My big fat Greek MMT exit strategy

Due to popular demand, I’ve begun outlining a Greek exit strategy to exit the euro currency,
and instead use its own new currency to provision itself:

1. The Greek government would announce that it will begin taxing exclusively in the new currency.
2. The Greek government would announce that it will make all payments in the new currency.

That’s it, deed done!
The govt can now provision itself and continue to function on a sustainable basis.

Now some Q and A:

Q. How will the new currency exchange for euro?
A. The new currency will be freely floating, with exchange between willing buyers and sellers at market prices.

Q. What about the existing euro debt?
A. Announce that it will consider it on a ‘when and if’ basis with no specific payment plans.

Q. What about existing govt contracts for goods and services?
A. They will be redenominated in the new currency.

Q. What about euro bank deposits and euro bank loans?
A. They remain in place.

Q. What about foreign trade?
A. Markets forces will function to adjust the trade balance to reflect foreign desires to accumulate financial assets denominated in the new currency.

To maintain full employment and internal price stability, I would further recommend the following:

1. The govt would fund a minimum wage job for anyone willing and able to work.

2. For any given size government, taxes should be adjusted to ensure the labor force that works for that minimum wage be kept to a minimum.

3. I would recommend the govt levy only a tax on real estate for the following reasons:
   a. Compliance is maximized and compliance costs and related issues are minimized- if the
       tax isn’t paid the property can be simply sold at auction.
   b. Everyone contributes as either an owner of the property or as a renter as the owner’s costs
       are ultimately passed through to renters.
   c. Transactions taxes are eliminated, thereby removing those restrictions on transactions.
       Freedom to transact is the source of that substantial contribution to real wealth.

4. A zero rate policy where govt deficit spending remains as non interest bearing balances held by counter parties at the Bank of Greece, and no govt securities are permitted.

5. All bank deposits in the new currency will be fully insured by the govt.

6. Banks will be govt regulated and supervised, which will include a 15% capital requirement, govt guaranteed liquidity, and a prohibition from any secondary market activity.

Comments welcome with additional questions, thanks!

Signs of Disinflation (Hatzius)

And this Fed fears deflation a lot more than inflation:

  • We see signs that the upside inflation surprises of 2011 have ended. Our new statistical summary of the price components of business surveys such as the ISM, Philly Fed, and NFIB points to decelerating inflation. In addition, our unweighted CPI diffusion index, which measures the breadth of price changes across 178 detailed price categories, fell to its lowest level since late 2010.

Inflation has been above our expectations in 2011, but we expect a substantial part of this surprise to reverse and see core inflation clearly below the Fed’s “mandate-consistent” level of 2% or a bit less by the end of 2012. The reasons are straightforward. There is still a large amount of slack in the US economy; nominal wage inflation remains very low; and much of the inflation pickup of 2011 can be traced to temporary factors such as short-term commodity price pass-through and upward pressure on motor vehicle prices in the wake of the Japanese earthquake. (We do not expect a full reversal of the core inflation pickup because the increase in rent inflation is likely to be more persistent.)

The recent inflation data have started to look more consistent with our view of moderating core inflation. The consumer price index (CPI) excluding food and energy has risen at an annualized rate of just 1.2% over the past two months, the lowest rate since December 2010 Statistically based measures of core inflation such as the Cleveland Fed’s weighted-median and 16% trimmed-mean CPI send a similar message.

Our unweighted CPI diffusion index is also starting to look a bit more benign again. It is constructed by seasonally adjusting all 178 individual CPI categories for which we have sufficient data, calculating the month-to-month change, and then reporting the percentage of categories showing price increases plus half the percentage showing no change. That is, values above 50 indicate that more categories are seeing price increases than decreases; the higher above 50, the greater the breadth of price increases relative to price decreases. (We perform our own seasonal adjustment because the Labor Department only provides seasonally adjusted CPI data for a subset of product categories.) Exhibit 1 below shows our diffusion index. While it is still clearly above the levels of 2009 and 2010, the October 2011 reading was the lowest since November 2010.

Exhibit 1: CPI Diffusion Index Has Started to Slow

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To gain more insight into future inflation trends, we have constructed a new measure that summarizes the inflation signal from various business surveys. Specifically, we calculated the first principal components of the price-related questions in the monthly ISM, Chicago PMI, Philly Fed, NFIB, Kansas City Fed, and Richmond Fed business surveys. These questions refer to prices paid, prices received, or wages and salaries and are generally reported as the difference between the percentage of respondents saying that prices rose in the survey month and the percentage saying that prices fell. (Focusing only on prices paid or prices received indexes does not make a significant difference to the results.)

The results are shown in Exhibit 2 below. In general, our business survey indicator of inflation tracks the ups and downs of the core PCE index–the Fed’s favorite measure of underlying inflation–reasonably well. After a significant acceleration in early 2011, the indicator has declined notably in recent months and is now consistent with a deceleration in core PCE inflation from the recent 2%+ level to somewhere closer to 1.5%. This is also consistent with our forecast that inflation will slow over the next year.

Exhibit 2: Business Survey Inflation Shows Recent Deceleration
chart

(RNC) Chairman Reince Priebus on the deficit

With the Republicans now willing to hike taxes out of fear of becoming the next Greece, the odds of the super committee going super big are increasing.

“America has crossed an unthinkable threshold: our national debt now exceeds $15 trillion dollars. That’s more than $48,000 per citizen,” Republican National Committee (RNC) Chairman Reince Priebus said. “In 2009, President Obama promised to cut the deficit in half by the end of his first term. Instead, he further accelerated its growth, producing three years of record deficits.”