People V Carmichael 9 Nov 2015

[DonnyTJS]

Is it possible to have a "run on the pound" in one country? I would have thought the run would be on the pound and not the country using it.

A flow of capital from banks in one state to another. I was in Slovakia when it happened.

[Orraloon]

A flow of capital from banks in one state to another.

How does that affect the value of the pound in one country but not the other?

[Orraloon]

I was in Slovakia when it happened.

Were you really? I'm surprised you never told us before.

[DonnyTJS]

How does that affect the value of the pound in one country but not the other?

The value wasn't affected (we're talking Koruna here), but the Slovak state was losing its currency reserves. As I mentioned earlier, after five weeks they pulled out of the currency union and floated their own Koruna and everything stabilized.

[DonnyTJS]

Were you really? I'm surprised you never told us before.

Arf...

I know I bang on about this, but it is a topic that keeps raising its head - understandably. I fully accept the difficulties in selling an independent currency to the voters in a referendum, but the issues with a post-independence currency union are genuine.

[Orraloon]

The value wasn't affected (we're talking Koruna here), but the Slovak state was losing its currency reserves. As I mentioned earlier, after five weeks they pulled out of the currency union and floated their own Koruna and everything stabilized.

So, you are not so much concerned with a "a huge run on the Pound in whichever country they thought would have the less valuable pound" your concern is more to do with a potential for a "hot money flow" from one country to another? That would probably happen if the economies of the two countries diverged significantly. No one knows for sure that that would have happened and if it did, the money might have flowed north instead of south. If and when that divergence started that would have been the signal to launch a new currency. They could have called it the English Pound.

[Orraloon]

Arf...

I know I bang on about this, but it is a topic that keeps raising its head - understandably. I fully accept the difficulties in selling an independent currency to the voters in a referendum, but the issues with a post-independence currency union are genuine.

Aye, it was a hard concept to try to sell to the public.

[DonnyTJS]

So, you are not so much concerned with a "a huge run on the Pound in whichever country they thought would have the less valuable pound" your concern is more to do with a potential for a "hot money flow" from one country to another? That would probably happen if the economies of the two countries diverged significantly. No one knows for sure that that would have happened and if it did, the money might have flowed north instead of south. If and when that divergence started that would have been the signal to launch a new currency. They could have called it the English Pound.

At no point have I said in which direction any putative currency flow might occur - it makes no difference since I'm pointing out why two parties might not want to enter into a currency union as independent states. And as I have said, the key here is 'speculation' - in 1993 no one bothered to wait for a divergence in economies - they simply leveraged it.

[aaid]

So, you are not so much concerned with a "a huge run on the Pound in whichever country they thought would have the less valuable pound" your concern is more to do with a potential for a "hot money flow" from one country to another? That would probably happen if the economies of the two countries diverged significantly. No one knows for sure that that would have happened and if it did, the money might have flowed north instead of south. If and when that divergence started that would have been the signal to launch a new currency. They could have called it the English Pound.

I think the point here is that with Slovakia it was the currency markets that brought about the end of the short lived currency union. They tested the resolve of the central banks to support the currency, bet that they wouldn't and won.

A similar thing happened in the UK in the 90s which resulted in Sterling pulling out of the ERM, older readers will recall Norman Lamont raising interest rates from 10% to 12% to 15% in the same day before finally admitting defeat.

[Khana Lagur]

Interesting turns this thread has taken. Now we're on currency it's quite clear that not many people have the foggiest idea about it.

If you can't explain to someone why the New Zealand dollar is one of the world's major currencies then - with all due respect - you really need to stop trying to second guess things like currency runs, speculation and central bank interventions.

[Auld_Reekie]

Which is why we need a serious debate about currency. The groundwork needs to start at some point for next referendum. Worried SNP are going to sit on hands and just wait for opportunity when same prospectus might win.

[thorbotnic]

The other thing to note is most currencies are kept afloat through an alchemical mix of bullshit and unicorns. The GBP for example is horrendously leveraged. It doesn't take many folk trying to get their money out the banks for the confidence trick that is currency to be exposed.

Not sure how a currency could be leveraged? People taking their money out of banks reduces the amount of money in circulation, which strengthens a currency's value.

[Orraloon]

Interesting turns this thread has taken. Now we're on currency it's quite clear that not many people have the foggiest idea about it.

If you can't explain to someone why the New Zealand dollar is one of the world's major currencies then - with all due respect - you really need to stop trying to second guess things like currency runs, speculation and central bank interventions.

We are all here to be educated. Well I am anyway. Why is the NZ dollar one of the world's major currencies?

[Orraloon]

Which is why we need a serious debate about currency. The groundwork needs to start at some point for next referendum. Worried SNP are going to sit on hands and just wait for opportunity when same prospectus might win.

I agree we need a debate but I'm not sure it would be sensible to decide now what the policy should be. We don't know when or if there will be another referendum so we have no idea what the economic conditions will be like if/when we have another referendum.

[Auld_Reekie]

I agree we need a debate but I'm not sure it would be sensible to decide now what the policy should be. We don't know when or if there will be another referendum so we have no idea what the economic conditions will be like if/when we have another referendum.

By then, it'll be too late. You don't just magic up the economic policy and fiscal structures of a new nation in 6 months to suit the trends at the time.

[Khana Lagur]

Not sure how a currency could be leveraged? People taking their money out of banks reduces the amount of money in circulation, which strengthens a currency's value.

It doesn't, mate. All it does it alter one of the different definitions of 'money supply' (which varies according to individual countries). Money supply has no direct correlation to any currency's value. Only demand can strengthen a currency.

We are all here to be educated. Well I am anyway. Why is the NZ dollar one of the world's major currencies?

In the simplest terms, because it is a major exporter (similar to Australia, Japan and Canada). Such economies have huge money flows because buyers have to buy in the currency of that country. The world buys a lot of food and livestock from NZ. So essentially, the eight major currencies are the largest exporters or the most stable economies (UK, USA, Euro, Swiss).

Currency (unlike the stock markets) is an auction market. Price will only move to wherever the next available limit order (an existing offer to buy or sell) is available and can be filled. By that I mean if the current price is 2.27 (NZ) and someone wants to buy £100m of NZ dollars the price will move to wherever that order can be fully filled (eg: £15m sitting at 2.27, £30m at 2.28, £15m at 2.29 and £40m at 2.30 - the price will go to 2.30). That is why when there are big orders to be filled prices move sharply. And this is also why central banks will be reluctant to chase their currency if it's falling rapidly (or rising rapidly). The Swiss and Japanese used to do it regularly but it's not really done much now as they know they are fighting fire. If there economy ois otherwise stable, it's largely pointless.

Currenty is primarily to facilitate global trade - only approx 18% of the market is speculative. I know that doesn't fit in with many people's narrative but them's the facts. And while many people might see the $1 trillion of speculative trade per day as nasty, bad men gambling you might want to have a think about what rate you'd get for your holiday money or your new Honda if that liquidity wasn't there.

[antidote]

Interesting turns this thread has taken. Now we're on currency it's quite clear that not many people have the foggiest idea about it.

If you can't explain to someone why the New Zealand dollar is one of the world's major currencies then - with all due respect - you really need to stop trying to second guess things like currency runs, speculation and central bank interventions.

Sensible words indeed

[DonnyTJS]

Sensible words indeed

[thorbotnic]

It doesn't, mate. All it does it alter one of the different definitions of 'money supply' (which varies according to individual countries). Money supply has no direct correlation to any currency's value. Only demand can strengthen a currency.

In the simplest terms, because it is a major exporter (similar to Australia, Japan and Canada). Such economies have huge money flows because buyers have to buy in the currency of that country. The world buys a lot of food and livestock from NZ. So essentially, the eight major currencies are the largest exporters or the most stable economies (UK, USA, Euro, Swiss).

Currency (unlike the stock markets) is an auction market. Price will only move to wherever the next available limit order (an existing offer to buy or sell) is available and can be filled. By that I mean if the current price is 2.27 (NZ) and someone wants to buy £100m of NZ dollars the price will move to wherever that order can be fully filled (eg: £15m sitting at 2.27, £30m at 2.28, £15m at 2.29 and £40m at 2.30 - the price will go to 2.30). That is why when there are big orders to be filled prices move sharply. And this is also why central banks will be reluctant to chase their currency if it's falling rapidly (or rising rapidly). The Swiss and Japanese used to do it regularly but it's not really done much now as they know they are fighting fire. If there economy ois otherwise stable, it's largely pointless.

Currenty is primarily to facilitate global trade - only approx 18% of the market is speculative. I know that doesn't fit in with many people's narrative but them's the facts. And while many people might see the $1 trillion of speculative trade per day as nasty, bad men gambling you might want to have a think about what rate you'd get for your holiday money or your new Honda if that liquidity wasn't there.

I should have said 'all other things being equal'. Converting bank deposits to cash reduces money supply; cet par this will cause a currency to rise in value.

[antidote]

At no point have I said in which direction any putative currency flow might occur - it makes no difference since I'm pointing out why two parties might not want to enter into a currency union as independent states. And as I have said, the key here is 'speculation' - in 1993 no one bothered to wait for a divergence in economies - they simply leveraged it.

[DonnyTJS]

Go on then Antidote, explain the failure the Koruna currency union if it wasn't due to capital flight and a lack of political commitment. Do you consider it irrelevant to the Yes campaign's currency policy going into last year's referendum? What policy do you suggest they campaign on next time around if not an independent Scottish pound?

[thplinth]

Analysis - Czechoslovakia: a currency split that worked

http://www.independent.co.uk/news/business/czechs-and-slovaks-split-their-currency-1470651.html

Every situation is unique and there is an argument that Scotland's currency would be the stronger not the weaker should they split. A currency union would have easily worked for a period but after a while I think a split would be inevitable.

No big deal as the Czechs and Slovaks proved.

Edited December 14, 2015 by thplinth

[thplinth]

If the Scottish & English Pounds were to split it would not just be Scots buying other hard currencies in the lead up to the split it would be the English doing it as well. I would imagine many people North & South would want to mitigate the risks of the split by say holding Euros or Dollars or Swiss Francs (where they could) for a while until it settled down.

But that said Scotland England are not emerging from 50 years of communism and are modern fully integrated western economies and Scotland in particular is endowed with rich natural resources. Hardly comparable to Slovakia in 1993...

And a currency union can exist and hold together... it is only when it becomes obvious the currency will split does a run happen.

Which is why the UK government was playing with fire using this scare mongering tactic. It would have become very quickly a self-fulfilling prophecy had we voted Yes. And they would have been swept up in it as much as we would.

Edited December 14, 2015 by thplinth

[antidote]

Go on then Antidote, explain the failure the Koruna currency union if it wasn't due to capital flight and a lack of political commitment. Do you consider it irrelevant to the Yes campaign's currency policy going into last year's referendum? What policy do you suggest they campaign on next time around if not an independent Scottish pound?

Why the ###### should I? You're the one that chuntering on about it like you are some sort of international financial expert just because you so happened to stay there at the time.

As the man suggested, why speculate about what speculators do.

Edited December 14, 2015 by antidote

[DonnyTJS]

As I've already said, I'm making no guesses as to which way any capital flow might go - and there's a lot to be said for having a weaker currency - that isn't the point I've been trying to make. The point is the potential for instability in a currency union without firm political commitment behind it. The prospect failed to convince before, and I don't see what's changed.

And this isn't about speculating what speculators do, we know what they do - they speculate. See what Soros did in papping Sterling out of the ERM, or Andy Krieger hitting the New Zealand dollar in '87. Not that this is particularly relevant to the prospect of an rUK - Scottish currency union. The UK govt wouldn't wear it before, and they're not likely to change their tune (see their paper on the subject here, which includes the Koruna union as a case study) so shouldn't the alternatives be discussed?