Dollar Decline and Scottish Currency Options

Piece I did for Newsnet Scotland:

On Monday the Chinese Yuan started trading against the Russian Ruble on the inter bank market. This is the latest in a series of moves which will promote the Chinese currency's use in global trade and finance.

With the US flooding world markets with dollars its reserve status is coming under increasing threat. As the dollar is the currency of international trade it means that most countries in the world need to have reserves of dollars to buy goods such as oil. This creates demand for dollars and holds the price up whilst at same time the Federal Reserve is devaluing it by printing trillions more (quantative easing).

Inundating the world with dollars creates volatility in exchange rates and destabilises international trade. It also means that US companies can go on a spending spree with dollars whose value is being held up by other economies. This causes inflation in the target economies. The US is also a huge debtor nation and its creditors see the value of their dollar holdings diminished by devaluation.

As US deficits (including off balance sheet) are now spiralling out of control America's creditors such as China realise they are not going to be paid back. As a consequence they want rid of their dollars and are making deals in all asset categories round the world. They could simply sell their dollars but if they put them on the market all at once the dollar would collapse and their reserves will become valueless.

Dollar depreciation has sparked a currency war which is effectively a race to the bottom. Most major currencies are being devalued and this is indicated by the rise in price of precious metals. Gold and silver are seen as safe-havens at a time of currency volatility. In the last few months silver has risen in price from €14 to €20.46 (50% rise) at the time of writing. This partly reflects a previous rally in the Euro which had been thought of as an alternative reserve whilst confidence in the dollar plunged. However recent sovereign debt panics in the Euro-zone have seen confidence in the Euro plummet.

In pounds, silver has risen 65 per cent since January. This shows the pound is nose-diving as British governments and the Bank of England continue their policy of quantative easing (money printing). The most recent figure for quantative easing in the UK was £200 billion and government borrowing for the month of August was an unprecedented £15.3 billion. With deficits expected to escalate and with Britain's financial sector still in crisis, the UK would be in the same postion as Ireland were it not for the fact that Britain can print more money. Ireland does not have that luxury - unless it leaves the Euro.

With currencies being debased at such a pace countries such as China, Brazil and Russia are pushing for a new global reserve currency. The Chinese seem intent on providing that platform:

"The pace of internationalizing the yuan is accelerating," said Zhao Qingming, a senior analyst in Beijing at China Construction Bank Corp, the country's second-largest lender.

"The direct trading between the yuan and the rouble will help expand trade settlements in the two currencies."

The message in these developments for Scotland and the SNP government is that should Scotland have to escape the pound in a hurry the Euro may well not be a wise alternative. An independent Scotland may instead be advised to choose an oil-backed currency such as Norway's Krone (NOK) - one of the most stable currencies in the world.

As the UK enters a period of traumatic sovereign debt, currency and financial crises, Scotland may be wise to float its own currency and so provide a stable platform for foreign trade whilst protecting the wealth of its citizens.

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Update on CCTV: