Why Not Create A Scottish Pound and Adopt Investment Credit Economics to Scotland’s Benefit?

On 21 February I sent an email to all the high hiedyins of the Government of Scotland, suggesting it would be an immense advantage to the “Yes” campaign for Scottish independence if the Scots adopted a policy of having their own currency when independent. That text of that email is a follows:

Dear First Minister and All Your Colleagues (and John Arbuthnot, President of the Royal Society of Edinburgh, for information)

1 There is a new economic genius on the bloc (and I mean the Western bloc) and his name is Richard Andreas Werner. His books are “Princes of the Yen” M E Sharpe, Armonk, New York and London, 2003 and “New Paradigm in Macro-Economics”, Palgrave Macmillan, London, 2005.

My review of “Princes of the Yen” is at http://londonprogressivejournal.com/article/view/1742/an-extended-review-of-princes-of-the-yen-by-professor-richard-werner

2 Professor Richard Werner has used Granger Analysis with deadly effect upon the sacred cows of neoclassical economics. One of his most outstanding proofs is that there is no Granger predictive relationship between the interest rate and economic growth, so the heart-searchings of the BoE are fairly pointless. (Although high interest rates can do great damage, low ones have no predictive relationship to economic growth.) Another result is money and credit is not (as the neoclassical economists assume) just a neutral medium of exchange, because credit creation can either act first, in favour of production (as investment credit creation) or second, to increase the liquidity of the banks (as financial credit creation, as Mervyn King led the way and used it to “save” the clearing banks) or third, as consumer credit creation (to increase the level of consumer demand, if a Keynes-observed 1930s situation of deficient demand prevails) or fourth and finally, as government-led invention and innovation credit creation (funding R&D and the invention and innovation that leads on from that, as Shinzo Abe is doing with cell sheet technology in Japan and as Obama is doing with his green energy initiative). His other results (not necessarily in the following order) are:

• “Granger causality” usually runs from money to outputs. (Sir Clive Granger, along with his colleague Robert Engle, won the Nobel Prize for contributions to economics in 2003 for his development of the “Granger Causality Test” which tests the direction and significance of predictive causality in economic data.)

• Separating the BoJ credit creation into its speculative and investment components explains both the speculative Japanese asset price bubble and the economic growth of Japan using the Granger causality test

• the long 1990s Japanese depression was caused by the “Princes of the Yen” in the Bank of Japan, not creating credit in order to force “structural change” in Japan. Werner quotes in his conclusion about the Bank of Japan that

“the central bank is aware that serious monetary stimulation would create a recovery but it has chosen not to take such policies, because it would delay the structural reform agenda that it supports” (Princes of the Yen, op. cit, p312)

• the high economic growth of Japan was therefore a Granger-predictive consequence of the large flows of Bank of Japan earmarked investment credit creation which operated through the Japanese secondary banking system to provide long-term low-cost loans to private industry to enable the continuing massive investment which delivered Japan’s growth. As Werner puts it:

“If, however, banks (or their regulatory authority) can ensure that new credit creation is used specifically for that type of activity which will enhance the potential growth rate, such as for productive investment, then even with output at full employment level, credit creation may remain non-inflationary and result in higher output – beyond the former full employment level.”

Richard Werner, “New Paradigm in Macroeconomics”, Palgrave Macmillan 2005, p211.

That happens because even when all the workforce are fully employed (and Japan had a 1% unemployment rate for much the high-growth period) there are always new and available capital investments (due to the continual march of technology and its embodiment in better capital plant and equipment, leading to a higher volume of better products) which can further improve the labour productivity and the quality of the output of that workforce. The continual upgrading of the capital equipment was the major factor in the rapidly improving workforce productivity and the attractiveness of Japanese consumer products on world markets.

3 An independent Scotland would have a very positive balance of payments with the rest of the world, partly due to North Sea Oil combined, in the longer term, with Scotland’s “green wind” technology on land and sea, as well as the newer wave-generation technologies about which you are fully aware, plus additional natural growth arising from the release of Scottish energies in its industries. An independent Scottish Pound would be a very strong currency which would never need to be floated. All attempts to force a rise in the rate should be met by adding surplus balance of payments funds to the reserves, so that hedge funds always lose their upward-forcing bet, as currently occurs in the countries of the China sea economies.

4 I suggest you accept the Coalition requirement that Scotland should have a separate pound, and your embryo Scottish government should propose to set up an independent National Bank of Scotland, operating under the control of the Scottish Government, with the objective of maximising Scottish economic development and welfare by creating appropriate levels of investment credit, and with an exchange rate of £1 Scottish = £1 English. You do not need to incur debt to do this, you can do as all the China Sea economies (China, Japan, South Korea and Taiwan) do – you can create no-cost investment credit at the central bank. Scottish commerce and industry could blossom as it did before, when from 1750 to the 1880s (the decade of the Bank Amalgamation Acts) local banks provided the funds for investment in local industries.

I do not need to tell you that the Scottish people are among the most inventive and innovative in the world, for Arthur Herman’s partly-valid view, that the Scots “invented the modern world”, lists most of that. You and your brilliant team are managing Scotland, even with the currently limited devolved powers, much better than the Coalition are governing the rest of the UK.

5 Neo-classical economics, as practised by the Coalition Government, has completely failed to deliver the goods. The Japanese experiment with neo-classical economics was a disaster and was responsible for their 1990s depression. The Japanese Prime Minister, Shinzo Abe, has now re-instated Shimomuran economics and a “Japan with abundant capital resources” as the best way forward for Japan. (Two or three days ago he doubled the provision of investment credit from 3.5 trillion yen to 7 trillion yen.)

6 Abundant capital – investment credit created at the central bank for capital investment purposes – solves many other otherwise intractable problems. To mention but a few – capital investment can provide the funds to deal with the recovery from major weather events, other national disasters, and the capital investment necessary to protect national assets in future; can accelerate the installation of capital assets required by a green economy; can accelerate the development of the essential R&D and the innovations which drive the economy forever upward; can reduce unemployment by continually drafting the unemployed into the capital construction and goods sector of the economy; can continually improve workforce productivity through continually updated capital plant and equipment; and can keep an economy at the leading edge of scientific and knowledge-based innovation. See http://londonprogressivejournal.com/article/view/1685/the-many-major-uses-of-investment-credit-creation-a-brief-walk-through-the-observed-results-so-far-and-the-future-possibilities-made-available-through-shimomuran-economics

7 I want all that for Scotland and I hope you all do too. Scotland could blossom into high rates of knowledge-based economic development and could be the first country outside the Chinese economic area to grow rapidly using Shimomuran economics. It could lead the way out of the neoclassical credit crunch and show Europe and the rest of the world the way. Scotland has previously done so, and I believe, if time and chance so permit, it could do so once again.

8 Please consider these policies.

9 I would be delighted to discuss. I am up in Edinburgh visiting some of my family and the Scottish National Library from the 7th to the 10th of March and would like to meet with you and/or your ministers or advisors if that would be useful to you. Other dates, should you wish due time to consider these points, could easily be made available.

I hope to hear from you

With the very best regards and every good wish

Yours aye

George Tait Edwards MBE

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A couple of weeks later I received an undated and unsigned reply from Mr Steven Ing of the Office of the Chief Economic Advisor to Scotland saying that “a Fiscal Commission Working Group, comprising of eminent economists including two Nobel Laureates, has examined the currency options for an independent Scotland,” and they had “concluded that retaining Sterling as part of a monetary union with the rest of the UK would be the best option – both for Scotland and the rest of the UK.”

But the whole point of my emailing the Scottish Government was that Shimomuran economics is not generally understood, and that Nobel Laureates are almost invariably neo-classical economists. Two of the three 2013 Nobel Prizewinners – Eugene Fama and Lars Peter Hansen – are extreme Chicago School monetarists who know nothing about how to accelerate economic growth. Robert Schiller – the third US economist “Laureated” in 2013 – is the liberal Yale economist famous for predicting the US sub-prime housing bubble in 2005.

The Guardian commented on these awards by quoting David Blanchflower, an economics professor at the Ivy League university Dartmouth College and a former member of the Bank of England’s interest rate setting committee, as saying:

“Fama’s research was a flawed attempt to show that unencumbered markets worked efficiently. At some point the Nobel prize economics committee will start to award economics prizes to people who have actually discovered stuff about the real world rather than a made-up dream world,” he said, adding

“A good test in medicine is whether the recipient’s research has saved a million lives. In economics it’s about writing down clever squiggles on diddles that mostly gets rewarded. Shiller is one of a few exceptions.”

While I admire the great achievements and high positions of all the members of Scotland’s Fiscal Commission Working Group, I very much doubt that any of them have any knowledge of Shimomuran economics, hence my letter. That Working Group need to reconsider the options because their conclusion – that Scotland should continue to use sterling – might lose the “Yes” camp the referendum vote.

The Coalition Government are being extremely ill-advised to refuse the use of the pound by Scotland after independence, because the £38 billion loss pa to the current UK balance of payments by the positive contribution made by Scottish oil and gas is probably large enough on its own to unbalance the stability of the pound, but that, I suppose, is their problem. Current Coalition policies and Camoronic-Osborne economics is not sustainable because it is based on the increasing impoverishment of the majority of the UK population and the much-hailed recovery is almost entirely a “South-East England” phenomenon, with 90% of the new jobs being created in the London basin.

Far from the Conservatives “Owning the Future”, as Osborne seems to have persuaded John Harris of the Guardian, the only thing the Coalition Government appear to have done is to replicate the 1930s poverty-inducing policies in the UK. As Bryan Gould has remarked in his 8th April article in the LPJ, the Coalition only own the dismal prospect of continuing austerity and “government cuts without end, of growing inequality, and of a Britain – with only 10% of our output accounted for by manufacturing – finding it increasingly difficult to pay our way in the world.”

A “No” vote in the referendum is a vote for continued Thatcherism. Scotland deserves better policies than that. So does the UK, or the rest of the UK, if Scotland achieves an independence which, given how badly it has been managed by the “London/SouthEast” Government of the UK, it now needs.

The capability of creating no-cost investment credit is the indispensable requirement to ensure the more full flourishing of Scottish enterprise, and an independent Scottish Pound is a key part of that. A rapid re-consideration by the Scottish Fiscal Commission Working Group should perhaps be quickly brought about.

© George Tait Edwards 2014

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This post was written by George Tait Edwards