Why an independent Scotland won't have inflation ‘like Zimbabwe’

Yet despite the ridiculousness of the claim, it was recently repeated by economist Sir John Kay, who claimed in a lecture at the Royal Society of Edinburgh in December: “Put another way, if the Scottish Government were to increase public spending by 5% and finance the expenditure by printing money, the quantity of notes in circulation would rise by 40% per year. That is the road to the economies of Venezuela and Zimbabwe.”

Not only is this claim wildly wrong, but to link the Scottish economy that is resource rich, diverse, and developed to that of Venezuela and Zimbabwe raises serious questions of professionalism. Further, Kay’s language is incredibly dated as we do not “print money” anymore. This is not the 1930s. Now we simply mark up accounts with a keyboard using credit. If spending via credit is what Kay is referring to then someone ought to tell him that the UK, and every other monetary sovereign nation on the planet, does this every single day.

Unionist thinking on inflation was mainstreamed by Monetarists in the 1980s, a school of thought that was rapidly deployed and supported by Margaret Thatcher (above) and Austrian economists. With this line of thinking, Unionists claim that growth within the money supply in an independent Scotland would rapidly increase inflation. Further, an independent Scotland that purchased its own debt through quantitative easing (or more accurately described as asset swapping) would also result in high inflation.

At this rate Unionists would be claiming that the First Minister could sneeze and that too would, somehow, cause inflation. Here’s why they’re wrong.

The Institute for New Economic Thinking carried out a comprehensive analysis of high growth in the money supply from between 20% and 200% from 47 countries, to see if any would increase inflation above 5%. There were over 50 cases of an increase in the money supply by 20%, yet only three of them resulted in inflation over 5%.

They further analysed just under 70 cases of money supply growth of 60%, and yet still the vast majority of cases saw no high inflation. Once this analysis reached 30 case studies of a 200% increase in the money supply, it found only nine led to high inflation. 56 years of data from countries that make up 91% of the world’s GDP conclude that John Kay and Unionists are wrong.

READ MORE: Scotland's deficit, the GERS debate, and why we're getting it all wrong

More desperate Unionists may go on to defend Thatcher and argue that her policy agenda successfully brought down inflation, so the likes of Kay hold a valid point. Yet what they forget to mention was the other social and economic costs of Thatcher’s policy outcomes, such as leaving millions of people in unemployment, the near total destruction of productive industries, stagnating wages, and crushing the bargaining power of unions. Thatcher reduced inflation by destroying the lives of millions.

Let’s also consider this from a business perspective. Unionists and Austrians put large focus on equilibrium, assuming businesses will immediately raise prices if there is increased demand. These assumptions suggest Scottish businesses have zero-order backlogs to match precise output. In reality, businesses do not need to immediately respond to increased demand as the timing of any response can be calculated. Any business that is waiting for real resources to increase output has no control over the entire supply chain, so by raising prices they would simply be hurting their cash flow.

READ MORE: Andrew Tickell: Scottish Labour's toxic four-word slogan sums up party's failures

Unionist assumptions also misunderstand how inter-business relations work. A business CEO does not wake up one day and proclaim they are raising prices. There is constant communication between industry representatives and stakeholders to maintain a healthy supply chain, and thus all actors must consider their relationship with buyers and suppliers. If a business decided to suddenly increase prices without industry consultation, it simply results in a loss of contracts and revenue. This further disrupts their growth projections and would see them largely isolated from other actors in the industry. The only scenario Unionists would be right is if industry experts suddenly developed brain worms.

It is in the interest of businesses for the economy to see growth in the money supply. First, the money supply would grow with the increasing needs of an independent Scotland’s economic system. Companies need newly spent currency to build new practices for the era of ecological sustainability and increasing renewable technology. Second, we have all seen in our local areas the tragic decline of Scotland’s high streets. Austerity has reduced our ability to spend, and thus forced businesses to cut back in production, wages, and employees. Scotland increasing the money supply would reverse the dangerous effects of Westminster austerity.

Further, Unionists are also wrong to suggest that we can simply increase the money supply like turning on a tap. For there to be real growth in the money supply, government spending must result in real disposable income increasing in the private sector. Until that disposable income is actually spent, there will be little effect on inflation.

If Scottish businesses and households have extra currency but do not necessarily want to hold on to them, then they will use it to increase their debt obligations payments. Considering household debt sits at around 130% of household disposable income, with insolvencies in the UK increasing to over 27,000, it’s safe to say the extra currency will be put to good use.

You will have noticed that Unionist arguments have the insane assumption that households and businesses are wildly irrational actors within our economy. If Scotland votes for independence, their vision entails that we would simply destroy our assets and seek to wreck any form of social security we have left. It’s the kind of argument that tells us that, not only do they take Scottish voters for complete idiots, but their understanding of the world is detached from reality.

So what causes rapid increases in inflation, especially now under the UK with inflation reaching over 7%? From what the evidence tells us, price increases have originated from Brexit increasing the cost of commodities, supply-chain disruptions from Covid-19, stagnant wages, and Westminster’s total lack of price regulations on wealthy individuals and businesses. Indeed, the policies to solve the current crisis are more likely to be passed through Holyrood with independence than Westminster.

If Unionists want to see real economic chaos of inflation, then they needn’t scaremonger about independence, but rather look at the very union they desperately defend.