Australia, you had little choice in that you now use the Australian Dollar.

Whatever currency is derived under Independence, Scotland will prosper. There are many similar sized countries that do well and don't have the same assets Scotland has.

I personally am not concerned whether I pay my mortgage in the Pound, Euro, Dollar, Groat or whatever. I think this is all political gamesmanship to project negatively on what cannot be achieved rather than focussing on what can be achieved.

Long before any discussions on referendum, I argued for Politicians to be more positive in the campaigning rather than negative campaigning. I'd much rather here from what each party is striving to achieve and progressively going forward. The electorate can then assess how successful they were and whether they believed they were the right party to bring them forward.

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Generali wrote: »

IveSeenTheLight has been successfully added to your ignore list

Thanked your post before your edit, but it's a pity your edit has resulted in this.
Nevermind
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