Pay attention Scotland - we’re cutting our own throat

There are major developments in the global economy that ought to be influencing policy in Scotland. Instead we appear to be about to do precisely the opposite of what we should be learning, and we’ll pay a price for it.

There's a bond market rout taking place (or took place – it has slowed as I write). I guess a lot of people find their eyes glossing over when this news comes on TV. But it is a warning, and it is telling us things we should listen to.

What I'm going to do is very briefly explain the bond market issue and what this is telling us about the western economies, but in particular I want to look at what this really ought to mean for what you'd want to do in Scotland – to contrast that with what we are actually doing.

Here's the basics (and I know some of you will find this very basic indeed). Bonds are government debt. It sells them to raise money either to invest or to cover deficits. Bond yields are how much money the government has to pay the investor to buy the debt. An investor will demand higher yields if they think their money is at greater risk of not being repaid.

The other way round to think about bond yields is to think of them as 'the rate of interest for government borrowing'. The higher the bond yield, the more a government has to pay to borrow. But while bonds are sold as time-limited investments (i.e. a government will repay a ten year bond in ten years...), that doesn't mean the investor is stuck with them for the duration.

There is a bond market and you can sell as well as buy. If you bought the debt of a nation and you suddenly think that nation is unreliable, you might try to sell that debt on to someone else. You might take a small loss, but that might save you a big loss. But then the small loss is because the person buying the bonds isn't going to pay the same price you paid, because you're selling them as risky.

That pushes bond values down and so pushes bond yields up (as they become riskier). That is what is happening just now. There is a global bond sell-off frenzy and it is pushing the cost of debt for western governments up to highs we've not seen since before the financial crisis in 2008 or during the Covid pandemic.

That is a sort of marker for you – whatever is happening just now, it is leaving financial speculators as twitchy as they were before a massive global financial meltdown or a global pandemic. That is, well, worrying.

By why is this happening now? Well, you can go and read the financial press in granular detail and you will find lots of reasons. But let me use three factors to illustrate the wider problem. First there is Iran. It is most straightforward – lenders don't want to see a nation bogged down in an expensive and unwinnable war which is pushing global prices up and stymying the global economy.

This has a secondary effect – the rising cost of oil means that there are inflation concerns and, despite this not being an 'excess demand' problem, the stupid central banks are all going to treat it as an excess demand problem and raise interest rates, making everything worse.

Second, western economies are very 'bubbly' again just now. It's the amount that has been spent on speculative AI investments. At the moment there is only faith that anyone will get their money back because no-one can provide evidence or financial data which suggests they will. And China is doing it all for free, so...

And then third, there is constantly mounting deficits in the western economies. National debt is rising to unprecedented levels. It's not just that this is raising the risk that buying sovereign debt right now might backfire on you, it also highlights something else.

It highlights the fact that if something does go wrong, the western economies have much less headroom to do anything. To use their own analogy, they have maxed out their emergency credit card. If they try and bail out banks or businesses in the event of a crash, it is not clear who will be willing to lend them the money or what happens if they print even more.

Now it's all much more complicated than that, of course. But those are the main dynamics – an adverse set of geopolitical conditions, a highly-leveraged economy which is predicated on returning a value it is not clear can be returned, and key nations with mounting public debt that may make it impossible for them to intervene if there is a crisis.

OK, what is all of this telling us? The first is simple; the west (and particularly the US) is reckless. It keeps creating global crises such that the post-war stability of leadership associated with the western world is a distant memory. Secondly, the west has financialised its economy to such a degree that it now seems impossible to prevent unstable investment behaviours.

We are a chancer economy built on gambling and monopoly, and that keeps building in inherent risk, even as our ability to mitigate risk keeps diminishing with every bailout. But – and this is really crucial – neoliberalism was a lie.

To see what this means, here are two startling pieces of information. One, of all the US national debt accumulated since World War Two, a cool third of it was borrowed by Donal Trump alone. He is responsible for one out of every three pounds the US owes. Second, there have been 11 recessions in the US and ten of them happened under Republicans.

Why does this happen? Because of an inherent contradiction in neoliberalism. It simultaneously demands that taxes be cut to increase demand, arguing that the increased demand will replace the lost tax revenue and the wealth would trickle down, while at the same time demanding 'deregulation of red tape', which means reducing the capacity to collect tax from the wealthiest.

The promised outcomes never arrived. Remarkably, the right of the political spectrum can promise spending (cutting tax is basically just spending) and claim it will pay for itself, then it doesn't, over and over; the deficit gets worse – and then we elect right wingers because everyone thinks it is the left which is racking up the debt.

“If the Scottish Government was making serious decisions now about what to do with Scotland’s economy to give us the best chance of making independence a success it would be worried particularly about anything which was draining tax revenue and anything which was exporting wealth”

Meanwhile none of this works because none of the theory stacks up. The economy is seldom stimulated by a tax cut in a way that replaces the tax cut money, so that isn't true. And the money doesn't trickle down, so it doesn't even create the demand because those at the top mainly buy assets, which just inflates them out of the price range of ordinary people, making it all worse.

Neoliberalism doesn't make ordinary people wealthier and it doesn't generate tax income like it claims (we're about to publish two very major reports that hammer both these points home in stark and surprising ways). It rewards speculation, not productivity. Yet it keeps getting a free pass, allowed to rack up national debt which then demands even more neoliberal responses.

That is what isn't being said; our ballooning national debts are the result of spending 30 years pursuing an economic agenda which doesn't deliver what is says it will and doesn't raise the tax is claims it will. Neoliberalism is a national deficit machine – neoliberalism has demanded disruption and reordering and has produced crisis after crisis. But not sustained tax revenue.

So what are the policy implications for Scotland? Well, if we're content to continue to be a devolved nation then the question ought to be a simple 'OK, how do we grow an economy that actually pays tax?'. Governments always think they can cut their way out of a national debt but that just suppresses the economy, further suppressing tax income.

They also claim (ad naseum) that they are going to 'grow the economy' to make the deficit go away, but since I've suggested these deficits are neoliberal artefacts, using neoliberal economics to solve the problem just entrenches the problem. What we need is improved productivity – and that takes time.

If devolved Scotland wanted to learn the lessons of the implications of this bond sell-off it would be working on our economic fundamentals, the real-world reality of an economy that creates wealth – productivity, high-quality fixed capital, workforce skills that match demand, less low-skill, low pay work and so on. Financial speculation wouldn't be part of it.

So then, if there are these limitations on the conclusions we can draw as a devolved nation, what would it mean for Scottish independence? Would we be better placed?

Basically can we design a Scotland with a different and better debt/economy relationship and from there can we operate without building up constant national debt? I believe the answer is yes. I have written on both the standard approaches and non-standard approaches that would give Scotland an advantage because it is starting from scratch with better knowledge of the problem.

But – and this is a big but – there are conditions which would determine the success of such a strategy, and high among them is confidence in the economy. Balance of payment deficits, balance of trade deficits, national account deficits, excessive overseas control of your economy – there are all kinds of factors which would affect Scotland's early fiscal situation.

This is what I'm trying to get to – in neither scenario do you want to lose further control over the domestic economy and nor do you want to make tax collection harder. The last thing you need is to run deficits and leak wealth at the same time.

That is where Scotland stands at the moment. Just remember, we are so, so far outside international norms in wealth retention it is eye-watering. We export six per cent of our national wealth every single year. Want your national debt to soar? Do that. Want bond markets to doubt the resilience of your economy? Hand it over to foreigners.

If the Scottish Government was making serious decisions now about what to do with Scotland's economy to give us the best chance of making independence a success it would be worried particularly about anything which was draining tax revenue and anything which was exporting wealth.

In other words, a pro-independence Scottish Government ought to be very worried about foreign direct investment where that investment takes the form of purchases of existing assets. One more time, if someone wants to invest in Scotland with the intention of building something which doesn't currently exist, brilliant, come on in, we'd love to talk.

But if the thing they want to 'invest in' already exists (natural assets, existing businesses, property, infrastructure), we should try and stop them. These are not investments for us, these are a process of converting long-term revenue (the money which would have been generated from these assets over time) for short term capital (the flog-off price). It's literally golden goose stuff.

Above I suggested we need to focus on the 'fundamentals' – well think of asset-purchase FDI as forfeited future revenue. That is the productive capacity we wanted to maintain and grow, so please explain how a one-off fire sale to a foreign owner is beneficial?

Two things happened this week, one is a statement of reality, the other is a silly fantasy. What is really happening is that bond markets are getting worried that the western nations have hollowed out their economies and are not a good bet. That is the reality as of today.

And the other? That is the fantasy of the Programme for Government that 'foreign direct investment' (fire sales of Scottish assets) is the same as productive investment. It is not the same, it is the opposite, the process of hollowing-out itself. Investment grows future wealth, FDI exports it all.

There are serious, serious things happening in the world just now and Scotland doesn't even seem to comprehend them. What we are doing is mad. And yet it seems that more and more FDI forever is the only thing the Scottish Government is genuinely committed to.

The current global financial markets show just how hard it is going to be to repair what we're doing now – but we'll have to one day, because a modern western economy that leaks six per cent of its wealth in the middle of a global investor panic is, well, fucked.