Professor Steve Keen says during Scotland's independence referendum
campaign Scots should consider moving to a parallel currency system
SCOTTISH TIMES EXCLUSIVE
Scottish independence: UK economy faces Lehman-type crisis, says leading economist
One of the world's leading economists, Professor Steve Keen, forecasts that the UK is heading for a "credit crunch similar to Lehman Brothers" and that Scotland breaking away from the "political domination" of the UK Government is "probably a good idea".
A principle speaker at this week’s Just Banking conference in Edinburgh - where Adam Posen of the Bank of England’s Monetary Policy Committee also featured among the speakers - Mr Keen, Professor in Economics and Finance at the University of Western Sydney, warned that the UK is heading into a major economic contraction because the "level of debt that England [UK] is in is astronomical even compared to the American level of debt".
Lehman Brothers was a global financial services firm before declaring bankruptcy on September 15, 2008 following the mass exodus of most of its clients, drastic losses in its stock, and devaluation of its assets by credit rating agencies.
Professor Keen’s shocking prediction is a wake-up call for Britons who have become accustomed to forecasts of recovery from politicians and commentators only to see unemployment and inflation continue to rise while benefits, tax credits and public services are being cut.
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Speaking to Scottish Times, the Australian economist, who has an on-going public joust with the New York Times's Paul Krugman, blamed asset price speculation for the UK’s “astronomical” debt problem which Mr Keen said "peaked at 450 percent" compared to GDP.
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He added that the UK has the largest "hot money" economy in the world and sounded the alarm that when the "game of asset price inflation is over all the regulation that let England accumulate financial wealth in the last 20 years will go into reverse because it will be so easy to pull the money out of the economy".
Explaining why the UK economy faces a Lehman-sized crunch and will experience a contraction far worse than the US has already experienced, Mr Keen said that it is "because you are a far more speculative economy than the Americans were and you've got a far bigger debt overhang and you've got far hotter hot money than even the Americans had."
Talking about the prospects for sterling, Professor Keen said that it is the loss of the UK's productive economy that's the real problem for the British pound.
Mr Keen said: "you've deindustrialised by sending manufacturing jobs to the third world.
"financed by a huge growth in debt at the same time that's kept this illusion of prosperity rolling. Once you pull away that illusion and you find that you've been involved in a huge ponzi scheme, generating fraudulent wealth rather than real wealth then you look at our productive capacity to employ people after we stop employing them as merchant bankers and mortgage brokers and so on, you haven't got the productive capacity any more. That's the real dilemma, that's what really weakens you.
"If you had a bubble like this and you hadn't shifted your production offshore then there would be no innate threat to the strength of the currency but if you've deindustrialised to the scale you have, then when you stop pretending you are getting rich by selling second-hand pieces of paper to each other then that's when the sh** really hits the fan."
Professor Keen’s intervention sheds new light on Scotland’s debate over independence. So far much of the debate has been about whether Scotland can afford independence. Mr Keen’s forecast for the UK economy suggests Scots would be wise to consider the potential risks and uncertainties of remaining within the UK economy. A severe contraction on the scale Mr Keen outlines would make Britain’s current austerity problems appear negligible.
Asked if he thought it would be in Scotland's interests to become independent, Mr Keen said that to break away from a UK Government "which for the last 25 years has been seduced by the neo-liberal dream which we're now finding out is actually a nightmare, then to break away from that political domination is a good idea".
Turning to the issue of what currency an independent Scotland should adopt, Professor Keen suggested that to protect Scotland from the UK's imminent contraction a "smart" move for Scotland would be "to have your own parallel currency".
Pointing to the Euro as an "insane financial system finally crashing", he argued that a Scottish currency running in parallel with sterling would avoid the problems that have plagued the Euro whilst remaining integrated within the UK market.
Mr Keen’s dire prediction of an impending UK crisis far beyond what Britons have already experienced can not be easily dismissed. He was famously voted first by peers in the Revere Awards for economists who forecast the Global Financial Crisis placed above Paul Krugman, Daniel Roubini, George Soros and former World Bank Chief Economist Joseph Stiglitz.
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