As we’ve established in a previous post, a currency-issuing government can’t go bankrupt because it can always issue more of its currency if there isn’t enough to go round. Of course, bad things happen if it issues too much money, or if it doesn’t take excess money out of circulation through taxation or bond sales – if too much money is chasing too few goods and services, prices go up, and people starve or lose their homes; and if there is not enough money, then we cannot pay people salaries. But the important fact is that there is some flexibility, a window of opportunity within which it is possible to work.
Modern Monetary Theory holds that budget deficits themselves don’t matter. What matters is having the right amount of money in circulation, to maintain a high level of employment with low inflation. And the government’s main economic job is to maintain this balance – by stimulus spending when necessary, regardless of the budget deficit.
So what’s the catch?
There is one crucial proviso, though. If the government needs to spend foreign currency – if it awards contracts in foreign currency, or has debts denominated on foreign currency, or if it has chosen to spend someone else’s money instead of issuing its own – then we are straight back to the household budget analogy. A government that doesn’t have a sovereign currency, or has overburdened itself with foreign debts, can’t issue money when it needs it. It has to go and borrow it on the international money markets – and it will have to earn the foreign currency to pay it back. Britain loaded itself up with dollar debt during World War II, and has only just paid that debt off. Guess what was used to pay it off? The proceeds from Scotland’s oil, and from selling off state-owned assets.
The simple MMT arguments seem to work in a country that:
- is more or less self-sufficient in the essentials of its society;
- hasn’t accumulated a mass of foreign currency debt (for a federal or devolved Scottish government, that includes Sterling);
- can afford to stop spending foreign currency on imports if its own currency loses value.
To be in this happy state, as far as we can make out, a country needs to export as much stuff that’s essential to others as it needs to import stuff that’s essential to its running; and it needs to create all public sector contracts in its own currency, not someone else’s.
If a country can achieve this, then it won’t need to be critically dependent on a favourable and stable exchange rate – the currency will probably tend to be strong anyway, so that’s just not going to be a problem. Britain’s currency has been in remorseless decline against the US Dollar since WW2 because we took on a huge amount of dollar debt during and after WW2, which we have only recently paid off.
And what does this mean for Scotland?
Anyone thinking about a major country-scale investment programme, such as Scotland would need to deliver our vision, needs to think very clear-headedly about the different options of where the money is going to come from, what it will cost to service the money, and what it will cost to pay back if circumstances change, favourably or unfavourably.
As long as the money is being invested in a sustainable future, the proposition should be attractive to people needing long-term guaranteed returns – the bond market, sovereign wealth funds, and pension funds. The trick is to keep control of the assets – not to give away the goose that lays the golden eggs.
Larry Elliot wrote a very good article in the Guardian recently about Nicola Sturgeon’s currency options. Interesting times!