Why Sterling is the UK’s silver bullet
by Malcolm Offord
In a few weeks’ time, the Scottish electorate will vote a new parliament into Holyrood with all the pundits predicting a majority for the incumbent Scottish National Party led by Nicola Sturgeon. She will campaign on the basis that a majority gives the SNP a mandate for a second Independence Referendum to be held early in the new parliament. This is despite constitutional matters being reserved to the UK Government in Westminster and despite previous SNP assurances that they would respect the democratic result of the 2014 IndyRef1 “for a generation”. For those of us who recoil in horror at the thought of another bitter and divisive referendum in Scotland, especially in the middle of the COVID pandemic, it is incumbent upon us once again to advance the positive arguments in favour of the UK. I believe the most important weapon of all is Sterling, the sovereign currency of the UK.
Since the date of first issuance of government gilts in 1691, the UK has never once defaulted on its debts. The three record high periods of government borrowing were the Napoleonic Wars in the early 19th century (300% of GDP) and the two world wars of the 20th century (200% and 250% of GDP respectively). The cost of WWII was repaid in 50 instalments the last of which was settled with the US and Canada in 2006. Current UK government borrowing at the year ended Mar’ 20 was 85% of GDP and this is estimated to increase to 100% post COVID. This clean history of borrowing and repayment is an enormous legacy for the modern United Kingdom and one which now – as we seek to combat the SNP’s quest for division – we should exploit. As someone who has spent a life around Britain’s money markets, I want to us weaponise our currency dividend for the Union.
Sterling is the ‘share price’ of the UK as a sovereign economic entity which gives us access to international capital markets. In short, Sterling is the silver bullet of the Union because it allows our government to create money on behalf of ‘we the people’. Of course, every country can have its own currency, but the magic of Sterling is that it is one of the world’s top five reserves currencies (Dollar, Pound, Euro, Swiss Franc and Yen) precisely because the UK has never once defaulted. This gives us pricing power and, therefore, access to cheaper funding than most other nations. So Sterling provides us with privileged access to the vast sums of international funds which are looking for a safe home. The added great news for all of us right now, is that funding is currently available to the UK at rock bottom prices.
At this point, I hear the Tory hard-core muttering unhappily that we must “live within our means”, that “vast debt is for the Labour Party”, that “we are the party of fiscal rectitude” and that “we exist to clean up the mess of socialist governments”. Some of that is true, but only because Labour governments don’t know how to deploy capital efficiently and economically, not because it is wrong for governments ‘to borrow’. After a decade of austerity, where successive Tory Chancellors have parroted these same old lines, it’s time now to slay some of these old Tory dogmas and dispel these ingrained myths of post-war economics.
Dogma number one: that government deficits are bad. By Newton’s 3rd law, if the government is in deficit, some-one-else must be in surplus. So, who is the government’s counter party? Answer: we the people. So how can we the people being in surplus be a bad thing? Answer: only if the government spends its deficit on things which don’t benefit we the people. If it spends its deficit on good and worthwhile things that benefit us like our health, our pensions, our defence, our economy, our education, our jobs, our housing and our environment, how can that be a bad thing?
Dogma number two: that the state has no money. This was a myth peddled by Margaret Thatcher; she famously once said the state’s spending power was limited to its citizens’ ability to pay tax. The grocer’s daughter was confused by her father’s sound advice that we as individuals, households, families, companies and corporations must live within our means. That is true. But that does not apply to a sovereign state like the UK with a 330-year track record of issuing government securities which never default. The UK is a currency issuer not a currency user. We the people are currency users who must live within our means. In contrast, a currency issuer like the UK government, trusted by investors to always repay its gilts, can spend ahead of its current tax collection so long as it nurtures a growing economy which will always repay these investments over the long term.
Dogma number three: that government issuance of gilts is borrowing. When I borrow, it comes with stringent conditions which I cannot dictate. If it is a mortgage, it is structured over 20 years but the price is 2% above bank base rate, it requires a 20% equity deposit and, if I default, I will lose my home to the lender. If it is a corporate loan, it will likely a seven year term with a margin of 3% over base and, if I trip a covenant, I will lose my business to the lender. In contrast, when the UK issues gilts, HM Treasury is the deal maker, not the lender. 80% of gilts are issued for term between 15-30 years, there are no covenants or events of default and the interest rate is set at bank base rate. The ‘lender’ has no recourse against the ‘borrower’ other than to wait for maturity and hope he gets repaid, which he always does. That means he is not a lender but instead an investor, and the government is not a borrower but instead a safe haven for investors.
Dogma number four: that the country cannot afford all this ‘debt’ and we are storing up problems for our grandchildren. Well, it has never been cheaper for the government to ‘borrow’ and if it invests that money wisely on levelling up this country by eradicating poverty and protecting our environment and turbo-charging our economy and sorting out our infrastructure and fixing our education system, I for one cannot think of a better use of cheap funding. And so long as our grandchildren are given a world class education allowing them to become innovative and productive citizens, they will grow the economy which will repay our gilts as well as protect our planet. Did the 250% of borrowing left by WWII ruin the life chances of the baby boomers? No, quite the opposite, they enjoyed life, grew the economy, created wealth for their families and, guess what, all the gilts got repaid.
It’s time now to call out this shrill and irrelevant counterpoint between the left and the right which has dominated western democracies for the last 50 years. The left shout ‘tax the rich’ and the right shout ‘shrink the state’. It’s all so boring and fatuous, like two bald men fighting over a comb.
Instead, we should be taking advantage of record low interest rates and using that money to invest in our future. We should look across to the US, the country with the most trusted currency of all, and mirror the ambitious $2 trillion stimulus plans of President Biden. He is using the US Dollar to overhaul and upgrade his nation’s infrastructure to create “the most resilient, innovative economy in the world” with plans to fix 20,000 miles of roads and 10,000 bridges amongst a long list of projects intended to create millions of jobs in the short run and strengthen US competitiveness in the long run. It’s bold and ambitious and reminiscent of Roosevelt’s New Deal in the ‘30s because it is focused on strengthening the social fabric of society as well as the economy by expressly targeting the twin challenges of climate change and racial equality as well as jobs and prosperity.
That’s why I would harness the power of Sterling to set up a multi-billion-pound British Levelling Up Fund which uses Britain’s world-leading expertise in investment management to be corner-stone investors in re-booting our economy for the 4th industrial revolution. Let’s put rocket-boosters underneath every business and social entrepreneur in Cardiff, Glasgow, Manchester and Newcastle, backing them to succeed, to employ 5, then 10, then 20 young people, all of whom will then repay that investment in lifetime taxes to HM Treasury. Other progressive countries like Norway and Singapore have Sovereign Wealth Funds that use the capital of the State to invest on behalf of their citizens, why don’t we? We can go much further, with an ambition to invest in social well-being as well as economic, to re-build our crumbling high streets and strengthen our local communities.
So I would say to the Prime Minister that yes this is our opportunity to level up in the UK once and for all. Can we afford it? Yes, we can. And no it would be a daft idea to put up taxes now and choke off any economic recovery at this crucial moment.
The world we live in today is changing rapidly. The solutions will come from individuals but the state has a responsibility to pump prime our weaponry. We need a government to invest wisely and compassionately (through a combination of our state agencies, private sector and third sector partners) and to tax people fairly and proportionately. Thereafter, Sterling will do the heavy lifting; it is the currency of the United Kingdom, available only to the nations which remain within the Union, where the whole is greater than the sum of the parts, and which allows governments to invest ahead of growth. Currency is the Achilles heel of the Scottish Nationalist movement because, without a trusted currency, an Independent Scotland will be denied access to funding at the scale and price available to the UK and instead will be consigned to austerity never seen before in modern times.
Sterling is the silver bullet that can make Britain work better for us all, and lead the positive case for the Union.