Pilkington highlights Mosler’s ECB distribution proposal
Posted by WARREN MOSLER on September 16th, 2011
thanks, well researched and much needed!!!
FINANCIAL CRISIS: Deeper malaise at heart of the European project
PHILIP PILKINGTONConflicting messages coming out of euroland of late. On the one hand we have a German constitutional court ruling that any permanent action on behalf of the European authorities to stymie the current crisis and pose a risk to other countries are unconstitutional. Add to that Angela Merkel saying that eurobonds are ‘absolutely wrong’. Yet on the other hand, we have Jose Manuel Barroso, the president of the European Committee, coming out saying that a eurobond proposal is imminent. Clearly these two official statements conflict with one another.
Lying behind this latest conflict in euroland is a much deeper conflict: that between full fiscal union and breakup. Eurobonds are seen by many in the EU as the first step toward full federal integration. Sure, the proponents tell us that eurozone-wide bonds would only be issued to back the currently deteriorating position of the sovereign nations in fiscal difficulty, but it’s obvious to all that institutional reforms would have to follow.
Eurobonds would effectively centralise the burden of government expenditure in the eurozone. All states would back the eurobond and all states would, in turn, be backed by the eurobond. Sovereign government debt would gradually wane in importance as the European-wide bonds rose in prominence. With this would come the debate over how fiscal policy should be managed in the union. If states no longer bear the ultimate burden of financing themselves why should they be allowed to make their own taxing and spending decisions?
The trajectory then appears inevitable. Those in the eurozone who want to centralise fiscal policy would soon be front and center stage in the political debate. And those opposed to such centralisation would be equally to the fore. The former would argue that since member states were no longer financing themselves, fiscal responsibilities need to be given to a higher authority. While the latter would make the case that having some eurocrat in Frankfurt or Brussels involved in micromanaging the decisions of a nation state’s taxing and spending is a ghastly prospect — they might allege that it is reminiscent of the old Soviet centralised bureaucracy; now less a Politburo than a Politeuro.
Those opposed to centralisation would probably end up calling for the break up of the eurozone proper — that, after all, would be the logical end point of their argument.
So, what on earth should we do? The dangers of having a centralised fiscal authority are obvious; but the break up of the eurozone would prove remarkably unpleasant for all those involved.
The central question is what the eurocrats would do once they had control over fiscal policy. If they continued on as they are — as arch-conservatives geared only toward curbing inflation, even when such inflation simply doesn’t exist — they would destroy the eurozone. Simple as. Trade imbalances and an uneven economic landscape necessitate government surpluses to be run in some countries and deficits in others. To think otherwise is to think in moral terms rather than economic terms. But if the eurocrats did continue in their highly conservative — dare I say, unrealistic — tracks, we would have constant fiscal crises on our hands and eventually member states who were not allowed to run necessarily loose fiscal policies would drop out of the union.
What the eurozone needs is a central authority with an extremely flexible fiscal policy. Without this the project is doomed from the outset and we may as well just start looking for the cheapest way to get out now before further costs are incurred.
In fact, the eurozone already has an institution that can effectively allow such a flexible fiscal policy to be pursued: the ECB. The ECB, like it’s US cousin the Federal Reserve, has control over the issuance of currency and in that capacity it can effectively pay for anything it wants — provided, of course, that which it pays for is denominated in the currency it issues (Euros, in the case of the ECB). This simple fact comes as a shock to many, but consider what former Federal Reserve chairman Alan Greenspan recently said regarding the Fed:
“The United States can pay any debt it has because we can always print money to do that,” said Greenspan in an interview with Meet the Press recently.
Well, the same is true for the ECB. They have the legal mandate to create as much currency as they see fit and that currency can be effectively used to pay for anything that is denominated in said currency; that includes national government debt. It follows from this that the ECB can, in fact, create any amount of money that can then be used to retire the government debt of those sovereigns now facing default and crisis. This is a much simpler solution than eurobonds because it doesn’t pose any risk to other eurozone countries. And it can also be used in order to ensure fiscal flexibility in the future and ensure that the eurozone prospers rather than collapses.
This proposal was originally put together by economist and government bond expert Warren Mosler. Here’s how it would work:
The ECB would create €1trn on an annual basis and distribute it among the eurozone nations on a per capita basis. So, Germany, since it has a larger population, would get more than, say, Ireland. Each country would then use their newly acquired funds to begin paying down their stock of public sector debt. When they reached a reasonable level of debt — say 60% debt-to-GDP — the transfers would either discontinue or could be renegotiated to allow compliant countries to spend them (provided, of course, there are no major inflationary pressures in the eurozone at the time).
Since the payments take place on an annual basis the ECB and other European authorities could use them as leverage over the sovereign nations to ensure that they complied with responsible deficit targets. This would be far more effective than the current system — which effectively fines member-states for non-compliance — as the penalties for non-compliance would be immediately visible and would not require time-consuming legal and administrative action.
This all seems so simple, so what are the objections? Why won’t the ECB do this and solve the crisis?
Well, economically speaking the problems are basically non-existent. We’ve learned from the Quantitative Easing (QE) programs in the US and Britain (as well as in Japan some years ago) that so-called ‘debt monetisation’ is not inflationary. Buying up government debt certainly increases the amount of bank reserves in the private sector and according to the old economics textbooks this should lead to increased lending and thus inflation. But such inflation simply has not occurred in either country (yes, there is some inflation in Britain right now but this is largely due to oil/food price increases and VAT rises — it is NOT ‘demand-pull’).
This revelation is both surprising and important. Recent studies by economists working within central banks show that mainstream economists have basically been getting the whole thing wrong. In reality expanding bank reserves will not increase lending and so it is not inherently inflationary. Consider this paper by economists at the Bank of International Settlements (BIS) — known among economists as ‘the central bank’s central bank — published in late 2009. The authors write:
“The preceding discussion casts doubt on two oft-heard propositions concerning the implications of the specialness of bank reserves. [These are] first, [that] an expansion of bank reserves endows banks with additional resources to extend loans, adding power to balance sheet policy. Second, there is something uniquely inflationary about bank reserves financing.”
The authors continue:“In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans. The aggregate availability of bank reserves does not constrain the expansion directly.”
So much for the inflation argument!
The other argument is that such debt monetisation might lead to a devaluation of the currency in question. If there are more Euros floating around the banking system, even if they aren’t spent into circulation, their value will decrease. In actual fact there is no evidence of any direct link between exchange-rate depreciation and the creation of money.
This doesn’t mean that depreciation may not occur due to monetisation but it does mean that we have to consider other variables. For example: what are the trade-off effects? If no action is taken and the eurozone crisis continues to spiral out of control will the currency depreciate anyway? You can bet your socks on that! So, exchange-rate issues are far more complex than simply ‘more money = devalued currency’.
In fact, the objections to this sort of plan are typically moral rather than economic in nature. Many commentators have begun to realise that a great deal of the discourse that has cropped up around the eurocrisis is not actually economic at all — it is moral. This is phenomenon about which economic commentators can say little, although it is a very real problem. However, if such moralising leads the eurocrats and the politicians to fiddle while Rome burns we may very well see the ECB creating bank reserves to backstop the banks anyway if a default occurs. Such will be messy. And we have seen it can be avoided. But what can one do? If nothing else necessity is certainly the mother of invention.
September 16th, 2011 at 9:41 am
Couldn’t this throw a wrench into interet rate (or inflation) targeting by the ECB? Seems to me you would still need a supranational interest bearing liability out there?
“The ECB would create €1trn on an annual basis and distribute it among the eurozone nations on a per capita basis. So, Germany, since it has a larger population, would get more than, say, Ireland. Each country would then use their newly acquired funds to begin paying down their stock of public sector debt. When they reached a reasonable level of debt — say 60% debt-to-GDP — the transfers would either discontinue or could be renegotiated to allow compliant countries to spend them (provided, of course, there are no major inflationary pressures in the eurozone at the time).”
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WARREN MOSLER Reply:
September 16th, 2011 at 9:59 am
right, financial assets would be shifted from national govt secs to (reserve) balances at the ECB.
they can support their rate target by either paying interest on reserves or offering ecb notes that pay the target rate or thereabouts
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JKH Reply:
September 16th, 2011 at 10:07 am
@WARREN MOSLER,
any operational or accounting detail offered to deal smoothly with the equal but opposite effect on ECB capital?
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JKH Reply:
September 16th, 2011 at 10:15 am
its a helicopter drop from the central bank to multiple sovereigns
love the smell of the ECB in the morning
WARREN MOSLER Reply:
September 16th, 2011 at 10:28 am
This distribution would probably be accounted for as an expense so, politically, for accounting purposes they’d have to accept negative net worth, or something like that.
operationally it’s no problem whatsoever
beowulf Reply:
September 16th, 2011 at 3:15 pm
@JKH,
“for accounting purposes they’d have to accept negative net worth, or something like that.”
Exactly. just as the Fed refunds net earnings to Tsy, the ECB rebates net earnings to NCBs (national central banks). Therefore the ECB can borrow (so to speak) Bernanke’s wonderful accounting innovation from earlier this year.
any future losses the Fed may incur will now show up as a negative liability (negative interest due to Treasury) as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible regardless of the size of the Fed’s balance sheet or how the FOMC chooses to tighten policy.”
http://www.zerohedge.com/article/accounting-gimmick-makes-fed-insolvency-impossible
There is an existing Eurozone fiscal policy tool ECB could utilize, the EU requires every member to levy a VAT of at least 15%. The ECB could loosen fiscal stance by funding a partial VAT holiday out of a Fed-like “negative interest due to NCBs” account. After all, burying one’s head in the sand is indeed a remarkably effective solution to problems that are illusory.
WARREN MOSLER Reply:
September 16th, 2011 at 6:34 pm
right, and with the political will to do something they can get’er done
JKH Reply:
September 16th, 2011 at 4:26 pm
“or something like that” …
… “exactly”
Creative accounting ideas are easy to float.
But strong policy proposals facing strongly opposed ideological forces (from some quarters) will be taken more seriously if implementation detail is presented seriously as well.
beowulf Reply:
September 17th, 2011 at 1:31 am
@JKH,
“Creative accounting ideas are easy to float.”
The accounting should adjusted to reflect reality, adjusting reality to reflect accounting only leads to full employment, of riot police.
JKH Reply:
September 17th, 2011 at 7:45 am
@Beo,
The operative word was “float”.
Recommend something specific as part of the proposal, instead of leaving it open and an afterthought. I’ve seen lots of traders get thrown out of board rooms for presentations that leave the details up to somebody else. If you have a reality in mind, represent it.
Roger Erickson Reply:
September 17th, 2011 at 9:23 pm
@Beowulf,
> The accounting should adjusted to reflect reality, adjusting reality to reflect
> accounting only leads to full employment, of riot police.
Lol right! You don’t send accountants to a reality fight!
What are they gonna do? Take notes & constrain options?
Ramanan Reply:
September 23rd, 2011 at 6:37 pm
@JKH,
JKH,
Here’s some sort of criticism about ideas floated by the Chartalists:
My comment here (#1)
http://neweconomicperspectives.blogspot.com/2011/09/marshall-auerback-on-irelands-vincent.html
September 16th, 2011 at 9:58 am
I was just looking through zerohedges blog and was surprised to find that the inflationistas are backing off their position of inevitable hyperinflation. Not to worry somehow Ron Paul saved us from it? No kidding. They really beleive this stuff.
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WARREN MOSLER Reply:
September 16th, 2011 at 10:26 am
right, there just aren’t any ‘real’ forecasters who see anything over a few percent over the next few years, with most near 0, and long term tips are down there as well, so the serious players can’t find any support for higher forecasts. and the drop in rates after the downgrade had to set them back as well
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Philip Pilkington Reply:
September 16th, 2011 at 10:32 am
@WARREN MOSLER,
Some of the MMT folks from Britland are getting nervous about inflation figures there. I think their fears are misplaced. But they claim that the seeds of a wage-price spiral may have been planted. Someone should look into this properly… maybe Bill Mitchell?
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WARREN MOSLER Reply:
September 16th, 2011 at 10:54 am
Be nice to have a UK version of Bill on board, if you know of any candidates, thanks!
The spiral can be set in motion when wages are increased for the further purpose of allowing employees to keep up with the ‘inflation’
A ‘relative value story’ into an ‘inflation story’ when the wage increases result in continuous excess demand and/or higher costs of production that drive further price increases.
Nor is this necessarily a ‘bad thing’ as there are many examples of long term prosperity with relatively high levels of inflation.
Inflation isn’t an economic problem per se. It’s a political problem
Mario Reply:
September 16th, 2011 at 12:39 pm
@Philip Pilkington,
“Inflation isn’t an economic problem per se. It’s a political problem”
I see what you’re saying there and can’t inflation also pose a real currency problem in terms of exchange rates and possibly shift that nation’s external sector dynamics? Let alone my own personal global traveling costs!! LOL
WARREN MOSLER Reply:
September 16th, 2011 at 1:58 pm
a shift in the currency per se won’t necessarily alter real terms of trade, depending on rigidities, but it might
September 16th, 2011 at 12:40 pm
wow GREAT article. I’m passing this along wherever I can. perhaps we could get this article onto the huffington post? It’s really needed out there imho.
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Philip Pilkington Reply:
September 17th, 2011 at 7:04 am
@Mario,
It’s for a newspaper so they get rights to it once it’s published.
If anyone is in contact with HuffPo and they want me to do a rewrite I have no problem with that (Warren?).
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Adam (ak) Reply:
September 17th, 2011 at 8:28 am
@Philip Pilkington,
I have to admit that the proposed solution seems to me to be too good to be true. First of all I read enough about the Prussians (I was born in former Danzig) to understand their rather perverse attitude towards order, guilt and punishment. Mrs Merkel’s ancestry is Prussian. “Ordnung muss sein”. The Greeks have to be taught the lesson even if the flogging is also painful to the sadistic teacher.
But the current federal Europe more resembles the Austro-Hungarian empire which inspired Franz Kafka than the Bismarckian Second Reich.
If a local council in a remote part of Poland wants to build a bridge they ask the EU to share the costs. Nobody will refuse to open the door to good Santa Claus who brings money to those who need them. This is how the EU bureaucrats not elected by anyone have accumulated power. They have to approve the investment. What about not forcing Poland to write the public debt ceiling into the Constitution? Maybe then there would have been enough funds for the bridge and the shipyard in Gdansk and a few other factories had not need to be closed.
What idiot has invented the privatisation of the railways or power grid? This is what the EU enforces on the member countries.
Also – it is naive to assume that the politicians really want to “solve” the crisis. The Euro-Enthusiasts put their proposals of a federal state for a referendum a few years ago – the French and the Irish showed them a finger. But the Euro-sceptics are afraid of undermining the neo-liberal consensus and no viable alternative has been put forward so far.
Euro stands like the bridge in Avignon – half-built and half-collapsed. That bridge is a monument memorising one of the previous attempts to impose a pan-European order.
As a holder of a passport of one of the countries which belongs to EU (happy to live far away from that mess in a normal, fiscally sovereign country) I dare to ask the following question: what is the democratic legitimacy of the processes which are occurring now in Europe? The Lisbon treaty was finally pushed down the throats of the people. It did not work any better than the previous treaty from Maastricht.
People in all the member countries have to be asked whether they want a pan-European Treasury or another wealth-redistribution mechanism. Otherwise it is up to the democratically elected governments of the member countries to do what is in the best interest of their own citizens.
In that context any proposal even sound from the economic operational point of view which prolongs the status quo is inherently undemocratic.
What if an orderly breakup of Euro would be less painful and simply better in the long run? Czechoslovakia split without any problems. After getting rid of Euro, EU can function just as a custom union and a body coordinating social policy like Australia and New Zealand.
These who sow fear about the breakup haven’t provided any meaningful arguments and may often be accused of conflict of interests.
I am not against solving the problems facing the EU but in my opinion the prerequisite of any lasting solution is democratic legitimacy and the prerequisite of the democratic legitimacy is a discussion based on true expression of the interests and views of the people. Otherwise the system based on centralised financing even if viable is just lipstick on a pig.
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Tom Hickey Reply:
September 17th, 2011 at 12:22 pm
@Adam (ak),
Well said.
It comes down to democracy, while the current system is being run for capital (ownership), especially finance capital. Capital interests are being used to subvert democracy through a quasi-political regime that is unelected and doing everything it can to be unaccountable to the people.
I think we can assume this is a test case for a larger program that began with international institutions like the BIS, IMF, Word Bank and central banks to place control of the global economy in the hand of an unelected and unaccountable regime operating as a de facto coup d’état.
Many people would regard this as a conspiracy theory, and there are various conspiracy theories based on this out there. I don’t see it quite in that light, however. I think it is an outcome of the institutional structure that emerged post-WWI and then WWII when a “new world order” was devised and agreed up by principle world leaders. The term “new world order” apparently originated with Woodrow Wilson and Winston Churchill, but was subsequently taken over by conspiracy theorists. We should not allow that to marginalize a perfectly apt concept that has been politically operative on a global level for a long time. It led to the creation of the League of Nations, later to morph into the United Nations, and associated international organizations along with cozy international relationships among central bankers.
The most cited evidence for this is perhaps Carroll Quigley. Quigley (1910-1977), Professor of History at Georgetown University and a member of the Council on Foreign Relations (CFR). “The powers of financial capitalism had (a) far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank… sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.”
— Tragedy and Hope,1966., ch. 20
Quigley did not see this as at all sinister, and he agreed with the noble aim of the elite to create a new world order that would usher in a long period of peace and prosperity through international cooperation. I would agree with him about the intent. I don’t see this as being a conspiracy of evil people bent on setting up a totalitarian world government, the way conspiracy theorists do.
At most, TPTB expected to be rewarded in a way commensurate with their contribution to creating a peaceful and prosperous world, that is, handsomely, including power, prestige, and financial resources, which they regarded as hardly exorbitant by historical standards of pillage. I don’t have a quibble with this either, other than that they should not have the power to compensate themselves out of the public coffer, or use their institutional power to promote inequitable compensation or privilege, or to erect a double standard. Reasonable reward is fine with me, though.
However, I do see huge issues for democracy inherent in the idea and execution, as well problems for democracy that have developed historically out of it, as nobel as the intent may be.
The problem boils down this, IMHO. When capital (read the combined financial sector as the creators and allocators of capital) is seen as predominant in influencing the desired global outcome (“globalization”), then the end is used to justify the means. This often involves serving the “requirements” of capital regardless of democratic or equitable processes by jamming through solutions that favor the continued power of the institutions involved and contribute to their gaining hegemony.
To me, this is the challenge of the time and being concerned with totalitarian socialism is to be looking backward for a danger that no longer is threatening and failing to notice the cliff in front that one is approaching.
It’s all too easy to dismiss the conspiracy theorists like the Ron Paul’s of the world that are warning against obvious bogeymen while failing to see that there may actually be real problems lying in that direction in spite of the all the obvious nonsense surrounding the issues. The entire euro project as a back door to Europeanization is a red flag for liberal democrats in this regard.
Philip Pilkington Reply:
September 17th, 2011 at 1:54 pm
@Adam (ak),
“The Euro-Enthusiasts put their proposals of a federal state for a referendum a few years ago – the French and the Irish showed them a finger.”
The Lisbon Treaty — which, I assume, is what you’re referring to — was not a real treaty. It just formalised certain arrangements that were already in place since Maastricht. Federalism is an ongoing project by the eurocrats but one never written into treaties.
As for the legitimacy of Europe, I share your concerns. But I’m far more concerned about the Euro falling apart and being unable to take money out of the ATM. Finally, having my house raided by looters. That, to me, is far more of a concern right now than democratic legitimacy…
Tom Hickey Reply:
September 17th, 2011 at 3:27 pm
@Philip P,
As for the legitimacy of Europe, I share your concerns. But I’m far more concerned about the Euro falling apart and being unable to take money out of the ATM. Finally, having my house raided by looters. That, to me, is far more of a concern right now than democratic legitimacy…
I appreciate that concern, which shows the importance of doing things in a democratic say. In an ideal world, I favor the idea Plato puts forward in The Republic about governance by an enlightened technocracy. However, in the real world when that sort of thing is attempted there are several dangers. First, the technocracy many not be either all that enlightened or even all that knowledgeable. Secondly, there is the danger of getting ahead of the people so that the imposition from above becomes socially unworkable due to asymmetry, lack of cooperation, and outright resistance.
Globalization and financialization are manifestations of this sort of technocratic imposition, and the outcome has been predictable, since it not only got ahead of the people but it was done from an unenlightened and self-interested mindset by groups of overly self-important people. The result has been mismanagement, corruption, and growing chaos.
The “wisdom of crowds” behind a democratic approach lies in the cooperative spirit and actual coordination necessary to implement far-reaching social change. Without cooperation and coordination based on fundamental consensus, the outcome of social engineering is precarious. TPTB got ahead of themselves owing to ignorance combined with self-interest and self-importance, and the result is a mess. Moreover, they seem to have thrown away the ladder and now cannot climb down from a very precarious perch.
Adam (ak) Reply:
September 17th, 2011 at 5:46 pm
Philip,
I am extremely sorry but I heard a very similar argument from General Jaruzelski in 1981. The stability needs to be preserved at any price. The price was 8 more years of decay and persecution.
Whether your house is going to be looted or not depends on the stability of the Irish state, not whether Euro is dismantled or the German banks go belly up. Telling ordinary people that “There Is No Alternative” and if they don’t allow for the rescue of the failing banks they will all suffer immensely is the ultimate blackmail – based on plain lies. Ireland may actually be less stable in long term if the current trends prevails.
What forced people to borrow so much money to buy houses? Spiralling out house prices. Not everyone was a speculator. Why did house prices inflate so much? Because the banking sector was pumping out cheap credit. And now they dare to say that people will die in misery if the pension funds lose their value or the deposits evaporate… this is how it works – the banksters studied Karl Marx very thoroughly and converted all the members of the working class into “petit bourgeois” by drafting them into compulsory pension schemes and giving “wealth creation” opportunities for everyone – pure Ponzi for little investors. The class consciousness has changed and everyone frets about falling share prices or banks going belly up. But these “petit bourgeois” are those who are skimmed the most by the overlords of usury.
Now we are in debt-deflation phase and this blows a hole in the state budgets. But such a good crisis cannot be wasted by the neoliberals.
The monetary sovereignty of the states has been replaced by the idea of monetary sovereignty of the finance sector where states have to borrow before they spend – from the finance sector of course.
The solution to the root problem is very simple and it has already been partially implemented in Poland and in Hungary – go back to the old system where the state guarantees and pays pensions. The reaction of the pro-European neoliberal propagandists is to brand Victor Orban a fascist. The propagandists scream even more loudly when Orban threatened to convert mortgage loans to Forints. (Actually Orban did his first reform it in the name of “fiscal austerity” and I am not sure whether I personally like him because he indeed is a right-wing populist).
References: http://blogs.wsj.com/emergingeurope/tag/viktor-orban/
Democracy in my opinion is about finding the common ground between conflicting interests of different groups of people, not seeking common wisdom because such a thing may not exist. The prerequisite of the democratic process is to see the real economic interests of the people.
Democracy cannot exist if there are no sovereign states. So in Europe – either abolish the member states, get rid of the Queen, the French President, German Chancellor and all of these mid-level bureaucrats (member states would then become the states of the federation like in the US or Australia) – or revert back to the full sovereignty and democratic accountability of the member states.
These individuals who make decision should be held accountable. The “invisible hand of the market” must not make strategic macroeconomic decisions because extraditing all the hedge fund managers to face the Tribunal of the State for the mismanagement of the economy is very problematic.
Viktor Orban has been branded a fascist but the only true fascists I have seen so far are the banksters because they want to build a new global totalitarian system and the propaganda they spew comes directly from Dr Goebbels textbook I am afraid.
Example: http://www.ft.com/intl/cms/s/0/80094624-e076-11e0-bd01-00144feabdc0.html (go through Google to bypass the registration), see “Argentina defaults” , “formerly middle-class people foraged in waste bins for food” – was this a result of the default or the policies which preceded the default?
I am very sorry but is seems to me that you have been influenced by that propaganda when you are saying that your home may be looted.
The application of MMT to save the current European system will not help the majority of people in the long run even if the austerity logic is defeated or contained. The system has to be orderly dismantled like Czechoslovakia. It was the refusal to allow for the natural breakup along the ethnic lines (and an attempt to carve up Great Serbia) what led to the wars in Yugoslavia.
In my opinion the banks in European states should be nationalised (as they are in China) because usury should be a public good. There is no reason why the individuals should see their money multiplied just because they already have some money. Otherwise nothing will change in the long run I am afraid… And then, only then, when the true capitalism (the system based on the private – individual – ownership of the means of production, not the global dictatorship of amorphous corporations and investment banks) is restored, the states should embrace the Functional Finance doctrine.
I think that the political situation in the US is different because the so-called “liberals” are brain-dead and the only political group capable of rocking the boat are right-wing nutters but let’s leave this topic for now.
PG Reply:
September 17th, 2011 at 10:13 pm
@Adam (ak), And the old saying “Those that trade freedom for security end up without freedom and without security” (or something like that) could also be remembered.
peterc Reply:
September 19th, 2011 at 12:56 am
@Adam (ak), Great comments. MMT indicates a path to genuine democracy and sovereignty. No more lipstick for the pig!
September 16th, 2011 at 4:15 pm
I’m sure I’m missing something, but I don’t see the big difference between the existing system and Mosler bonds. In both cases, central Euro authorities tell rogue states to “get your house in order else you get no handout”. Greece is currently failing to get its house in order. Under a Mosler bond regime it would still fail because the reasons for failure are political.
A better solution would be an effective devaluation of Greece’s currency with Greece still in the Eurozone. That could be achieved by cutting all wages in Greece. Easy in theory. Politically near impossible.
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WARREN MOSLER Reply:
September 16th, 2011 at 6:36 pm
it started out that way when the euro was around 1.00 vs the dollar. then tight fiscal caused it to appreciate (euro crop failure) and the rest is history
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Kristjan Reply:
September 17th, 2011 at 9:08 am
@Ralph Musgrave,
Cutting all wages will not work. Private sector debt is nominal and you don’t cut that. This is exactly what they have been trying in Europe. Private sector debt starts defaulting and then banks fail. They are more than willing to bail out the banks. It is financial oligarchy.
By the way It was done in Latvia and Estonia. Part of the population fled the country and is working abroad now. Many are still making their mortgage payments for houses they can’t even live in. It can be done politically but the results might surprise you.
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Philip Pilkington Reply:
September 17th, 2011 at 1:59 pm
@Ralph Musgrave,
Internal devaluations are sloppy and I’ll bet would not work. I had a conversation with Parenteau about this a while back.
First of all, governments that are totalitarian don’t have control over wages (thank God) so there’s no mechanism to reduce them.
Secondly, if they did reduce them I’ll bet there would be significant price stickiness. This would lead to higher unemployment as aggregate demand fell.
Thirdly, if you reduce wages you reduce taxes taken in.
Fourthly, the external markets are VERY weak at the moment.
More on that here (note comments too): http://bit.ly/n9goGI
Internal devaluation is a fantasy of a policy. It shouldn’t be taken remotely seriously.
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Kristjan Reply:
September 17th, 2011 at 3:12 pm
@Philip Pilkington,
Prices are sticky, no doubt about that but they did It in Estonia. Salaries were cut in public sector and private sector. Unemployment got sky high for a while close to 20% but then It started falling. Current account became positive too. They had fixed rate currency at the time and they wanted to adopt euro. Government deficit was within limits of the Mastricht requirements. The growth is slowing now, unemlpoyment is still high, real wages are still falling, inflation is somewhat high. And of course trading partners in EZ were stimulating. Now Estonian government is making next year budget with 2% deficit ( It has never happened before in growing economy)and their economic forecast is far too positive in my opinion so the deficit will probably be a lot bigger. They are not issuing bonds, they have reserves.
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Philip Pilkington Reply:
September 17th, 2011 at 3:47 pm
@Kristjan,
Ireland ain’t Estonia. We’re a high consumption economy. Prices would be much more sticky and wages FAR harder to alter.
Besides, Estonia and Latvia had Great Depression-style growth losses. Who cares if they started growing again if they lost about 10 or 15 years of growth. That’s a crazy policy. We’d be better off exiting the Euro.
Last but not least, Latvia looks like its going to slip back into recession now that global demand is falling. Becoming an export hub with slave-wage rates is a disastrous idea and I’d sooner see Ireland exit the Euro than regressing the country decades into the past over some accounting irregularities.
Philip Pilkington Reply:
September 17th, 2011 at 3:51 pm
@Kristjan,
Also, it’s not commented much on, probably because Latvia is used for propaganda purposes, but their deficits rose quite high after the internal devaluation and continue to be quite high. If the goal was deficit reduction it didn’t work — and the deficits are likely to get bigger in the future as global demand wanes.
Latvian deficit: http://www.tradingeconomics.com/latvia/government-budget
Anyway, Greece is a better example. More developed country. And we can see what’s happening there… Internal devaluation doesn’t work.
Kristjan Reply:
September 17th, 2011 at 5:20 pm
@Philip Pilkington,
I agree with most what you are saying
Latvia and Estonia are both going down.
I don’t think Estonia and Ireland are that much different. Just Estonia is very small and It is trying to be very right wing. And that is their idea of being right wing, gold standard :)
They are both used in propaganda.
http://www.novinite.com/view_news.php?id=130546
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Roger Erickson Reply:
September 17th, 2011 at 9:31 pm
@Krisjan,
> It is financial oligarchy.
Totally. And it’s operationally inept. Like shooting your foot to let it know who’s boss.
Sophisticated parasites & sophisticated crooks know enough to not kill their host.
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September 17th, 2011 at 8:30 am
If the extra 1 trillion euros are spent only in euroland, do they have any effect on the dollar-euro exchange rate? On the other hand, if, the entire trillion was used to buy things in dollars, then they euro would depreciate relative to the dollar, right? What would be the effect on the dollar-euro exchange rate if the trillion euros were spent on oil?
Just trying to get clear on the effects of ‘printing money’ on international exchange rates.
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WARREN MOSLER Reply:
September 17th, 2011 at 2:18 pm
the ‘extra 1 trillion euros’ don’t represent any new spending.
the just allow the govt to spend what they have been allowed to spend under the current austerity measures.
when govt spends more than it taxes, the result is someone out there holding that increase in outstanding govt liabilities in one form or another.
what this proposal does is shift the composition of the outstanding govt liabilities from national govt securities to clearing balances at the ECB.
But the total remains the same.
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September 17th, 2011 at 2:47 pm
“The ECB would create €1trn on an annual basis and distribute it among the eurozone nations on a per capita basis.
As I said in an earlier comment, this is nothing more than giving euros to eurozone nations on a per capita basis. Not sure why Warren proposes this in the form of eurobonds rather than simply euros. Perhaps some political reason?
But eurobonds are more complex than euros, because they go by the name “debt,” which confuses people, while euros (although they too are debt), do not look like debt.
For years, I’ve proposed that the EU give euros to nations on the basis of population, and that the U.S. Treasury do the same for the U.S. states. Given sufficient euros and dollars, the euro nations and the U.S. states immediately would emerge from the worldwide recession.
Rodger Malcolm Mitchell
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WARREN MOSLER Reply:
September 17th, 2011 at 2:52 pm
where did i say anything about euro bonds?
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Philip Pilkington Reply:
September 17th, 2011 at 2:56 pm
@WARREN MOSLER,
Dunno. I didn’t write it. Eurobonds are a crap idea as they move toward fiscal integration which I tear down in the piece.
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Rodger Malcolm Mitchell Reply:
September 17th, 2011 at 3:30 pm
@WARREN MOSLER, Sorry, you didn’t. I skimmed the article too quickly, and became fixated on a suggestion I made back in 2009 and subsequently (Item 16, http://rodgermmitchell.wordpress.com/2009/09/07/introduction/),that “The federal government should distribute dollars to each monetarily non-sovereign state, on a per capita basis. The states would determine how they distribute the dollars (to counties, cities and/or taxpayers). I suggest a distribution of $5,000 per person or a total of $1.5 trillion.”
I’ll read more carefully. Sorry, again.
Rodger Malcolm Mitchell
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September 18th, 2011 at 3:45 pm
http://ftalphaville.ft.com/blog/2011/01/24/466731/buiter-on-europes-secret-liquidity-operations/
what’s that?
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September 18th, 2011 at 4:33 pm
Posted at http://www.electricpolitics.com/2011/09/whither_the_euro.html#comments
Elite opinion in the Eurozone remains stridently devoted to further integration. According to their view, national governments are to progressively devolve more and more powers down to the regions and up to Brussels. At the same time, it has long been clear that European popular opinion has cooled to EU integration, having seen little but more unemployment, higher prices, and greater social dislocation with the implementation of successive EU treaties. The present economic union is likely all that can be built in the face of popular resistance. In order to move onto a political union, the EU must undergo a crisis in which the Europeans are strenuously propagandized of the terrible fate that awaits them if the EU falters. The recent Norwegian massacre, for instance, raises many of the same suspicions as the 9-11 attacks and can be seen as part of a larger strategy of tension to demonize any return to national sovereignty and push them towards greater integration. Only when thoroughly zombified by fear will the European peoples consent to dismantle their organic, historical countries in favour of a neoliberal European super-state.
So long as this unified Europe remains militarily dependent on the US, the latter will not oppose it. For the Anglo-American oligarchy, the question is not whether to have European integration, but what kind of integration. This leads me to add a word about Germany. The last two world wars can largely be summarized as a contest between the project for a German-dominated Europe that can rival the Anglo-American thalassocracy, and that of a German-dominated Europe that would still remain subordinate to Anglo-American interests on the global level. The triumph of the latter project can clearly be seen in the strategic layout of Europe: an economic zone of countries to absorb German exports while much of the profits accrued by German industry are invested in Anglo-American banks. It is also interesting to note that the recipients of the prestigious Charlemagne Prize, awarded to those who have made great contributions to European unity, tend to be European politicians of marked Atlanticist inclinations, and even such unlikely “champions” of European unity as Henry Kissinger, Bill Clinton and Tony Blair!
At the same time, keeping Germany in its subordinate position is a task requiring constant vigilance and the Anglo-American domination is never total. The German elites, despite having to work in a cultural milieu subject to severe post-WW2 American brainwashing and in a country still dotted with US military bases, have managed to exploit rivalries between the USA, France and Russia to their advantage. To take one example, the Gerhard Schroder government rallied to the side of France in opposition to the US war on Iraq in 2003, only to simultaneously provide intelligence support to that same war and then sign an “German-American Alliance for the 21st Century” with Washington…and also while building up an energy partnership with Russia that bypassed deeply Atlanticist Poland! These manoeuvres are not only the product of strategic cunning in Berlin, but also of contradictory tendencies within German big capital. In the 1930s, the German elites were divided on a partnership with the British Empire and one with the Soviet Union. Today, they face a similar choice between a continued subordination to the USA or a strategic understanding with Russia and China. Their choices made history 80 years ago…and I wonder how they will make history this time.
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September 18th, 2011 at 4:56 pm
Michael Hudson interview at Guns and Butter:
http://archives.kpfa.org/data/20110914-Wed1300.mp3
Guns and Butter
“Debt Deflation in Europe and America” with Dr. Michael Hudson. European banking crisis causing a constitutional crisis of the European Central Bank; Germany; the myth of Social Security in the US.; bank balance sheet crisis; food, fuel and climate crisis; the super congress; debt deflation; FHA lawsuit against the banks; criminalization of the financial sector; Modern Monetary Theory; the coming lost decade; debt cancellation.
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September 19th, 2011 at 6:40 am
1trn distributed per capita is 3k per greek, Greece is 16k per greek over the 60% norm.
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WARREN MOSLER Reply:
September 19th, 2011 at 7:36 am
ok, thanks. it will take a few years for that to come down to that level with ongoing distributions, should they happen.
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September 19th, 2011 at 1:19 pm
I took ultimo 2010 numbers from eurostat to get some perspective on this.
http://i257.photobucket.com/albums/hh240/dugoxdugo/mosplan.jpg
It takes about 5.6 trn to get every country capable to reduce their debt back to 60% of GDP whilst giving each european an equal share.
Total debts should be reduced with about 2.3 trn leaving about 3.2 trn to spend.
How does one determine a safe speed for transfering these trns?
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WARREN MOSLER Reply:
September 19th, 2011 at 2:42 pm
any number is ‘safe’ because it doesn’t increase govt spending. it just reduces how much the govs have to borrow, as part of their deficit spending winds up as ECB clearing balances
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