Currency, choices and a good splash of snake oil all round

There was a recent opinion piece by Dr John Ball, economist and Wales Independence supporter, In Nation Cymru on the subject of sovereign money.[ Wales own currency ]

He argues that If we are to succeed in persuading the people of Wales that Independence presents a brighter future we must be honest with them.

Present the facts and not indulge in fantasy economics worthy of snake oil salesmen selling fake remedies.

Not much to disagree with there,

If only he didn’t then offer something very similar to the salesmen he castigates, using unsubstantiated assertions, more  associated with  the columns of the Daily Mail or Telegraph.

Wales' new currency will provide insurmountable obstacles, inevitable instability and high interest rates, inevitably lead to significant inflation and a new currency from day one is an untested theory and fanciful idea that must be challenged.

It gets you wondering how the 163 independent countries with their own currencies, ever overcome those insurmountable obstacles. Or the inevitable consequences, or why, with all those dire difficulties, not one of these countries, as far as I am aware, ever asked to return to its original status.

With regard to the latter assertion. A nation taking its own currency from day one is neither a theory nor is it untested. Many of the above mentioned countries have done so and in Wales case day one will only come after a long and considered campaign.

A sprinkling of snake oil.

Dr Ball does go on to give some examples of these dire consequences if Wales takes the fanciful step of its own currency.

Form of exchange.

Dr Ball paints a bleak picture of Wales' ability to trade using its own currency.

Wales exports are worth £18 billion, he says, while Wales imports, mostly from the UK, are worth £60 billion.

Nothing like a good splash of snake oil to distort the figures.

The £18 billion he quotes are international exports, however Wales also exports to the UKr, £48.2 billion according to government figures. Now how did he miss that.

Wales imports from the UK are £40.36 billion.

He says, You don't have to be a genius in economics to understand that suppliers to Welsh businesses will not want to be paid in a strange, unknown currency.

You don't have to be a genius in economics to know that's not the way it works.

There are many cross border methods of payment to ensure that goods are delivered and payments are made.

Moreover  any agreed currency can be used as payment. Payment can be in their own currency or as is common, in the US Dollar.

Direct Costs

Dr Ball argues of the direct costs of a new currency.

There will be costs to Independence.

Approximately £1billion, as a per capita estimate from that associated with Scotland's Independence campaign.

The large part will be IT systems for pensions, welfare payments and taxation.

Then there are the costs of the formation and expansions of the departments of state for the new sovereign nation.

The estimate from the Scottish experience is that a Central Bank would cost £30 million, but that it would be self-financing in two years. 

The cost of  producing a Wales currency would be approximately £96 million

The cost of converting ATMs is  a change of computer program and as long as the new currency is a compatible size to the ATM cassettes, little cost there.

Similarly, with shop tills..

Direct costs relating to Wales having its own currency, approximately 10% of the total direct costs of Wales Independence start up.

Exchange rate inflation.

Dr Ball confidently expects ‘ significant ‘ inflation as a result of Wales' new currency.

Yet there is very little evidence that any introduction has caused significant inflation

Inflation caused by excessive demand, commodity prices and unmanaged devaluation,

External inflation to which the UK, and Wales, is particularly susceptible, as significant importers of basic essentials of food and energy.

Sterling has experienced devaluation of 10% since Brexit, leading to inflation of 3%

Since devaluation of that magnitude is at the extreme end, Wales would have little to fear in that regard.

Inflation due simply by the introduction of a new currency, little evidence.

Wales currency reserves

Another ‘ insurmountable ‘ obstacle. Another sprinkle of snake oil.

Scotland needs £20 billion  currency reserves, almost as much, he says, as Wales taxes.

In 2023 Wales raised £32.6 billion in tax revenues.

 To argue that £20 billion is nearly as much as £32.6 billion even a snake oil salesman would find difficult..

Scotland needing £20 billion reserves, seems to imply that Wales would need similar. Ignoring  that the  Scottish economy is roughly 2 1/2 times that of Wales.

WalesI will get its reserves from its Central Bank exchanging Welsh currency for most of the £8 billion pounds in circulation in Wales and from the exchange of currency from the £18 billion export trade.

If more is required, the Central Bank will buy it on the foreign exchange market, just like other independent countries.

Deposit flight.

Deposits will flee the country

So says Dr Ball.

Deposit flight is more associated with banks than a nation's finances.

There is little evidence of significant deposit flight from the introduction of a currency.

Currency related deposit flight is usually as a result of lack of confidence in financial management or unmanaged devaluation.

Why should it happen if Wales announces its own currency?

Transferring accounts in this way is costly

A Welsh resident or business doing so will have its account in a foreign currency with associated costs.

This is against the fact that the pound will remain legal tender in Wales for some time, similar to the pound and Euro, when the UK joined the EU. Or at decimalisation, when both forms of currency ran in parallel for some years.

The Pound. 

We must stay with the pound, says Dr Ball.

Such certainty.

It offers stability and low costs, he says.

No need to concern ourselves about not being able to set interest rates, that's now done internationally.

Wales will still have fiscal control. That is quite separate from the monetary issue

An agreed formal use of the pound.

That was rejected by the UK Treasury with respect to Scotland.

It would mean, say the UK government, underwriting the economic policy of a foreign nation.

The same argument would apply to Wales.

An informal arrangement, The worse of all worlds.

Wales would have no monetary control, nor would it have the support of the UK Treasury nor BOE.

So if it's possible, some kind of formal arrangement and if I understand correctly, until such time Wales is in a position to transfer to its own currency.

Two problems with this, well more than two.

Firstly, The UK would be deciding Wales monetary policy, indeed Wales would have no monetary policy.

Contrary to Dr Balls assertions, the BoE would be deciding interest rates according to UK government policy, with little consideration of Wales.

This in turn influences exchange rates which could have a negative effect on Wales economic policy.

If Wales has decided on an export-led policy, a high interest rate/ high exchange rate policy by the UK government would have an unfavourable effect on Wales policy, making exports dearer.

Secondly, Dr Ball argues that monetary policy has no effect on fiscal policy, which Wales will be free to carry out.

The reality is that monetary policy does impact fiscal decisions, and vice versa.

Interest rates impact on the deficit and debt of the UK and which Wales would continue to share by staying with the pound, influencing the amount of money the government has to spend.

At a basic level, interest rates influence consumer and business decisions on saving, investment, spending and borrowing, again influencing the amount the government has to spend. 

And there's more.

It would be political naivety, if Wales didn’t expect that the price of the UK government underwriting Wales monetary policies, was not the insistence of tight fiscal rules regarding spending and taxation.

Wales would need to borrow

There would be start-up costs of over £1billion and it would need to run a deficit until its revenues came onstream.

Staying with the pound would restrict  that borrowing.

It would limit the amount that can be borrowed as the security is dependent on the BoE. The interest rates would be higher again due to restricted security. Spain when borrowing outside the Euro had borrowing costs as high as 31%.

Crucially Wales would be borrowing in a foreign currency, its debt and repayments would be in a foreign nations currency.

With these restrictions, it is difficult to see Wales able to carry out an economic policy tailored to Wales needs and aspiration, which is surely the point of Independence, rather it is likely to mirror the UK economic policies.

Not a palatable thought,

Then there's crises, I said there was more,

 

In the event of another covid or financial crisis, Wales would be unable to deal with it.

It would be unable to raise the money and the UK would have no responsibility. Wales is a foreign country.

Wales with its own currency could deal with it. It would cause a debt, but a debt in Wales own currency.

As far as moving to sovereign money in the future.

That in itself will cause instability as the money markets that Dr Ball is concerned about, will be anticipating the move in the future.

Also the issues he has argued are merely being postponed until that time.

He hopes that the interim period will see Wales more settled, stronger, however it is difficult to see Wales making any significant advances with the restrictions on its economic choices by staying with the pound 

The above just seeks to illustrate that staying with the pound is not the easy option portrayed and whether arguers of currency think they wear a white or black hat, they are still selling snake oil and doing the Welsh people no service.

Dr Ball and those of the opposite view are indulging themselves, by arguing on currency choices outside the context of an Economic Plan for an Independent Wales.

A Plan that shows the Welsh people, their pensions, wages, public services are safe, indeed will be enhanced.

How it's paid for and the timescale they can expect,

A Plan of the costs and benefits.

Without that, there is no Independence.

Scotland failed to have a credible economic plan and it lost the referendum.

Dr Ball scoffs at a new currency from day one.

Day one is when the Plan is produced.

Produce the Plan and the currency choice will become clear and credible..