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Scottish Independence - The Debt Debate Heats Up

ElectionOracle / Scotland Feb 14, 2014 - 05:42 PM GMT

By: Andrew_McKillop


The troubled, often bloody and sometimes farcical history of union and disunion in the British Isles has major tipping points. One of the biggest was Scotland's union with England of 1707, described by historians as a surprise transformation from a hostile merger of two parliaments (Scottish and English) driven by politicians and bankers, to an expansionary and colonial economic partnership project which for some while was the most powerful going concern in the world. The previous Union of the Crowns, of 1603, could be called an arms-length deal whereby Ireland played the role of the main colonizing value-added target, but the two crowns of Scotland and England, although they sat on the same head of James I (of England) and VI (of Scotland), stayed separate.

Scotland's parliamentary politicians of 1707 were dominated by merchant traders and bankers. Their mega-project of the time, called the Darien Project, was the model for several other ill-fated, finance-dominated colonial projects – or more exactly financial scams. Many historians agree that Scottish banker John Law's creation and operation of mega-scams for and on behalf of the French king of the time, Louis XV, were “inspired” by the Darien project to colonize Panama and extract “massive quantities of gold” and of course huge trade gains. The total financial collapse of the Darien project was likely the most powerful single driver of the full Scottish-English union of 1707.

Wikipedia describes the Law project based in France to develop “the lands of Mississippi” as firstly including his creation of a bank able to issue paper credits in return for specie or hard cash. In May 1716, the Banque Générale was the pioneer issuer of paper money, and quoting Wikipedia: “was set up by convicted murderer and millionaire gambler John Law”.  Three-quarters of its capital consisted of Royal treasury notes and bills – debt that is. In August 1717, Law bought the failed Mississippi Company whose claimed objective was French colonization of a swath of territory starting in Louisiana.  Law backed his project with a joint stock trading company called the Compagnie d'Occident and obtained a trade monopoly covering the West Indies and all of North America from Louis XV and his Regent or Administrator (due to Louis XV's young age).

This directly led to the Mississippi Bubble, very similar to the Darien Bubble in Scotland less than 20 years before. Frenzied speculation on future gold production, future trade gains, and future revenues from colonization both enabled and encouraged by Law, directly led to what we can call the first-ever “modern stock exchange” collapse, in Paris, 1719-1720. This caused an approximate 90% loss of nominal market cap from peak to trough.

Today's arguments, mostly coming from English sources, that dissolving the Union is a bad thing because of declining North Sea oil and gas production and revenues, and the immense banking debts of RBS and Halifax-Bank of Scotland (HBOS), both of them Anglo-Scottish ventures, or adventures, can be turned around as fast as John Law quit Paris and fled to Venice, to play and lose again. After Law, the French crown delevered its debts and applied a royal austerity cure, only because there was no other choice. Breaking up the English-Scottish union can be a similar salutary experience. Both Scotland, and even more so England need to delever.

Debt and Nationalism

So-called “sovereign” debt is a hangover term from the 18th century, due to it implying “guaranteed by the reigning sovereign monarch”. The Scottish parliament's traders and bankers of 1700 had run up massive debts finally “guaranteed” by the reigning English-Scottish (in fact Dutch) monarch, William II of Orange, and had to dilute that debt by uniting with their opposite numbers and partners among the English. The sovereign monarch of France in 1716, and his Regent, had run up so much debt they welcomed the John Law scam – until it backfired, which it inevitably had to, but buying time and muddling through are hallmarks of “good management”, history tells us.

The important fact is that in neither case was the debt ever fully paid down – it was diluted and spread, by numbers of actors and through time. The can was kicked down the road.

Today's argument is that the UK's sovereign debt is about 1.35 trillion GB pounds, of which on a per capita basis for Scotland's 5.29 million inhabitants makes their “share” about 8.5% of that, roughly 115 billion GBP. English jiggery-pokery accounting then claims that servicing that “inherited sovereign debt” would swallow as much as two-thirds of Scotland's future 90% share of revenues from overall North Sea oil and gas production, at 2013 rates, where UK tax revenues from the majority-Scottish offshore waters was about 9 billion GBP a year. Servicing Scotland's inherited debt could swallow 5 or 6 billion GBP per year – at current rates of interest, which are extreme low. It would be a bad deal.

Focusing almost exclusively, or exclusively and only, on North Sea oil and gas (about 90% of which is produced in Scottish waters) ignores “small details” like Scotland's whisky industry, tourism, fishing, lumber and other useful and meaningful activities. Activities which the English, crammed together in their wet and small island at a density of 407 persons per square kilometre, which is one of the world's highest, are unable or unwilling or too lazy to do. England could delever its population, for starters, reducing its number of couched potatoes. When or if the highly symbolic prop of North Sea oil and gas is ripped away, England will have to face its basic problems of too much debt, too many entitled couched potatoes, and not enough meaningful economic activity – palliated by the fond belief this can be magicked away with latter-day John Law scams, called the “finance oriented service economy”.

Not paying national debt is, we are forced to admit, the lesson of History and the real objective of all or most leveraged buy-outs operated between nations. The debt has to be outplaced – exactly like English and British industry. Initially an internal or domestic-only operation, at some stage it “goes critical” and international. Arguments for maintaining the Scotland-England union most certainly have to work this theme. Whether or not the Scottish people vote for Independence this year, the UK debt and banking crises will not go away.

Previous Models

Scotland's Darien project, and its collapse were most certainly a main driver of the Union. The project was launched in 1696 with the creation of the trading company called “The Company of Scotland Trading to Africa and the Indies”. The “Indies” of the time included central America as well as eastern Asia. The company's founder was the English parliamentarian and merchant banker William Paterson, who in 1694 had played a leading role creating the Bank of England, and was a leading figure among the group of bankers creating the Bank of Scotland.

The total collapse of the Darien project led to the death or disappearance of all 2500 Scottish settlers and soldiers sent to Darien, whose local government (while it lasted) can be called an example of hyper-democracy, having a President who was changed every 15 days! The collapse of the physical project was however and in fact almost a side-issue. Different estimates by historians for the “total financial reach” of the Darien project, and its spinoffs in both England and Scotland, and elsewhere in Europe, easily attain 2 million pounds sterling of 1695 value, collected in cash and transformed into many times that amount, in credits. The debt generated by the Darien project's collapse was expertly utilized by Patterson and his partners, both Scottish and English, to seal the Union of 1707.

This was a debtors' union. As already mentioned, transforming either public or private debt into credits benefitting a public entity, or private entity were and are the model for all major scams and stock exchange collapses – starting with John Law. The triviality of the physical props or “physical basis” of these scams can be understood - in the Darien project's case, the Scottish settlers brought with them several thousand Bibles and about 3500 powdered wigs, to sell to the local Indians. John Law's Mississippi Company's main employees were above all active in France, around the Paris Bourse or stock exchange, dressed in miners' clothes with picks and shovels – and bags full of fake gold coins. This was the right stuff to bring in the pigeons and the get-luckies!

Breaking apart Scotland and England in 2014 can also generate or throw up massive new opportunities for debt denial, debt creation, and asset trading. The potential salutary role of both Scottish and English public or “sovereign” debt being paid down, and this “shock fact” being forced by the shock of the Union being dissolved, will not be good music to a lot of ears. Simply on this ground, the more-wily among the English and Scottish will quickly recognize the excellent, perhaps massive potential for scam-mongering that will exist, if the Union is dissolved. Alba nasean a rithis!

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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