26 Feb Scottish independence: UK downgrade means promised ‘recovery’ is like Waiting for Godot
Scottish independence: UK downgrade means promised ‘recovery’ is like Waiting for Godot
Scotland’s independence referendum campaign took a dramatic turn last week as it emerged that one of the key arguments for remaining inside the British Union – the UK’s hallowed AAA rating status – completely unravelled.
Despite desperate attempts by senior politicians to calm the horses, the political significance of Moody’s downgrading the UK to Aa1 cannot be overstated.
Firstly, Britain’s global reputation as a financial services hub has already been fatally undermined by unending revelations of systemic City fraud underpinned by the acquiescence of Britain’s political class top to bottom.
Set against this context the ratings downgrade has dealt the mortal blow – British ministers and bankers cannot now speak with the unquestioned moral authority they once enjoyed in the world’s corridors of power. Indeed, the UK government had to import a Bank of England governor, Mark Carney, from Canada as the AAA-rated indigenous stock was found to contain horsemeat.
In terms of UK political consequences, the Tories have just have had their worst moment since Black Wednesday in 1992 when George Soros gambled against the pound and won, sinking the economic credibility of the Tory party into the bargain. The result was that Labour enjoyed largely uninterrupted poll leads for the next fourteen years and Tony Blair’s New Labour project was unleashed.
All that was over a few measly billion pounds. Today, the UK financial system is based on a fraud model in the form of rate fixing (in a global market worth trillions of pounds), ‘mis-selling’ of financial products, money laundering and cartel operations all of which is extracting from the British economy at a pace.
Did our government show the resolve to protect us from this crime wave? Actually, it gave state hand-outs to City chums in the form of bail-outs and quantitative easing (money printing). Meanwhile scapegoats were paraded and petty thieves and rioters sent to jail.
Labour will convert the moment into significant political capital. Shadow Chancellor Ed Balls said the announcement by Moody’s was a “very, very bad moment” for Mr Osborne given the chancellor’s previous assertion that losing this status would be a humiliating blow.
It is a major blow. Sterling is at its lowest level this year against every other major European currency except the Icelandic krona. In recent years the pound has been hugely devalued thanks to low interest rates, so reducing the spending power of the population’s wage packets – a backdoor tax.
Britain’s seemingly insolvable problem is its enormous combined public and private debt (see chart below). Our debt problem has paralysed the economy but politicians are unable to deal with it because they have been blindsided by incompetent economists.
Most economists hold to the quaint notion that lenders lend to borrowers and banks are mere intermediaries. The reality, as any banker will confirm, is that it is banks who create new money and lend to borrowers.
Simple enough to understand but economists are trained to see credit as having a neutral impact on the economy as lenders can’t spend the money they’ve lent. They therefore, incredibly, do not include money or debt in their economic analysis.
After decades of credit expansion Britain faces a profound decades-long contraction/decline. Credit cannot be extended because Britain has reached the point of debt saturation and the capital to borrow against is spent and actually diminishing thanks to low interest rates.
Set against this reality the austerity versus stimulus argument is a false choice as both increase the overall debt burden and both serve the interests of the financial class.
However the Moody’s downgrade will have its most profound political impact in relation to the Scottish independence debate.
Scotland’s Unionist parties have hitherto luxuriated in the widespread assumption that Britain’s economy – in contrast to the supposed instability and uncertainty independence would bring – is fundamentally sound and enduring.
The campaign against Scottish independence, BetterTogether, must now wave a teary goodbye to that former axiomatic truth as it is transferred to the myth department.
Will team Salmond capitalise on this gift from the electoral gods? Since the financial crisis hit, the SNP have been slow to take Unionism on in the economic viability of UK versus independence. John Swinney has however been facing growing pressure to forget the ‘building recovery’ and ‘fiscal soundness’ rhetoric and raise the public’s awareness of the UK’s general economic and social disintegration.
Troubling for the ‘yes’ campaign is that businesses increasingly believe the narrative that in the current economic climate, now is not the time to attempt independence. Furthermore, the lack of detail on what independence will mean for commerce is causing concern across the business community – that is a fact and not a Unionist myth.
If the SNP want to win the economic debate they will simply have to go for the jugular. A stale debate over who is best at managing recovery and fiscal rectitude will only encourage businesses to believe that Scotland should wait for this mythical recovery and then go for independence.
This game-changing Moody’s moment however has presented the SNP with the unexpected and ideal opportunity to contend the economic viability debate.
The image of Scotland escaping the Titanic on the independence lifeboat could now underpin a compelling business case. If the economic argument is framed in terms of the UK’s long term inevitable decline then businesses would see now as the ideal moment for independence.
In Catalonia, the Nationalists have pointed to Spain as a failing state. Their most recent independence march saw 1.5 million Catalans call for an end to rule from Madrid. Scotland’s most recent independence march in Edinburgh was paltry by comparison with around 10-15,000 in attendance – hardly a sign of a widespread desire for statehood.
If the Nationalists are to turn the business case around then they must portray promises of recovery as undeliverable and akin to ‘Waiting for Godot’.
This rating downgrade is about markets calculating the danger of the UK either not paying its debts or devaluing the pound to inflate them away. It is a risk rating.
The word ‘risk’ strikes fear into the heart of the business community. SNP strategists would be remiss if they did not now use all the party’s channels to promote the message that the ‘UK is a business risk’. The result would be to totally undermine the entire premise the Unionism argument rests on.
The fly in the ointment is the SNP’s insistence on remaining within the sterling zone. If the pound is such a deeply flawed currency, then why on earth should an independent Scotland keep it?
Perhaps the answer is an independent currency which the leading economic expert Prof John Kay argues should be actively considered. A separate currency though plays badly in focus groups however Moody’s has opened the window of opportunity and a slick information campaign could build a constituency for such a policy.
There is also the option of establishing a parallel currency meaning a Scots currency for domestic transactions and the pound for international transactions – this strategy worked during the transition phase of introducing the euro.
Such a strategy would be bold but done properly would seize the initiative and ask fundamental questions about what the ‘no’ campaign stands for.
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