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LQD: A Way Out of Austerity

by ARGeezer Mon Dec 9th, 2013 at 11:16:36 AM EST

How to Exit Austerity, Without Exiting the Euro  Rob Parenteau  New Economic Perspecitves

First of all, if a government stops having its own currency, it doesn't just give up `control over monetary policy'...If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market, in competition with businesses, and this may prove excessively expensive or even impossible, particularly under `conditions of extreme urgency'...The danger then is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.

So wrote the late Wynne Godley in his August 1997 Observer article, "Curried Emu". The design flaws in the euro were, in fact, that evident even before the launch - at least to those economists willing to take the career risk of employing heterodox economic analysis. Wynne's early and prescient diagnosis may have come closest to identifying the ultimate flaw in the design of the eurozone - a near theological conviction that relative price adjustments in unfettered markets are a sufficiently strong force to drive economies back onto full employment growth paths.

Rob Parenteau notes that countries caught in the deflationary vise brought about by the EMU and the associated policies would face a high cost for exiting the Euro and proposes an alternative.
(Corrected name for Syriza leader)


If we can agree with the late Wynne Godley that the separation of central bank monetary policy from fiscal policy is one of the core design flaws of the eurozone, and we can acknowledge that the expansionary fiscal consolidations promised five years ago have proven anything but expansionary, then it is clear that effective demand must be revived by other measures. If private sector investment demand is going to continue to prove to weak (especially relative to private saving preferences), and if the increase in trade balance is going to continue to be made largely through import contraction (on the back of weak final domestic demand), then economic growth can only return if countries abandon austerity measures. Simply put, peripheral nations in the eurozone must regain control of their fiscal policy, and must actively pursue full employment growth policies.

To accomplish this, the following alternative public financing instrument may need to be unilaterally adopted in each peripheral nation in the eurozone. Federal governments will henceforth issue revenue anticipation notes to government employees, government suppliers, and beneficiaries of government transfers. These tax anticipation notes, which are a well known instrument of public finance by many state governments across the US, will have the following characteristics: zero coupon (no interest payment), perpetual (meaning no repayment of principal, no redemption, and hence no increase in public debt outstanding), transferable (can be sold onto third parties in open markets), and denominated in euros. In addition, and most importantly, these revenue anticipation notes would be accepted at par value by the federal government in settlement of private sector tax liabilities. The revenue anticipation notes could be distributed electronically to bank accounts of firms and households through some sort of encrypted and secure system, or they could be sent as certificates, preferably in denominations of 50 and 100 euros, to facilitate their possible ease of use in other transactions, should private agents elect to do so. Essentially, the government is securitizing the future tax liabilities of its citizens, and creating what amounts to a tax credit that will not be counted as a liability on its balance sheet, and will not require a stream of future interest payments in fiscal budgets.

One advantage of this alternative financing approach is that day one, the government issuing these tax anticipation notes (we could call them G Notes for Greece, I Notes for Italy, S Notes for Spain, etc.) can pursue the fiscal deficits that are required to return their economy to a full employment growth path. Fiscal austerity can be abandoned without abandoning the euro.


There are many caveats. I can see how this might work, especially if the member's national central bank can substitute anticipation notes for euros, accumulate euros and reserve them for reserves and 'foreign exchange', thereby keeping the national notes within their borders. Euros could be used to purchase goods not available within their own borders, fuel, food and pharmaceuticals for instance. Parenteau notes that current 'austerity' policies are contracting bank balance sheets in EMU countries, making Euros less available for purchase by selling assets or trade goods. (This seems unlikely to be mere coincidence.)
Of course, to make this alternative financing mechanism, enforcement of tax collection will need to be improved in some nations. A more equally distribution of the tax burden across citizens would also help in the issuance of these notes. To accomplish this, citizens will also need to take back their democracies from what Jamie Galbraith has termed the predator state. Otherwise, there is a risk that programs facilitated by the issuance of tax anticipation notes will just become another vehicle for political patronage.

Well, should Alexis Tsipras and Syriza gain control in Greece and should a left government come to power in Italy such changes are, at a minimum, conceivable.
second criticism of this alternative financing mechanism is that it would offer a quick route to accelerating inflation, if not hyperinflation, as some of the constraints on government budgets would be reduced or removed. To address this, it might be helpful for the central bank of each country to be held responsible for not only monitoring inflation conditions, but also for creating early warning systems for the possible acceleration of inflation. Both exercises could be overseen and validated by an independent third party - say IMF or ECB staff.

Hard rules could then be set in place along the following lines: should inflation accelerate through say a 4% YoY ceiling for more than six months in any nation, the Treasury of that nation would have to implement an across the board sequestration on government spending of 5%. This sequestration would remain in effect until the inflation rate dropped below 4% for at least six months. A schedule for ratcheting such measures if inflation continues to accelerate above the ceiling could surely be devised. Alternatively, taxes could be increased on households to create a deferred savings pool, much as Singapore currently employs, and much as Keynes proposed for WWII England.


I would only count on the ECB for vigorous attempts to sabotage any such efforts in a member state. The deferred savings pool, on the other hand, sounds like a great plan. It could be sold as a national effort to regain sovereignty - the 'moral equivalent of war' - and the savings could also finance expansion when inflation is controlled.

But the real accomplishment would have to be one of re-educating the population on the basics of economics and governance and this would require the government to regain control of at least one or two of the major media outlets, such as the public television system in Greece. What has gone wrong, who benefited and what must be done to prevent a recurrence. I have a sense that most have a bit of a clue by now as to the answers to the above.

Display:
How are tax anticipation notes different from a de facto issuance of new currency denominated in Euros? Would this not infringe on the ECB's monopoly of currency issuance and thus be fiercely resisted by the ECB and the Austerians in Germany and elsewhere? Would there be legal challenges?

I'm all for financial innovation if it unties the Gordian knots of austerity strangulation, and innovations like this are probably best slipped in under the door on a small scale whilst nobody is watching. But you would need to be aware of the likely consequences when the ECB "discovers" what is going on.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Dec 6th, 2013 at 01:46:18 PM EST
Rob Parenteau's expertise is more with economics than with Euro-zone politics and I think such policies would indeed run into a buzz saw of opposition. I indicated as much for the ECB. But then, anything that the peripherals do other than meekly submit to looting will be vigorously opposed. To me what he has provided is a possible way that some peripheral country or group of countries who is/are determined to challenge the status quo without exiting the euro might proceed. It could be a wedge to start the process of regaining fiscal sovereignty at least on a partial basis without immediately facing the consequences of leaving the euro.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 6th, 2013 at 07:21:25 PM EST
[ Parent ]
If it were sold as the only way to avoid a Euro exit, they might even get away with it... given how disruptive a Euro exit would be for all concerned. But how is this different from quantitative easing, and wouldn't it run into the same problem of ineffectiveness as QE when up against the zero bound of interest rates? I.e Those with money will simply hoard it and not spend our invest it.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Dec 6th, 2013 at 07:55:11 PM EST
[ Parent ]
The point is that if government spends directly into the economy without having to fund it in the capital markets, the hoarders of money lose the ability to pre-empt economic activity by withholding their money. Right now, hoarding instead of spending or investing depresses the economy, which would not be the case under an active self-funded fiscal policy.

This is, of course, all anathema to the hyperinflation mouthbreathers in charge.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Dec 6th, 2013 at 08:40:33 PM EST
[ Parent ]
And blowing up the hoarder's game is the point of the whole exercise.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 6th, 2013 at 11:43:01 PM EST
[ Parent ]
Which is why it won't happen.

We're having youthanasia by the rentiers, not euthanasia of the rentier.

(with apologies to Keynes and Megadeth)

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Dec 7th, 2013 at 05:18:01 AM EST
[ Parent ]
This:
We're having youthanasia by the rentiers, not euthanasia of the rentier.

Sounds like a sig line. And I agree. But just how will they go about shutting it down? Geezers want to know.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 7th, 2013 at 10:26:42 AM EST
[ Parent ]
The ECB would kill this like the Bank of Austria killed the Wörgl experiment in the 1930s, promptly beating the village back into economic depression.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Dec 6th, 2013 at 07:53:17 PM EST
[ Parent ]
I agree that that would be the immediate impulse. But, if the national central bank of that country could manage to acquire a substantial portion of the euros circulating in the country they could replace them with a de facto domestic currency of the same nominal value. This would be similar to what Samuel P. Chase, US Sec. Treasury did during the US Civil War. He arranged a large loan to the government from Wall Street. The loan was backed by gold on demand. He demanded the gold and told the banks to use the paper currency they received as reserves instead of gold. Later Treasury just issued greenbacks. Thus the Treasury had gold with which to purchase needed imports, the banks had currency for domestic purposes and, when things got tight again, the Treasury emitted Greenback dollars.

In this situaton, the NCB would have euros for needed imports, the domestic currency for domestic purposes and it could always issue more domestic currency. With this they could get the domestic economy functioning and produce some things for export to replenish foreign reserves and euros. It is hard for me to see much further than that, except that when the domestic economy responded as expected it would encourage other countries to join the game. Then things could get really interesting. I can see that military force could stop the country from proceeding. Please explain how they could be stopped by non-military means. The only way I can see is by the ECB declaring any euros they possess to be invalid. But on what basis?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 6th, 2013 at 11:45:11 PM EST
[ Parent ]
But, if the national central bank of that country could manage to acquire a substantial portion of the euros circulating in the country they could replace them with a de facto domestic currency of the same nominal value.
You would have to institute capital controls, unfortunately.

Capital controls by the Troika (as in Cyprus) good. Capital controls to protect a Gesellian experiment... bad.

Also, you're assuming the National Central Bank is on the side of its national government and not the ECB in this fight.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Dec 7th, 2013 at 05:20:58 AM EST
[ Parent ]
NCB must be on side of government - check.
Government must institute capital controls - check.
Government then issues 'revenue anticipation notes' to pay for needed production and services and simultaneously raises AND COLLECTS taxes on business and personal income three or four times median income. If they succeeded in the tax collection and set their rates sufficiently high Keynes' balanced budget theorem should come into play:
"an equal increase in government expenditures and tax receipts lead to an equal increase in income." - John Maynard Keynes by Hyman Minsky, p.28. But I think the government would want to go beyond this. One good way would be by funding renewable energy installations, paying for solar panels and windmills with exports and installation with domestic currency. Greece could do a lot of deficit spending before it even got out of deflation.  

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 7th, 2013 at 10:56:26 AM EST
[ Parent ]
NCB must be on side of government - check.
Government must institute capital controls - check.
Government then issues 'revenue anticipation notes' to pay for needed production and services and simultaneously raises AND COLLECTS taxes on business and personal income three or four times median income.
Euro exit in all but name.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Dec 7th, 2013 at 01:45:42 PM EST
[ Parent ]
For internal purposes for sure. But it could avoid some of the costs of formally leaving the euro.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 7th, 2013 at 02:06:33 PM EST
[ Parent ]
But the important difference is that it actually isn't a formal Euro exit, and all these policies are reversible once the economy improves: whereas leaving the Euro and then rejoining a couple of years later is hardly feasible. We're talking here about extreme measures to get out of a deep hole, not necessarily a permanent change in policy or practice.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Dec 7th, 2013 at 07:48:49 PM EST
[ Parent ]
I'm not sure sizeable real exchange rate differentials wouldn't develop, making it impractical to reverse the "reversible" policies.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sun Dec 8th, 2013 at 03:28:27 AM EST
[ Parent ]
But, were the economy to improve significantly wrt the rest of the EZ-XGermany, other countries may want to follow the same path. That would either pressure the remaining countries to alter their policies or pave the way for a Seuro solution. I also expect that there would be effective internal devaluation. But the problem for most EZ countries is overvaluation as it is.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Dec 8th, 2013 at 10:36:20 AM EST
[ Parent ]
ARGeezer:
NCB must be on side of government - check.

My head on approach to ensure this would be to start an investigation against the NCB leadership for undermining national suvereignity, national economy and EU treaties. I think this would in Sweden be three counts of high treason. Then replace them and let them try to appeal. The NCB boss can appeal to the Court, the rest of the NCB board gets stuck with highest national court.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Dec 7th, 2013 at 03:37:59 PM EST
[ Parent ]
ARGeezer:
One good way would be by funding renewable energy installations, paying for solar panels and windmills with exports and installation with domestic currency.

giving a huge bump in employment...

(and incidentally letting the energy cat entirely out of the bag.)  :)

as i keep repeating ad nauseam, i think this is the (possibly only) way out of the mess we're in...

any fool can do the math on that one, but the media has done such an assiduous job of persuading the public that alt energy will give us cooties and we should let their highnesses decide for us to be wedded to nuke power and stay energy-renters till we're six feet under.

fukushima has helped to demystify some of this homicidal propaganda. even angie jumped to attention on that one...

it's a terrible price to pay for ignorance that our masters have decided to make in our name.

problemino:  even the largely sham democracy we participate in would not be able to co-exist with that, viz the new japanese law on reporting anything but 'good news' about the cleanup, and the similar press-muzzle put on reporting on factory farms in the USA.

democracy in the dark ain't democracy, how long will it continue pretending to play one on TV?

...as long as they keep producing charismatic liars to sell us plutonium nickels.

or until we wake up in sufficient numbers to insist on proper government.

"A fool with a tool is still a fool." - Abraham Verghese

by melo (melometa4(at)gmail.com) on Sat Dec 7th, 2013 at 06:03:00 PM EST
[ Parent ]
Would this not infringe on the ECB's monopoly of currency issuance and thus be fiercely resisted by the ECB and the Austerians in Germany and elsewhere? Would there be legal challenges

As a matter of fact I was coordinator at the panel of the Levy Institute's Minsky conference in Athens where Parenteau presented his G-Note idea and I asked him exactly that question. His answer was "screw the ECB". He argued that these would be denominated in Euros, pretty much like mini-bonds, so not a parallel currency - and anyway if Greece could argue on whether this would be currency-like long enough, by the time it would be resolved, there might have been enough of the desired economic relief to substantially assist an anti-austerity government.

What has been pointed out by conservative pundits here is that this action might be interpreted by depositors and investors as preparation to exit the Euro (which is IMHO a feature not a bug BTW), and thus cause capital flight. To this I can answer that the possibility of a SYRIZA government would trigger capital flight so fast that it will have dried up the banks well before the swearing-in of the new cabinet. Thus capital controls might be imposed by the ECB on the rundown to the elections or, more probably, they wouldn't so that the new government is as powerless as possible when it assumes office. Either way, by the time G-notes are introduced, capital flight won't be much of a problem

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Tue Dec 17th, 2013 at 08:05:12 PM EST
[ Parent ]
Note also that taxation of the poor and the (former) "middle class" is so ridiculous by now that tax arrears are now up to something near a full year's total of tax income, at around a third of GDP. If the G-Notes were to be valid as tax payment at 100% value, they would be in demand, as long as the sum total of G-Notes was appreciably lower than that value.

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Tue Dec 17th, 2013 at 08:10:25 PM EST
[ Parent ]
Is not this partly the result of payment of wages also being in arrears?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Dec 18th, 2013 at 11:06:32 AM EST
[ Parent ]
Yes (most of the people I know including yours truly are owed anything from 1 to 8 months back wages - that's those that still have work - with the possibility that they will never be paid)... That and the imposition of hefty property taxes on people with dwindling or zero incomes, in a country with 80% home ownership and a wide dispersion of small property

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Wed Dec 18th, 2013 at 07:33:27 PM EST
[ Parent ]
Given these facts the Greek parliament should pass a law suspending foreclosure for the duration of the depression. Else the entire country will be owned by 'core' debt holders. This is a high-tech version of the 'gold squeeze' used by J.P. Morgan in the late 19th century against the middle class in the south - a part of why 'carpetbaggers' became such an epitaph.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Dec 19th, 2013 at 11:29:47 AM EST
[ Parent ]
ARGeezer:
This is a high-tech version of the 'gold squeeze' used by J.P. Morgan in the late 19th century against the middle class in the south - a part of why 'carpetbaggers' became such an epitaph.

Tell us more.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Dec 19th, 2013 at 12:15:01 PM EST
[ Parent ]
One of the few good things one can say about Papandreou's PASOK government is that it voted in a law that forbade foreclosures BY BANKS for "first homes", pretty much across the board. The troika has been pressuring the government for months now, to revoke this protection.
Thus, already a new plan has surfaced to be voted by parliament in the next week that would blunt this law, and allow confiscation even of primary residences , for pretty much anyone that isn't dirt poor - that is anyone who has:
  • under 27k/y income AND
  • a home worth less than 200k in 2009
  • AND deposits no larger than 15k in bank
  • AND total property worth less than 270k in 2009  
(the 2009 part is important: the gvt refuses to reassess land and property values since this would mean that they would be getting much less than the troika wants from property taxes - in some areas you have to pay to give away property)

Property is already taxed above and beyond any country in Europe even at the superinflated 2009 prices.
Note that no property is protected against the State. If you owe as little as 20k (I think)to the tax office it can and will seize your home. Secondary residences for even less.
Already the tax-office can unilaterally withdraw sums from bank accounts for debts as little as a few hundred Euros. And the state will confiscate first, and if you have a problem with that you must take it up with the notoriously slow and bottlenecked Greek judicial system...

Most here are convinced that this confiscatory policy is strategically planned to transfer property from the middle class to banks and "investors", that the annihilation of small property owners is a step in the direction of creating a near-third world social structure and the proletarization of society.

But do tell more about the "gold squeeze" and the carpetbaggers....

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Thu Dec 19th, 2013 at 07:25:29 PM EST
[ Parent ]
Correction: Not 27k personal - 36k family income

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Thu Dec 19th, 2013 at 08:29:01 PM EST
[ Parent ]
Unfortunately, I do not have the references at hand now. The stage was set by the successful lobbying of the New York banks, led by J P Morgan, for the resumption of the gold standard after the Civil War, which required the withdrawal of the 'greenback dollars', which began, per Wiki in April of 1866 and soon rose to $4 million/year. This, unsurprisingly, was highly deflationary and was halted in 1868, during one of the frequently recurring post civil war crises and some were even put back into circulation during the panic of '73. In 1874 the amount of Federal Notes in circulation was capped at $382,000,000. In 1875 the  Specie Payment Resumption Act authorized a new withdrawal down to $300 million and mandated that the notes be convertible to gold, but the Secretary of Treasury acquired enough specie to convert them all, whereupon the public became happy to hold the notes and the withdrawal was halted with $346,681,016 still in circulation, where it remained well into the later half of the 20th century. In addition there were varying quantities of silver and gold coins in circulation as well as bank credit, the security for which was the National Notes. There was no US central bank until just after the start of WW I in August, 1914, but National Notes had served as reserves for bank loans since the Legal Tender Acts during the Civil War.

But the US had a strong seasonal swing in the need for money due to the demand for credit during and after the harvest both for harvest and crop sale and transport. From about the first of the year to the late summer money tended to be concentrated in New York and much of the varying amount was used to back loans for stock speculation. In August gold would flow into New York from London to cover the shortage due to the withdrawal of cash from New York for the harvest. Historically, that was why crises tended to occur in September, especially if there were also disruptions in Europe.

I learned all of this since September in my online Money and Banking course offered by Perry Mehrling of Barnard College, Columbia, from online reading materials by Allyn Young. This cast what I previously had known about Yankee Carpetbaggers in the South after the Civil War in an entirely new light.  

   

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Dec 22nd, 2013 at 11:59:33 PM EST
[ Parent ]
Either way, by the time G-notes are introduced, capital flight won't be much of a problem

Even if the money leaves are there not physical assets that remain and could not forfeiture of these assets be used as a threat to force the return of much of the money or as an action in the event the money does not return?  

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Dec 18th, 2013 at 11:02:33 AM EST
[ Parent ]
Money will leave and money will be hidden away, as it is now. The problem is not that in the long run it would be impossible to pull it back, but that this sort of thing can seriously undermine any government that challenges the ECB: even in the short term this could topple a government...

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Wed Dec 18th, 2013 at 07:36:42 PM EST
[ Parent ]
What a hideous monster has emerged from 'dreams and good intentions'. The ECB needs to have a stake driven through it and the Euro-Zone needs to be dissolved if this is all the better they can do.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Dec 19th, 2013 at 11:32:37 AM EST
[ Parent ]
What "dreams and good intentions?" Every time I learn something new about how the Euro was actually cooked up, I learn something new about the depths of bad-faith brinkmanship and economic illiteracy of its founders.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Dec 19th, 2013 at 03:58:07 PM EST
[ Parent ]
How are tax anticipation notes different from a de facto issuance of new currency denominated in Euros?

The latter would be struck down by a summary motion in the Court. The former you can probably wrap in enough bad-faith legalistic bullshit to buy a year or two.

Would this not infringe on the ECB's monopoly of currency issuance and thus be fiercely resisted by the ECB and the Austerians in Germany and elsewhere? Would there be legal challenges?

Only if they connect the dots to the default on "hard Euro" balances. Which default is not averted by issuing Mosler bonds.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Dec 19th, 2013 at 03:29:20 PM EST
[ Parent ]
Some to whoever feels competent to answer:

  1. Current account. If the country is still running a current account deficit, it will run out of euros for foreign trade, right? Then it would need devalue and a one euro X Note would become less then a euro, ending the currency union. So what time scale are we talking about there?

  2. ECB killing the banks. If ECB denies the banks in the country access to euros, won't they go belly up? And can the country recapitalise banks while running X Notes?


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by A swedish kind of death on Sat Dec 7th, 2013 at 03:58:53 PM EST
The current account would have to be positive and would have to stay close until the domestic economy became much more robust due to the stimulus. They would also have to be able to earn either euros or other hard currencies or do trades with other countries for needed imports. Others should be better able to say, but i would think that the country could, effectively, devalue its domestic currency wrt the euro.

Normally the function that the ECB should be providing for a euro-zone country would be that of a lender of last resort. But the ECB doesn't really do lender of last resort anyway, so that might not make too much difference. But the NCB could still perform lender of last resort to domestic institutions, but I would think it could better focus on prudential regulation to keep them out of trouble by insisting on good underwriting. But if this is just one small country there might be danger from the international financial system gaming the difference between the euro and the domestic currency.

The goal should be to develop a sufficiently robust domestic economy that the country could survive leaving the euro. But adopting a policy of issuing a domestic only currency while formally remaining in the eurozone should give the country a developmental, if not a competitive advantage. That advantage would be furthered by purging the domestic economy of rentier activity and corruption and to insure that new investment went to needed projects that could pay back the investment. Turn 'reform' back on the hucksters now peddling the term as a fraudulent slogan. Gaining an economy free of rentier parasites and corruption would make that economy inherently more competitive, as would making infrastructure improvements.

At first the focus would have to be on import substitution, especially energy and food and the development of tourism and export industries. Given that they would be competing with international investors that expect 15-20% returns this should be possible by accepting lower returns but paying the labor more. That would support the domestic economy.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 7th, 2013 at 08:10:53 PM EST
[ Parent ]
Current account. If the country is still running a current account deficit, it will run out of euros for foreign trade, right? Then it would need devalue and a one euro X Note would become less then a euro, ending the currency union. So what time scale are we talking about there?
This is the main reason why it would be necessary to institute capital controls. The least disruptive way to do this is to impose an "exit tax" on money flows. I have proposed to set the exit tax rate equal to the CDS spread of the country. It would also be possible to set it equal to the "risk premium" (10-year yield spread over prime Euro-denominated bonds) on sovereign bonds. Capital controls including an exit tax were introduced by Malaysia in response to the 1997/8 Asian crisis:
Malaysia chose differently. Instead of going to the IMF, Malaysia imposed sweeping controls on capital outflows, fixed the exchange rate, lowered interest rates, and increased spending. From September 2, 1998, foreigners were banned from removing portfolio capital for one year. On February 15, 1999, this was replaced by a graduated tax on outflows, which still remains in place.
(Dani Rodrik on Project Syndicate, July 12, 2001). See also Krugman and a more detailed analysis of how that worked.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sun Dec 8th, 2013 at 04:45:59 AM EST
[ Parent ]
ECB killing the banks. If ECB denies the banks in the country access to euros, won't they go belly up? And can the country recapitalise banks while running X Notes?
The banks might well default on their Euro-denominated obligations and require a recapitalization by the domestic government, in 'X notes'.

How the National Central Bank can remain part of the European System of Central banks under such a regime, especially if capital controls are introduced, is a definite difficulty here.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sun Dec 8th, 2013 at 06:19:39 AM EST
[ Parent ]
There already is the implicit threat that should a government refuse to implement austerity measures the ECB would deny Greek banks access to Euros, anyway \

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Tue Dec 17th, 2013 at 08:13:51 PM EST
[ Parent ]
2) The NCB can continue to draw upon its Target2 account until the ECB decides to default upon the Target2 system. That would be an ECBuBa default, not a Greek default. The Greek NCB would be in breach of the treaties long before that, but that is a question you can probably punt into a legalistic briar patch: The Euro was built on bullshit economic reasoning, which means it's full of inconsistencies around which to build a bad-faith legal position.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Dec 19th, 2013 at 04:01:08 PM EST
[ Parent ]


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