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My big fat Greek MMT exit strategy

Posted by WARREN MOSLER on November 17th, 2011

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!

122 Responses to “My big fat Greek MMT exit strategy”

  1. Clonal Antibody Says:

    Glad to see the hat tip to land value taxation (Henry George/Michael Hudson)

    Great recommendations!

    Reply

    Art Reply:

    @Clonal Antibody,

    That Georgist #3 jumped out at me too.

    Reply

    jane saktouri Reply:

    A land tax would cripple the most productive sector of the greek economy-apart from tourism-the small farmer.Greek small farmers already have the lowest standard of living and the lowest pensions in the country (300 euros a month) and they are the only thing not wrong with the economy now-tax them on land holdings and you will destroy the mostly successful agriculture industry.

    Reply

    WARREN MOSLER Reply:

    there can be exemptions that serve public purpose

    Reply

    Clonal Antibody Reply:

    @jane saktouri,
    It is a Land Value Tax and not a Land Tax. Current taxation paradigms tax the land use, and not the land. However, a vacant hectare lot in downtown Athens obviously has a much higher value than an inaccessible hectare of agricultural land elsewhere. Currently taxation is paid on the house value, and not on the land

    Land Value taxation addresses that issue. So if I had a vacant hectare lot in lower Manhattan, under LVT, I would pay the same tax on it as the owner of the swank 1000 foot high skyscraper next door. Thus, I would either develop that vacant lot fast, or sell it to somebody that could. This keeps the land prices down, and development rates high. Residents pay less for housing, cities provide more services, and banks can extract less money from the borrowers (for the amount borrowed is less.) Historically, there have been no real estate bubbles in locations that have instituted a LVT.

    Agricultural land would obviously have a far lower tax than would land inside a dense city. Cities that have a Land Value Tax are considered to be some of the most livable cities. Examples are Pittsburgh in the US, Singapore, and Hong Kong.

    Reply

  2. roger erickson Says:

    Warren,
    You forgot to begin with a necessary requirement!

    1a) Greeks would announce a government that will begin legislating exclusively to serve Public Purpose.

    Reply

  3. Geoff Says:

    Instead of exiting, I’d love to see Greece try issuing Mosler Bonds. Last we heard, there were some backroom, pretty top level discussions about the idea. Any news on that front, Warren?

    Reply

  4. John Wilkins Says:

    How would the Greek government service the existing euro denominated bonds?

    Reply

    WARREN MOSLER Reply:

    probably be able to just ignore them.

    Reply

    John Wilkins Reply:

    @WARREN MOSLER, The problem is the other EU nations might seek to punish them in some way, perhaps with sanctions. Of course, they might also be relieved.

    Reply

    Jim Baird Reply:

    @John Wilkins,

    The rest of the world has tried to punish Argentina, too. It hasn’t been all that effective.

    ESM Reply:

    @John Wilkins,

    @Jim:

    100% agreed. Sovereign immunity is quite strong.

    John Wilkins Reply:

    @John Wilkins
    I’m sure your right. In any event, it is hard to imagine anything worse than what they are facing now.

    Kristjan Reply:

    @John Wilkins,
    Also they tried to punish Germany
    http://en.wikipedia.org/wiki/Occupation_of_the_Ruhr
    this wikipage
    http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic
    says that Keynes was critical of chartalism,
    does anyone know any link regarding this matter?

    Tim Reply:

    @John Wilkins,

    Could it service the bonds in its new currency (at market exchange rates)?
    I think this is consistent with act no. 2 of Warren Mosler’s exit strategy.

    Reply

    WARREN MOSLER Reply:

    but why?

    Reply

    John O'Connell Reply:

    @WARREN MOSLER,

    Why?

    Because they want to be regarded as honorable and trustworthy, and so that “Greek” will not become a synonym for “Bernie Madoff”.

  5. Gary Says:

    Is the tax on real estate or land? Also – is that the only tax? (No income taxes?)

    Reply

    WARREN MOSLER Reply:

    yes, that’s the only tax.

    on all land, and on residential real estate as well, as I don’t see any public purpose in encouraging larger homes?

    Reply

    Jose Reply:

    @WARREN MOSLER,

    What will happen to hotel room prices?

    If I am a Greek citizen owning a house in Greece I’ll want to sell it in order to evade taxes. I’d go live in a tax-exempt hotel, instead.

    But then, if hotels start charging much higher rates (which they would in any case, if also subject to a new property tax), there might be a huge drop in the number of tourists travelling to Greece.

    Yet the whole purpose of a new, devalued currency would be to restore the balance on current account, mainly via more tourists going to Greece, right?

    So maybe it would be better to just introduce the new currency and leave the tax system as it is, at least for the moment.

    Reply

    Gary Reply:

    @Jose,

    tourists get tax costs passed to them anyway – despite what kind of taxation is used. If land is not taxed, but employment or transactions are – the costs should be the same, or maybe bigger?

    WARREN MOSLER Reply:

    compliance costs are drastically reduced.

    WARREN MOSLER Reply:

    the tax system can be left as is.

    the purpose is not necessarily to have a new, devalued currency, but to enable the govt. to provision itself.

    yes, hotels could be taxed much like residences as desired.

    Art Reply:

    @Jose,

    “So maybe it would be better to just introduce the new currency and leave the tax system as it is, at least for the moment.”

    It would bring them closer to a Hong Kong style system, where none of those things has happened.

    If supply siders are right about marginal incentives, any negative impact should be more than offset by dropping all other rates to zero.

    Gary Reply:

    @WARREN MOSLER,

    would be nice to see it implemented.

    I would say land tax should be enough. Taxing houses would discourage construction through discouraging improvements, it seems to me.

    Reply

    MamMoTh Reply:

    @WARREN MOSLER,

    So the rich Greek would avoid paying taxes buying land, properties and other assets abroad, turning what is now tax evasion into legal tax avoidance.

    Reply

    WARREN MOSLER Reply:

    the problem would be his consumption of Greek resources, either directly or indirectly, not nominal wealth per se.

    MamMoTh Reply:

    I am not saying that it would be a problem. But clearly it will turn what is now tax evasion into legal tax avoidance. I believe most Greeks won’t be happy with that.

    WARREN MOSLER Reply:

    you aren’t avoiding anything. Past taxes are still due.

    Gary Reply:

    @MamMoTh,

    rich Greeks would have to live abroad and commute to Greece in order to avoid paying any part of taxes.
    In effect rich Greeks would become foreigners – or maybe they would only own a small piece of land in order to be official residents of Greece?

    Interesting problem though: poor owning the land.
    The poor would rent the land to the rich who wanted to work in Greece, but did not want to pay taxes?

    Or maybe businesses would own the land and then build housing and rent it? And businesses are owned by the rich, I assume. So rents would be as high as possible, and they would go to pay taxes, to maintain buildings, and the remainder as profits to the rich.

    Not very different as now – except that rich would live on smaller space to avoid paying taxes?
    Another difference – is that banks would not be as willing to lend against land and real estate – for they would not want to be stuck with highly taxed property.
    So there would not be housing bubble.

    Also the employment and transactions would be untaxed – which I assume would make society way more enterprising.

    It would be different society indeed. It is amazing how much is changed by taxes.

    WARREN MOSLER Reply:

    good thoughts, thanks. might even be the case that the rich from other nations would move to Greece and pay the property tax rather than the income taxes elsewhere.

    Art Reply:

    @MamMoTh,

    The problem being that you’re undermining a national past time?? :)

    Anders Reply:

    @MamMoTh, the beauty of land tax is that because rent provides a channel to pass on some of the tax to households and businesses, it needn’t a priori change the post-tax income distribution of the country. Although of course in practice you would expect there to be more changes over time. If people emigrate and sell their property, there will be a big decrease in land values and so housing affordability should go up.

    The difficulty with land tax is calibrating it so that it remains fair. To my knowledge, real estate taxes are only re-calibrated every few years once property is re-appraised. I think if land tax was the main form of taxation, then reappraisals would need to be quite frequent. This ‘frictional’ cost of raising tax could well be equivalent to the current cost of tax collection and compliance – although compliance would of course be very high.

    Also – if all land values are 5% lower than when the govt last set the rate at which land would be taxed, presumably this would call for a revision to the tax rate, eg increase from 2% to 2.1%. This seems potentially destabilising, although I’m still a huge Georgist fan.

    The only place where land tax really hurts people is when land is being used unproductively – ie large homes, second homes. So it nudges society back towards more similar-sized housing arrangements.

    MamMoTh Reply:

    @Anders,

    I have nothing against property taxes, but I fail to see the beauty of it. Most countries have some sort of property tax at the local or national level already anyway.

    But it definitely seems to me that it’s not a good idea to have it as the only source of taxation as proposed.

    It would be quite regressive. Those on low income who have properties that are highly valued would be obliged to sell them. The wealthy would be able to buy properties and other assets that generate income abroad and avoid paying taxes, they could buy properties in the country, rent it passing the cost of taxation, and pay no taxes on the income from the rent. Plus all the unintended and unpredicted consequences any change in taxation always brings.

    WARREN MOSLER Reply:

    In real terms I see ‘progressive’ more in terms of distribution of consumption rather than distribution of income

    MamMoTh Reply:

    How can regressive taxation lead to progressive consumption?

    WARREN MOSLER Reply:

    it’s just that consumption can be progressive.

    Gary Reply:

    @MamMoTh,

    Yes, those on low income and highly taxed property would be obliged to sell the properties – and move to the property where their income corresponds to taxes. But people do something similar even now – based on cost of living.

    What land tax would create is more efficient use of land. No more land speculation. And just think of implications of cheap land. Because it would become cheap. It would be costly (comparatively) to own, but cheap to acquire and use.
    Also think of the implications of banks not lending against property and land. The lending would be done for profitable enterprises – and there would be much more of them because income and labor and consumption taxes would be lifted. Another implication – that there would be no property bubbles – which is enormously important in itself.

    Regarding rich avoiding taxes by buying property abroad – are you worried that rich will make profits in Greece and then carry them abroad? Is that something new?
    Also – if they will buy property abroad – thus increasing property prices there – that is the problem for that country. Greece would have a benefit of more land available for less prosperous Greeks.
    Moreover – rich Greeks will have a choice between cheaply acquiring land in Greece and paying larger taxes, or buying expensive property abroad and paying smaller taxes for it. It may go either way.

  6. ESM Says:

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

    I don’t see how this part can possibly work. The Greek banks are just as unable as the government to service Euro liabilities.

    Reply

    WARREN MOSLER Reply:

    then they are declared insolvent and the remaining assets, if any, move to the new owners. Depositors may lose some.

    Reply

    Mario Reply:

    @WARREN MOSLER,

    couldn’t the greek government also “replenish” any lost euros held by greeks with the new valued drachma? Otherwise most everyone would lose everything and have no money to spend since they all have euros in banks basically.

    Also wouldn’t the EU seek to keep and refuse greeks to withdraw EU dollars from EU banks if Greece basically decided to stop paying EU debts? I’m sure the EU wouldn’t appreciate that and do something, whatever they could, to punish them for such disobedience. ;)

    Reply

    WARREN MOSLER Reply:

    yes, the eu could do just about anthing, but i’d cross that bridge when i came to it.

    second, depositors probably won’t lose much, if anything. the banks have about 10% equity capital, so that many of their assets can go bad and depositors still be whole.
    If they lose more, yes, depositors go into the hole for the amount of those additional losses. So if they lost another 10% via bad assets, depositors lose 10% of their deposits, etc.

  7. Adam (ak) Says:

    This could be actually incomplete:

    “Markets forces will function to adjust the trade balance to reflect foreign desires to accumulate financial assets denominated in the new currency. ”

    Unless strict capital controls are in place the trade balance will be adjusted to reflect not only the foreign desires to accumulate financial assets denominated in the new currency but also domestic desires to accumulate financial assets in foreign currencies. This process called dollarisation often leads to using a foreign currency in every day transactions.
    http://www.investopedia.com/articles/07/unofficial_dollarization.asp#axzz1dzkR7grq

    The phenomenon is well known in Southern (former Yugoslavia), Eastern and Central Europe. I remember time when due to high inflation house prices were only advertised in USD/DEM in Poland. You could pay in PLZ (the old Zlotys) at the spot exchange rate or change money at a corner shop (there were everywhere).

    Dealing in USD/DEM was still officially illegal in the mid-1980ies but a special class of petty businessman, money changers (cinkciarze, people approaching you and saying “cincz many” or “cieńć many” – “change money” in Polish pronunciation) were extremely common on streets next to dollar shops and banks. Some of these people became proper businessmen later.

    Greece would most likely experience wild gyrations of the exchange rate of the new currency – like Argentina or Russia after the defaults. Until the CPI inflation falls to single-digit numbers people will simply vote with their wallets and avoid using the new currency – unless a highly positive real interst rate is guaranteed on all “on demand” bank deposits.

    Facing similar problems and under a concerted attack from the foreign speculators Malaysia introduced strict capital controls and this strategy paid off.
    http://www.mir.com.my/lb/econ_plan/contents/press_release/capital.htm

    Anyway these issues are not trivial and their existence cannot be simply denied.

    Reply

    Philip Pilkington Reply:

    @Adam (ak),

    From Warren:

    This could be actually incomplete:

    “Markets forces will function to adjust the trade balance to reflect foreign desires to accumulate financial assets denominated in the new currency. ”

    true by identity!

    Unless strict capital controls are in place the trade balance will be adjusted to reflect not only the foreign desires to accumulate financial assets denominated in the new currency but also domestic desires to accumulate financial assets in foreign currencies.

    All part of the same thing.

    This process called dollarisation often leads to using a foreign currency in every day transactions.
    http://www.investopedia.com/articles/07/unofficial_dollarization.asp#axzz1dzkR7grq

    Doesn’t matter if it does, except to reduce imports a tad.

    The phenomenon is well known in Southern (former Yugoslavia), Eastern and Central Europe. I remember time when due to high inflation house prices were only advertised in USD/DEM in Poland. You could pay in PLZ (the old Zlotys) at the spot exchange rate or change money at a corner shop (there were everywhere).

    Again, doesn’t matter if they are priced in paper clips. And if I recall correctly lots of people over there had mtgs in fx, so may have been pricing accordingly?

    Dealing in USD/DEM was still officially illegal in the mid-1980ies but a special class of petty businessman, money changers (cinkciarze, people approaching you and saying “cincz many” or “cieńć many” – “change money” in Polish pronunciation) were extremely common on streets next to dollar shops and banks. Some of these people became proper businessmen later.

    ok. no reason to make it illegal.

    As long as the govt can provision itself with its currency the rest is of little consequence.

    Greece would most likely experience wild gyrations of the exchange rate of the new currency – like Argentina or Russia after the defaults. Until the CPI inflation falls to single-digit numbers people will simply vote with their wallets and avoid using the new currency – unless a highly positive real interst rate is guaranteed on all “on demand” bank deposits.

    Both doesn’t matter and not true. Italy, for example, had double digit inflation for years, with lira used almost exclusively. but again, doesn’t matter.

    Facing similar problems and under a concerted attack from the foreign speculators Malaysia introduced strict capital controls and this strategy paid off.
    http://www.mir.com.my/lb/econ_plan/contents/press_release/capital.htm

    Depends on how you define ‘paid off’

    Anyway these issues are not trivial and their existence cannot be simply denied.

    Again, as long as the govt can provision itself with its currency it all can result in full employment and prosperity.

    Reply

  8. Kaiser Says:

    Warren,

    The same goes for Ireland, yes???

    We’re a basket case and Austerity is coming again in the next budget in December.
    We thought we had rid ourselves of 800 years of Colonialism until recently…..
    Now we’re occupied by the FIRE boys.

    Kaiser

    Reply

    WARREN MOSLER Reply:

    yes!

    Reply

  9. Tim Says:

    If I understand correctly, next to an employment guarantee, taxes are the tool to stabilise economic activity. And taxes are only on real estate.

    I can’t seem to work out how a real estate tax will work as a stabiliser.
    How do changes in the tax rate efficiently remove or add demand to the economy?
    For example: how would a tax decrease on a property increase the consumption of real goods and services of the renter (the ultimate purpose of the tax decrease)?

    Furthermore, and maybe more importantly, can a tax on real estate be designed as an automatic stabiliser?

    Reply

    Gary Reply:

    @Tim,
    I guess spending would have to vary more, not taxes.

    Reply

    WARREN MOSLER Reply:

    the tax creates the nominal demand for the new currency, and govt spending provides the currency demanded to pay taxes and net save.

    yes, the elr/jg pool acts as an automatic stabilizer. However if it gets too large or too small a proactive fiscal adjustment would be in order.
    this could include a change in the property tax, or perhaps a more micro adjustment based on whatever happens to be causing the ‘imbalance’

    Reply

    Art Reply:

    @Tim,

    “can a tax on real estate be designed as an automatic stabiliser?”

    There are some interesting claims and some research re land price speculation playing a big role in many historic financial crises. I don’t have a strong opinion either way, but the inference drawn by proponents is that land taxes are counter cyclical.

    Reply

    pebird Reply:

    @Tim, Real estate is also the easiest to track compliance, hard to move it around. I assume there might be different rates for residential, commerciial, industrial areas, but that’s a minor point.

    Reply

  10. Philip Pilkington Says:

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

    Legality issues, I should think. Would the EU demand that all Euro assets held by the Greek people be converted into neo-Drachma by declaring it illegal to use the Euro?

    It would sure make for an interesting court case…

    Reply

    Neil Wilson Reply:

    @Philip Pilkington,

    I’m not sure what the greek term for ‘sod off and die’ is, but that should be the approach regarding the EU trying to set rules.

    There is no law without enforcement, and enforcement against a sovereign nation generally requires tanks and/or aircraft with bombs on them.

    Reply

    Adam (ak) Reply:

    @Neil Wilson,

    What is missing in the whole Greek debt story is this:
    http://www.aljazeera.com/news/europe/2010/05/2010513145757738686.html
    Nobody (maybe except for Bill Mitchell) talks about where the “malinvested and stolen” by lazy Greeks money really ended. 3% of the GDP on military hardware (mostly imported) was about the half of the current account deficit before 2008.
    http://www.tradingeconomics.com/greece/current-account-balance-percent-of-gdp-wb-data.html

    I haven’t heard any of the German or French austerity proponents telling Greece to stop wasting money on purchasing useless stuff from overseas (why would the Germans want to reduce their export?) They want the Greeks to reduce pensions and lay off public workers instead…

    The Greek ruling elite seems to be paranoid about a possibility of a war with Turkey.

    Nobody dares to upset the military complex and the Christian Orthodox Church hoarding the riches since year 313 (the process limited and partially reversed only during the Crusades and the Turkish occupation).

    “The Greek Orthodox Church owns property worth some €700 billion – more than double the country’s national debt. And yet it is the struggling Greek state that pays the salaries and pensions of all the Orthodox clerics in the country.”
    http://www.france24.com/en/20110627-wealthy-orthodox-church-spotlight-amid-greek-crisis

    They should go after the lowest hanging fruits first.

    Sometimes a lot needs to be changed in order not to change anything.

    Reply

    Calgacus Reply:

    @Adam (ak), “The Greek Orthodox Church owns property worth some €700 billion …. They should go after the lowest hanging fruits first.” Well it worked for Henry the Eighth (I am, I am).

    Poor Greece. The EU showed tremendous favoritism to Turkey by letting Greece on the Euro suicide pact before Turkey.

    Hope this gets through. The blog suddenly seems to be eating my posts, declaring me persona non grata.

    Matt Franko Reply:

    @Adam (ak), What about the Import Certificate system that Beo has been promoting as a way to address the US CAD over here. Seems like that type of system might do well withing the EZ to eliminate the CADs over there which seem to be the root of the problems…

    German and French arms merchants would have to purchase Euro for Euro credits from Greek farmers and hospitality businesses?

    Resp,

    WARREN MOSLER Reply:

    interesting how the Turkey issue seems to come up around Thanksgiving time

    Neil Wilson Reply:

    @Warren,

    Groan.

    Philip Pilkington Reply:

    @Neil Wilson,

    Yes. Yes, they should.

    Reply

    WARREN MOSLER Reply:

    the entire proposal is illegal and constitutes a default.
    so it’s a post default/clean sheet of paper proposal

    Reply

    Jim Baird Reply:

    @WARREN MOSLER,

    If this be treason, then make the best of it!

    Reply

  11. Talvez... Says:

    I see a problem… Greece has no registry of property!

    I’ve spoken with several North-europeans which are very critical of that option.
    Their main critics would be:
    1. Hyper inflation from the money making
    2. They would not be able to buy imported goods, like oil.

    I keep defending an euro exit by Greece – I think they are being overly pessimistic. But how would you reply to those points? (I’ve given up trying to explain them why money making doesn’t necessarily create inflation).

    Reply

    WARREN MOSLER Reply:

    less inflation with an employed buffer stock policy than with today’s unemployed buffer stock policies.

    there will be no problem buying imported goods and services.
    why should there be? even the latin american nations back when they had high inflation imported heaps.
    in fact, they were most often fighting what they considered ‘excessive imports’

    and are you saying the govt. doesn’t have any records of the real estate? no land records, no permits, etc?

    Reply

    MamMoTh Reply:

    @WARREN MOSLER,

    latin american countries needed (and still need) dollars to buy their imports, especially oil.

    Reply

    Art Reply:

    @MamMoTh,

    Hence the high inflation? (chicken v egg?)

    WARREN MOSLER Reply:

    wholesale importers sell the local currency for the fx they need and exporters buy it with the fx they ‘earn’ and the exchange rate fluctuates and continuously discounts it all.

    but local purchases are done in local currency

    Talvez... Reply:

    @WARREN MOSLER,
    I’m not Greek, but my Greek contacts told there is no land records, at least. Still, the easiest tax to implement is property tax.

    Basically their premise is that:
    If they leave (and default – what your wrote in the article does sound like default), drachma devalues a lot, oil will become very expensive in the internal market. Some even got to the point of saying food prices would rise because (even though Greece has plenty of land available and the best of climates) it doesn’t grow much foodstuff (but olive oil) and it would not even be able to buy seeds, machines, (even know-how!). Besides from the lack on knowledge of how agriculture works, it surprised me a lot that someone thinks that way.
    I could only reply that never in the long history of defaults, or breaking currency pegs, the dark scenario they envisioned never occurred.

    Reply

    WARREN MOSLER Reply:

    right

  12. Talvez... Says:

    The question of legal issues would hardly be a problem should Greece leave. International Law has provisions for emergencies, which is clearly what Greece is seeing right now.

    Reply

  13. GLH Says:

    You should leave the word Greek out and put a blank so that each country could fill in the blank in succession as the bottle spins in their direction. Greece, Italy, Spain, etc.

    Reply

  14. PG Says:

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

    Interesting option. Would people be allowed to withdrawal deposits in euro notes? Make payments in euros through bank transfers? Transfer euros from domestic bank accounts to foreign bank accounts?

    Reply

    WARREN MOSLER Reply:

    yes, just like they can with dollars and other currencies today.

    Reply

  15. Chaz Says:

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

    After the switch, pretty much everyone expects the drachma to drop relative to the euro. In fact, a big part of the argument for the switch is to achieve a decline in the euro value of Greek wages. So wages will fall.

    If all the Greek workers’ debts stay in euros and thus hold their value, while wages decline, that means a big increase in working Greeks’ debt/income ratio. Suddenly tons of common Greeks would have to carry a big personal debt burden and many would be forced to default. Add a big property tax on top of that and you have basically every mortgage in the country underwater. Meanwhile Greece’s 1% (net creditors) get a big increase in their buying power as their assets’ values rise in drachma.

    Seems to me that you need to either convert all debts to drachma or declare a jubilee.

    Reply

    WARREN MOSLER Reply:

    the modern day version of ‘jubilee’ is bankruptcy, so appropriate bankruptcy laws can be enacted as needed.

    more important, initially there will more likely be a massive shortage of the new currency, as every property owner will need them, and there will also be a need for cash in circulation, etc.
    and spending will be constrained and prices anchored by the size of the JG/ELR pool.

    Reply

    Art Reply:

    @WARREN MOSLER,

    Russian ruble post-1998 default supports idea of drachma demand:

    http://moneycentral.msn.com/investor/charts/chartdl.aspx?symbol=%2fRUBUSD&CP=0&PT=11

    Argenitne peso not as much, but still not a disaster:

    http://moneycentral.msn.com/investor/charts/chartdl.aspx?symbol=%2FARSUSD

    Reply

    WARREN MOSLER Reply:

    And, like Argentina 10 years ago, when you have ultra high levels of employment and real GDP growing north of 5% you win elections, big time

    ESM Reply:

    @Art,

    Argentina forcibly converted dollar bank accounts to peso 1:1 and then froze the peso bank accounts, only allowing small weekly withdrawals. And the first couple of guys didn’t last in office very long. In fact, I think Argentina set a record for most changes in government in one week at the time of default (5 different presidents iirc).

    WARREN MOSLER Reply:

    right, they didn’t need to do all that

    MamMoTh Reply:

    Argentina forcibly converted dollar bank accounts to peso

    And there were rumours last week they were about to do it again. But so far they’ve only restricted the purchase of USD.

    Chaz Reply:

    @WARREN MOSLER,

    Yeah, but if they went through ordinary bankruptcy procedures, wouldn’t such a huge volume of bankruptcies be pretty disruptive? The large creditors and the courts don’t have nearly enough capacity to process it all. Cases would drag on for years with the borrowers in limbo.

    Reply

    WARREN MOSLER Reply:

    Could be. But in the context of full employment and prosperity.

    That means if people got hurt because their homes were not worth the euro value vs their local currency incomes, the houses would get sold at current market prices, which would presumably be less than the euro value, to the point where they are affordable with local currency given local currency incomes. And with full employment that means the new prices will be ‘affordable’ to the point of full occupancy.

    Chaz Reply:

    @Chaz,

    I see your point. It’s just that in the U.S., the housing market isn’t shaking out like that. Instead a lot of houses are being held off the market, the banks are refusing to write them down on their books, and market prices have stayed fairly high. Tons of homes are just vacant. Our legal system is seriously clogged as I said above, and we’re not at the level of defaults Greece would have.

    But I guess Greece’s bigger shock could have a silver lining there. All the Greek banks and mortgage lenders should end up insolvent and nationalized, which means the government would be able to set the price of housing as well as lending policy to make sure the market clears. They also have the ability to offer principal reductions and rental options rather than evict after one missed payment the way our banks do.

    I do feel that, one way or another, the government needs to find a way to let most people stay in the same houses they’re in now and not have all their stuff repo’ed. If everyone defaults, gets evicted, and swaps houses, they might be just as well off after two years on paper, but they’ll have gone through a very stressful two years and lost quite a bit of personal value.

  16. Dan Furlano Says:

    Isn’t this story about Brazil close to what Warren is proposing. Obviously the underlying inflation issue is different.

    http://www.npr.org/blogs/money/2010/10/04/130329523/how-fake-money-saved-brazil

    Reply

    Art Reply:

    @Dan Furlano,

    Both episodes involve currency transition, but in opposite directions (and in Brazil it was intra- instead of international).

    In Brazil they wanted to shift (break) people’s inflation expectations dramatically (I might get an MMT call out on that). The URV was basically a new unit of account guaranteed to appreciate against the existing nat’l currency. The key factor was probably that taxes were payable in it.

    In Greece, they need to halt a deflationary spiral, ie transition to a currency unit that will depreciate relative to euros. And again, taxes payable only in drachma is the key element.

    Reply

  17. Rodger Malcolm Mitchell Says:

    You might be interested in this November 8th article on the same subject: http://rodgermmitchell.wordpress.com/2011/11/08/what-would-happen-if-greece-returned-to-the-drachma/

    Rodger Malcolm Mitchell

    Reply

  18. Anders Says:

    Has anyone heard about the Target2 system – specifically, that it apparently allows for the Bank of Greece to continue printing EUR banknotes without limit, running up a liability against the rest of the Eurosystem of central banks (mainly the Bundesbank).

    I’m not sure what legal recourse the ECB has against this strategy, if this is true…!

    Reply

    WARREN MOSLER Reply:

    yes, and it’s not what you think it is

    Reply

  19. Anders Says:

    Oh – so your Big Fat strategy still stands then :-)

    Reply

  20. Trond Andresen Says:

    I agree with Warren and others that Greece needs to revert to a national currency. The problem is that people in power in Greece is completely in thrall to the euro elite (which they belong to themselves or aspire desperately to) and will never consider such a way out. Even the majority of public opinion is fearful about leaving the euro. So why not try this:

    An immediate emergency solution for indebted eurozone countries: an electronic parallel currency.

    The indebted eurozone countries lack euros, but possess large non-used resources: unemployed/underemployed persons, and firms with underutilised capacity. The following may be implemented immediately – without leaving the eurozone and without leaving the EU – to ameliorate the crisis situation:

    An indebted eurozone country central bank (“IECCB”) issues “emergency currency units” (“ECs”). These do not exist as currency (paper and coins), but only as accounts with the IECCB, for individuals and firms. Thus the problem of tax avoidance on ECs at least, is avoided. Payments and transfers are implemented via mobile phone, for instance using one of the succesful schemes already in operation in Africa. ECs may be exchanged freely with euros, at the current exchange rate decided by supply and demand. The government pays gvt. employees and pensioners a certain share of their salaries in ECs, the rest in euros. The gvt. hires unemployed persons in a job guarantee scheme at the minimum wage. They are paid in the same EC/euro mix.

    Taxes in euros are upheld, and a flat tax in ECs (like a VAT) is collected automatically when a mobile phone transaction is executed. Income taxes may be paid in a mix of euros/ECs, with a lower limit on the euro share. The validity of ECs as (part) payment of taxes will ensure that the EC is trusted.

    Note that this scheme allows a gradual movement towards monetary sovereignity. The share of ECs in wages, consumption and taxes may increase with time as EC’s gather confidence.

    Fees for user-cost public services are paid in a mix of ECs and euros, with a gvt.-set lower limit on the euro share (which – however – may be adjusted as things develop). Firms decide what mix of of ECs and euros they accept for payment for their goods and services – and adjust this when needed. The share of euros vs ECs in the wages in private sector firms is negotiated between employers and employees.

    The whole scheme should be flexible, one should avoid rigid barriers that may engender parallel black market activity. There will of course be some inflation in ECs, but this should be possible to control within acceptable limits.

    A very important point is this: by enabling activation of idle labour and production capacity, net exports increase. Even if this extra activity is mediated with a parallel currency, the generated increase in net exports also enhances the ability of the country to service its debt burden in euros.

    More in a paper here:
    http://www.itk.ntnu.no/ansatte/Andresen_Trond/econ/greece-etc-2.pdf

    Reply

    Adam (ak) Reply:

    @Trond Andresen,

    The proposal seems to be technically feasible but there is one serious issue: as I already mentioned Greece is a country where effectively the military oligarchy, Orthodox church and the rich are in power.

    The core problem is not that the Germans are enslaving poor Greeks. The core problem is that they are enslaving themselves and the Greek oligarchy is acting as an agent for the EU.

    The social anti-dote to the Byzantine autocracy is mess, anarchy, corruption. In such a case lack of obedience and subverting the controls is good for the people – as in the former communist countries. We were able to lead semi-normal lives in Poland in the 1980ies precisely because of the black market and subversion of the enlightened directives of the communist party.

    Let’s look at the implementation details of the proposal:
    “An indebted eurozone country central bank (“IECCB”) issues “emergency currency units” (“ECs”). These do not exist as currency (paper and coins), but only as accounts with the IECCB, for individuals and firms. Thus the problem of tax avoidance on ECs at least, is avoided. Payments and transfers are implemented via mobile phone, for instance using one of the succesful schemes already in operation in Africa.”

    Since the system would be centralised (there is no technical reason to run such a token-based non-credit monetary system as a distributed one) every transaction can be tracked (and indeed has to – in order to subtract the VAT tax). But this information about the transactions already available in the system can also be used for different purposes and you know perfectly well that I can write a SQL query or a script which will for example identify all the people who have been buying forbidden controlled substance (for example recently delegalised cigarettes) from a dealer arrested during a random breath test near Athens 3 days ago.

    Bingo! We have:
    1. fascist puppets in power:
    http://www.nakedcapitalism.com/2011/11/mark-ames-austerity-fascism-in-greece-%E2%80%93-the-real-1-doctrine.html\

    2. total control over all the monetary transactions in the new electronic currency (there must be individual accounts in the system, the system is not partially anonymised and decentralised like the infamous Bitcoin, the currency of choice of drug peddlers and child pornographers)

    3. we only need wide adoption of these tools:
    http://www.theregister.co.uk/2011/11/18/microsoft_patent_employee_monitoring/

    and the transition to the model outlined by George Orwell in “1984″ is complete.

    There is no escape. It is like the system already implemented in China but much better – we, the Westerners always wanted to build perfect things. The level of information already collected and stored in the Internet about every individual living in a Western country is staggering. This information currently available is distributed – stored at Google, Facebook, the ISP, Paypal, the bank, insurance company, road authority (car sightings) etc. Once the state gets hold of the information about all the monetary transaction and uses data gathered by the totalitarian corporations about the employees, the only way to escape the system would be to commit a suicide – but this can also be thwarted as an abnormal pattern of spending and online activities will be spotted early enough. The poor guy will be put under medical supervision in advance and force-fed with antidepressants – and his individual private social insurance account will be debited automatically.

    BTW how is it possible that no serious challenge to the ruling oligarchies has been mounted in any of the Western countries? What if the system I mentioned above – the totalitarian corporationism where state is just reduced to the role of an enforcer but also empowered as the information brokerage facility – has been mostly implemented already?

    I actually think that we (people who don’t like the status quo) cannot win and we should start building an alternative network of human connections ignoring the existing facilities.

    Reply

    WARREN MOSLER Reply:

    it’s not perfect, and only a start, but seems the way to begin reclaiming the political process here in the states is my proposal for campaign contributions to be split 60/40 with the opposition.

    Reply

    John O'Connell Reply:

    @WARREN MOSLER,

    I’d do away with campaign contributions almost completely. Let the media be required, in exchange for their broadcast licenses, to give free and equal exposure to all the candidates, and sponsor the debates. Are the Republican candidates paying to get on TV for their debates? If they wanted to get together and do it, they could even charge the TV companies for their appearance, and fund their campaigns that way. The Sunday shows have them on all the time, also for free. How much does it cost to make a utube video? There’s no need anymore to spend hundreds of millions of dollars on a campaign. Get rid of all the mudslinging 30-second TV ads, which are what costs so much money. Let them do that on utube, if they must. Allow campaign contributions for in-person campaigning travel expenses only, with full and instant disclosure of contributors and amounts.

  21. Jim Says:

    Re: 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.
    ——————————————–
    This is one item that has always seemed unjust to me. A person’s home is their last piece of security in this hard world. And yet, if they lose their income and cannot pay taxes on their home they are thrown out. In reality, as well, no one really owns their home, because it can be taken from them if they don’t pay taxes.

    I fully endorse people having to pay taxes on their their second home, or on plush villas, and the like, in cases where it is obvious the person has no security problem. I am against the average Joe being put in that position. One could for example, tax acreage over 5 acres and sq. footage over 2000 sq. ft. or some such standard. This keeps it objective, and yet also maintains security for the non-rich.

    Same goes for renters. People paying low rents should not be taxed via some clever or rapacious landlord.

    Reply

    WARREN MOSLER Reply:

    don’t forget the federally funded job for anyone willing and able to work which will pay more than enough for the property tax

    Reply

  22. Jim Says:

    Obviously, the above does not involve commercial properties. But what about corporate farmland and grazing lands, in our subsidized ag country?

    Reply

    WARREN MOSLER Reply:

    yes, lots of details for Congress to sort through

    Reply

  23. Trond Andresen Says:

    Adam, in Norway every second “krone” (= NOK)is transacted via EFTPOS card (I do not include credit cards). 70% of all payment transactions are done this way. And the share is steeply increasing. Cash is on the decline. All card transactions go through the privately run company “Nets”, http://www.bbs-nordic.com/en/ . The trend towards electronic transactions is unstoppable, which is rational and excellent. I think that conjuring up Big Brother in this context is scaremongering. What is really the big problem about all transactions in a society being logged and cleared in a computer system (preferably at the CB, not privately run)? Do you yourself avoid paying by EFTPOS card because of fear of “1984″?

    Reply

  24. Ron T Says:

    After default nobody would export to Greece for Drahma, they would demand USD/EUR. So this would force Greece to either be a net exporter or become a closed economy. Don’t you think it is unfeasible?

    Reply

    Neil Wilson Reply:

    @Ron T,

    I take it you’re not an entrepreneur. If ‘nobody’ will export to Greece for Drachma, then there is a whopping great profit to be made by enabling that to happen.

    Certainly I hope that ‘nobody’ does export to Greece for Drachma, because I would quite happily do the Euro/Drachma exchange for anybody too scared to take the money.

    I know Greek taxation gives Drachma value and I’m quite happy to charge people who don’t believe that.

    And if I am, then you can be damn sure many other would. I wouldn’t be the only one (regrettably).

    Reply

    MamMoTh Reply:

    @Neil Wilson,

    Sure, anything can happen at the right price. There will always be currency speculators that would make trade possible using drachmas at some price shared by Greek importers and foreign exporters, mostly by the former.

    Reply

    WARREN MOSLER Reply:

    hasn’t been the case with other nations. in fact, they all seem to have a ‘problem’ of excessive imports?

    Reply

  25. Jim Says:

    Re: don’t forget the federally funded job for anyone willing and able to work which will pay more than enough for the property tax

    True,a but the principle of non-ownership remains. A person’s home should be inviolable.

    Also what about the elderly, the ill, the ones who aren’t able to work and don’t fit into a government program. Bottom line is that people are at the mercy of the bureaucracy even to the extent of not even being owners of their home. Finally it is the state which owns your life, all because of money. Not good. It turns the human being into nothing more than an instrument, a means, a mere homo economicus. Everything should have limits–even taxes and the power of the state.

    Re: yes, lots of details for Congress to sort through.

    Imagine. One is in the hands of that lot! As if we had a gov’t representing people, towns, cities, rather than corporate entities and the “vampire squid.”

    Reply

    WARREN MOSLER Reply:

    if desired for public purpose, my rent to own proposal would fit nicely here.

    and welfare for those less fortunate deemed worthy goes without saying.

    and agreed about the monetary system in general.
    govt provision via taxation radically changes the human life experience
    i regret having had to live with it

    Reply

    Joe Reply:

    @WARREN MOSLER,

    Is the problem not caused by (re)defining
    coercion,
    theft,
    fraud etc
    as ‘legitimate’ when done by ‘government’?
    How can anybody claim a (just) ‘right’ to take food I have earned off my table for themselves or their mates?

    Reply

    WARREN MOSLER Reply:

    good question! but that’s what govt is all about. read Hobbs any?

    Chaz Reply:

    @Joe,

    You may have earned many things, but you earned them with society’s very extensive assistance. So society’s entitled to a cut and a say.

    If you want to earn everything by yourself, for yourself, go to the Montana wilderness, wander a few miles off the highway, and build yourself a cabin. I promise we’ll leave you alone.

    Save America Reply:

    @Joe, I just watched this movie “into the wild” about this guy that moves into the woods in alaska because he is disgusted with society. At the end of the movie he dies because he eats some poisonous food and can’t get back to society to save his life. Before he dies he concludes life is meant to be shared with other people, and living alone in the wilderness for an extended period of time is not the way to nirvana. You will be assimilated, resistance is futile…

    selise Reply:

    @WARREN MOSLER,

    “and agreed about the monetary system in general.
    govt provision via taxation radically changes the human life experience
    i regret having had to live with it”

    what alternative would you (if you could now) choose?

    Reply

    WARREN MOSLER Reply:

    The closest thing for me would have been a govt job…

  26. Jim Says:

    Re: Is the problem not caused by (re)defining
    coercion,theft,fraud etc. as ‘legitimate’ when done by ‘government’?
    How can anybody claim a (just) ‘right’ to take food I have earned off my table for themselves or their mates?
    —-

    Well, no human society is possible without government. We are not angels, and “it takes all kinds to make a world.” Nor is any person entirely “independent,” since without other people I could not exist. I benefit from community and I also benefit from infrastructure for which is it fair that I contribute my fair share. I have no problem with being “coerced” into being civilized or even charitable. It is a question of initial intentions as well as of a sense of limits and proportions.

    Reply

    Joe Reply:

    @Jim, it is the matter of *how* ‘government’ is funded I was calling into question not whether anybody benefits from community or not. I would agree that no man is an island. I contend merely that by funding ‘government’ by all the methods reserved as ‘illegal’ for individuals will result in thieves, liers, cheats etc gravitating to positions within ‘government’ leaving a cartel of miscreants in charge of the funding for those community goods we all do benefit from and
    these scum WILL loot and pillage at best of times – make it legal and you will never be able to solve any problem.
    Or stated another way – why not fund community stuff at the lowest level (where you know the people who get your cash in ‘their’ communal kitty) – with checks to stop anything getting kicked upstairs unless it really were supraregional. Why should ‘government’ even have a ‘right’ to borrow? Since borrow-spend-tax is necessarily also dictate-and-enslave.

    How about ‘government’ charging for services like any other business just with no profit distributions and no compulsion to use. I personally highly object to being forced to pay tax for using a tv/radio that I don’t even have or having my water rates hiked because the local govt. hiked water removal charges to the local water co. in order to bail out the local state bank that went bankrupt guaranteeing rental income to ‘govt.s’ chums and tv stars who often didn’t even rent the flats out (that were often financed by aforementioned state bank too) since their income was guaranteed…

    Why not even have the same rules for all (no exceptions for politicians?) Any reason limited liability for corporations should not be called into question? Just *why* should it be possible to be able to limit liability for some but not for others?

    Reply

    Unforgiven Reply:

    @Joe,

    “… I would agree that no man is an island.”

    True. But if people don’t know how their currency works, they will end up electing a bunch of stupid atolls.

    You have to assume that the price you get for your services and or merchandise includes something for the cost of being governed (it’s priced in). How you distribute that portion is more of a political preference.

    If we know how our currency works, then we can automatically turn our backs on those that use deficit terrorism (we’ll go bankrupt, we’ll become Greece, there’s no money, we’ll turn into Zimbabwe, etc) as they clearly don’t know what they’re talking about and clearly don’t deserve public office. If they DO get elected, then they will continue to to baffle the populace with bullshit and waste money flailing about to no good effect, putting together Super Committees and the like.

    Reply

  27. Potomac Oracle Says:

    Why should this currency monopolist need to tax? Isn’t that a DIF?
    What does Greece do to guard against currency speculation?
    Where does Greece obtain funding to recapitalize its banks under the requirements of Basil III?

    Reply

    WARREN MOSLER Reply:

    have you read the 7 deadly innocent frauds on this website?

    Reply

  28. John Says:

    America: Freedom to Fascism – Director’s Authorized Version

    http://video.google.com/videoplay?docid=-1656880303867390173

    Reply

  29. Jim Says:

    Re: have you read the 7 deadly innocent frauds on this website?

    :-)

    Reply

  30. Oliver Says:

    Michael Pettis put this up at econommonitor.

    http://www.economonitor.com/blog/2011/11/will-greece-unravel-by-christmas/

    I was wondering what you thought about this passage, since it seems to contradict what you wrote:

    By openly acknowledging that Greece could abandon the euro, Europe’s leaders may have set in motion events that will automatically force Greece to leave. Here is the logic. If Greece is ever forced to leave the euro, it will first have to redenominate domestic corporate and household liabilities into the new currency – let’s call it the drachma – or else domestic borrowers will be wiped out by the fall in the value of revenues relative to debt as the drachma immediately depreciates against the euro.

    But it doesn’t end there. If a bank’s assets – its outstanding loans – are to be redenominated into drachma, then its liabilities, i.e. deposits, must be redenominated too, or else the balance sheet mismatch will bankrupt the bank.

    My comment is the first of under ‘OlivilO’.

    Reply

  31. Lisa Says:

    @Warren: “and agreed about the monetary system in general.
    govt provision via taxation radically changes the human life experience
    i regret having had to live with it”

    Is there any other way to provision a government, especially in a complex industrial system as ours–aside from pure communism, of course?

    Reply

    WARREN MOSLER Reply:

    and, more to the point, those that provision this way have won the wars, so it’s an adaptive trait.
    :(

    Reply

  32. Lisa Says:

    Right. But theoretically, is there an alternative way?

    Reply

  33. A Default is Better Than the Deal on Offer « Greek Left Review Says:

    [...] astute to promote fiscal austerity on top of yet more fiscal austerity, (even though that is certainly not winning Mrs. Merkel any popularity points in Greece), until the Greeks themselves scream “Uncle!” and default [...]

  34. Dan loves Sprachen Lernen Says:

    very interestimng…thank you!!

    Well, at the time of this writing (today) a new 130 Bio Euro “rescue package”…

    to be honest, I still have not made up my mindif I am a fan of pumping more and more money into Greece (to rescue French banks?) and if that move is necessary to rescue the Euro (which I believe is a good thing)…

    so wouldn’t releasing Greece from the Euro (while they lied their way in) create a crisis?

    To be honest I do not understand our Chancellor (am German) in her insistence on bailing everyone out… while it does not seem that the help reaches the Greek people and we (NL, FIN,A, GER) are thanked with burning flags, like the US flag in Iran…

    this situation is very annoying… why can’t we just let them have their way…but they do not want to leave the Euro…which I also do not understand, when I read your texts…

    so can you shed any light why everyone clings to this unhealthy situation? Is it the US pressurizing Germany etc. to ensure Obama’s reelection?

    Just reading “Currency Wars” by Rickards…I wonder what a currency war has to do with this…

    any idea??

    Thx

    Dan

    Reply

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