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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

The Mosler Plan for Greece

Posted by WARREN MOSLER on June 29th, 2011

The Mosler Plan, as previously posted on this website, is now making the rounds in Europe as an alternative to the French Plan that is currently under serious consideration:

Abstract
The following is an outline for a proposed new Greek government bond issue to provide all required medium term euro funding for Greece on very attractive terms.

The new bond issue includes an addition to the default provisions that eliminates the risk of loss to investors. The language added to the default provisions states that while in default, and only in the case of default, these transferable securities can be used directly, by the bearer on demand, at face value plus accrued interest, for payment of any debts, including taxes, owed to the Greek government.

By eliminating the risk of loss, Greece will be able to independently fund all required financial obligations in the market place for the foreseeable future. The immediate benefits are both reduced interest costs that substantially contribute to deficit reduction, and the elimination of the need for the funding assistance from the European Union and the IMF.

Introduction- Restoring National Sovereignty
Current institutional arrangements have resulted in Greece being faced with escalating interest costs when it attempts to fund itself in the market place, to the point where timely funding is not currently available without external assistance. This requirement for external assistance to avoid default has further resulted in a loss of sovereignty, with the EU and IMF offering funding only on their approval of deficit reduction plans by the Greek government that meet specific requirements. Compliance with these demands from the EU and IMF not only include tax increases, spending cuts, and privatizations, but also include aggressive time lines for achieving their deficit reduction goals. It is also understood by all parties that the immediate near term consequences of these imposed austerity measures will include further slowing of the economy, and rising unemployment.

Greece will restore national sovereignty, and regain control of the process of full compliance with the general EU requirements for all member nations, only when it restores its financial independence. Financial independence will allow Greece to again be master of its own destiny, on an equal basis with the other EU members. And the lower interest rate that result(s) from this proposed bond issue will itself be a substantial down payment on the required deficit reduction, easing the requirements for tax increases, spending cuts, and privatizations.

While this proposal restores Greek national sovereignty, and eases funding burdens, we recognize that it is only the first step in restoring the Greek economy. Even with funding independence and low interest rates the Greek government still faces a monumental task in bringing Greece into full compliance with EU requirements and restoring economic output and employment. However, it should also be recognized that financial independence and low cost funding are the critical first steps to long term success.

The Bond Issue- No Risk of Financial Loss
Market based funding at the lowest possible interest rates requires investors who understand there is no ultimate risk of financial loss, and that the promise to pay principal and interest by the issuer is credible. To be credible, a borrower must have the means to meet all contractual euro obligations on a timely basis. For Greece this has meant investors must have the confidence that Greece can generate sufficient revenues through taxing and borrowing to repay its debts.

The credit worthiness of any loan begins with the default provisions. While there may be unconditional promises to pay, investors nonetheless value what their rights are in the event the borrower does not pay. Corporate debt often includes rights to specific collateral, priorities in specific revenues, and other credit enhancing support.

The new proposed Greek bond issue, with its provision that in the event of default the bonds can be used at face value, plus interest, for the payment of taxes by the bearer on demand, gives the bond holder absolute assurance that full maturity value in euro can always be achieved. And with this absolute assurance that these new securities are necessarily ‘money good’ the ability to refinance is established which dramatically reduces the risk of the default provisions actually being triggered. And, again, should there be a default event, the investor will still get full value for his investment as the entire euro value of the defaulted securities can be used at any time for the payment of Greek taxes. So while this discussion concerns the case of default, the removal of the risk of loss means there will always be demand for them at near risk free market interest rates, and that the default discussion is, for all practical purposes, hypothetical.

These new Greek government bonds will be of particular interest to banks, which, again, encourages bank ownership, which makes default that much more remote a possibility. This is because, in the case of default, a bank holding any of these defaulted securities will be able to use them for payment of taxes on behalf of bank clients (using that bank for payment of their taxes). Under these circumstances, a bank depositor client making payment of euro would, in effect, simultaneously buy the defaulted securities from the bank and use them to pay the Greek government taxes due. Again, the fact that the bank would be fully paid for its defaulted securities in the process of depositors paying their taxes means there will be no default in the first place, as these favorable consequences mean there will be continuous demand for new securities of this type at competitive market interest rates, to facilitate all Greek refinancing requirements.

The new ‘money good’ Greek bonds will be attractive to all global investors, both private and public. This will include international banks, insurance companies, pension funds, and other private investors, as well as sovereign wealth funds and foreign central banks which are accumulating euro reserves.

Fiscal Responsibility
As a member in good standing of the European Union, Greece, like all the member nations, is required to be in full compliance of all EU requirements. Therefore, while this proposal will restore national sovereignty, financial independence, and lower interest rates for Greece, austerity measures will continue to be required to bring Greece into EU compliance. However, Greece will gain substantial flexibility with regard to timing and other specific detail, and will be able to work to achieve its goals in an organized, orderly manner, without the continued pressures of default risk and without the specific terms and conditions currently being demanded by the EU and the IMF. Nor will the ECB be required to buy Greek bonds in the market place, obviating those demands as well.

286 Responses to “The Mosler Plan for Greece”

  1. JKH Says:

    Haven’t really thought about your proposal before, but:

    Paying taxes with bonds doesn’t produce Euros to fund current budgetary spending.

    In fact, it widens the current deficit in Euros by the amount of the taxes paid with bonds.

    In the extreme scenario, where all current period taxes are paid with bonds, the deficit in Euros expands to become the entire budget.

    So when old bonds are used to pay all taxes, new bonds must be issued for the entire amount of the budget.

    Why won’t the bond market price in this risk?

    Reply

    Matt Franko Reply:

    @JKH,
    The bonds can only be used to pay taxes after default (creates exit strategy for investors in case of default)?

    I would think that the balances tansferred to the Greek Treasury account to buy the bonds in the first place would be used for funding the Greek govt. hopefully no default would ever occur and the bonds would just pay (now reduced) coupon until maturity…

    Warren’s previous broader proposal for the entire Eurozone (per capita distributions) was primarily intended to remove the needless default risk Eurozone-wide and it looks like he again has come up with a more focused proposal just for Greece (which is in immediate chaos) that intends to remove needless default risk… Resp,

    Reply

    JKH Reply:

    @Matt Franko,

    Not sure that addresses my point, Matt.

    E.g.:

    “And, again, should there be a default event, the investor will still get full value for his investment as the entire euro value of the defaulted securities can be used at any time for the payment of Greek taxes.”

    My point above was that taxes paid with bonds effectively require that new bonds be issued in the same amount. That increases required bond financing for a given level of government expenditure, beyond the level otherwise indicated by the deficit as usually calculated. So my question is, wouldn’t the bond market price in that additional bond financing risk? This also has a bit of a Ponzi feel to it.

    Reply

    Neil Wilson Reply:

    @JKH,

    It’s just makes the bonds as a shadow currency in the case of a default. It gives the Greek central bank the ability to issue ‘money’ again if pushed too far – and they can do it unilaterally without permission from the ECB.

    So it has a Ponzi feel to it in almost the same way as a US dollar bill has a Ponzi feel to it.

    WARREN MOSLER Reply:

    quite the opposite.

    ponzi is when the govt has to issue more bonds/borrow more to get the euro for the bondholders to get paid.

    currently all the euro members are in ponzi, for all practical purposes

    in the case of my proposal, all the govt. has to do is levy taxes for the bond holder to get paid.

    that is, the govt gives the bondholders value by levying taxes, which it can legally do, and, without limit.

    the govt doesn’t have to collect taxes to pay bond holders, only levy taxes.

    so ponzi no longer applies.

    Winslow R. Reply:

    Following Neil’s thought a bit further…

    Next step would be to create a Greek central bank which would purchase greek defaulted debt with Greek euros that could be officially used along side ECB issued euros in Greece.

    If the new currency was allowed to float towards a lower value, everyone that had ECB euros would pay their nominal taxes in Greek euros, in effect the default would shift some but not all pain from defaulted bond holders. In order to minimize the ‘ponzi’ scheme from leading to rampant inflation and an embarrassing exchange rate with all pain born by bond holders, the general Greek population would likely be hit with a higher nominal tax.

    Or the exchange rate could be pegged at 1:1. This would likely require an even higher nominal tax and all adjustment pain borne by Greek tax payers.

    The additional ‘shadow currency’ gives the option to impose shared sacrifice.

    We know how the Greek population reacts to austerity. Perhaps it’s time we find out how Greek bond holders react to austerity. So far, it seems, they are pretty good at getting the ECB to create more euros or at least banks to purchase more Greek bonds.

    JKH Reply:

    Points appreciated, but let me try again:

    So if as I described above every bond used to pay taxes must automatically be replaced by a newly issued bond, the stock of outstanding debt never goes down and in fact continues to increase by the amount of the annual deficit, just as in the normal case of cash taxes.

    And if (for example) the current amount of outstanding debt is 20 times the amount of annual taxes (I don’t know what the actual number is), then an amount of debt equal to 20 times the amount of annual taxes can’t and won’t be used to pay taxes, never will be used, and in fact is increasing every year by the amount of the deficit.

    So given that huge overhang of debt that can’t and won’t be used to pay taxes, why will debt be priced at par merely because a small margin can be used to pay taxes at par? Why won’t pricing reflect the risk that almost all of it can’t and won’t be used to pay taxes, and can’t and won’t be redeemed at par? Why doesn’t pricing reflect the relatively low satiation point in the potential demand for outstanding bonds as a result of taxation?

    The bid for bonds from the government itself is very finite in that sense – limited to the amount of taxes over any taxation period. Moreover, by the time the next tax period comes up, the bonds just purchased have automatically been replaced by new ones issued. Surely in the general circumstances the market will not price bonds at par (merely due to redemption pricing), given such limitations on allowable redemption volumes compared to total outstanding bonds.

    WARREN MOSLER Reply:

    wouldn’t you like to keep your savings in interest bearing securities that, in the case of default, you could use to pay your taxes?

    the economy as a whole desires to net save, for a lot of structural reasons, which is why govts can and do run deficits in the first place.

    yes, it may be unrealistic to assume that nominal savings can actually buy the real goods and services implied when we measure it, especially if ‘spent’ all at once.

    but that’s another story.

    meanwhile removing risk of nominal loss from bond holders facilitates orderly continuation of the process

    beowulf Reply:

    @JKH,
    So it has a Ponzi feel to it in almost the same way as a US dollar bill has a Ponzi feel to it.

    High praise indeed. Certainly Gen. Benjamin Butler, the Army’s foremost monetary expert, would be impressed (his Civil War memoirs are a trip).
    My “secretary of the treasury” so managed his financial affairs that the very large and extraordinary expenditure for feeding [New Orleans] and cleaning it and employing the idle men so they might feed themselves and their families, cost the United States not a dollar; and the Secretary of the Treasury of the United States, when he acknowledged my return of twenty-five thousand dollars in gold which had been sent to my commissary as an advance, said: “You are the cheapest general we have employed.
    http://books.google.com/books?id=u0spAAAAYAAJ&dq=&pg=PA517#v

    roger erickson Reply:

    @Warren,

    Warren, that’s a great point; but it’s confusing to keep calling it a debt or deficit. Sloppy semantics makes for protracted argument. Issued fiat currency can’t be in deficit if no input is required. If the language isn’t fixed, this sophistry won’t go away.

    Do you mind if I paraphrase you this way?

    “The private sector as a whole desires to net save – for a lot of structural reasons – which is why fiat currency issuers can and do increase currency supply in the first place.”

    WARREN MOSLER Reply:

    how about can and do spend more than they tax

    Matt Franko Reply:

    @JKH,
    Perhaps it would not be that the owners of the bonds would be “paying taxes with the bonds” rather the owners of the bonds would effectively be exchanging liabilities the with the Greek Treasury directly (non-govt sector tax liability exchanged for govt sector bond redemption liability). The Greek central bank would not be involved per se, this transaction would settle outside of the banking system technically.

    If the Greek govt was then in default, how they then proceed to get financed going forward would be a new problem for them. Resp,

    WARREN MOSLER Reply:

    they would take the imf/eu bailout? but totally hypothetical as there would never be a default

    Daniel Reply:

    @JKH,
    This is a risk for the Greek Government not the bond holder. Certainly if bonds are used to pay taxes this means Greece has to find funds elsewhere to fund spending, previously done by issuing bonds. Regardless of how or if the Government solves their funding problems the bond holder can still get Euros for their bonds as long as people with Euros are paying tax.

    As for issuing lots more bonds to cover the shortfall. As this only happens in the event of a default it’d be likely that at this point there would either be a bailout (unlikely) or a departure from the Euro. Most likely the Government starts printing Drachma and the tax/spending link is broken for them. If they continue to accept Euros for taxes they can still honour their old bonds.

    Reply

    WARREN MOSLER Reply:

    right, the point is that from the bondholder’s point of view there is no risk of loss, and therefore there will be demand for bonds, and therefore Greece will be able to fund itself

    Reply

    WARREN MOSLER Reply:

    and when bondholders have no risk they will buy all the bonds the govt wants to sell them at reasonable interest rates

    Reply

    WARREN MOSLER Reply:

    what’s priced in is the risk to the bond holder, who is not at risk.

    therefore these are safe bonds for bond holders

    therefore Greece can fund itself and there will be no defaults

    Reply

    JKH Reply:

    @WARREN MOSLER,

    I still don’t see how that addresses my core point:

    Any taxes levied simply to pay off bonds are useless in the sense that they do nothing to help finance the budget. Any such tax liability that the government creates is simply an ex nihilo accounting entry that does nothing for cash flow.

    And the supply of bonds will never drop on a net basis due to such a bond for taxes facility. Bonds redeemed for taxes must be replaced 1:1 by bonds for cash (or taxes for cash).

    If it becomes a larger tax strategy to create tax liabilities in order to create a demand for bonds – as you suggest above – I don’t see how that can succeed either. The bonds must be replaced either by new bonds issued for cash or taxes for cash. Either way, investors or taxpayers must come up with Euros in cash.

    And apart from that, there’s a big difference in guaranteeing bonds at par for the payment of taxes, and guaranteeing a future level of taxation that will ensure the redemption of all bonds at par. And where does that redemption process end? It doesn’t – because new bonds must be issued or new cash taxes levied 1:1.

    Sure feels like Ponzi to me.

    And Daniel above alluded to problems in the event of default, which is what we’re talking about.

    Reply

    Neil Wilson Reply:

    @JKH,

    You’re missing the obvious point here that the bonds become the cash in the case of a default.

    There will be a demand for them because Greeks can use them to pay their taxes. If they drop below par Greeks will exchange Euros for Bonds to pay taxes. And before too long the Greeks are just exchanging bonds with each other.

    Then you rename the Bonds to ‘Drachma’ and away you go.

    WARREN MOSLER Reply:

    first, for all practical purposes no one’s supply of bonds ever drops, apart from the occasional surplus, under current circumstances
    and probably never will.

    Second, first look at it from the bondholder’s point of view. if he sees there is no ultimate risk, he will be willing to buy more than enough to fund the govt, out of his own desire for returns

    JKH Reply:

    @JKH,

    you’re assuming your own conclusion about risk

    the redemption value of the bonds is based on payment for taxes

    but the debt to gdp ratio means an insanely high tax burden in order to realize redemption value even contingently on all bonds in the current period

    that means redemption value simply can’t be realized on the entire bond float in the current period

    its a race to redemption in the current period

    that means the redemption value on the entire debt can only be realized by pushing redemption timing out into future periods

    in that case, you have to discount the redemption option for time

    which means the bonds will not price in the value of redemption in the current taxation period

    WARREN MOSLER Reply:

    yes, all true of all bonds of all nations. and most people think it’s true about currency issuers as well, and buy their bonds anyway.

    yes, if you owned bonds and used them to pay your taxes it might take several years. so what? they are accruing interest at, say, euribor plus 3% and you can borrow against them at any time at much lower rates if you are a bank. so why would you want to use them, and not just keep making the profit?

    and because of the above, they won’t default in the first place. it’s too attractive to buy the new bonds that will continuously be issued at market prices.

  2. Paul Palmer Says:

    Warren, next step is to propose this for funding the US States. But I’m sure you’ve already thought of that..

    Reply

    Dollar Monopoly Reply:

    @Paul Palmer,

    @paul

    I think Warren has written about it in his proposals some where but your comment also make me think of an NPR segment i recently listened to.

    From Money Planet of NPR – When the US paid of the entire National Debt

    http://www.npr.org/templates/transcript/transcript.php?storyId=135423586

    SMITH: So the United States agreed early on to consolidate all the debts of all the states: $75 million. The U.S. would try to pay down the money it owed during the good times, then it would fight another war, and the debt would go up again. The politicians never liked it.

    Reply

    roger erickson Reply:

    @Dollar Monopoly,

    DM, from your link:

    “SMITH: But Andrew Jackson had .. a lot of land in the wilderness. So they did a brisk business selling it off.”
    [Note that this included a tidy profit from the Cherokee Trail of Tears.]

    “Mr. BRANDS: He vetoed, for example, programs to build national highways. He considered these to be unconstitutional in the first place, but bad policy in the second place.”

    “Mr. GORDON: There was a huge crash and the beginning of the longest depression in American history. It actually lasted six years before the economy began to grow again.”

    “SMITH: Now, no one’s saying paying off the debt caused the depression.”

    lol, another bitter laugh

    “SMITH: .. Andrew Jackson just wasn’t savvy enough to do it gently. But the result was that we had to kiss a debt-free USA goodbye. The country never came close again.”

    You could lead these guys to water in the desert, and they wouldn’t drink. Most people can be VERY stubborn about refusing to think. Most ideologies don’t allow it. Members actually have to forswear it by oath, as the cost of membership.

    Reply

    Dollar Monopoly Reply:

    @roger erickson,

    it’s a sad state of affairs but understandable. to make an analogy to the physical world, we are in the middle of the classical physics vs quantum physics identification and differentiation. It’s a paradigm shift. the thing i remember from Brian Greene’s book is that Einstein died a recluse because he didn’t buy into quantum physics. Einstein had a blindspot …and he was Einstein. No wonder MMT is taking so long to take hold. Luckily the internet has speed up communication and now we can all have a discussion and share instantaneously. I’m predicting 2012 will be the year MMT will blow up.

    WARREN MOSLER Reply:

    yes, it’s somewhere on this website probably as a proposal for california a while back

    Reply

    pebird Reply:

    @WARREN MOSLER, California essentially did this with “Revenue Anticipation Notes”, a short-term funding mechanism during their annual budget gymnastics.

    Reply

    WARREN MOSLER Reply:

    except to my knowledge they weren’t acceptable for payment of taxes

    pebird Reply:

    It’s funny, a few years ago the banks started making noise that they were going to stop accepting the RA Notes from California suppliers. Then some vendors said they were they were going to turn them in to pay state taxes, California was going to make it illegal to have trade in Revenue Anticipation Notes, then the Bank of America suddenly dropped their plan to no longer accept them, and the funding crisis disappeared.

    Arthur Reply:

    @Paul Palmer, The states can’t do it because the Constitution bans it (no state shall emit a bill of credit or something like that). See Craig v. Missouri, 29 US 410 (1830). The states can, however, tax bank revenues/capital and accept state licensed bank money (book credit) to pay for such revenues/capital taxes. This amounts to the same thing, I think, as issuing bonds that can cancel tax liabilities, though I have not thought it through fully. It was, in fact, one of the main ways states financed themselves before the Great Depression.

    Reply

    Calgacus Reply:

    @Arthur, From http://www.law.cornell.edu/anncon/html/art1frag93_user.html , it seems that might be right, that there is legal leeway to do this in all but name. The cited cases allowing things like “coupons receivable for taxes” or “bills issued by state banks” should indicate how politicians of yore worked around this article.

    Reply

  3. Max Says:

    I haven’t given this much thought, but I perceive a flaw in this plan: who enforces the default provision? If it’s just a promise of the Greek government, then what makes it more credible than the promise to pay interest and principle?

    Reply

    PJ Pierre Reply:

    @Max,

    It’s a matter of ‘ability to pay’, the issue of ‘willingness to pay’ remains.

    One has to remember that ‘willingness to pay’ is a risk that any lender must always account for.

    The proposal make ‘ability to pay’ a non issue as long as Greece can levy taxes.

    Reply

    WARREN MOSLER Reply:

    right, and issuing under eu law means greece can’t stop you from using them to pay greek taxes by prosecuting you for non payment

    Reply

  4. Alan Avans Says:

    Max, you ask who enforces the default provision? Default is well nigh impossible in the first place and the fact that in the event of default the bonds can be purchased at low low prices by Greek taxpayers for the purpose of meeting their tax obligations…well, does the impact of such an arrangement on the Greek government really need further explanation?

    Reply

  5. Alan Avans Says:

    Oh, almost forgot. As to who specifically will enforce the default provision, I imagine it will be whoever is designated the administrative custodian of the bond program.

    Reply

    WARREN MOSLER Reply:

    and ‘not enforcing’ means someone presents the bonds, the govt doesn’t accept, and charges him with tax evasion. then the euro court system has to support the charge of unpaid taxes

    Reply

    Max Reply:

    That works for people who are out of reach of the Greek government. But how many such people owe Greek taxes to begin with?

    Reply

    WARREN MOSLER Reply:

    people hold dollar assets who have no dollar taxes due.

    all the dollar is is a us tax credit

    Max Reply:

    Yes, but your argument requires Greek taxpayers who are beyond the reach of the Greek government. Meaning, they don’t live in Greece or own property in Greece. This is certainly a tiny minority of Greek taxpayers, yes?

    WARREN MOSLER Reply:

    doesn’t matter

  6. Ramanan Says:

    The assumption that this scheme works is that the public debt does not rise faster than national income.

    Imagine a scenario.

    Imagine there are large number of bond holders (foreigners included).
    i.e. the par amount of the bonds they hold is far more than the taxes taxpayers have to pay in the near future.

    Tax holders can create reverse auctions in which they will buy bonds at the lowest price to in order to take advantage of this scheme. (to the point of refusing to do it unless their return is 20%).

    So its not clear if it is guaranteed that bond prices will be “pulled to par”.

    The assumption that this scheme works is the following: Imagine a bond is trading at 80 near maturity. But wait, since a tax payer can purchase this at 80 and pay his tax of 100 with the bond, why would the bond trade at 80 etc.

    However, the assumption that there will be enough tax payers near maturity willing to buy the bond for paying taxes is a big assumption.

    Reply

    WARREN MOSLER Reply:

    there only needs to be sufficient savers who recognize no ultimate risk of nominal loss

    Reply

    Ramanan Reply:

    @WARREN MOSLER,

    I will put it another way. The Greek public liabilities keeps rising. At some point, people are simply getting tax credits which can be used to pay taxes later. Not now. In other words, while positive interest rate is being paid on public debt, negative rate is being paid on tax credits. This is because bonds/taxes-payable keeps rising, with no mechanism for this to reverse.

    Reply

    WARREN MOSLER Reply:

    they get interest bearing securities that are money good due to the default clause that makes them, worst case, tax credits that are good forever.

    what better way to satisfy nominal savings desires that increase geometrically?

    JKH Reply:

    @WARREN MOSLER,

    The Ponzi aspect is that you can’t redeem bonds for payment of taxes unless you issue new bonds for cash or issue new tax liabilities for cash, in the same amount as the bond redemption.

    The mechanism by which bonds are redeemed for cash essentially creates a second currency – bonds.

    But the government does not spend in that currency. So it is useless in terms of funding the budgetary needs of the government as a Euro currency user.

    Reply

    JKH Reply:

    @JKH,

    above, meant:

    “The mechanism by which bonds are redeemed for the payment of taxes essentially creates a second currency – bonds.”

    WARREN MOSLER Reply:

    only in the case of default, which because of the default language, doesn’t happen

    WARREN MOSLER Reply:

    only in default, which the default language for all practical purposes prevents.

    be the bond holder, like a greek bank. are you worried you won’t get full nominal value, one way or another/

    Neil Wilson Reply:

    @JKH,

    But the government could very easily spend in bonds if insufficient Euros are forthcoming. There is a demand for them as they extinguish taxes.

    Remember we are in a default situation here.

    WARREN MOSLER Reply:

    the gov sells the bonds for euro and then spends the euro

    WARREN MOSLER Reply:

    why would there be no euro forthcoming to buy new greek bonds at euribor plus 3%?

    JKH Reply:

    The government can’t spend in bonds and remain part of the EZ. Bonds are an alternative currency.

    WARREN MOSLER Reply:

    the gov spends euro after it sells the bonds for euro

    WARREN MOSLER Reply:

    they don’t need to. they spend euro

    WARREN MOSLER Reply:

    the point is, there isn’t going to be a default.

    greece will issue the bonds that will get bought by investors like banks because they like the yield and are satisfied that there is no ultimate risk of loss for all practical purposes, and greece will spend the euros on their deficit spending and on redeeming maturing bonds.

    JKH Reply:

    Thanks for feedback, as always.

    My instinct is that my point still holds, but I’ll suspend for now to avoid kicking up redundant dust. Perhaps back later. Crying uncle is a remote contingency, but not at all supported by current state of mind.

    Would be interesting to see feedback from Europe. Any interesting published feedback to date?

    WARREN MOSLER Reply:

    not true.

    you still aren’t thinking from the bond holder’s point of view. when you buy a bond you want to know the risk of getting nominal value.
    with these bonds you will get nominal value. either euro or, in the case of default, you have forever at good interest rates to use them for payment of your taxes or anyone else’s taxes.

    that’s not chopped liver

    MamMoTh Reply:

    with these bonds you will get nominal value. either euro or, in the case of default, you have forever at good interest rates to use them for payment of your taxes or anyone else’s taxes.

    why forever? wouldn’t in case of default the value of these bonds get nominally fixed to their value at maturity?

    WARREN MOSLER Reply:

    and they keep accruing interest

    MamMoTh Reply:

    How do they keep accruing interest?

    My understanding is that the Mosler bonds will be worth their maturity value from the day of default. Where do the accruing interest come from?

    WARREN MOSLER Reply:

    after maturity most all bonds continue to accrue interest until actually paid.

    JKH Reply:

    @Ramanan,

    similar idea, R.

    see my last comment above regarding discounting of redemption value timing

    Reply

    Ramanan Reply:

    @JKH,

    Yes saw, clarified my thoughts somehow to put this across.

    I am sure you have more thoughts on this but find it not so straightforward to put into words, but the above was very well written.

    Reply

  7. roger erickson Says:

    There is always a whole spectrum of options being intelligently discussed, few of which pass from local to nationwide discussion. Policy is the result of selling ideas, not just having them.

    While these suggestions are ongoing, politicians are choosing their – apparent – jobs over their countrymen, and accepting the “FINAL AUSTERITY BILL.” (bitter)lol, & then cry for Greece.

    The implications of that are propagating wider & faster than either foresight or willing analysis ever did.

    http://online.wsj.com/article/SB10001424052702304584004576417121066876968.html

    (ps: they changed the wording even as I typed)

    Reply

    Dollar Monopoly Reply:

    @roger erickson,

    MMT will fail not from poor logic but rather poor marketing if we don’t get a clear coherent message for the average joe to grasp. The trick to simplifying these discussions is two part. First pose everything in binary terms. People naturally think in binary terms: Currency Issuer vs. User, Spending vs. Savings, Savings vs. Debt, Asset vs. Liability

    The second part is then to reframe: All issuer liabilities, or debt, is user savings.Debt for a user is a burden. Debt for an issuer is not a burden…it’s a convenience.

    Once we get some good talking points, like i’m trying to create on DollarMonopoly.com, then we push a social marketing campaign all over the web.

    Reply

    Art Reply:

    @Dollar Monopoly,

    Agree with you on marketing (and that MMT stands a better chance with a bottom-up strategy), but even this:

    “All issuer liabilities, or debt, is user savings.Debt for a user is a burden. Debt for an issuer is not a burden…it’s a convenience”

    is eye-glazing stuff for most people. Our widespread lack of financial education is a problem (although those most educated in economics are a real problem too at the moment!).

    I continue to find that the easiest analogy for most people to get their heads around is to the gold standard, believe it or not. Goes like so:

    1) A growing economy requires ongoing additions to money supply. [Or "financial assets" for non-beginners. Rothbard's acolytes will expose themselves here - not literally, I hope! - saving you some time and effort.]

    2) Gold mines used to supply us with new money, right? Did anyone ever worry that they were running ongoing ‘deficits’ of gold? [Plenty of people don't know the answer; assure them that the correct one is "No."] Today, the US [or other] govt’s deficit spending adds money [financial assets] to the economy, the same way that gold mine’s ‘gold deficits’ used to. Do budget deficits seem like such a bad thing now? Does a balanced budget amendment still sound like a good idea?

    [Might appeal to some to point out that fiat money doesn't face resource constraints of a gold standard or impose the steep environmental and social costs that gold used to. For inflation hawks, you have to acknowledge that yes, fiat money definitely is more inflation-prone than gold was, for that same reason; but institutionally that risk is now pretty well managed, and then some; at this point, any lingering Rothbardian is sure to expose themselves, so be ready to cover your eyes! Unless they're good-looking, of course.]

    3) If someone wants to talk about national debt: Gold mines’ ‘deficits’ continuously added to the supply of money [financial assets], in much the same way that govt deficits add to the supply of money and govt debt today. Did anyone ever argue that we should re-bury all the gold that had been mined? [Again, some sincerely don't know the answer; assure them it's "No" for this one too.] Of course not. It’s also telling that whenever the US govt has significantly paid down or paid off its debt, it has been followed by a recession or depression. So should we ever try to pay down govt debt for its own sake? Does ‘paying off the national debt’ still sound like a good idea?

    The gold standard analogy’s not perfect by any stretch, but it seems to be a relatively easy story for non-finance/econ folks to grasp, compared to accounting identities and sectoral balances.

    Reply

    Dollar Monopoly Reply:

    @Art,

    Thanks for the feedback. I agree with you the isolated statement I provided would make eyes glaze over. So let me add a little context

    For starters, a currency issuer’s debt (aka. governement debt) is not remotely analogous to currency user’s debt. Just as every asset has a corresponding liability in accounting, the currency issuer’s debt is dollar for dollar equal to the currency user’s savings. The issuer’s debt is not a financial constraint or burden of any sort, it’s simply the result of the users’ decision to save rather than spend. All savings by users in banknotes, deposits, or treasuries create a corresponding liability with the issuer as a matter of double-entry accounting. The issuer’s debt, or liability, exists as a convenience to those users who choose to save risk-free instead of spend (invest or consume) in the private sector. On the surface this may sound correct but what exactly is going on?

    read more at my site DollarMonopoly.com

    Art Reply:

    @Dollar Monopoly,

    You’re making it worse! I get it, but you’re going to lose 90% of the people who haven’t already glazed over as soon as you say anything like, “a currency issuer’s debt (aka. government debt) is not remotely analogous to currency user’s debt. Just as every asset has a corresponding liability in accounting…” And you’re sure as hell not going to de-glaze anyone’s eyes with “let me add a little context”!

    A technical narrative will only resonate with people if accompanied by hands-on experience, like the buckaroos project at UMKC. For UMKC students, it’s compulsory. But compulsion is usually counterproductive in marketing, isn’t it?

    IMO, forget assets and liabilities and other jargon for general MMT-marketing purposes. Just help people get their heads around the fact that they shouldn’t assume deficits and debt are bad, using plain everyday language that doesn’t demand that they learn a lot of new stuff. So far, the best I’ve come up with is the govt budget ~ gold mine analogy. The old baby sitters co-op story is the only other one I’ve heard, and even it’s a bit confusing.

    Neil Wilson Reply:

    The one I’m using at the moment is this:

    Why would an entity that owns a central bank borrow money from anywhere else? If you own a bank then any loan you get from the bank is at an effective rate of zero (any interest you pay the bank comes back to you as bank profit). And because you own the bank they are hardly going to turn you down for a loan.

    So why would you would borrow from third parties at interest when you own a bank? It doesn’t make any sense.

    That immediately puts a question mark over the whole bond market thing (most ordinary people borrow from banks, not bond markets – the psychological anchor works in your favour there).

    It’s a lot easier to start there than talk about consolidated government sector balance sheets and endogenous money creation. I find that the ‘government owns the central bank’ is an easier sell than ‘currency issuer’.

    Dollar Monopoly Reply:

    @Art,
    interesting. i guess different strokes for different folks. those marketing scenarios don’t appeal to me because it’s impossible for me to extrapolate from “tokens” to dollars. at least it was pre-MMT exposure. at the end of the day the message is just the means to the end. as long as MMT sells is all that matters. so having multiple approaches is fine because the messages typically resonate with different groups anyway.

    thanks for your feedback even though your think “i’m making it worse” :-)
    It’s always fascinated to me to see what approaches appeal to what people.

    Art Reply:

    @Dollar Monopoly,

    No problem, it’s based on feedback I’ve received after glazing over many an eye on various subjects. :)

    Neil, I’d even hesitate to use yours, as it might sound Ponzi-ish or like counterfeiting to anyone who doesn’t already know a little bit about the financial system and public finances (besides, don’t those bonds play an important role in helping the CB hit its target??).

    Digging gold out of the ground and using it as money is a comparatively simple idea for 99% of the world. If it gets any traction, I then point them to Warren’s 7DIFs.

    Dollar Monopoly Reply:

    @Art,

    Why does economics cause so much confusion? I mean at the end of the day the whole subject is binary? Assets and liabilities. Banknotes, deposits, and treasuries are both an liability and an asset. Liabilities to currency issuers. Assets to currency users. Users “save” the issuer’s liabilities when they don’t want to spend (ie trade) them on (for) anything in the marketplace. As a result issuer debt is user savings. How do we go from these simple concepts to such a clusterf@ck of explanations of everything else.

    I mean this whole subject needs to be reorganized because the technical language we have used to described this stuff is causing more confusion than clarity. This is by no means a criticism of Warren because we are all here on this blog because of his clarity and knowledge. I pose this as a challenge to all of us to simplify, simplify, simplify. I mean basic concepts he has mentioned elsewhere are mine boggling easy to understand. For example, “The only reason to trade is to import. The cost of importing is exporting.” This is such a ridiculously basic concept to understand but somewhere in the midst of all our capital account deficits talk becomes an easy oversight.

    Here is my rhetorical questions of the day – why is macro-level economics so confusing?

    Tom Hickey Reply:

    “Here is my rhetorical questions of the day – why is macro-level economics so confusing?”

    Because most people have trouble balancing their check book?

    Dollar Monopoly Reply:

    @Tom Hickey

    True. But for every 50 idiots there has got to be someone smart enough to say. “I bet I can put these 50 idiots to work”. But look at our state of affairs today. We have massive unemployment because the smart ones can figure out how to make the system work. It’s mind boggling these Ivy league academic douche bags are the ones protected from the very misguided economic policies they promote.

    okay i’ve vented. thanks for indulging me. i’m going for a run.

    Reply

  8. Dave Begotka Says:

    Dudes this is like trying to find the end of a circle

    Reply

    Dollar Monopoly Reply:

    @Dave Begotka,

    i totally agree with you Dave. This is mind numbing stuff if someone doesn’t sit down and try to layout a clear coherent MMT message. Speaking of which ….has anyone seen this new DollarMonopoly.com site? :-)

    Reply

  9. Art Says:

    Warren, good luck! I can see how the EU would support this, but wouldn’t the IMF fight it tooth and nail? They hate not to be needed.

    “The immediate benefits [include]…the elimination of the need for the funding assistance from the European Union and the IMF.”

    Beowulf, thanks for the Butler autobio link, just read his first page (33), great stuff!

    Reply

    beowulf Reply:

    @Art,
    You’re welcome. Gen. Butler was an interesting fellow, I first read about him in a NY Times piece on how this wily Army officer refusal to send back runaway slaves led directly to Lincoln’s Emancipation Proclamation.
    http://tinyurl.com/theshrugthatchangedhistory

    I found Butler’s Book online while looking him up (a pity he turned down Lincoln’s VP offer in 1864). Naturally such a wise fellow was in-paradigm in his economics (modern terms added in brackets).
    The common idea is that there will be inflation when you issue paper money. It is drawn from the old idea of ["fractional reserve"] bank circulation… There is a limitation on this power of issuing greenbacks, and only one… they can only be issued in such quantities without depreciation ["inflation"] in fact, as will be absorbed by the community to the degree that they are required for business purposes ["NGDP"]…
    When you have issued two hundred millions more of these greenbacks and paid your interest-bearing debt with them… Are they appreciated or depreciated ? Appreciated (“deflationary”], in fact, because you save the interest on the two hundred millions which you have paid off…
    Framing an American system of finance I do not propose to adapt it to the wants of any other nation and especially the Chinese… the best system of finance, to do what? To lessen the burden of taxation and to relieve the loyal, true-hearted, but over-burdened people from this so great weight of taxation.
    (link above 941,953).

    OK, that bit about China makes me think he co-wrote this book with Tupac back in ’94. :o)
    http://www.metacafe.com/watch/5693205/chappelle_show_tupac_sketch/

    Reply

  10. MamMoTh Says:

    Definitely an interesting proposal and discussion.

    I do share the questions raised by JKH and Ramanan. It seems to me it would be a good empirical experiment on how taxes can drive a currency even when you never actually pay your taxes with that currency?

    I am a bit skeptic about its results. On the other hand, how could it hurt implementing this simple idea? Its simplicity is its strongest point, and, if in the worst case the situation will remain the same for the Greeks, why not give it a try?

    Reply

    WARREN MOSLER Reply:

    so if greece decided that my business cards would be excepted for payment of greek taxes for one euro each don’t you think i could sell a few…

    Reply

  11. MamMoTh Says:

    A few more questions.

    * what is the rationale behind accepting the bonds for tax payments only in case of default instead of at any time?

    * why not accept bonds for other payments like for the privatization of assets?

    * if this proposal lowered yields on greek bonds, wouldn’t it rise them on other countries bonds including the rest of the PIGS?

    Reply

    beowulf Reply:

    @MamMoTh,
    “what is the rationale behind accepting the bonds for tax payments only in case of default instead of at any time?
    why not accept bonds for other payments like for the privatization of assets?”

    The state should be able to choose how it wishes to be paid. If the bonds available for any tax payment (and not just those post-default), the difference in value between interest-paying bonds and interest-free money creates a tax arbitrage opportunity. The same goes doubly so for voluntary transactions like asset sales. The buyers already have enough market power, unlike taxpayers they can always walk away from the deal.
    While they’re at it, as Neil Wilson suggested at Yves’s site, Greece should impose a land value tax. Its current property tax regime has more holes than a pipe organ.
    http://www.ktimatoemporiki.gr/content.php?id=116#AnnualRealestateTax

    (info on how a LVT would operate)
    http://www.prospercalifornia.com/2010/01/assessor-explains-practicality-of-reform-proposal/

    Reply

    MamMoTh Reply:

    @beowulf,

    If the bonds available for any tax payment (and not just those post-default), the difference in value between interest-paying bonds and interest-free money creates a tax arbitrage opportunity

    before I ask another silly question, what would the tax arbitrage opportunity be?

    Reply

    beowulf Reply:

    @MamMoTh,

    Let’s say that Greek bonds had the tax payment rules as T-bills (which are accepted for taxes at Secretary’s election).
    (b) Acceptable in payment of taxes. The Secretary of the Treasury, in his discretion, when inviting tenders for Treasury bills, may provide that Treasury bills of any series will be acceptable at maturity value, whether at or before maturity, under such rules and regulations as he shall prescribe or approve, in payment of income taxes payable under the provisions of the Internal Revenue Code… may be surrendered to any Federal Reserve Bank or Branch, acting as fiscal agent of the United States…
    http://law.justia.com/cfr/title31/31-2.1.1.2.25.0.5.5.html

    If a 12-month bill was yielding, say, 5%, a taxpayer could buy the bill at maturity value less 5%, the next day he could surrender it to his nearest bank at maturity value to net a 5% discount on his taxes. Unless its in the T-bill offering boilerplate, I don’t think the Secretary has ever provided for allowing T-bills for tax payments.

    WARREN MOSLER Reply:

    thanks!

    WARREN MOSLER Reply:

    yes, it works just as well as accepting them at any time, as those would sort of be like one day bonds. the maturity can be anything
    i just wanted to keep it as simple as possible.

    don’t need to do any more to make it all work and the funding crisis go away. (but not the economic mess)

    lower rates one place don’t raise rates at another?

    and the rest of the euro zone would probably quickly do same

    Reply

  12. Tom Hickey Says:

    JKH, Ramanan, your arguments seem to me to be similar to the inflationary concerns of those that argue that “all fiat currencies have ultimately failed.” What I am not getting? It looks to me like if Chartalism is correct, then Warren is, too.

    Reply

    Ramanan Reply:

    @Tom Hickey,

    Greece has surrendered its sovereignty for the Euro. So not sure about the fiat thing.

    Lets see more closely. The Greek GDP is around €230b. Its public debt is around €355b.

    Greece government expenditure is around €85b and taxes around €75-80b.

    http://www.minfin.gr/portal/en

    I would imagine that taxes are deducted at source for most wage payments. Even securities transaction taxes are taxed immediately.

    Its not straightforward to calculate the taxes not deducted at source but lets say its around €40b.

    Of the €355b of the public debt, lot of it is held by foreigners (€133b)(http://www.bankofgreece.gr/Pages/en/Statistics/externalsector/international.aspx

    Also, day in and day out the Greek Treasury is involved in rolling over securities and I would imagine a good proportion (30%?) is rolled every year. So that is €90b.

    So do you think the dynamics between the people waiting to pay €40b in taxes and the €90b of securities being rolled over can happen smoothly ?

    Not sure of the 30% – but this assumption is not way off – the US government gross issuance in 2010 was $6T. http://www.sifma.org/uploadedFiles/Research/Statistics/StatisticsFiles/TA-US-Treasury-Issuance-SIFMA.xls

    So lets say the government defaults. Some tax payers will bid up the price of government bonds and it is not clear to me that the market will clear near par. Then ?

    Reply

    Ramanan Reply:

    … plus there is no mechanism for Greek public debt/gdp from rising forever except fiscal retrenchment and in case they don’t want that foreigners have to be relied on increasingly to finance the deficit.

    Foreigners won’t find it too attractive to believe that in case there is a default, some tax payer will come and pay the foreigner Euros at par.

    Reply

    WARREN MOSLER Reply:

    people and banks already accept all currencies from all over the world

    beowulf Reply:

    @Ramanan,

    But tax are due year in, year out, so bondholders can always wait till next year, adding interest along the way. What’s more, you shouldn’t neglect the $40 billion or so that’s withheld. If the bonds were trading below par, wouldn’t employers buy them up to get a discount on payroll taxes owed?

    Reply

    Ramanan Reply:

    @beowulf,

    Yeah withheld and paid to the Treasury not ignoring.

    “If the bonds were trading below par, wouldn’t employers buy them up to get a discount on payroll taxes owed?”

    The amount of bonds would be far higher than the amount of taxes that needs to be paid in the near future so the bond holder needs to worry about the fact that his bond won’t be bought by a tax payer.

    WARREN MOSLER Reply:

    they get bought by banks who can make 30% returns on equity on them by not redeeming them

    WARREN MOSLER Reply:

    be the bond holder…

    Reply

    roger erickson Reply:

    @Ramanan,

    > Greece has surrendered its sovereignty for the Euro

    Correction. Greece has surrendered it’s freedom to be a fully sovereign issuer of Euro’s, NOT it’s own tax liabilities. There, it’s still sovereign, so can implement Warren’s end run around the ECB’s overly specific restrictions.

    Reply

  13. jason m Says:

    Unrelated, except in the sense that MMT’ers (like Warren getting circulation in the EU) are popping up on the radar. I Do not recall an MMT’er ever being quoted in one of Canada’s major newspapers in the business section.

    (See Marshal quoted near bottom of pg 1)
    http://www.theglobeandmail.com/report-on-business/economy/default-threat-remains-despite-greeces-austerity-vote/article2079890/

    Reply

  14. Hugo Heden Says:

    I don’t understand half of what’s written here, so here’s my layman summary of the whole thing.

    Firstly. There is admittedly some logic to the idea that Greek bonds should be safer than the bonds of a company (in the same precarious financial position). The reason is that in the event of company default, the company disappears and there is nothing left, while in the case of a Greek default there will still be a whole nation lying around — “Greece” — with a geographical area, a population, a government, taxes and so forth.

    (We acknowledge that in the case of a military invasion and the like, what’s known as “Greece” may actually “disappear” economically and politically. In that sense there is always a risk holding government bonds or currency. And the whole earth could blow up any day (21 October?). But right now the main issue is Greece “defaulting”.)

    Now, according to MMT, fiat money is fundamentally tax driven. Taxing is what gives fiat money its initial and fundamental value (although there is a slew of additional reasons for desiring to acquire fiat money once the currency and the taxing system is established).

    Ok, so what Warren is suggesting is that Greece should issue bonds (denominated in euro) that can be used to pay taxes even in the event of Greek default.

    That means that the fundamental driver of the value of the bonds — their ability to extinguish tax liabilities — will remain even after a default.

    In turn, that means that these bonds (the Mosler style bonds), are exempt from default. They are “safe”. They are just like bonds issued by a “monetarily sovereign” government (a regime that issues its own non-pegged currency) like Japan and the U.S.

    Now, there is of course the objection that if there are too many of these bonds issued — say corresponding to a hundred times the yearly tax intake of the nation. Would not the market object to this?

    Well, maybe — but no more than they do for the U.S or Japan.

    So what the Mosler proposal does is that it enables Greece to issue bonds that are just as safe (i.e with as low interests) as Japanese bonds.

    This is a bit of a strawman — I’m not sure that I’m understanding this correctly.

    Reply

    Dollar Monopoly Reply:

    @Hugo Heden,

    welcome to the worm hole Hugo and plan on reading a bit before any of this starts to solidify.

    Reply

    beowulf Reply:

    @Hugo Heden,

    We acknowledge that in the case of a military invasion and the like, what’s known as “Greece” may actually “disappear” economically and politically.

    Interesting point. Greece is free to stiff German bankers in a way it couldn’t, say, 80 years ago. As the saying goes, NATO was established to keep the Russians out and the Germans down.
    Article 5
    The Parties agree that an armed attack against one or more of them in Europe or North America shall be considered an attack against them all

    http://www.nato.int/cps/en/natolive/official_texts_17120.htm?

    Reply

    WARREN MOSLER Reply:

    you win the torch! want to take over this blog? these guys are wearing me out!

    Reply

    eb Reply:

    @Hugo Heden,

    “Now, there is of course the objection that if there are too many of these bonds issued — say corresponding to a hundred times the yearly tax intake of the nation. Would not the market object to this?

    Well, maybe — but no more than they do for the U.S or Japan.”

    i would think mkt would object given Greece doesn’t print the Euro

    Reply

    Hugo Heden Reply:

    @eb,

    Good point. I think I agree. Ḯ’m also having trouble with the “refrigerator” issue raised by Hbl below, as well as the Ponzi feel to it, discussed by JKH in comment-thread number 26 below.

    Reply

    WARREN MOSLER Reply:

    Take another look thanks.

    The bond holder doesn’t need Greece to be able to borrow to pay him, the way the govt worker does.

    The bondholder just needs there to be Greek taxes

    And there are plenty of those, and taxes are going up as well

    Hugo Heden Reply:

    (Replying to Warren July 5th, 2011 at 5:36 pm)

    The bondholder just needs there to be Greek taxes

    And there are plenty of those, and taxes are going up as well

    This is crucial (for my understanding) — will there be plenty of Greek taxes compared to the amount of the Greek M-bonds outstanding? If there will, then I don’t see a problem. However, if the amount of issued M-bonds is “very large” compared to projected tax collections, then it’s all trickier.*

    However, hmm, in any case (whether or not “plenty of taxes” compared to bonds outstanding), this should be an improvement over the current situation.

    * (This is much like Hbl’s question below about the refrigerators (July 1st, 2011 at 10:47 pm) — and most of the other objections raised here as well I think..)

    [Sorry about the duplicate comments above.. computer trouble]

    JKH Reply:

    @Mosler,

    “The bond holder doesn’t need Greece to be able to borrow to pay him”

    This seems a bit narrow on focus.

    If Greece can’t raise the same amount of cash as the amount of taxes paid with bonds, the consequence makes the continued exchange of bonds for taxes rather meaningless, doesn’t it?

    As noted numerous times, the government needs to be able to raise cash to fund expenditures that won’t be funded by bond paid taxes. It can raise cash with bonds or taxes.

    If it can do neither, then it can’t spend, and it basically shuts down its function.

    In that scenario, the continued exchange of bonds for tax liabilities becomes rather meaningless, doesn’t it? What would be the purpose?

    Why bother paying taxes at all when the sun explodes?

    It’s probably in the bondholder’s general interest for the government to continue operations.

    hbl Reply:

    Hugo Heden @ 6:54pm: “(This is much like Hbl’s question below about the refrigerators (July 1st, 2011 at 10:47 pm) — and most of the other objections raised here as well I think..)”

    Just in case it was not clear in my comment, I was not raising any objection to Warren — I was agreeing with him on this topic while expanding his over-simplified initial refrigerator example. I think refrigerators (or bonds) would be bought by arbitrageurs and “saved” until they could be redeemed at full value (perhaps there would be a small shift due to time value of money but not much).

    hbl Reply:

    JKH @ 8:45pm: “If Greece can’t raise the same amount of cash as the amount of taxes paid with bonds, the consequence makes the continued exchange of bonds for taxes rather meaningless, doesn’t it?”

    I don’t quite understand this concern. How common is it for a sovereign borrower to not be able to sell bonds to raise money AT ANY PRICE? For the bond market to fully refuse to cooperate, wouldn’t it have to assume 100% loss on the bonds? (I’m no expert on this stuff so tell me where I’m wrong). But no one is pricing in that large a loss for Greece that I’ve heard.

    Anything less than 100% expected loss, and the bonds will still sell at SOME price, and give the government the cash it needs for further spending. Then the question is what price? With the Mosler clause in this post, I agree that the price (and thus interest rate) would reflect the risk free rate, or close to it.

  15. Rodger Malcolm Mitchell Says:

    This has the odor of a thousand smart people offering suggestions on how to make a balky perpetual motion machine work. Folks, repeat to yourselves: “The euro won’t work; the euro won’t work.”

    Not only doesn’t it work, but it has no purpose. It doesn’t create stability and only marginally facilitates trade. So even, if by some alchemy, you were able to make it function, what’s the point? Why is everyone working so hard to find a “solution” to this monstrosity?

    The euro nations surrendered the single most valuable asset any nation can have: Monetary Sovereignty. And now we try to find clever ways to save this failed system?? Pardon me, while I now search for a way to transmute lead into gold. I’ll succeed before the euro nations do.

    Rodger Malcolm Mitchell

    Reply

  16. Yuu Kim Says:

    “Warren, that’s a great point; but it’s confusing to keep calling it a debt or deficit. Sloppy semantics makes for protracted argument. Issued fiat currency can’t be in deficit if no input is required. If the language isn’t fixed, this sophistry won’t go away.”

    great point, roger!! this is precisely the point i (and yourself) have made in previous posts and i just don’t think it gets said enough.

    the terminology is really the sticking point for most people and it’s what allows the “sophistry,” as you put it, to go on.

    mmt’ers need to drive home constantly to the public what the words “debt” and “deficit” actually mean as in relation to the national gov’t and the fact that taxpayers (and foreigners) do not fund the nat’l gov’t, but that it’s actually the other way around.

    the philosopher Ludwig von Wittgenstein once said something to the effect that most “philosophical” disagreements are in fact disagreements over the meaning of words. i say the same goes for mmt. most of the supposed arguments “against” mmt are generally disagreements over the meaning of the words “debt” and “deficit” and over the fact that taxpayers and foreigners don’t fund the nat’l gov’t.

    Reply

    Tom Hickey Reply:

    @Yuu Kim,

    “What is your aim in Philosophy?”
    “To show the fly the way out of the fly-bottle” (Philosophical Investigations, 309)

    If a fly looking for food gets into a bottle lying on its side, it cannot extricate itself because it flies upward. Wittgenstein held that most intractable problems are due to our running up against the limits our our language. We get trapped in a container of our own construction. The philosopher role is to point this out through logical clarification that adds nothing substantive, but only shows how language is confusing us, especially in ordinary language, where the logic is not transparent.

    This is really a most of what MMT has to do, e.g., by pointing out how the so-called money multiplier is ex post rather than ex ante, how stock and flow are regularly confused, and how the distinction between horizontal and vertical reveals that commonly used terms like “debt” are ambiguous and often confusing. That’s why the technical distinctions are important, and double entry accounting is crucial.

    Reply

  17. Greg Marquez Says:

    @DollarMonopoly @Art
    Here’s an analogy I’ve been tinkering around with in my mental workshop.

    The economy works like a game of Monopoly. The government is the banker and the players are the different consumers/businesses/employees/employers.

    - In order for the game to begin everyone has to get money from the banker, because he’s the only one with money. In order for the economy to function the government must issue money, they’re the only ones with a legal right to issue money.

    - In order for the game to keep going the banker has to keep giving out $200 to everyone who passes go. If the bank didn’t give out the $200 the game would gradually slow down to the point where no new investments would be possible, no new purchases or rent payments would be possible. Everyone would eventually run out of money. If the banker stops paying out the $200 when the players pass go eventually the bank, through taxes and sales of property to players would end up with all the money. In order for the economy to grow the government has to keep increasing the supply of dollars. This is especially true in real life because new people and businesses keep joining the game. If the government stopped spending eventually the government, because of taxes would be the only one with dollars.

    - If at some point the banker in the monopoly game said I must balance my books, I’ve been giving out more than I’ve been taking in, I either need to start taxing the players more or stop spending, the game would slow down and eventually grind to a halt. The same thing happens if the government decides to balance it’s books. To do so it must take money out of the economy. Taking money out of the economy will cause the economy to slow down and eventually grind to a halt. To truly balance it’s books the government would have to take all of the money out of the economy since all of the money came from the government in the first place.

    - If at some point the banker in the game of monopoly decided to stop giving out the $200 from the bank box and instead borrowed money from the players in exchange for bonds, those bonds would be the equivalent of money. The players would quickly realize that the bonds could be used to pay rent to each other just like a $500 bill could be used to pay rent to other players. Similarly when the government borrows money the bonds that it issues are really just a camouflaged form of money. If instead of printing bonds it printed $10,000 bills and sold those the results would be the same. The bonds can be used to pay for things just like money. It is therefore nonsensical for the government to treat bonds like debt, they are just a camouflaged form of money which may be exchanged for non-camouflaged money whenever the user chooses. No real debt beyond the requirement to exchange the camouflaged money for non-camouflaged money has been created.

    Reply

    Hugo Heden Reply:

    @Greg Marquez,

    Sounds reasonable to me. You’ve read Bill Mitchell’s A simple business card economy and Peter Cooper’s Parable of a Monetary Economy?

    Reply

    Rodger Malcolm Mitchell Reply:

    @Greg Marquez, Good analogy. Add to that the fact that in Monopoly the banker actually can run out of Monopoly dollars, while a Monetarily Sovereign government cannot.

    Rodger Malcolm Mitchell

    Reply

    pebird Reply:

    @Rodger Malcolm Mitchell,

    When I played Monopoly and someone had lost some of the bank money, we just drew up some on paper.

    Reply

    Dollar Monopoly Reply:

    @pebird,

    lost? whatever i bet you were the one sneaking those bills out the bank and stuffin it in your sock. thats what i did. never sit across from the banker. sit next to him. heh heh

  18. Good Habit Says:

    The proposal doesn’t actually change anything. The real problem isn’t the possibility to get funding. The problem is that the EU regulations actually make sucessful funding illegal.
    Greece wouldn’t be perceived as default risk if the ECB just played the role of a sovereign currency issuer, just serving 17 nations than just one. As long as the ECB will always consider treasury bonds of any Euro-country 100 % save and lend bank reserves without hesitation, their can’t be default. And as long as bondholders are sure about that, there will be no perceived default risk.
    Only the inflexible handling of the agreed deficit and debt limits of the “stability pact” introduce the default risk. As long as the weaker nations don’t come under pressure from the other Eurozone members because they have deficits above those limits, there is no default risk. And of course, in earlier years, as long as Germany and France were in violation of the rules, no big fuss was made – but the weaker members are put under pressure, and therefore, the markets start to perceive them as default risk, which will eventually become a self fullfilling prophecy.

    So,all attempts of Greece – or any other country – to get cheaper funding by offering additional guarantees actually is a clear violation of the “stability pact”. The EU requires less deficit, less spending, and hence less funding.
    Of course, the rules could (theoretically) get changed – like allowing everyone a deficit as high as the actual rate of unemployment – with interest free loans to countries with unemployment (and existing debt) over a certain threshold. (out of a prosperity fund – financed trough an unlimited overdraft by the ECB).
    But, like all reasonable solutions, this is extremely unlikely, because politicans like to introduce suffering (for others).

    Reply

  19. hbl Says:

    Warren – Great proposal! But what does “making the rounds in Europe” mean? Ed Harrison (while linking to your proposal) suggested he thought the odds of adoption are low. Is he wrong and it is getting traction?

    Here’s how I’d choose to frame the compact version:

    1. Markets usually price government debt at the “risk free” rate.

    2. For a government sovereign in its own currency, the market interest rate includes no credit risk component because the central bank can act as an unlimited buyer of last resort (even if it has to use the secondary market). Because it has this power, the central bank never has to use it!

    3. Without a known unlimited buyer of last resort, interest rates can enter an escalating spiral as a self-fulfilling prophecy of default risk takes hold.

    4. In the EU, given intra-EU politics and other forces, the ECB is not willing to be an unlimited buyer of last resort, thus the self-fulfilling prophecy of rising credit risk and interest rates has been taking hold.

    5. Your tax proposal creates a new unlimited “buyer” of last resort: Greece’s treasury! (The mechanism is indirect via tax repayment using government debt or arbitrage from non-Greek debt holders to Greek taxpayers via banks, but the bottom line is the same). Because Greece’s treasury would have this power, it would never have to use it, and market interest rates on Greek debt should plunge as credit risk fades.

    6. The question of the size of Greece’s debt relative to annual tax obligations is useful, but ultimately it only adds in a time-based arbitrage to the mix. Bottom line: markets would recognize the added presence of the unlimited “buyer” of last resort (willing to buy at face value) and exit the self-fulfilling prophecy cycle.

    Reply

    Ramanan Reply:

    @hbl,

    ” Because Greece’s treasury would have this power, it would never have to use it”

    As per my comments above, I am yet to figure out where the bazooka in Greece’s Treasury’s pockets is and so will the markets wonder.

    Reply

    hbl Reply:

    @Ramanan,

    Ramanan,

    I read your comments but I don’t follow your concern.

    For example, your statement: “The amount of bonds would be far higher than the amount of taxes that needs to be paid in the near future so the bond holder needs to worry about the fact that his bond won’t be bought by a tax payer.”

    I disagree. As I understand it, the banking sector has unlimited arbitrage “firepower”. It can essentially buy and horde ALL the outstanding treasury debt if it wants in anticipation of its use in settling future tax obligations (the “time arbitrage” I mentioned). This is because when a bank buys an asset it gains an asset and a corresponding deposit liability, but has the same ability as before to buy more assets (its reserves don’t go away, or at least they don’t banking-system-wide). I don’t think capital ratios are even a constraint given that these are risk-free assets, right?

    And I have previously assumed that a similar banking system arbitrage is how all short term rates (treasury bills, etc) get pegged to alignment with the short term federal funds rate.

    It’s parallel in concept to the “bazooka” held by governments in the US and Japan. In the US, the Fed can’t buy bonds directly from the treasury, but it can buy them in the secondary market. The banking sector again has unlimited arbitrage power in that arena. The market knows it!

    Reply

    Ramanan Reply:

    @hbl,

    Don’t have much to say.

    The arguments seem to be that because of such a clause default won’t happen and there is arbitrage. Seems like LTCM kind of strategy/argument.

    hbl Reply:

    Ramanan,

    My belief is that the clause simply makes Greece’s situation much more comparable to the US situation, in that in both cases there is a form of unlimited “buyer” of last resort for the debt at face value. So either you reject the notion that this clause makes the debt of the two nations similar in this respect, or you believe the US is also subject to rising interest rates due to fear of sovereign default, just like Greece.

    It might be, but it would be for low probability political reasons, not out of deficit-driven inevitability (the usual portrayal for Greece). Didn’t Russia default for low probability political reasons and have some role in the LTCM blowup? (Not that they weren’t destined to blow up from over-leverage in multiple areas… I forget the historical details I read once about this and could easily have this completely wrong.)

    Ramanan Reply:

    @hbl,

    “Arbitrage” arguments assume no default. Now the arguments here seem to do this backward. Arbitrage arguments don’t work if there is a reasonable possibility of default.

    However, you are invoking the arbitrage argument assuming there cannot be a default etc. Its circular!

    Its a pyramid scheme.

    Imagine you are a foreign buyer – maybe a French bank. Why would you buy Greek bonds? You don’t have to pay taxes to the Greece government (even if you do for some reasons, its minimal).

    The same question may be asked without the proposal. And the answer is that the foreigners are speculating on the fact that Greece government will put the public debt on a sustainable path and the return is high for the risk.

    WARREN MOSLER Reply:

    you’re mixing metaphors with the words ‘no default’

    foreigners are speculating on the risk that greece might not pay at maturity and might eliminate all taxes.

    people buy bonds with a lot more risk than that

    and what happens to your US bonds if the US govts cease to tax in dollars?

    hbl Reply:

    Ramanan,

    “However, you are invoking the arbitrage argument assuming there cannot be a default etc. Its circular!”

    What is a “default” for a sovereign government? When its assets drop below its liabilities?? Its *financial* assets are ALWAYS less than its financial liabilities — that’s how it provides net financial savings to the non-government sector. (Massive net exporters could be an exception in theory). So should one of its goals be to accumulate enough tangible assets to be able to show a balance sheet of total assets exceeding total liabilities? Is that public purpose?

    Default for sovereigns follows interest payments escalating out of control because lenders are able to demand unnaturally high rates (or not “lend” at all). This can only happen if the government doesn’t have sufficient control of the currency and other triggers set things in motion, hence the “self fulfilling prophecy.” The Mosler proposal gives that control back to Greece.

    The circle itself should not “naturally” exist for a sovereign government! While it’s admittedly not a very close analogy, this reminds me of sci-fi movie plots in which a time traveler from the future brings back the technology to make time travel possible in the first place…

    Most likely your disagreement will be in whether Greece has really gained sufficient currency control in this plan, and we’ll probably just continue to disagree on that. I certainly could turn out to be getting it wrong.

    WARREN MOSLER Reply:

    default means missing a payment, interest or principal.

    it’s not that greece can never default, it’s that the bond holder won’t lose his euro

    be the bond holder

    Ramanan Reply:

    @hbl,

    Greece has surrendered its sovereignty!

    I am saying that all the arguments are circular. It has to be proved that Greece somehow becomes sovereign under this plan.

    There is nothing in the plan which makes sure bond holders do not hold the government at ransom.

    And if you claim it is a separate currency somehow, it is a violation of IMF’s articles of agreement which prevents multiple currency practices. Of course you can say who cares, but the cleaner thing is to just leave.

    There is nothing in the plan which gives the government sufficient powers to prevent itself from failure. Rather the underlying idea seems to be that all economic actors are trying to maximise returns… that way of looking at the world.

    WARREN MOSLER Reply:

    there is no claim of anything. all there is is an additional sentence or two in the default clause of otherwise identical bonds.

    greece taxes in euro, spends in euro, and borrows in euro, just like always, and just like all the other member nations.

    hbl Reply:

    Warren: “default means missing a payment, interest or principal.”

    Thanks for setting me straight… I think I knew that but got a few things mixed up in my hasty reply. What hadn’t fully sunk in until now is the distinction between cash flow insolvent and balance sheet insolvent, so now I get why commenters elsewhere keep calling Greece insolvent.

    WARREN MOSLER Reply:

    right, they pick a word that is sensational sounding and then use it in a different context where they can define it any way they want

    WARREN MOSLER Reply:

    the odds aren’t all that high due to politics. lenders and the govt seem to like my proposal a lot better than the french and german proposals, but don’t want to buck the pols at the moment

    Reply

    MamMoTh Reply:

    @hbl,

    2. For a government sovereign in its own currency, the market interest rate includes no credit risk component because the central bank can act as an unlimited buyer of last resort (even if it has to use the secondary market). Because it has this power, the central bank never has to use it!

    That is if the central bank sets the interest rate at 0 or pays interest on reserves right?

    Reply

    Rodger Malcolm Mitchell Reply:

    @MamMoTh, Interest rate is irrelevant to this question. A Monetarily Sovereign nation has the unlimited ability to service any debt of any size, any time. Greece, being monetarily non-sovereign, does not have this power.

    The whole problem is based on the failure to recognize the differences between Monetary Sovereignty and monetary non-sovereignty.

    Rodger Malcolm Mitchell

    Reply

    MamMoTh Reply:

    @Rodger Malcolm Mitchell, yes, we all know that. My question addresses however the point that the unlimited power of the central bank as a buyer of last resort depends on the monetary policy (setting interest rates) and the its institutional power (paying interest on reserves).

    I can’t see how hbl’s claim holds in the pre-crisis setting when interest rates were >0 and no interest were paid on reserves.

    WARREN MOSLER Reply:

    the central bank is score keeper for the dollar

    what safer place to keep your points than with the score keeper?

    WARREN MOSLER Reply:

    greece has the power to tax and the power to accept its securities in payment of taxes

    JKH Reply:

    @Mosler,

    Why is the power to tax any less important in the case of bond paid taxes than it is the case of cash based taxes?

    If its equally important, why not just increase cash taxes to get the job done?

    WARREN MOSLER Reply:

    sorry to start out this way, but from the bond holder’s point of view should current bonds default, say, next week, you could wind up with nothing even though they continue to levy taxes, and even if they increase them, and even if they soon run a budget surplus. they can just either outright reneg or force a restructure and you just have to take it.

    but if they were mosler bonds, should greece default, say, next week, you would still get full nominal value as long as they continue to levy taxes. and if you do use them to pay taxes they can’t say they don’t count and chase you for tax evasion, as under eu law that act of tax collection won’t be enforceable.

    let’s put it this way, if current bond holders had the option to ‘convert’ to mosler bonds with the same maturity and interest rate, would any turn down that offer?

    Hugo Heden Reply:

    @WARREN MOSLER July 5th, 2011 at 10:16 pm

    but if they were mosler bonds, should greece default, say, next week, you would still get full nominal value as long as they continue to levy taxes. and if you do use them to pay taxes they can’t say they don’t count and chase you for tax evasion, as under eu law that act of tax collection won’t be enforceable.

    let’s put it this way, if current bond holders had the option to ‘convert’ to mosler bonds with the same maturity and interest rate, would any turn down that offer?

    This is very convincing.

    Now I’m gonna have to read through the whole comment section again, with this new understanding in mind :-)

    hbl Reply:

    @MamMoTh,

    You make an interesting point that I overlooked. Perhaps my way of thinking about this is faulty for that reason… or perhaps the market “knows” that if the central bank needed to take such extraordinary measures that it also has extraordinary powers to manage interest rates to its liking (for example other countries have paid interest on reserves pre-crisis, right?).

    However, that might put TOO much emphasis on the intelligence of the market, so I’ll concede that there definitely might be a more accurate framing of the logic than mine :)

    But the “tax obligations give the currency value” angle needs *something* else to supplement it, as I see it.

    Reply

    WARREN MOSLER Reply:

    all a central bank does is debit and credit accounts on its own spreadsheet.

    and it’s easy to understand that if the govt announced that your old refrigerator would be good for $10,000 in payment of taxes its worth that much?

    hbl Reply:

    Warren: “and it’s easy to understand that if the govt announced that your old refrigerator would be good for $10,000 in payment of taxes its worth that much?”

    Yes, I agree with that and everything you’ve said on this post. Tax obligations giving the currency value IS an important and very core point.

    But if the government announced that only the first 100 refrigerators per year would be good for $10,000 in payment of taxes (simply because only $1,000,000 in total taxes are owed per year), that’s when things get marginally more complicated in calculating the value of a used refrigerator. Ramanan and others seem to think that’s a fundamental problem that arbitrage might not solve. I’ve agreed with you that even if there are more bonds than tax obligations for a given year, your proposal would still manage to keep bonds “worth” essentially their full government-established value.

    WARREN MOSLER Reply:

    to which you can say, in this narrow context, and recognizing the differences, that the yen is a tax credit and there are 2x gdp of them outstanding and extreme competition to get more at very low rates at each jgb auction.

    Neil Wilson Reply:

    @MamMoTh,

    Not necessarily. Remember that government bonds are the national debt issued by the government. Open money operations bonds are just part of the liquidity system managed by the central bank.

    So you get rid of the ‘national debt’ bonds and replace them with OMO bonds that drain excess reserves to hit a target rate.

    Different entity, Different bonds, different part of the national accounts. In the UK, for example, the Bank of England is part of the private sector from a national accounts perspective.

    Reply

    WARREN MOSLER Reply:

    there’s no credit risk because what you own is an account at the fed in its own currency

    Reply

  20. Parker Williams Says:

    Tax extinguishing bonds. Brilliant Warren, absolutely brilliant. Step #1 of Greece solved, next.

    Reply

    WARREN MOSLER Reply:

    :)

    Reply

  21. ESM Says:

    I certainly feel like we’ve been around the block once or twice before on this “in case of default, use for taxes” idea. Bottom line is it accomplishes nothing, as JKH and Ramanan have hinted at. After a default, the bonds will trade at the same price as they would have without the tax/default language, and that level will be around 50 cents on the dollar.

    Most Greeks probably already think that they would be allowed to net out money owed to them by the government and money they owe to the government.

    Reply

    WARREN MOSLER Reply:

    ok, don’t buy any…
    :)

    Reply

    pebird Reply:

    @ESM, As long as people need currency to pay taxes, then the bonds are money good. As soon as you extinguish one tax liability, a new one starts up.

    These are default-resistent financial vehicles – if Greece decides not to pay a bond holder, then the bond holder basically needs to incur some Greece tax liability (like a capital gain or income) and pay the tax with the bond. Or sell the bond (at a discount) to someone who has tax liabilities to pay. I’ll take that bet. Or you think Greece is going to eliminate all taxes?

    Remember that new economic activity generates new tax liabilities. So, to make your bonds good money, all you have to do is create some economic activity to generate your tax liability.

    Worrying about if Greece has too many bonds around to pay taxes is like worrying if Greece has too many Euros around to pay taxes. Sure if a quadrillion bonds were sold you might have a problem, but there isn’t demand for a quadrillion anyway, so they wouldn’t get sold.

    The main thing is to get the portfolio interest rate down below the GDP growth rate + inflation, then you can have as much debt as you want.

    Reply

    ESM Reply:

    @pebird,

    Suppose Greece decided tomorrow that taxpayers could pay their taxes 1:1 in US dollars. That is, $1 US could extinguish 1 Euro of Greek tax liability. By your argument a dollar would be worth a Euro.

    I think you know that’s not true. Maybe the dollar would get a small bid and rally a few cents against the Euro, but it wouldn’t move terribly much.

    Now, after default, a Mosler bond will trade to a price determined by supply and demand. It will not trade at par in Euro, for the same reason that the dollar wouldn’t in the previous scenario. There would be too many Mosler bonds (I’m assuming that all Greek govt bonds would be Mosler bonds, since I can’t imagine it is legal to grant special redemption privileges to a new bond when all govt bonds are supposed to be pari passu), and not enough tax liability. The Mosler option really changes nothing, because the fundamental problem was that there were too many bonds and not enough tax liability.

    Default causes a Mosler bond to turn into something that has absolutely nothing to do with the Euro except that par plus accrued in Euros represents an absolute ceiling on value. Default turns a Mosler bond into a new type of currency, which I claim is indistinguishable from a Drachma.

    Think about it this way. If Greece started paying government workers in Drachmas (say, at the rate of 2 Drachmas for each Euro they used to be paid), and then allowed tax liabilities to be paid 1:1 in Drachmas, would 1 Drachma be worth anywhere near 1 Euro.

    I don’t think so. You know why? Because the Drachma still wouldn’t be a Euro. It couldn’t be used to extinguish French or German tax liabilities. The same holds for defaulted Mosler bonds.

    Reply

    pebird Reply:

    @ESM, As I said, I could sell the bonds at some discount, or incur a tax liability through some transaction and pay the liability with the bond. I have the ability to generate a new tax liability – and if I the ability to do so, then so do others.

    You assume that a default would be because of too many bonds in relation to tax liabilities. But I think the bonds would be reduced in value to the extent that there are no economic transactions that generate tax liabilities. In other words, new bonds are not necessary to generate new tax liabilities.

    I think you overestimAte the potential discount.

    ESM Reply:

    @ESM,

    “I have the ability to generate a new tax liability – and if I the ability to do so, then so do others.”

    If you have the ability to generate tax liabilities any time you want to, then it means that you have the ability to earn income any time you want to. I don’t see why you think this is such an wasy thing to do in a country with double digit unemployment.

    “But I think the bonds would be reduced in value to the extent that there are no economic transactions that generate tax liabilities.”

    Yes, but this is exactly the same situation for Greek govt bonds without the Mosler option too. The reason why the recovery value in a default would be so low (and indeed, the reason why default would happen in the first place) is that the ability of the Greek govt to raise tax revenue is small in relation to the obligations it has oustanding.

    It helps to consider a Greek govt bond to be a fiat currency of the Greek govt already. It really is actually. It is an IOU of the government, and if the government issues too many relative to its ability to extinguish them through levying and collecting a tax (and relative to private sector savings desire), then the value goes down. Just like with a fiat currency. The Mosler option would make the analogy a little cleaner. The only difference with a real fiat currency, however, is that the value of a Greek govt bond is capped at (par plus the sum of its coupons) Euros.

    WARREN MOSLER Reply:

    i never said that greece has an unlimited ability to sell mosler bonds at reasonable levels.
    i did say it can support a whole lot more of the under current circumstances than regular Greek bonds.

    WARREN MOSLER Reply:

    if they took dollars for taxes, one to one, the govt would get dollars as taxes are paid which they would have to sell to buy euro to spend.
    and the econ would borrow dollars to pay taxes and get them back when the govt spent them

    so it would be a tax cut without much of anything else changing.

    if mosler bonds default, yes, market prices could fall or rise, depending on the coupon.

    meanwhile over time some mosler bonds would be used for tax payment, but once it’s clear they are accepted for tax payments
    it would make more sense to hold them and get the yield than to use them for payment

    MamMoTh Reply:

    Good points ESM, but as mentioned before the fact that many more bonds will be issued than there are tax liabilities to extinguish does no necessarily mean the plan will have no effect. After all Japan has been issuing more yen without its value going down for that reason, neither in the fx market nor because of inflation.

    Reply

    Ramanan Reply:

    @MamMoTh,

    a. Japan (all sectors combined) is a net creditor of the rest of the world

    b. Most Japanese Govt debt is held internally, I suppose and is not reliant on foreign funding.

    c. The BoJ can take care.

    d. If the currency devalues, they become more competitive and a bigger creditor of the rest of the world.

    WARREN MOSLER Reply:

    For a currency issuer resident vs non resident ‘funding’ makes no difference

    It’s just a reserve drain

    ESM Reply:

    @MamMoTh,

    Japan has been issuing more yen relative to … what?

    More yen than Greece has been issuing Greek govt bonds (i.e. “Drachma”)?

    Well, yes, but as Ramanan points out, Japan is different from Greece.

    A priori, it is very difficult to know how much fiat currency is too much for any given country/economy. MMT sort of tells us that. It tells us to look to inflation and unemployment to determine when how much is too much (or too little). The economic numbers tell us that 200% debt/GDP in Japan does not currently cause inflation there or depreciation of the yen abroad. I suspect that the reasons have to do with all of the points Ramanan has made, which MMT might wrap altogether under the rubric of “savings desire.”

    Greece is different from Japan. The amount of Greek govt bonds (“Drachma”) vs GDP/taxing ability/savings desire is already too much, at least at the current level of Greek govt bond equals par Euro. It is only being held there by the EU and ECB with chewing gum and baling wire. The equilibrium point is 0.50 Euro, and eventually it will go there unless France and Germany decide to subsidize Greece forever. The Mosler option simply doesn’t change this. It merely makes the fiat currency nature of Greek govt bonds (and the fact that they are not worth par Euro) more explicit.

    Neil Wilson Reply:

    @Ramanan,

    Japanese government debt is held by residents because they are a trade surplus country. Trade deficit countries debt is held more by non-residents.

    It is the trade imbalance that determines who holds the currency, therefore it is obvious that will determine who holds the replacement bond debt.

    WARREN MOSLER Reply:

    i’d put the causation differently.

    Dollar Monopoly Reply:

    @MamMoTh,

    change the language change the game is my new motto. The government debt of Japan and Greece are not remotely analogous. The Japan is a currency issuer and Greece is a currency user. Government debt of a currency issuer is the currency user’s savings as a matter of double entry accounting. It’s just a digital account corresponding to all currency users’ savings in banknotes, deposits, and treasuries.

    comments courtesy of a warrior of the KC Tribe

    Ramanan Reply:

    Neil,

    My comment didn’t have any causality attached.

    Neil Wilson Reply:

    @Ramanan,

    ‘reliant on foreign funding’ is a causal statement.

    Ramanan Reply:

    Neil,

    Yes Greece is highly reliant on foreign funding. Any doubt ?

    Ramanan Reply:

    Neil,

    Also note Germany is a huge creditor of the rest of the world… because of having run surpluses on the current account of international balance of payments but …

    http://www.bundesbank.de/download/statistik/sdds/stat_auslandsvermoegen/sdds_auslandsvermoegen_quartal.en.pdf

    says around €700-800b of German government bonds is held by foreigners (German public debt is around €2,100b)

    So a surplus in the external sector doesn’t necessarily imply that government bonds will be held domestically.

    Neil Wilson Reply:

    @Ramanan,

    (a) Macro is about aggregate values. (b) Germany is in a currency union.

    (i) That is like suggesting that Japanese bonds not held by residents of Honshu implies aggregate non-domestic holdings.

    (ii) Taking the phrase ‘Japanese Government Bonds’ to mean ‘All Japanese Government Bonds’ is an excluded middle argument.

    WARREN MOSLER Reply:

    Right, but you can carve out any ‘sector’ for sector analysis

    Ramanan Reply:

    Neil,

    I knew that was coming my way :)

    “(a) Macro is about aggregate values.”

    Yeah I was talking about aggregate .. German sectors as a whole

    “(b) Germany is in a currency union.”

    Yeah, so ?

    Sorry couldn’t understand your point (ii)

    But what exactly is your causality on current account balance/imbalance and government bonds ?

    Are you claiming that a country like Japan with more exports than imports will necessarily imply more government bonds held by residents ?

    Its likely I agree but not the reason.

    Ramanan Reply:

    Neil,

    Btw, there are various examples I can provide but may hear the argument that the institutional setup is different.

    Norway is one example where the currency floats but a lot of government debt is held by foreigners even though it runs external surpluses.

    http://www.ssb.no/intinvpos_en/tab-2010-10-12-01-en.html

    The gdp is around 2.3T NOK. Public debt is around 50% so government debt is 1.15T NOK.

    http://www.ssb.no/english/subjects/09/04/brutgjeld_en/tab-2011-06-07-01-en.html

    0.6T NOK of government bonds issued is held externally.

  22. albert Says:

    I make the same questione that I have done on NEP, someone could help me undertand this matter?
    thanks

    If banks in USA (for example) buy securities from the government and so, reserves to purchase these securities come from the FED, and so every deficit spending is in HPM, what’s the difference in Europe?

    States sells securities and primary dealers buy , but reserve to buy securities come from ECB, no?

    what’s the difference?

    Reply

  23. Tom Hickey Says:

    Edward Harrison has a competing plan up at Credit Writedowns.

    The Harrison Plan for Greece

    Reply

    MamMoTh Reply:

    @Tom Hickey,

    That’s a more complex plan, maybe it’s simple to bond traders but not to me.

    I think Warren’s plan strongest point is its simplicity, easy to understand, easy to implement.

    We might argue whether it could achieve what Warren intends it to. I think a more important point is to see how it could hurt the Greek economy even if the plan didn’t achieve anything. If there are no obvious drawbacks, why not give it a try?

    Reply

  24. Jose Says:

    The Mosler plan is simply brilliant.

    Now, the key question is, would it be legal under existing EU law? Can a eurozone member state decide today that it will accept its own bonds for payment of taxes?

    If there is no legal obstacle to this, then Greece should implement this plan immediately, to get a “feel” on its real-life consequences.It has nothing to lose by adopting it.

    Maybe interest rates on newly-issued Greek “Mosler” debt will fall dramatically, to rates well below the current EU “aid”. At this point Greece would be in a strong position to require better terms and demand re-negotiation of the EU package.

    And, yes, this seems like the creation of a new, parallel currency that would co-exist alongside the official euro. A partial return to monetary sovereignty for Greece.

    Fascinating…

    Reply

    Rodger Malcolm Mitchell Reply:

    @Jose, Warren’s plan is no different from (but perhaps more complex than) issuing drachmas along side of the current euros, eventually phasing out the euros. Read Warren’s plan, and wherever you see the word “bonds” substitute “drachmas.”

    So long as Greece and the other euro nations cling to euros, we forever will be inventing brilliant plans to overcome the fundamental deficiency of the euro system: The euro nations cannot control their money supply.

    Rodger Malcolm Mitchell

    Reply

    Jose Reply:

    @Rodger Malcolm Mitchell,
    I agree on the bonds = new drachmas question.

    My point is – would this be legal under existing EU law?

    Because, if it is indeed legal it means there is a loophole under which any eurozone member State can issue any time it wants what in practice would amount to a parallel currency.

    And if one single country decides to do just that this would mean the end of the “single currency” system in Europe.

    Also – all this could be done without violating any EU disposition.

    Truly amazing stuff! And no one had thought about this before?..

    Reply

    WARREN MOSLER Reply:

    drachmas don’t pay euros for interest and they don’t pay euro at maturity

    Reply

    Hugo Heden Reply:

    @WARREN MOSLER,

    Ok, so these Greek “M-bonds” would be denominated in euro and pay interest in euro. There would also be a clause saying that in the event of Greece defaulting … and only in the case of default, these transferable securities can be used directly, by the bearer on demand, at face value plus accrued interest, for payment of any debts, including taxes, owed to the Greek government. (Quoted from the blog-post).

    But, in the case of default, what happens if Greece leaves the Eurozone and introduces a new currency, the “drachma”?

    I guess the idea is to still accept the bonds for tax-payments (or else they would not work as intended today).

    However, the bonds would be denominated in euro. At the point of tax-payment (in drachma), the value of a bond (face value plus accrued interest) would have to be converted from euro into drachma. What conversion rate would be used? The market exchange rate (between the euro and the drachma) at that time?

    This could be a real winner for the bond holders. 100 euros today does not extinguish much Greek tax liabilities. But if Greece leaves the euro and introduces its own currency, I guess these 100 euros could soon be worth quite a lot (in Greece).

    And as the Greek government would have to accept these euro denominated bonds as tax-payments, it would essentially amount to Greece being indebted in a foreign currency. Right?

    And being indebted in a foreign currency means Greece can indeed default. I.e, the bonds would not be “safe” from defaulting.

    Or is it implied in the proposal that Greece promises to not abandon the euro?

    WARREN MOSLER Reply:

    yes, if greece leaves the euro these bonds would be like debt in a foreign currency.

    and remember, greece does have the ability to ‘print tax liabilities’ which keeps bondholders whole, even if they are the ones subject to tax hikes, which is a different story.

    Hugo Heden Reply:

    @Hugo Heden (replying to myself July 5th, 2011 at 6:02 pm)

    For future reference, I just realized that this is being discussed below, for example see Warrens comment on July 5th, 2011 at 2:10 pm

    MamMoTh Reply:

    @WARREN MOSLER, yes, if greece leaves the euro these bonds would be like debt in a foreign currency..

    That would be a big problem for Greece if your plan was implemented? How could the government default on a Mosler bond if they were to leave the euro?

    WARREN MOSLER Reply:

    thanks
    no legal restrictions
    not a parallel currency any more than any other bond

    Reply

    Jose Reply:

    @WARREN MOSLER,

    Ok, technically it would not be a new currency but those bonds could be used to pay taxes, would have zero default risk, etc.

    Thus, they might end up being accepted as payment for goods and services, since firms would be glad to receive the bonds and later use them for discharging their own tax obligations…

    I think something similar happened with securities issued by some of the provincial governments in Argentina, during the 2001 crisis.

    Anyway this a a truly great idea. If adopted it would likely alleviate the interest charges on the EU periphery countries and also give them more leeway to negotiate less draconian terms with the EU core.

    Reply

    Rodger Malcolm Mitchell Reply:

    @WARREN MOSLER, Warren, the MMT folks claim that the ability to pay taxes is what gives currency its value. Since these bonds would be identical with a sovereign currency, except for interest and expiration date, they effectively would be a sovereign currency.

    Issue a 100 year bond paying 0% interest and good for taxes, and voila, you have a currency. The only thing left is to name the bonds “drachmas.”

    They, in fact, would be a Monetarily Sovereign currency, which over time, could replace the euro in Greece, God willing.

    Rodger Malcolm Mitchell

    Reply

    Ralph Musgrave Reply:

    @Rodger Malcolm Mitchell,
    IMHO Roger is right to say that these bonds are in effect Euros. But I don’t agree that they are or would become Drachmas. The bonds are denominated in Euros, so they are Euros. So what this bond production would amount to would be allowing Greece to print more than its fair share of Euros. Effectively, Greece would be stealing from other Euro countries – something Greece would be totally averse to, I don’t think.

    WARREN MOSLER Reply:

    agreed.

    but the presumption of overspending assumes they willingly violate the stability and growth pact, and don’t purse austerity.

    that’s what keeps all of europe from ‘over printing’ (along with the current marketing issues)

    NeilW Reply:

    The Germans have been stealing from the rest of Europe since the Euro started. That’s what a persistent export surplus with no balancing transfer payments does.

    WARREN MOSLER Reply:

    I’d call that donating to the rest of Europe, if you measure things in real terms?

    Neil Wilson Reply:

    But stealing the Euros from Greece et al means the periphery run out of money before they run out of productivity and then their real output then goes to waste.

    It’s only donating if its in addition to what would be there naturally. Otherwise its nearer to pollution.

    RSG Reply:

    @Rodger Malcolm Mitchell,

    drachmas don’t pay euro at maturity

    ESM Reply:

    @Rodger Malcolm Mitchell,

    @RSG,

    “drachmas don’t pay euro at maturity”

    Neither do defaulted Euro bonds.

  25. Ming33 Says:

    A fascinating conversation. You’ve just kept me up past my bedtime, but thank you. The “Mosler” bonds sound like a good, simple, straightforward idea. Perhaps the new “Brady” bonds for a 21st century Europe.

    Could they become too successful? When I see the discussion of two side-by-side money-things I wonder if old Gresham’s law might apply? Or is that invalid here?

    Could the banks take Mosler bonds and spin off various assorted derivatives? The “Mosler” bonds and their derivatives then drive the euro into the mattress, or vice versa? It seems like it could get complicated. If other countries follow Greece and issue “Mosler” bonds then the investment banks get involved, because well, we have a big pile of money. Creative people will want do stuff with them. Should there be some clause to limit their use (perverse use)?

    Reply

    beowulf Reply:

    @Ming33,

    Much like a defense contractor, Warren stands ready to offer both weapon systems and their countermeasures. :o)

    Reply

    WARREN MOSLER Reply:

    probably not. won’t be any more problematic that ‘real’ govt bonds from the likes of the US, Japan, UK, etc.

    Reply

  26. JKH Says:

    @JKH.Mosler,

    On initial reflection, I’m growing slighter warmer on the proposal, but still considering some of the detail. That said, I’ve no reason yet to change my mind on a number of points I’ve made.

    The first such point has to do with this:

    Warren M:

    “quite the opposite.

    ponzi is when the govt has to issue more bonds/borrow more to get the euro for the bondholders to get paid.
    currently all the euro members are in ponzi, for all practical purposes

    in the case of my proposal, all the govt. has to do is levy taxes for the bond holder to get paid.

    that is, the govt gives the bondholders value by levying taxes, which it can legally do, and, without limit.

    the govt doesn’t have to collect taxes to pay bond holders, only levy taxes.

    so ponzi no longer applies.”

    Disagree.

    The Ponzi in question continues:

    Every bond that is redeemed for taxes requires that a new replacement bond be issued for cash. That’s because tax payments made with bonds provide no cash to fund budget expenditures.

    And maturing bonds that aren’t used to pay taxes still require a cash roll.*

    Therefore, the net cash requirement for the government is the same, whether bonds with remaining duration are redeemed for taxes, or maturing bonds are rolled for cash without having been redeemed for taxes.*

    And of course the ongoing deficit still requires that new bonds be issued for cash.

    That means the net cash requirement for the government is the same, with or without the Mosler plan.**

    Therefore, to the degree that Ponzi is operative pre-Mosler plan, it is operative with it**.

    * Note that the risk that holders of maturing bonds may not be able to find demand for those bonds for the purpose of paying taxes prior to maturity is a real one. All it requires is that the face amount of the total supply of maturing bonds exceeds the amount of taxes that need to be paid in the current period. That lapse in required demand is a structural risk that needs to be explored – more on this later.

    ** That is to say that the same Ponzi funding dynamic continues at a fundamental level, because the same funding requirement continues. But I don’t mean that to suggest necessarily that the Mosler plan won’t change the government’s cost of funds and thereby influence the compounding of the debt over time. That’s where I become warmer on the plan.

    Reply

    Ramanan Reply:

    @JKH,

    Very nice points JKH. And I too think the Ponziness is due to the intrinsic construction of the Euro Zone itself.

    This is mainly due to the accumulated current account deficit (which is related to the budget deficit by the sectoral balances identity).

    The only way Euro Zone nations can prevent the public debt/gdp and yields on bonds from blowing up is by deflating demand and reducing the current account.

    Here is a file I created on the international nature of the crisis. http://dl.dropbox.com/u/16533182/Euro%20Zone%20Stock-Flow%20Ratios.xls You can see PIGS on the graph (if you read from the right).

    Back to the topic …

    “Every bond that is redeemed for taxes requires that a new replacement bond be issued for cash. That’s because tax payments made with bonds provide no cash to fund budget expenditures.”

    Warren here will argue that but thats only on default and the offer is too lucrative for default to take place! Difficult to convince him of the default ;)

    Reply

    JKH Reply:

    @Ramanan,

    R.,

    Thanks.

    I’m only highlighting one of numerous points to be made about the M plan.

    That is, that the M plan can’t change Ponzi status based on the reasoning provided in the quote.

    That’s because the quote is incorrect in any context.

    The M proposal does not change the principal funding requirement for government. Therefore, a change in the principal funding requirement can’t be the explanation for a change in Ponzi status.

    That’s really all I’m saying as a first point.

    I’m not even saying that Ponzi status might not change or evolve at the margin. I’m just saying that it won’t change for the reason given. Any predicted change must be for more robust reasons than what is provided here.

    Reply

    WARREN MOSLER Reply:

    all the bond holders care about is the ability to give them nominal value

    and that reduces the risk to the rest of the budget, as bond holders are what funds it

    JKH Reply:

    @Ramanan,

    R.,

    BTW, the following is very much up your alley for sure. A very, very heated European discussion on TARGET that I got involved with. Many, many links over several weeks if you explore it.

    http://olafstorbeck.com/2011/06/25/the-dirty-tricks-of-hans-werner-sinn/#comment-820

    Reply

    Ramanan Reply:

    @JKH,

    Thanks.

    Lots of links there! Will check them out.

    Ramanan Reply:

    @JKH,

    Just browsed through the links for a while without going into details. Seems like Sinn is viewing money as exogenous/fixed and is trying to argue that if Bundesbank has claims on other NCBs, it will be able to lend less to local banks and this leads to credit contraction or something like that. As in Martin Wolf’s words

    “By shifting so much of the eurozone’s money creation towards indirect finance of deficit countries, the system has had to withdraw credit from commercial banks in creditor countries.”

    But Storbek seems clearer on these things and says the ECB does not control the money stock etc.

    Its possible that he is misinterpreting Sinn.

    I believe what Sinn is saying is the following:

    There are frequent claims that the so-called “sterilization” is not possible beyond a point. (as the name implies, it it supposed to sterilize the money supply growth through the neoclassical money-multiplier process).

    So while there are large capital flows into Germany, whats happening is the item “Claims on Banks” keeps reducing from the Bundesbank’s balance sheet. At some point this becomes zero. After that Bundesbank loses its ability to target short term rates or something along those lines. “That would make inflation inevitable.” partly supports my attempt to read Sinn’s mind.

    However, there is a way out – Bundesbank issues bills etc which Sinn doesn’t talk about.

    WARREN MOSLER Reply:

    any ‘money shortage’ would be evidenced by elevated interest rates somewhere

    Ramanan Reply:

    @JKH,

    ““Claims on Banks” keeps reducing from the Bundesbank’s balance sheet. At some point this becomes zero.”

    As in .. in Sinn’s extrapolation.

    However in reality, this may stop because when there is a transfer of deposits cross-border, banks in the peripheral countries will run out of collateral to provide to their NCBs and this itself will lead to issues for the peripheral countries’ banks.

    JKH Reply:

    @Ramanan,

    He’s saying capital flight in Euros from Ireland to Germany increases Euro deposits with German banks, which increases German bank reserves with the Bundesbank. That’s reflected further as Bundesbank net TARGET claims on the ECB.

    This allows the Bundesbank to unwind refinancing with the German banks, which draws down the excess reserves. He refers to that unwinding of refinancing as “crowding out”. But it’s really demand driven, since the German banks don’t need that level of CB refinancing, because they’ve gained deposits from the periphery (e.g. Ireland).

    Ramanan Reply:

    @JKH,

    Yeah, strange he refers to the unwinding of refinancing as crowding out!

    Ramanan Reply:

    @JKH,

    Here’s Buiter Part 2 on the Sinn episode. http://www.nber.org/~wbuiter/originalsinn2.pdf

    JKH Reply:

    @Ramanan,

    thanks, Ramanan

    i’ll have a look

    JKH Reply:

    @Ramanan,

    P.S.

    I find Buiter’s approach to this stuff to be excessively laborious.

    The important ideas don’t require all those academic equations and chicken scratch.

    He was that way in his discussions of CB capital on his old blog, as well.

    Ramanan Reply:

    @JKH,

    Yeah I too skipped the part with the painful notations.

    But I think he is clear about money being endogenous and no money stock being targeted which is good (which he mentions in Part 1, upfront).

    He can directly use simple numbers like EUR100 being transferred etc or empirical numbers such as EUR350 Billion on Bundesbank’s balance sheet.

    JKH Reply:

    @Mosler,

    “the govt doesn’t have to collect taxes to pay bond holders, only levy taxes”

    no idea what it means to levy taxes without collecting taxes

    Reply

    JKH Reply:

    @Mosler,

    i.e. the plan is not a (levied) tax only payable in bonds; it’s a plan for an option to pay tax in bonds; the tax is always collected, in bonds or otherwise

    Reply

    WARREN MOSLER Reply:

    first taxes are passed into law, and then later get paid

    Reply

    WARREN MOSLER Reply:

    “Every bond that is redeemed for taxes requires that a new replacement bond be issued for cash.”

    that’s not the bond holder’s problem. as long as he knows he can get full nominal value he’s happy. (remember, be the bond holder, etc.)

    the net cash requirement for the govt to fund it’s other expenses may be the same, but there is no cash required to return value to the bond holders

    Reply

    JKH Reply:

    @Mosler,

    “all the bond holders care about is the ability to give them nominal value”

    Every time I point out a nuance about the plan, you hit me over the head with this baseball bat.

    I sort of get that point, you know? I understand that if you hold a bond that you know somebody can use to pay taxes, your value is guaranteed. I’ve never questioned that – hopefully I’m not a total idiot, at least not yet. And none of the points I’ve raised questions that.

    Anyway, here’s a point which I’ve already alluded to:

    The size of the debt relative to projected taxation matters. Suppose the entire Greek debt consists of M bonds. It increases every year by the size of the deficit.

    The M bonds do not guarantee the ability to get par value through exchange for tax liabilities.

    They only guarantee the ability to get par value when the option of exchanging them for tax liabilities can be exercised. Such exercise is not guaranteed, which means par value is not guaranteed.

    The reason such exercise is not guaranteed is that some holders of bonds may not be able to find taxpayers with the tax liability necessary to use the bonds in exchange.

    As I already noted, this could happen for example if taxpayers have already paid their current period taxes, with bonds or cash, but there are holders of outstanding bonds that mature in the current period.

    The plan per se does not guarantee those holders their par value.

    Similarly, from a macro perspective, in order for all bondholders to be guaranteed their value by the plan, there must be a mapping effectively of all outstanding bonds into an annuity of projected tax payments that can use those bonds.

    The more the debt grows, or the greater the related debt/tax ratio becomes, the long in duration that annuity may have to be.

    Long story short, it would be wise to ensure that the debt is sufficiently long duration to allow bondholders in aggregate to map their bond holdings into their tax planning – or implicitly into somebody else’s tax planning.

    If this condition is violated sufficiently, the market as a whole will see through it.

    Another obvious point of course is that there may be a critical mass of bond/tax coverage that may not be 100 per cent in order for the desired pricing effect to take hold for the bond market as a whole.

    The question becomes, what is that critical mass. And that’s where the macro numbers for outstanding debt and tax projections matter.

    Reply

    JKH Reply:

    @JKH,

    meant critical coverage in the sense of duration coverage as described

    Reply

    WARREN MOSLER Reply:

    I think all you are saying is that market value can fluctuate. I agree.

    I never said par value is guaranteed at all times. Only that the investor won’t ultimately lose money.

    Tax planning will not be a factor. They will be bought and trade just like any other high quality bonds.

    And yes, there is some debt to GDP presumption where the bonds would trade at a discount

    Just like there is some debt GDP ratio that makes the yen go down.

    And if Greece at some point has trouble selling bonds they may need to raise taxes.

    Which they are planning on doing anyway.

    Reply

    ESM Reply:

    @WARREN MOSLER,

    “I never said par value is guaranteed at all times. Only that the investor won’t ultimately lose money.”

    Good grief. How can an experienced bond trader like you say something like that Warren?

    You don’t believe in the time value of money perhaps? Would you like to buy some principal protected S&P index products? Or perhaps you’d just like to buy some 10 year zero-coupon Treasuries at par?

    Look, allowing bondholders to pay taxes with defaulted bonds is no different from issuing drachmas and allowing drachma-holders to pay some or all of their tax bill in drachmas. Because the amount of “tax credits” outstanding vastly exceeds the tax burden plus savings desires, the value of the “tax credit” (whether a drachma or a defaulted Greek Euro bond) will fall to some level (I predict approximately 50 cents on the Euro) well under par.

    The defaulted Greek bond tax credit should be roughly equivalent to a drachma tax credit, in terms of price at least. I guess you can argue
    that the defaulted bond would accrue interest arrears (maybe), so perhaps it would trade a little higher, if drachma interest rates were held low. Of course, if the greek bond interest rate was 4%, and the drachma interest rate was 8%, and the bonds traded down to 50 cents on the dollar in default, then there would be no difference in the carry.

    WARREN MOSLER Reply:

    never owned a cmbs that extended with an above market coupon?

    if attempted funding gets too large for savings desires, with drachma the currency goes down. with euro the market clearing interest rate goes up.

    however, savings desires are substantially enhanced by the new default language. and by the austerity measures

    ESM Reply:

    @WARREN MOSLER,

    “if attempted funding gets too large for savings desires, with drachma the currency goes down. with euro the market clearing interest rate goes up.”

    With Greek Euro govt bonds, the price goes down, just like with Drachma.

    I’m not sure the added default language is meaningful at all (e.g. a Greek court might allow people to net off credits and debits against the government under current law anyway), but even if it does afford bondholders another way to get value for their bonds, all that will happen in the event of a default is the following:

    1) Nobody will pay Greek taxes in Euro; and
    2) Everybody will pay Greek taxes in defaulted Greek Euro bonds; and
    3) Greek Euro bonds will become essentially Greek Drachma.

    The Euro will of course have much more value than a defaulted Greek Euro bond because it can be used to pay taxes of more substantial countries, as well as satisfy savings desires for those who are risk-averse and need liquidity.

    The bottom line is that there is no coupling mechanism between the value of a defaulted Greek government Euro bond and the Euro. There is no reason why the value of one has anything at all to do with the other.

    WARREN MOSLER Reply:

    no, with one’s own currency rates are a function of cb settings and anticipated settings. hence, japan’s term structure of rates with much higher debt to gdp than greece

    if japan had a problem of excessive deficit spending the yen would fall and rates only rise to the extent markets anticipated boj hikes

    WARREN MOSLER Reply:

    Greek taxes are payable in euro.
    if you’re a greek bank making a 30% roe with these bonds you are also accruing a tax liability payable in euro.
    Why would that change in a default? only if greece leaves the euro
    And if that does change, and Greece switches to another currency, the euro value of the bonds can be used based on spot fx rates when the tax is paid.
    the bonds don’t every functionally become drachma

    JKH Reply:

    @WARREN MOSLER,

    Here’s another interpretation that would seem to support ESM’s argument that the bonds for taxes plan would have no effect on the market price of bonds or on the risk of default:

    Consider:

    a) The Mosler plan, where the government guarantees that bonds can be valued at par for purposes of making tax payments

    b) An alternative “plan”, which is a simple announcement that the government guarantees the repayment or redemption of bonds at par, for cash

    These two “different” guarantees have an identical Euro cash consequence for the government budget. The government’s Euro cash balance with its central bank will be short an amount of cash equivalent to the nominal value of the bond redemption/repayment at par – an identical amount for the same bond in case a) or case b):

    In case a), the cash shortfall shows up as budgetary expenditures in cash that aren’t yet financed with cash.

    In case b), the cash shortfall shows up as debt repayments in cash that aren’t yet financed with cash.

    In either case, the government must cover the cash shortfall by issuing new debt.

    (A variation is that the government can cover the cash shortfall by levying new taxes for cash. This applies to both cases. But it can’t levy new taxes for bonds to do this, because that doesn’t cover the cash shortfall.)

    Then, comparing a) and b):

    If the government’s guarantee in case b) were credible, nobody would be worried about default. That’s obviously a contradiction.

    Default risk is fundamentally a cash flow risk.

    Therefore, given the identical cash flow implications of a) and b), there’s no reason to believe that the government’s guarantee in a) is any more credible than in b).

    This seems to support ESM’s argument that the bonds for taxes plan would have no effect on market price of bonds. It would seem to suggest, as he suggested earlier, that it accomplishes nothing.

    And there I thought I was warming up to it.

    ESM Reply:

    @WARREN MOSLER,

    Yes, JKH, that’s a very clever way to look at things. Essentially a proof by contradiction by showing the cash flows are identical in the two scenarios.

    I like to think of the Drachma analogy because I think the following two options are equivalent for Greece:

    (1) Default, stay in the Euro, and restructure the debt with a 50% nominal (and real) principal haircut;

    (2) Default, leave the Euro, and restructure the debt by converting to Drachma with no nominal haircut;

    I think in both cases the bonds will trade around 50 cents on the Euro immediately after default. Either way, the value of a Greek government IOU (or tax credit, if you will) is fundamentally determined by the ability of the Greek government to levy and collect taxes and the willingness of other countries/entities to extend grants and loans. Based on the total amount of IOUs outstanding, and the ability of the Greek government to tax, I can’t see how a Euro-denominated Greek government IOU can be worth anywhere near par without outside support.

    One thing I think Warren is missing is that if you allow people to pay their taxes either in Euro or something that is worth less than a Euro (say US dollars on a 1:1 basis), nobody in his right mind will pay his taxes in Euro. It is an arbitrage to pay the taxes in the something else. Sure, this leads to an arbitrage bid for the something else (in this case, US dollars), and the arbitrage condition holds as long as the something else is worth less than a Euro. But just because the arbitrage condition provides a ceiling for the value of the something else (i.e. par Euro), it doesn’t follow that the value will actually reach the ceiling or even come close. The value of the US dollar, for example, would not be materially affected if the Greek government allowed payment of Greek taxes in dollars.

    WARREN MOSLER Reply:

    It’s not about being allowed, it’s about being demanded

    If Greece defaults and goes back to drachma, and when you go to pay your Greek taxes with defaulted MOSLER bonds,
    And at that time if the market for drachma-euro is ten to one, each euro worth of bonds will extinguish ten
    Drachma of tax liability. Etc.

    And why would anyone holding a defaulted bond paying euribor +300 sell it at 50 when it can be used to extinguish
    Taxes at par?

    ESM Reply:

    @WARREN MOSLER,

    “I like to think of the Drachma analogy because I think the following two options are equivalent for Greece:”

    Meant to say that the two options are equivalent for bondholders.

    I think the 2nd option is better for Greece in the long run.

    WARREN MOSLER Reply:

    Greece can’t restructure MOSLER bonds in default. They are issued under eu law, not Greek law, which means if you
    Use then to extinguish Greek taxes the eu recognizes those taxes as paid no matter what the greek gov tries to say

    MamMoTh Reply:

    It seems to me there are two different ways of looking at the plan.

    Warren says his bonds will never default nominally for the payment of taxes, hence bond buyers will see them as safe savings and Greece will never need to default.

    ESM and JKH look at the plan from the moment of default, and say that in that case it achieves nothing. Not sure whether their conclusion is right, but it seems to me the right thing to do is to look at the actual case of default, otherwise the added default clause would be just a trick to fool lenders?

    WARREN MOSLER Reply:

    I didn’t say it that way

    Yes, look at the actual case of default. The bonds continue to accrue interest and they can be used for tax payment
    At any time. Much like a premium cmbs that extends

    MamMoTh Reply:

    @WARREN MOSLER,

    OK, maybe the fact that bonds continue to accrue interest has been overlooked? Sure if there are that many more bonds than tax liabilities, bonds will trade at a discount, but by how much is anyone’s guess.

    Still, in this whole thread and other discussions about your plan, the only criticism I’ve found is that it would be ineffective. I have yet to see anyone pointing out that it will worsen the situation for the Greeks.

    So I don’t see any reason not to implement your plan if only as a real life experiment of your ideas. It’s a pity it is not likely to happen.

    pebird Reply:

    “Consider:

    a) The Mosler plan, where the government guarantees that bonds can be valued at par for purposes of making tax payments

    b) An alternative “plan”, which is a simple announcement that the government guarantees the repayment or redemption of bonds at par, for cash

    These two “different” guarantees have an identical Euro cash consequence for the government budget.”

    First of all, isn’t plan b) the current situation Greece finds itself under?

    The whole point of the Mosler plan is that the bond holder now has an active right that can be executed in the case of default – the bond holder does not need the government to do anything.

    Whereas in plan b), you are depending on the government to make the bond good. I don’t see how in the case of default that plan b) would have any value whatsoever.

    The risk in Mosler bonds is not only would Greece have to default, but also that Greece would have to eliminate taxation.

    The too-many bonds consequence is the same in either plan a) or b), except that the lower interest rate of the Mosler bonds would reduce overall debt, assuming the same government spend and macro conditions.

    They don’t have identical Euro consequences because the lower risk in the Mosler plan will result in lower interest rates.

    JKH Reply:

    @Mosler,

    JKH:

    “Why is the power to tax any less important in the case of bond paid taxes than it is the case of cash based taxes?

    If it’s equally important, why not just increase cash taxes to get the job done?”

    WM:

    “but from the bond holder’s point of view should current bonds default, say, next week, you could wind up with nothing even though they continue to levy taxes, and even if they increase them, and even if they soon run a budget surplus. they can just either outright reneg or force a restructure and you just have to take it.

    but if they were mosler bonds, should greece default, say, next week, you would still get full nominal value as long as they continue to levy taxes. and if you do use them to pay taxes they can’t say they don’t count and chase you for tax evasion, as under eu law that act of tax collection won’t be enforceable.

    let’s put it this way, if current bond holders had the option to ‘convert’ to mosler bonds with the same maturity and interest rate, would any turn down that offer?”

    I’d like to understand more about the range of scenarios, with corresponding structure and dynamics, for a two tier market of Mosler and non-Mosler bonds.

    E.g. a relatively small new Mosler bond issue on its own does little to support pricing or default risk in the rest of the market. That’s different than an assumed Mosler conversion of the entire market.

    In any event, current non-Mosler bonds are priced for the current risk of default, which means at a deep discount, given the risk of default and the level of old coupons.

    When you say conversion to new Mosler bonds at the same interest rate, I assume you mean conversion to a bond with the same (old) coupon, but which presumably based on your argument will open up trading at par, so the yield equals the old coupon rate (roughly).

    I think you’ve acknowledged that the Mosler bonds require supportive tax policy to some degree.

    This may depend on the relative size composition of a two tier market.

    In any event, whatever supportive tax policy is assumed to be supporting the Mosler bonds also affects the rest of the market, to some degree.

    Back to a hypothetical conversion:

    Since the Mosler bonds and the non-Mosler bonds will be priced according to their perceive risk characteristics, there should be an indifference to holding either. Those who convert from non-Mosler to Mosler are giving up substantial yield according to current pricing.

    That begs the question again as to the effect of the supportive tax policy that underlies a Mosler bond issue on the rest of the market. If the government comes in and offers a 100 per cent conversion option to the entire market, based on the assumed pricing above, that mass conversion option would have to carry with it a very supportive tax policy, indeed, in order to be credible.

    Rephrasing my question, if the existing bond holder expects taxes will be supportive of Mosler bonds, why wouldn’t he expect taxes will be supportive of his existing bond at their prevailing yields, and more so possibly?

    Put another way, if the expected tax policy is supportive enough to make Mosler bonds truly “risk free” under a mass conversion, why shouldn’t it support the convergence of existing bonds at their current juicy yields to that same eventual “risk free” status? Why shouldn’t that alone price out default risk on existing bonds? So why give up that yield? After all, the bond holder will be giving up substantial current yield, if my assumption about pricing the new ones is correct.

    The guarantee attached to Mosler bonds is in effect also a commitment to tax policy. Why wouldn’t that commitment give strength to existing bonds? In which case, as I said, why not just make that tax policy commitment directly, without Mosler bonds?

    Reply

    JKH Reply:

    @Mosler,

    I know – be the bond holder.

    :)

    Reply

    Ed Rombach Reply:

    @JKH,

    Warren – We’re trying to arrange a phone interview. Can you e-mail me your tel #?

    ESM Reply:

    @JKH,

    I think that adding the Mosler option to Greek bonds will not change their value materially, but I agree that it would add some non-zero amount to their value. It is, after all, an option, and just as allowing payment of Greek taxes in dollars 1:1 would create an additional bid for the dollar, so would allowing payment of Greek taxes in defaulted Greek bonds (although I’m still not convinced you couldn’t do this already under current arrangements, making it explicit does add value by reducing uncertainty and hassle).

    So the following question naturally arises (and indeed was asked by somebody here): Why not do it?

    Well, there is a reason. The bond obligor – bondholder game is zero sum. If Greece grants a free option to bondholders, then it is hurting itself (and therefore Greek citizens in aggregate) financially to the same extent. In fact, this is somewhat of a regressive policy because it will benefit rich Greek taxpayers (they can extinguish their Euro tax burdens at 50 cents on the Euro) at the expense of poor Greeks who net/net pay negative tax.

    If you were going to do this, perhaps it would be better to allow bondholders to bid for the option to convert (which then travels with their bonds).

    There is an interesting and somewhat analogous situation with Japanese government bonds. It is little known, and the market basically ignores the issue, but Japanese bonds are all callable at par. Many of these bonds trade much higher than par, and it wasn’t that long ago that there were bonds trading at prices of 130. Japan has implicitly promised not to call their bonds even though it has the legal right to do so. Should Japan offer to remove the callability clause for free? Should it allow bondholders to pay a small fee to remove the clause? Should it start issuing new bonds which are not callable? Or should it just ignore the whole issue as it has done for decades now?

    Reply

    WARREN MOSLER Reply:

    glad you agree it is credit enhancement.

    my proposal is only for new bonds, and in my humble opinion this credit enhancement will be sufficient to get them sold at very reasonable rates.

    and yes, better for the borrower to borrow entirely non recourse, with no collateral, so you can just walk away.
    problem is finding lenders to take the other side.
    so designing bonds so the bond holder can walk without obligation isn’t ever the point.

    if greece, or anyone else wants to borrow, it has to attract lenders.

    and if you think deficit spending is regressive because it rewards lenders, that’s an entirely different issue.
    in fact, my 0 rate policy is designed to minimize rentier incomes.
    and selling mosler bonds reduces interest earned by lenders as well.

    and to say the mosler default clause helps rich greeks pay taxes also pretty much falls wide of the mark as they would still have to buy the bonds to then surrender them.

    either greece wants to borrow or it doesn’t. and if it does, mosler bonds are sufficiently credit enhanced to substantially reduce borrowing costs.

    the difference between borrowing and taxing is that borrowing includes repayment

    Ramanan Reply:

    @ESM,

    Have any link for the Japanese bond callability ?

    JKH Reply:

    @ESM,

    New M bonds are effectively senior government debt, ranking ahead of all other outstanding bonds:

    a) They can be put back to the government at par

    b) They are insured against default events or restructuring events that may affect the rest of the debt outstanding

    This option structure is embedded in the fact that M bonds can be used to pay taxes at par.

    But the tax aspect is not essential for this option structure to be offered.

    Buyers of M bonds pay for this option, to some degree, by accepting a lower rate.

    But the holders of the rest of the debt would seem to pay for part of it as well by bearing an increasing per bond burden of the existing default risk.

    WARREN MOSLER Reply:

    the rest of the bond holders are better off because they know greece has a better chance of paying them via the sale of new M bonds over time

    JKH Reply:

    @Mosler,

    The rest of the bond holders incur disproportionate default risk while waiting, as well as the uncertainty of sufficient tax demand as the M bond population increases

    WARREN MOSLER Reply:

    I don’t see it that way. their risk is greece can’t raise the cash to pay them at reasonable rates, forcing default

    JKH Reply:

    @ESM.Mosler,

    Quick thought suggests that the introduction of a senior ranking bond might be unconstitutional

    WARREN MOSLER Reply:

    checking on that as well with greek law firm.

    for legal purposes, it’s more like coming out with a collateralized bond

    JKH Reply:

    @Mosler,

    Other quick thought:

    Any way such a roll out of M bonds could be linked to and conditioned on some formulaic increase in taxes, to buttress longer term demand?

    WARREN MOSLER Reply:

    Growing economies generate higher taxes

    MamMoTh Reply:

    @ESM,

    If the Mosler plan was effective and reduced interest rates also on outstanding bonds as Warren suggests, then it is not clear that granting the privilege to Mosler bondholder would hurt the Greek taxpayers, even if it is a zero sum game.

    What I see as the main risk for the Greeks is if the plan were not succesful (enough) in lowering rates, and Greece is eventually forced to leave the Euro, the it would have to bear a Euro denominated debt on which it could not default in any way.

    ESM Reply:

    @ESM,

    @Ramanan

    “Have any link for the Japanese bond callability ?”

    Hmmm, surprisingly hard to find via google search. Here is one of the first things that popped up:

    http://pages.stern.nyu.edu/~rwhitela/papers/benchmark%20jfi91.pdf

    Look to page 5 of the PDF (which is actually page 56 of the excerpted Journal of Fixed Income).

    Ramanan Reply:

    @ESM,

    Thanks ESM, but it just says bonds are callable :(

    Hugo Heden Reply:

    I wonder if the following is roughly what people are thinking:

    1) Greece can default even though issuing Mosler bonds. However, “default” would mean something else for Mosler bond holders than for regular bond holders, because Mosler bond holders still possess Greek tax extinguishers.

    2) Mosler bonds would probably be considered safer than regular bonds — the “Moslerness” is a credit enhancer. Therefore, they should be cheaper for Greece to issue than regular bonds. The motivation is pretty clear from Warrens comment (July 5th, 2011 at 10:16 pm):

    …but if they were mosler bonds, should greece default, say, next week, you would still get full nominal value as long as they continue to levy taxes. and if you do use them to pay taxes they can’t say they don’t count and chase you for tax evasion, as under eu law that act of tax collection won’t be enforceable.

    let’s put it this way, if current bond holders had the option to ‘convert’ to mosler bonds with the same maturity and interest rate, would any turn down that offer?

    3) Since Mosler bonds are cheaper, the likelihood of Greece “defaulting” should be less if Mosler bonds are used. This would in turn make the market consider lending to Greece yet safer, which would make it even cheaper for Greece to borrow.

    Something like that?

    Now, replying to @MamMoTh (July 6th, 2011 at 12:54 pm)

    MamMoTh said: What I see as the main risk for the Greeks is if the plan were not succesful (enough) in lowering rates, and Greece is eventually forced to leave the Euro, the it would have to bear a Euro denominated debt on which it could not default in any way.

    Right, this looks like foreign currency debt (as noted by Warren in July 5th, 2011 at 7:15 pm)

    But I’m not sure.

    Look: If Greece leaves the Euro (and introduces the drachma), that would mean Greece has “defaulted” (wouldn’t it?) So these Mosler bonds would enter its “quasi-defaulted” state of being able to pay Greek taxes.

    But remember that they would not be otherwise redeemable — a bond holder will not be able to get euros from the Greek government. Therefore, these “quasi-defaulted” Mosler bonds are not like regular foreign currency debt.

    In fact, when such a bond is used to pay Greek taxes, the face-value (plus accrued interest) in euros will be converted to drachma (at the fx spot price at that point in time).

    Basically, this debt is “redeemed in drachma”, not euro. Again, this is fundamentally different from regular foreign currency debt.

    The quasi-defaulted Mosler bonds will pretty much be regular sovereign currency bonds — except that it’s face value is denominated in Euro, so the drachma value of the bond will fluctuate with the fx spot conversion rate between the drachma and the euro.

    WARREN MOSLER Reply:

    not bad, thanks!

  27. Ralph Musgrave Says:

    By way of flying a kite, here’s a slightly different idea to Warren’s.

    Any monetarily sovereign country can wipe out its debt simply by printing money and buying it back (perhaps by ceasing to roll over). If that’s too stimulatory, no problem: just raise taxes by whatever is needed to ensure that the deflationary effect of the tax equals to inflationary effect of the buy back. Bill Mitchell said that creditors need indebted countries more than the latter need their creditors. He was right.

    The Eurozone as a whole could do a “buy back”. But I don’t see Europe letting just ONE country, e.g. Greece do that. Other countries would want to do the same. But the latter would be beneficial: it would reduce EVERY Euro country’s debt, which in turn would at least help Greece a bit. The losers would be banks and those with money deposited in banks: they’d get less interest.

    The above idea would not deal with PIGS’ lack of competitiveness, but it would buy time.

    Reply

    WARREN MOSLER Reply:

    right, the ecb would have to do that. functionally identical to my per capita distribution proposal

    Reply

  28. Links 7/5/11 « naked capitalism Says:

    [...] The Mosler Plan for Greece Warren Mosler [...]

  29. Links 7/5/11 | Jackpot Investor Says:

    [...] hacked Milly Dowler’s phone when Rebekah Brooks was editor Independent (hat tip Buzz PotamkinThe Mosler Plan for Greece Warren MoslerECB will continue to accept Greek debt Financial TimesFear of Credit Default Swaps [...]

  30. The Mosler Plan for Greece Fits Ireland too – Smart Taxes Network Says:

    [...] The Mosler Plan for Greece [...]

  31. Will Richardson Says:

    There’s far more money in any economy than taxes that need paying in any year.

    But the money’s still accepted as payment even though only a fraction of it is ‘needed’ or used to ‘pay’ taxes.

    So why’s the amount of bonds relative to tax such an ‘issue’?

    Reply

    ESM Reply:

    @Will Richardson,

    The difference is taken up by what MMT calls “savings desire.”

    Any money above savings desire plus the tax burden tends to be spent quickly and converted to another form, which will drive down the value of the monetary unit against real goods and services (inflation) or other currencies and assets (depreciation), until once again there is balance (assuming depreciation leads to increased nominal savings desire).

    In the case of Greece, its deficit spending has been made possible by artificially enhanced (i.e. by the Eurozone structure) savings desire. Now that political support in the Eurozone for facilitating Greece’s deficit spending is waning, it is obvious that the value of Greece’s IOUs must depreciate. That will come in the form of a steep decline in the market value of Greece’s bonds, followed by a default, either through principal haircut or through forced conversion to the Drachma.

    Reply

    WARREN MOSLER Reply:

    That’s what’s been happening.

    My proposal both kicks the can 20 years down the road via enhanced credit quality and reduced interest expense.

    Yes, as previously discussed, if their deficit happens to increase dramatically from here the bonds could trade down some without a tax increase

    Reply

  32. The Mosler Plan for Greece Fits Ireland too – Smart Taxes Network | scwilliam.com Says:

    [...] The Mosler Plan for Greece [...]

  33. rvm Says:

    I hope the EU accepts the Mosler Plan for Greece – it will be the best publicity for the MMT paradigm ever. Warren won’t handle the interview requests from all over the place. :-)

    Reply

  34. Max Says:

    The Greek government needs euros. If they accept bonds instead of euros, they will have less spending power for any given level of taxation. The motive to default on the ‘default provision’ is essentially the same as the motive to default on the bonds.

    The only way I see to make Greek bonds safe is to back them with the ECB (as German bonds are [implicitly] backed).

    Here’s another way of looking at it. Suppose that Greece accepted its bonds as payment for taxes always (not just as a ‘default provision’). What would happen? There would be a rush to trade in the bonds and Greece’s tax revenue would drop to zero. It would be equivalent to buying back the bonds at par. If Greece could do that, then nobody would be worried about default risk in the first place. Since they can’t, any pledge along those lines is non-credible.

    Reply

    WARREN MOSLER Reply:

    with the bonds issued under eu law, they can’t deny the use of defaulted mosler bonds for tax payment
    they would have to leave the euro and the eu, and then somehow sidestep the law as well

    Reply

    Max Reply:

    The EU can make it a crime to default on regular bonds. No need for special type of bond.

    But how do they enforce it? Invade Greece?

    As an investor I trust bonds that are backed (even if only implicitly) by central banks. Anything else has credit risk. Layering on more promises doesn’t fundamentally change anything.

    Reply

    WARREN MOSLER Reply:

    If you use tender the defaulted bonds for payment of taxes, Greece won’t be able to prosecute you for non payment of taxes

    Max Reply:

    They can prosecute if you live in Greece. If you flee, then they confiscate the property you left behind.

    WARREN MOSLER Reply:

    EU law would prevent said prosecution.

    Max Reply:

    EU law and what army?

    Reply

    WARREN MOSLER Reply:

    It’s pretty much like federal law vs state law over here.

  35. Tom Hickey Says:

    Seems to me that the only way to resolve the issue in any kind of a permanent way is to recognize that a common currency and national bonds are unworkable since it brings to the fore the asymmetry that affects/infects the currency area. There there is going to be a common currency, there has to be a common bond, too. Otherwise, the present arrangement will be permanently unstable in the absence of a common fiscal authority in addition to a common monetary authority.

    While I am more positive about the Mosler bond than some here, I don’t see it turning the EZ into an optimal currency area. Until the underlying asymmetry is addressed, instability will persist.

    Simon Johnson: Italy Could Be The Next European Domino

    Reply

    Max Reply:

    The euro system can only be stable if Germany runs a trade deficit. Germany doesn’t need to stockpile euros because they control the ECB. The peripheral countries do.

    Reply

    Neil Wilson Reply:

    @Max,

    Yep. Germany hires more civil servants.

    In other news, hell freezes over.

    :)

    Reply

    PZ Reply:

    @Max,

    Germany’s need to run trade surpluses is somewhat of a mystery. They must have some kind of a system of “forced savings”, probably pensions. I wonder if any work has been done on the subject. This goes straight to the core of the problems in the euro area.

    Reply

    WARREN MOSLER Reply:

    Just under 20% of paychecks goes to pension contributions

    WARREN MOSLER Reply:

    i don’t see it doing anything apart from allowing greece to fund itself at lower rates.

    Reply

  36. Tom Hickey Says:

    RSJ takes on Mosler Bonds in Arbitrage and Non-Arbitrage at windyanabasis.

    Reply

    WARREN MOSLER Reply:

    Cheap shots and no comment section?

    Reply

    Tom Hickey Reply:

    @WARREN MOSLER,

    Warren, there’s a comment section, and Steve Waldman is the first to comment.

    Reply

    Matt Franko Reply:

    @Tom Hickey,
    WM: “Issue bonds that can be used to extinguish Greek tax liabilities upon default”

    SRW: “it has lots of subtle characteristics”

    ???????, Resp,

    PS from SRW’s latest blog: “I’m short long-term US Treasuries, and have been for years” :o

    Tom Hickey Reply:

    @Tom Hickey,

    Matt, SRW said he is still thinking this through. Maybe he’ll post his conclusions at Interfluidity when he figures out the implications of the “subtle characteristics” he mentions seeing. I hope so.

    WARREN MOSLER Reply:

    link?

    Matt Franko Reply:

    @Tom Hickey,
    Sorry Warren I was paraphrasing your proposal. SRWs full comments at RSJ’s blog here:
    http://windyanabasis.wordpress.com/2011/07/09/arbitrage-and-non-arbitrage/
    Resp,

    WARREN MOSLER Reply:

    good comments!

    JKH Reply:

    @Tom Hickey,

    my comment left there:

    I agree with the thrust of the post, and said essentially the same thing repeatedly in earlier comments at Mosler’s.

    Redemptions of bonds for taxes are non-cash transactions. Such redemptions must be matched by new debt issuance for cash, in order to fund the budget where cash taxes are no longer forthcoming.

    If the required redemption refinancing mechanism uses M bonds, that creates an M bond float that by construction cannot be redeemed in total for taxes, over ANY time period.

    That being the case, there is always residual default risk prevailing for M bonds holders – the fact that it is physically impossible for all to redeem in any given period means that the effective exercisability of the redemption option cannot be guaranteed for all bond holders over any given period – no matter how long that period. This means buyers of M bonds in such refunding operations (and all other holders) are taking on that risk of non-exercisability. That risk must be compensated with a premium interest rate.

    I referred to this in my comments at Mosler’s as Ponzi-like. It is not Ponzi in the sense that funding is required to pay interest. It is Ponzi in the sense that new buyers of M bonds must take on residual default risk in order to facilitate that some subset of M bond holders will be able to exercise their par redemption option successfully.

    This is essentially the same thing as your feedback loop idea.

    The relevant risk will increase due to an additional dimension, which is the size of the M bond float as a proportion of total debt float and as a multiple of some periodic tax revenue measure. The larger the M bond float measured in these terms, the greater the risk that bond holders will get left out in the cold and not be able to get par for their bonds.

    The ultimate, extreme case is where M bonds eventually become the entire bond float. Other things equal, the default risk that existed pre-M bond still exists. The government’s promise to pay par on M bonds is essentially a promise not to default, which in this extreme case becomes as useful as such a promise might be on a pre-M bond basis. This is a case of total risk feedback, in which there is nothing left to transfer the risk to (i.e. no non-M bond holders).

    There is a way around this problem. That is to issue M bonds whose tax redemption is only refunded with non-M debt.

    This would define an M bond portfolio that declines over time to zero.

    Only in this way can the default risk be transferred fully (or nearly fully) from the M bond portfolio component to the non M bond portfolio component.

    Note that in this latter sense, the Mosler plan could be effective as a temporary bridge financing mechanism, allowing for the possibility of other favourable developments. However, this essentially creates a two-tier senior/junior government debt structure that I doubt could be approved from a constitutional perspective.

    WARREN MOSLER Reply:

    M bonds can always be used to pay one’s own taxes

    And if you can own them on a leveraged basis at a positive spread to funding,
    there is no limit as to how many you’d like to own and taxes you owe go up lock step with the bonds you own, etc.
    Yes, there are limits, and all I’m saying is those limits are a lot higher than current debt levels

    And your suggestion serves to not remove as much risk for the bond holder.

    Imagine you are the bond holder and the decide which you would rather have. Current Greek bonds, your m bonds, or my m bonds?

    It’s obvious to me mine would be most investors first choice.

    Therefore mine would command the lowest rates for Greece as well

  37. Talvez... Says:

    OK, I searched this post just to add this information:

    Government bonds in Portugal are usable to pay taxes.
    Yes interests also went through the roof.

    Reply

    Talvez... Reply:

    @Talvez…,
    OK, been asking some more, and it’s not accepted at face value.

    Reply

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