QE for Dummies

The First Minister is asking us to give up our insurance policy and hopes we're too stupid to understand that. History shows we're not.

Where to begin with Nicola Sturgeon’s interview on BBC’s Today Programme? I thought she made lots of mistakes but one really stands out.

Doubling down on the idea that the Northern Ireland border is a model that could work for Scotland, just as the First Minister there has resigned over the issue, made Sturgeon sound like the most deluded of Brexiteers.

Once again she used the interview to describe a parliamentary majority for leaving the UK which is secured off the back of parties seeking only tactical regional list votes as “gaming the system”. This will likely be quoted back to her next week.

For me though, the car crash moment was on Quantitative Easing (QE).

What is QE and Why Does It Matter?

QE is sometimes described as our central bank printing money to pay for things. The longer version is that the Bank of England creates digital money (like the money in your bank account when you pay a bill online). The bank then uses that money to buy government debt. By doing this the government can borrow more than it would be able to do otherwise, boosting spending in our economy. It might be hard to get your head around, but the UK Government ends up owing itself money.

Quantitative easing is an insurance policy: when a crisis comes we use it to make sure we can spend big at a time when the economy is in trouble. This matters.

Twice in the last decade, Scotland would have been in serious trouble if we did not have the spending made possible by QE. First, after the financial crisis when banks many times bigger than the size of our economy were close to collapse. The announcement this week by the Royal Bank of Scotland that they could not stay registered in Scotland if we left the UK is a reminder that the need for this insurance policy isn’t hypothetical.

The second time when quantitative easing has saved us is in the current crisis. When hundreds of thousands of us were furloughed by firms closed due to Covid, rather than sacked; when our NHS needed emergency funding to handle the pandemic; and when we needed to develop and distribute a vaccine in record time, that was QE.

Nicola Sturgeon’s policy is that Scotland should operate without a central bank, perhaps for as long as a decade. Without a central bank, we would not control our currency, and so we could not create the digital money that buys the government debt that, in turn, allows us to make the emergency spending we need in a crisis.

Behind the complicated monetary policy is a simple message: The SNP’s dangerous plan to give up our central bank means giving up our economic insurance policy. It would have meant no furlough, no emergency funding for the NHS, no speedy vaccines.

Sturgeon Hopes Your Heids Button Up The Back

This policy of using the pound outside of an agreed currency union, also called Sterlingisation, has been criticised by dozens of respected economic experts, including Nicola Sturgeon’s own advisers.

Finally Nicola Sturgeon is being asked about her dangerous policy, and it ain’t pretty:

Let’s look at her answers in detail. Webb, unlike Sturgeon, has done his homework.

Justin Webb: “Could Scotland continue with quantitative easing, this almost accounting trick really isn’t it, that’s kept us afloat as a country, and indeed that’s keeping other countries afloat as well, whereby the central bank buys back government bonds. You just mentioned that eventually you’d have your own currency but for a time you would not have the Euro and you’d be using the Pound Sterling. So you wouldn’t be able to do QE.”

The only honest answer to this is “no.” The SNP’s own Growth Commission was clear that QE isn’t possible under their proposals. So how does Nicola Sturgeon answer?

Nicola Sturgeon: “I guess, you know, we set all of this out in the 2014 referendum. We would use Sterling, we would set up our own central bank, and we would be able to perform the functions of a central bank.”

The issue here is that in 2014 the SNP Government did set out the policy on the functions Scotland would be able to perform if we used Sterling outside a currency union. They said we would have no power to create currency. Nicola Sturgeon this morning claimed “we would be able to perform the functions of a central bank” but the very policy she points to from 2014 says the opposite. It concludes that Sterlingisation would mean operating “without formal monetary arrangements, e.g. central bank or lender of last resort.”

She is asked the question a third time:

Justin Webb: “But not quantitative easing could you?”

Nicola Sturgeon: “We currently are part of the central bank of the UK, we would have a share of the debt and the assets of the UK and we would negotiate that when Scotland votes yes.”

This is, to put it kindly, utter gibberish. Quantitative easing is a policy, not an asset. It’s like saying she would negotiate a share of the speed limit. Webb is having none of it.

Justin Webb: “But hang on my point is that if you didn’t have your own national currency and you weren't part of monetary union, of a broader monetary union, you couldn’t engage in quantitative easing could you? So in an emergency like the one we’ve just faced, you’d be in trouble.”

She’s now way out of her depth and (what are the chances?) the signal cuts out.

Nicola Sturgeon: “Sorry I’ve lost sound. Sorry. Hello?”

Justin Webb: “I can certainly hear you…”

We’ve all pulled the ‘sorry I’m going through a tunnel’ thing when we don’t want to talk about something. Few of us have done it on national radio. With communications restored, Webb asks the question a fourth time:

Justin Webb: “I was talking about whether or not actually technically it would be a fact wouldn’t it if we faced another huge emergency like the one we have just faced, quantitative easing would not be available to you.”

Nicola Sturgeon: “We would, in the transition period, set up the infrastructure of a central bank, we would be within Sterling until we did that, and we would have the ability to exercise those functions of an independent country, but look, we will set out, as we did in 2014, we will set out all of the case for independence as we come to ask people to make that choice: yes or no to independence?”

Sturgeon is hoping that people don’t know the difference between keeping the pound as our own currency and using the pound as the currency of what would then be another country. During the possibly decade-long transition she refers to, we wouldn’t yet have our own central bank but nor would we have the protection of the UK’s central bank. She would take away our insurance policy and leave us unprotected from economic crises.

Why is Nicola Sturgeon in such a mess on this?

Everything about the SNP position on currency is about politics, not economics. They know that support for replacing the pound with a separate currency is very low. So instead they adopt a policy they know would be an economic disaster for Scotland because they think it helps their political strategy. This is all about telling sceptical voters on the doorstep that we would still use the pound after leaving the UK. By the way, it isn’t me who is saying this is all about conning the voters, it is the SNP Minister for Business recorded in a briefing session for party activists:

Basing your strategy on the hope that Scottish voters are easily duped is stupid. Nicola Sturgeon tried it in 2014 with her message that “the pound is as much ours as it is England’s” but voters understood that sharing anything means both sides of the arrangement have to agree. I remember being in a taxi back then and swelling with pride in my nation as the driver talked me through the need for a lender of last resort and why an informal arrangement wouldn’t work.

Even if most voters never become experts on monetary policy, they can smell B.S. a mile off and Sturgeon’s interview this morning reeked of it.

In Case You Missed It

• A new poll found support for leaving the UK lower than in the 2014 vote. It isn’t just that the poll found only 42% wanting to leave the UK, the share supporting remaining in the Union is nearly back to the level of the 2014 vote.

• The frigates the SNP has spent years telling you aren’t being built are starting to roll out from the big sheds in Govan.

• More from the IFS on how every part of the UK gets funds transferred from the South East. But of course, only Scotland has a government that wants to give up our share of this money.

• A detailed report from the Institute for Government looked at the records of devolved governments. The section on the SNP’s record on Nicola Sturgeon’s “personal defining mission” of improving education is worth a read.