Greece should default and exit the euro immediately

Regular readers will note that I have consistently advocated the abandonment of the Euro and especially the immediate exit of Greece, Spain, Portugal, Ireland and Italy to push things along. The basic design flaws in the ideologically-constructed monetary union were always going to bring it down. It wasn’t a matter of if but when. The when was always going to be the first major negative aggregate demand shock that the union experienced. Come 2008 we saw very starkly how quickly the region unravelled and now the situation is getting worse not better. Not many commentators agreed with me and most argued that with some tinkering and some harsh austerity the zone could rescue itself. The problem is basic though and has little to do with behaviour of the member states, although I will write tomorrow how the conduct of the Germans has exacerbated the crisis. It is clear that governments like Spain were more frugal than Germany’s government prior to the crisis and they now have 20 per cent unemployment and worse. As the crisis deepens though more commentators are now arguing for a Greek default and/or both default and exit. The sooner the southern states get out of the bind they are and free of the pernicious ideology of the EU/IMF/ECB troika the better. Tomorrow is not a day too soon.

Over the weekend, there were two pieces of news that told me that “tomorrow is not a day too soon” for the ailing Eurozone countries to announce default and exit.

The EU Finance Ministers met in Wroclaw, Poland last Friday and received the US Treasury Secretary Timothy Geithner who urged them to reverse their current fiscal austerity and to spend more via the “debt rescue fund”. He wanted the European Financial Stability Fund to be able to draw on ECB credit lines.

The Europeans responded by claiming that there was “no room for tax cuts or extra spending” despite their economies now heading back into recession and the monetary system being on the brink of collapse. Of-course, just last week, they were only too willing to draw on the US Federal Reserve (without collateral) to renew the US dollar swap lines to the European banks. When their capitalist mates are in trouble anything is possible but when it comes to saving jobs for the low- or middle-income workers such action becomes impossible.

Why Geithner thinks he can lecture other nations on the virtues of fiscal stimulus when the US government is now undermining real GDP growth in America is another matter altogether. But then two wrongs do not make a right and his entreaties to the EU were sound – spend more before the system collapses.

This Bloomberg report (September 17, 2011) of the meeting – Europe Rules Out Stimulus, Shuns Geithner Plea – quoted the deficit terrorist aka the Luxembourg Prime Minister Jean-Claude Juncker:

We have slightly different views from time to time with our U.S. colleagues when it comes to fiscal stimulus packages … We don’t see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible.

“That will not be possible” – I saw him saying this on a Belgian TV news report and my heels got an immediate urge to click together in obediance.

What does he mean that will not be possible? What he means is that they are so overwhelmed by their neo-liberal ideology that the EU bosses refuse to acknowledge their system is falling apart. Europe is a curious place in some ways (for an outsider). There is a strong recognition of tradition and in some ways tradition is a very sound basis on which to operate. It protects heritage from capitalist developers who only care about profits etc.

But tradition is also stifling and when combined with a conservative economics it becomes destructive. The people of Europe are enduring this conservative yoke now. As the nations found out in 1848, the brutal suppression of workers’ rights does not provide for social or political stability. The whole continent is festering and things are getting worse.

The Euro bosses did manage to agree on new Stability and Growth Pact rules that “make it easier to impose sanctions on countries that overstep the budget-deficit limit of 3 percent of gross domestic product”. The new rules come in at the start of 2012 and are nonsensical in the extreme. Jean-Claude Trichet called the new rules a “substantial improvement” which just goes to show how far gone the logic is over here.

The following graph shows the sectoral balances for the Eurozone as a whole since 1999. I used data available from the ECB data warehouse. To keep the graph clean I have not included the external balance which for the overall EMU is more or less balanced – slight criss-crosses either side of the zero line. What it effectively means is that the private domestic balance (the difference between total private spending and income – the green line) is the mirror image of the government budget balance.

As Modern Monetary Theory (MMT) emphasises, a government sector deficit (surplus) has to equal to the penny the non-government surplus (deficit).

I have also included the real GDP growth rate (per cent per annum) – grey bars and the 3 per cent deficit to GDP SGP rule. You can see that the budget deficit (blue line) often violated this rule in the earlier years of the Eurozone and that outcome was largely driven by deficits incurred in Germany and France – as real GDP growth laboured.

You can also see how dramatic the collapse has been in private spending and the extent to which the automatic stabilisers have driven the overall EMU budget into significant deficit. It makes no sense in a situation of negative growth to try to buck against the automatic stabilisers by imposing discretionary fiscal contraction. The worst thing a government can do in a recession that is driven by a collapse in private spending is to introduce pro-cyclical fiscal policy changes – that is, policy changes that reduce overall spending even more.

That is exactly what the EU bosses are doing. They are so obsessed with fiscal aggregates (public debt ratios) that they have lost any sense of comprehension of what budget deficits actually do. It is clear the private domestic sector is intent on saving overall to reduce the massive debt overhang that was built up during the credit binge.

In that context (and given that the institutional arrangements that see the governments matching their deficits with debt-issuance), the reduction in private debt (as households and firms seek to reduce risk) has to be accompanied by an increase in public debt. There is no way of avoiding that.

The ECB also has the capacity to allow that process to proceed in an orderly manner without the private bond markets having any influence on bond yields. The fact that this has not happened reflects on the failure of the ECB to act in an appropriate manner.

The other problem that is causing paralysis is the insistence by Finland (backed by Germany) that any further assistance to Greece be made conditional on the latter providing collateral – “in the form of real estate or shares in nationalized Greek banks”.

The EU Finance Ministers could not agree on that at this meeting but the dispute was not about the principle. The Austrian finance minister was quoted as saying:

There is unity that collateral, first of all, must be open to all and, second, must cost something.

In other words, the vultures are lining up for their share of Greek antiquity and the tourist islands. I mused (without humour) that when the deflation being imposed on Greece by the European elites reduces wages and conditions to some irreducible minimum and makes the tourist industry attractive to the fat northerners that the profits from the activity will be repatriated to the new “collateral owners”, presumably some other fat northerners.

It beggars belief really how unashamed all these characters are.

The other piece of news that came out over the weekend was the leaked E-mail sent by a senior official in the Greek government to various Greek government ministers outlining 15 new austerity measures that the EU/ECB/IMF (hereafter “the Troika”) are demanding from the government in return for continued fiscal assistance (bail out loans).

The EU finance ministers’ meeting essentially concluded that Greece would not get any further aid unless further austerity conditions were agreed to. The Troika apparently demanded that the Greek government agree to these conditions by Monday (September 19, 2011). Mr. Ilias Pentazos, Secretary General of Fiscal Policy, Ministry of Economy and Finance relayed the 15 demands via and urgant E-mail over the weekend to his ministers and general secretaries noting that the Troika would not pay the sixth instalment of the 8 billion euros bail-out unless they were met in full.

He wrote that in the earlier austerity measures, the Government had agreed to “reduce the number of civil servants by 80,000 by 2015”. But now the Troika were demanding 100,000 jobs be scrapped in the public sector.

The Troika is demanding that 60,000 public servants be sacked in 2011 alone. The labour redundancies in the public utilities had to begin immediately with 20,000 positions identified for culling.

Here is a Google translation of the article in the Greek newspaper VIMA (September 19,8 2011) – The 15 Troika conditions. My Greek readers can tell me how accurate the translation is.

Here is a translated version of the E-mail which lists 15 conditions and the area of Government that will be held responsible. You can click the E-mail link to see the details of which Departments and Officials are to be held accountable.

The 15 measures demanded of the Greek government by the Troika are:

1. Issue ministerial decisions/circulars to make the cut in fixed and temporary contracts effective across all general government entities (including for teachers so as to meet the savings target in the MEFP)

2. Issue presidential decree/ministerial decisions to make the furlough effective, extend the scheme to include all general government employees, and issue letters to the employees to be transferred into the furlough

3. Issue ministerial decisions/circulars to the start collection of excise on natural gas and heating oil measures.

4. Legislate withholding as the instrument for collection of the solidarity surcharge

5. Take board decisions to make the cut in the NAT/OTE pensions effective

6. Cut subsidy to Hellenic Post for the distribution of newspapers. Issue ministerial decisions to make already legislated part effective

7. Pass the law on the new wage grid for the general government (including SOEs), which includes a cut in overtime pay and remuneration

8. Pass law to extend freeze of main and supplementary pensions through 2015

9. Pass law to revaluate fines on unauthorized buildings and settlement of planning and issue any

10. Issue ministerial decisions with respect to the closure/merger of the 35 entities specified in the second implementation bill and a closure of an additional 30 entities

11. Issue ministerial decision to determine closure/merger of KED, ETA, ODDY, National Youth Institute, EOMEX, IGME, OSK, DEPANOM, THEMIS, ERT

12. Issue ministerial decision to approve completed registry for all mobile and immobile assets of concerned EBFs that pass under State’s property

13. (i) Issue ministerial decision to uniformly regulate health benefits for all social security funds; (ii) sign uniform contracts of private hospitals (16) and health care centers; (iii) sign contracts between NHS hospitals and private insurance companies for the leasing of beds

14. Pass and implement law to reduce OGA pensions

15. Pass legislative amendments to establish drug rebate for SSFs and sign contract with the pharmaceutical companies to make it effective/Establishment of insurance price for pharmaceuticals

These are in addition to the harsh austerity measures already in place. The intent is clear – kill aggregate demand in the country. The motivation – the most Machiavellian that one could imagine. Certainly, the democratic rights of the Greek people no longer mean much to the Euro elites.

Within that context, the cries for Greece to give these elites the bird are growing. I am feeling less alone as the days pass on this point.

UK Guardian economics journalist Larry Elliot argued (June 20 , 2011) that – Greece must exit the eurozone. He notes that

Europe’s leaders have no plan B. They see no need for it because they are still committed to plan A – the European dream of fraternity and solidarity. This must be defended at all costs, even if it means permanent austerity for Greece, Ireland, Spain, Portugal and any other country that can’t cut the mustard.

To think that the Euro elites can continue to impose permanent austerity on the weaker EMU nations is a pipe dream. To think that communities and citizens will tolerate the neo-liberal mantra – that wages and conditions have to be cut to render the nation competitive in the absence of a fixed exchange rate and no currency sovereignty is a dream.

It will not work because as Larry Elliot notes ” it runs counter to the basic principles of democracy” and ultimately people rebel against this sort of dictatorial rule.

But moreover, it defies economic logic. The financial ratios that the Euro elites claim are their target (budget deficit and public debt ratio) are all moving in the opposite direction. Why? Answer: they are dependent on growth. The austerity is killing growth which then increases the deficit and the public debt ratio. To then impose harsher fiscal contraction on the nation will further undermine growth and promote a further dislocation from the the stated aims.

The way to reduce the deficit, ultimately, is to spend for growth. The projections that Larry Elliot provides a frightening:

… to stabilise Greek debt at 140% of GDP, the country has to run a very large budget surplus once interest payments are stripped out … [the] … primary budget surplus has to be in the 7-10% of GDP range. To illustrate the scale of that challenge, in 2010 Greece appears to have run a primary budget deficit of at least 4% of GDP. Running a primary budget surplus requires revenues from taxes to be higher than government spending. What then are the chances of Greece running a primary budget surplus of 7-10% of GDP if subjected to further austerity measures? None whatsoever, which is why either default or devaluation – and perhaps both – seem increasingly likely.

That is, the strategy being imposed on Greece by the Troika is either incredibly stupid (that is, they think it will work but it cannot) or evil (that is, they want to make an example out of Greece and destroy its public sector and collective-oriented society). I wouldn’t mind betting it is a combination of the two.

Larry Elliot concludes:

… there are no good options for Greece … it is clearly not going to deflate its way to solvency. Providing a second, or even a third or fourth, bailout cannot disguise the fact that monetary union is fundamentally flawed, with zero chance that the weaker members can become as competitive as those at the core.

I totally agree.

Last week (September 14, 2011), the former Argentinean central bank manager Mario Blejer said that – Greece Should ‘Default Big,’ Says Man Who Managed Argentina’s 2001 Crisis.

He was the central bank boss when Argentina successfully pulled off the “world’s biggest sovereign default” and is now saying that “Greece should halt payments on its debt to stop a deterioration of the economy that threatens the European Union”. He was quoted by Bloomberg as saying:

This debt is unpayable … Greece should default, and default big. A small default is worse than a big default and also worse than no default.

He joins the growing chorus that now recognises clearly that the conditions being imposed on the euro nations by the Troika are “recession-creating” and “will leave Greece saddled with more debt relative to the size of its economy in coming years and stifle growth”.
He is quoted as saying:

It’s totally ridiculous what is going on … If you assume that these countries do everything that is in the program, they do all these adjustments and privatizations, at the end of 2012 debt-to-GDP will be bigger than this year.

Blejer said that Portugal and Ireland should join the Greeks in defaulting but didn’t make a case for an exit of the Eurozone.

Former British Chancellor of the Exchequer Norman Lamont (1990 to 1993) also wrote yesterday (September 19, 2011) that the – Break-up of euro looks inevitable. Lamont never liked the idea of the euro in the first place and now says that Europe should admit “it has taken a wrong road” although as he notes “facing reality has never been its strong point”.

He also traces the problem to the Euro itself – that is, the basic design flaw from the inception – rather than the behaviour of Greece or Spain or wherever.

He says:

Unless the straitjacket of the single currency is removed, citizens on its periphery will face a dismal and prolonged future of stagnant living standards. Politicians may be prepared to put their people through that, but the public will not accept it.

I totally agree (and I don’t normally agree with the likes of Lamont).

Also yesterday (September 19, 2011), the default and exit case was made by Nouriel Roubini in the Financial Times article – Greece Should Default and Abandon the Euro.

Nouriel Roubini recognises the current reality that seems to have escaped the Euro bosses:

Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression. Exacerbated by a draconian fiscal austerity, its public debt is heading towards 200 per cent of gross domestic product. To escape, Greece must now begin an orderly default, voluntarily exit the eurozone and return to the drachma.

He rejects the arguments that Greece can become “more competitive” by domestic deflation, a lower euro overall or increased productivity growth. He think the reality is that if the export-led strategy is continued under present conditions Greece would face “ever-deepening depression”.

It is thus logical that the only viable path is exit. Why?

A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth, as it did in Argentina and many other emerging markets which abandoned their currency pegs.

There is no doubt that the drachma would depreciate (probably considerably) against the Euro. The Germans have been claiming “the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt” (Source).

There is a lot of conservative fluff about the collapse of the drachma if Greece exits. The point is that it would clearly depreciate and probably significantly but that process would be finite and relatively short-term in duration. Once the shock factor dissipated the exchange rate would settle to reflect the differential unit labour costs.

The price impacts would also likely be one-off (especially if the Greek government ensured there was no flow-on to the wage system from the higher import prices). The reality is that the Greeks would have to accept a “real income” loss as a result of the depreciation but via import substitution this process would also be finite. It is likely that foreign investment would ultimately move into the import-competing sector as their exports fell.

The Germans would also ensure the drachma didn’t free fall. How? The sunny islands would become even more tempting for the northerners and they would bring Euros in exchange for the drachma. Countries that float their exchange rates typically see a rise in exports and a fall in imports both movements which promote higher growth.

I plan to write a blog – a sort of exit blueprint to combat some of the myths that the Euro elites are perpetuating because it is in their interests (politically) for Greece to stay under their thumb.

The point is that as Roubini notes an exit would be “traumatic”:

The most significant problem would be capital losses for core eurozone financial institutions. Overnight, the foreign euro liabilities of Greece’s government, banks and firms would surge. Yet these problems can be overcome. Argentina did so in 2001, when it “pesified” its dollar debts. America actually did something similar too, in 1933 when it depreciated the dollar by 69 per cent and repealed the gold clause. A similar unilateral “drachmatization” of euro debts would be necessary and unavoidable.

In other words, once the Greek government restored its currency sovereignty it could offer a conversion of euro liabilities into drachma without any solvency issues. If rejected it could just default and let the creditors wear the costs.

The conservatives suggest there would be capital flight from Greece. A lot of funds have probably already gone and the Troika have been seeking ways to estimate that. But ultimately where people choose to store their saving is one thing but if they have to pay taxes in the local currency then they have to ensure they can get hold of that currency.

In a sovereign currency, no matter if there is a second “trading” currency, the local currency always is in demand as long as the national government can enforce its tax laws.

It is true that the Greek banks would record major euro losses but they could also be “properly and aggressively recapitalised” by the Greek government in drachma without on-going losses. The short-term approach would be to close the banks immediately to prevent major capital losses and then guarantee the deposits in drachma (at an agreed transitional exchange rate – which could be higher than the ultimate market determined parity).

The Germans also claimed that the introduction of a new currency in Greece “would consume the entire capital base of the banking system and the country’s banks would be abruptly insolvent” (Source) . That is, until the now sovereign Greek government recapitalised (and nationalised if necessary) the commercial banks. Greece would be well advised to introduce widespread reforms of its banking system at the same time restoring the basic role of banking and reducing the scope for unproductive speculation.

Please read the following blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks for further discussion.

The claims that the banks in France and Germany would incur major losses is not something the Greek government should consider. That is a problem for their national governments (if they also exit) or the ECB. Either way, the commercial banks can be supported to avoid insolvency. This reality would offend the ideology of the neo-liberals but it is clearly within the scope of the national governments and/or the ECB to support their banking systems.

The other claim is that the ECB would lose. Please read my blog – Better off studying the mating habits of frogs – for more discussion on why the ECB faces no problem even if it makes losses on assets it currently holds.

I will write more about this when I have more time.

I also recognise that there are other MMT approaches (see for example, ) but they assume that Greece will stay in the Eurozone. I have never supported the basic concept of the Eurozone and therefore think that approaches which maintain the zone, no matter how ingenious, just prolong the problem.

Nouriel Roubini also addresses the claims by the conservatives that default and exit will be more damaging to growth than the current policy path (austerity):

Some argue that Greece’s real GDP will be much lower in an exit scenario than in the hard slog of deflation. But this is logically flawed: even with deflation the real purchasing power of the Greek economy and of its wealth will fall as the real depreciation occurs. Via nominal and real depreciation, the exit path will restore growth right away, avoiding a decade-long depressionary deflation.

While I agree with that assessment, it also remains that the restoration of Greek government currency sovereignty will allow it to promote domestic growth. It doesn’t have to sack the 100,000 public servants for example or decimate public programs.

The conservatives also claim that Greece would “also be cut off from capital markets for years to come”. That is what they said about Argentina which demonstrated what the World’s financial masters didn’t want anyone to know about. That a country with huge foreign debt obligations can default successfully and enjoy renewed fortune based on domestic employment growth strategies and more inclusive welfare policies without an IMF austerity program being needed. And then as growth resumes, renewed FDI floods in.

One commentator wrote a few years ago that that the Argentinean Government appears to have perpetuated the perfect crime. The Government offered the world financial markets a ‘take-it-or-leave-it’ settlement which was favourable to the local economy. At the time, the rhetoric claimed that countries that treat foreign creditors so badly would surely stagnate and suffer a FDI boycott. This is the standard neo-liberal line that is used to coerce debtor nations into compliance with the needs of ‘first-world’ capital largely defined through the aegis of the IMF. But the Argentinean case shows this paradigm to be toothless because the Government defied the major players including the IMF and the Argentine economy went on to boom despite it.

It is clear that many foreign firms came back into Argentina after the default in addition to strong investment from Argentine interests. The country’s biggest real estate developer explained (in 2005) the quandary facing the neo-liberals as such: “there has never been a better time to invest in Argentina … [as for foreign banks, after shunning Argentina for a while] … now the banks are coming to us … It’s been tough. We will have restrictions … But in terms of access to capital, what defines access? Greed. When opportunities look profitable, access to capital will be easy.”

This is a lesson all countries should learn. International capitalism, ultimately does not really take ‘political’ decisions – it just pursues return. The clear lesson is that sovereign governments are not necessarily at the hostage of global financial markets. They can steer a strong recovery path based on domestically-orientated policies – such as the introduction of a Job Guarantee – which directly benefit the population by insulating the most disadvantaged workers from the devastation that recession brings.

My view is that the international financial markets would not wreak havoc on the Greek economy which would look very competitive after restoring its own floating currency. The tourist opportunities would be very enticing to FDI and the its dominant shipping industry would also be very attractive under the new parity.

The international investment community would soon realise that rather than being a threat to their activities, the competitive Greek economy would provide them with an even better investment climate in which to chase return than one that is in more or less perpetual deflation and recession. It is time that we abandoned the neo-liberal myths and instead realise that in capitalism ‘greed comes before prejudice’.

Conclusion

There is a growing chorus now for Greece to default and exit. I see this as the only way forward for the nation. The Euro elites will fight that every step of the way but, ultimately, the Greek people should determine the future of their nation.

My assessment is that shock trauma of the default/exit strategy would quickly give way to growth and adjustment is always easier in a growth environment. There are clearly aspects of the Greek economy that I would fix (for example, tax avoidance by the high income earners).

The alternative being offered by the Troika is extended depression and ultimate failure. There is not enough tolerable “adjustment” room to render that strategy successful.

That is enough for today!

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This Post Has 37 Comments

  1. Bill writes; “In a sovereign currency, no matter if there is a second “trading” currency, the local currency always is in demand as long as the national government can enforce its tax laws.”

    I used to think that MMT’s insistence on “taxation as the only “force” which ensures an operational fiat currency” (my phrase) was excessively doctrinaire as it ignored the issue of legal tender for commercial transactions. However, the RBA’s statement on legal tender moves my understanding closer to the MMT position.

    Despite noting that “The Concise Oxford Dictionary defines legal tender as ‘currency that cannot legally be refused in payment of debt (usually up to a limited amount for baser coins, etc.)’. ” ;

    the RBA site goes on to say,

    “It is the Reserve Bank of Australia’s understanding that, although Australian currency has legal tender status, it does not necessarily have to be used in transactions and that refusal to accept payment in legal tender banknotes and coins is not unlawful. This is the case even where an existing debt is involved. However, a refusal to accept legal tender in payment of an existing debt, where no other means of payment/settlement has been specified in advance, conceivably could have consequences in legal proceedings, i.e. the creditor may be unable to enforce payment in any other form. ”

    I guess I am still hanging on to vestiges of my notions that customary acceptance of legal tender and the impracticalities of running a retail business in particular without accepting legal tender are also “forces” which ensure acceptance of the fiat currency. But these “forces” all seem to gain force only from the national government enforcing tax payments in the fiat currency.

    As a thought experiment, what is the position of an eccentric but relatively harmless and unobjectionable person (who actually has adequate legal tender) being refused service at the only food store in a remote town. Does this person have any legal redress along the lines “I offered legal tender and was refused food that was for sale. Now I must starve or walk 100 kms to the next food store.”? Could the store be ordered (by the local magistrate perhaps) to sell this person food? If so, would this level of law constitute another guarantee (beyond taxation) that the fiat currency has “real force” (for want of a better term)?

  2. Being an economics student, I’m supposed to be interested in matters like the Greek debt crisis, but I find myself completely uninterested in the economic aspect of it, and only worried about the social consequences this is having on the people of Greece (and the rest of the Eurozone)

    I’m about to start my 3rd (and final) year at uni in a week, and if there’s one thing I’ve learnt about Economics it’s that the whole subject is not science, not art, not humanities but simply religion. Unfortunately at UK Universities, you have to select your subject in your first year, unlike the US when you receive a broader education and only declare your major in your 2nd or 3rd year. I wish the UK system was like that, because it would have given me the chance to drop this useless subject for something more useful.

    The first “fact” that my lecturer imparted onto me was that “resources are scarce”. IMO resources are not scarce, it’s simply that the distribution of these resource is ridiculously uneven, both locally and globally. And yet my professors with phds were there, in front of me, and saying with a straight face that resources were scarce???!! Anyone with two eyes can tell that there are enough resources for us to feed, clothe and look after each and every person in our country, and if simply reallocate some extra resources to the developing countries, we can start to alleviate their problems also.

    I’m a fan of Star Trek and I long for the day when a society like the one depicted there becomes reality (without the interstellar wars of course) A world of no money, no competition and no “economy” to disagree over.

    I’ve looked at MMT as I’ve longed to get a different “non mainstream” approach to economics, but IMO the problem isn’t the “type” of economics we pursue, it’s economics itself. We don’t need an economy, we don’t need a monetary system and we don’t need economists. If a government came in and abolished all economics departments at universities and declared that “economics” as an academic discipline no longer exists, I think a lot of the problems of the world would disappear as well.

    I think Greek government should simply say, “I’m sorry, we can’t pay the debts, because we don’t recognise the concept of debt anymore, and we’re abolishing the concept of an “economy” anymore and are living our lives without the burden of that ideological construct hoovering us anymore”. I’d love to see the faces of that smug economists if they did that.

  3. A Short Fable From the Eurozone–A Bank, A Gaggle of Ministers and a Few Worthless Treaties
    By Mike Whitney
    http://www.informationclearinghouse.info/article29161.htm

    Le Tarp?–Geithner’s European Junket
    by MIKE WHITNEY

    http://www.counterpunch.org/2011/09/16/geithners-european-junket/

    Bankers’ man, Anders Aslund, invokes Latvia to bail out his reputation
    The Pillaging of Latvia
    by JEFFREY SOMMERS and MICHAEL HUDSON

    http://www.counterpunch.org/2011/09/19/the-pillaging-of-latvia/

  4. Could the store be ordered (by the local magistrate perhaps) to sell this person food? If so, would this level of law constitute another guarantee (beyond taxation) that the fiat currency has “real force” (for want of a better term)?

    He could, but he might try to counter by raising his price unreasonably; which would call for another law that one cannot raise prices under such and such conditions. And so on, ad infinitum. Which I think shows that laws are largely there to prevent given evils, to same extent, and to institutionalize cultural values which are already present; they cannot of themselves create such values, but stupid laws can certainly undermine them.

  5. Problem with national currencies has been, ever since capital movements were liberalized, growth in foreign currency lending. Thats why many eastern european countries have not devalued/floated, if for example 90% of their private sector loans are nominated in foreign currency they would explode in value. It’s crazy, there is no reason to keep capital accounts open at all!

  6. Hi Bill

    I have been thinking lately what the impact of Greece leaving the Euro would be, especially on its banks.

    I am thinking that we the Greek banks that damage is overdone. The Greek banks currently have assets and liabilities in Euro. However, if the Greek government said it was returning the drachma the Greek banks would have two options (unless forced by law) continue to account in Euros. Their liabilities will stay the same but the assets are likely to be marked down because presumably most of their loans are to Greeks who would not now have the Euros to repay their loans. Given that most of their assets and most of their liabilties, I assume woiuld likely to be with the Greek people, then moving to the drachma as the unit of account would result in their liabilties staying the same, their Greek assets staying the same (or in the case of Greek Government bonds/bills increasing in value as there is no longer a default possiblity), and their non-Greek assets increaing in value with the exchange rate.

    It is the non-Greek banks that the move to the drachma would have an issue. However, the loss in assets values will be the net between the devalaution of the drachma verses the increase in the value of the asset. For example, just say a French bank owns 10 year Greek Government debt which is worth some where around 20euros. If the Greek Government return to the drachma, these bonds would return to say 100drachma (or thereabouts depending on the coupn rate and cash drachma rate). The dracmha would have to depreciate by over about 70% for the French bank to have an asset valued at 22 euros (which the asset has been marked down to under mark-to-market rules, and for which necessary capital has been raised against).

    So if for example the the drachma depreciates 50% against the euro, and the Greek banks move to the drachma, then the Greek people win because they have the yoke of the euro lifted from their sholders, and the non-Greek banks are likely to see their Greek asset values increase in value, booking them a profit, and freeing up capital for lending (if they can find credit worthy borrowers).

    Neal.

  7. Also, as it is the net movement in the value of greek asset values that will matter for non-Greek euro banks, the ECB has an incentive to buy drachma to stop the drachma depreciating too much against he euro. The Swiss might also find it an attractive way to get rid of some of their euros.

  8. SR819 – I know what you mean I’m a working economist who’d like to be an anthropologist astrophysicist when I grow up. My favourite Keynes quote:

    “The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems – the problems of life and of human relations, of creation and behaviour and religion.”

    I think he felt the same. The one good think about economics is that it gives you a certain authority, like your professor, to spout all kinds of half-baked theories to non-economists. When the world does turn, and it will, it will be our turn to bang on endlessly about principles of functional finance and fiat money and all the other nonsense the generation behind us will scorn us for.

  9. I think economics is a very interesting field provided one remembers two things;

    1. The subject is not actually economics but political economy.
    2. The human political economy (and society in total) is a sub-system of the biosphere.

    In other words, the study of economics needs to remain grounded in the totality of market and political society (political economy) and grounded in the realities of environmental factors, limits and physical laws.

    “Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy. It developed in the 18th century as the study of the economies of states, polities, hence political economy.” – Wikipedia.

    The “economics” that intelligent and sensible people now find uninteresting and even repellant is the classical and neo-classical scientistic approach taken, as it is, to extremes; ie the attempt to remove moral philosophy, ideological analysis and social analysis from economics whilst at the same time ignoring the empirical realities and limits of the environment surrounding and containing all human systems. The result is an abstract, mathematized, dogmatic and largely spurious research project divorced from all recognizable individual, social and physical empirical realities. Furthermore, this spurious research project is enlisted in an ideological program promoting the interests of rich capitalists to the (attempted) exclusion of all other classes and interests. At the same time, this ideological program feigns not to be an ideological program at all but instead masquarades as objective truth.

    Unfortunately, if Keynes wrote as quoted above, he was wrong and always will be wrong on that point. Humanity can never escape from physical laws, particularly (but not only) the laws of thermodynamics. Humanity can also never escape from the overall political economy project which entails the ongoing struggle for existence within a society within a biosphere. This is unless Keynes meant “the economic problem” in a more limited sense of simply overcoming basic want and basic equity problems. Even then, I think he was overlooking the issue that a settled hegemony is never achieved in human affairs even for a short time before countervailing forces and interests fight that accommodation.

  11. Basically I agree. But I think it would be better to dissolve the Eurozone as such in an orderly manner. I do not see a political will to address the basic design flaws and their absurd consequences. If somebody needs further proof of the grotesque effects of the Eurozone design here it is: Greece imports olive oil from Germany

    That said our European “elites” are unfortunately completely clueless and in denial of reality. For instance our Austrian finance minister Maria Fekter. Her remarks after the meeting in Poland: “I found it peculiar that even though the Americans have significantly worse fundamental data than the euro zone that they tell us what we should do and when we make a suggestion … that they say no straight away,” Or Belgian finance minister Didier Reynders: “We can always discuss with our American colleagues. I’d like to hear how the United States will reduce its deficits … and its debts,”

    With such economic illiterates running the show we’re doomed.

  12. SR819, You say you are interested in the social consequences of Euro problems, not the economics of it. My answer to that is: “solve the economic problems, and you solve half the social problems”.

    Re your criticism of economists for saying that resources of scarce, all that economists mean here is that there is not an infinitely large and zero cost availability of iron ore, apples or anything else. Plus the scarcity varies widely as between different resources – e.g. gold ore is more scarce then iron ore.

    Your point about some sections of the human population facing extreme scarcity because of political / historical / economic factors is an entirely different point.

  13. Dear Bill
    I agree with you that Greeece should leave the Euro and default (partially). However, the biggest problem with the reintroduction of the drachma, as I see it, is the foreign sector. Greece imports a lot. After the reintroduction of the drachma, foreigners who export to Greece will not accept drachma’s. Since Greece has a trade deficit and since it will take time for export revenues to increase as a result of the devalution, Greece will face an acute balance-of-payment crisis. Greece is not like Argentina. Argentina is an exporter of grain and oil, while Greeece imports food and energy. Insuring that imports are not disrupted to such an extent that the Greek economy will suffer bottlenecks, that will be the big challenge after abandonment of the euro.

    Regards. James

  14. “One commentator wrote a few years ago that that the Argentinean Government appears to have perpetuated the perfect crime. The Government offered the world financial markets a ‘take-it-or-leave-it’ settlement which was favourable to the local economy. At the time, the rhetoric claimed that countries that treat foreign creditors so badly would surely stagnate and suffer a FDI boycott. This is the standard neo-liberal line that is used to coerce debtor nations into compliance with the needs of ‘first-world’ capital largely defined through the aegis of the IMF. But the Argentinean case shows this paradigm to be toothless because the Government defied the major players including the IMF and the Argentine economy went on to boom despite it.”

    Is this simply not another case of the Paradox of Thrift? While it might be better for the whole to shun Argentinian debt and bully them into not defaulting it is “rational” for the lone actor to make sure he get’s atleast some of his money in case of a default. And these capital-scabs decrease the bargaining power of foreign capital which will lead to more investors wanting to take Argentinas deal. This is my first comment here, so I hope I got stuff atleast marginally right…

  15. James,
    wouldn’t the switch to the dracma eliminate the possibility of a balance of payments crisis. Isn’t that the point of having your own currency.

  16. James,

    You’re forgetting that exports in Greece will shoot up. It will become the Mediterranean holiday destination of choice practically overnight.

    That and their shipping will become drastically cheaper.

    Yes a well informed Greece government will have to keep the Drachmas flowing internally to keep demand up and rebuild the infrastructure that is failing due to the current policies. And there will be a huge cost of living adjustment for the Greeks and the foreign imports will have to be substituted for domestic alternatives.

    But it is short term pain or long term suffering.

  17. This is truly shocking. The Wall Street Journal reports about a spectacular rise of suicides in Greece due to economic distress. In the first 5 months of this year 40% more suicides than in the same period last year. The austerity measures imposed by the Troika on Greece are not only insane economics but also literally murderous.

    WSJ: Greek Crisis Exacts the Cruelest Toll (Gated! Tip: Copy the title and search on Google.)

  18. Neil + Stephan,

    I agree with you both completely. And not just Greece: Spain and Ireland are the same. I was in Spain last month; it was really expensive, even though the restaurants were half empty and there were rows of taxis waiting for fares. I wanted to go on a horse-riding trip to Ireland, something I’ve done many times in the past. Not now. Not at the rates they unwittingly charge. The € is worth over 90p, you see. Tourism here in the UK has been increasing with a lot of people coming over from the continent to take advantage on the cheap pound.

  19. @Neil Wilson

    Surely you are right. But the unspoken question is uncertainty during the transition time interval. Can one be sure that critical imports (energy, critical chemicals including pharmaceuticals, critical food, and equipment) will not be be impaired at the transition period? A plan (or plans) to this that people can believe on and half of the problem will be solved.

  20. Dear Neil and Rodney
    You are right in pointing out that a devaluation is meant to reduce imports and to increase exports by making the former dearer and the latter cheaper. However, there is no guarantee that this will happen quickly. The effects of a devaluation on exports are usually slow because firms need time to expand and foreign customers have to adjust their plans. Many Northern Europeans, for instance, have already made plans to go to Turkey this winter. Next winter they may go to Greece if Greece becomes cheaper. If it takes time for Greece to increase its export earnings, then it may have trouble financing its badly needed imports. That’s the point that I was making.

    Regards. James

  21. Where is the greek version of “macho”. The 15 steps would be unacceptable to any self respecting person, much less autonomous country.
    I heard on the BBC last night talk of default and getting out of euro Europe. They did oooh and aaah about how bad it would be. Then a guy from Argentina commented that when they defaulted improvement was noticeable in 3 months

  22. James Schipper,

    if they let it float every foreign purchase is ‘financed’ in the FX markets by selling domestic currency. There cannot be balance-of-payment crisis in this case.

  23. James,

    In Britain we go to Greece in the Summer and the Winter. And there is a big market for late deals. If the price of Greek holidays drop overnight there will be a similar increase in substitution sales.

    You often here this line of ‘exports take time to ramp up’, which is very manufacturing oriented. Service exports ramp up in weeks and employ lots of people. Even shipping ramps up very quickly until you fill all the boats up.

    So I put ‘The effects of a devaluation on exports are usually slow because firms need time to expand’ in the ‘do that and you’ll burn in hell’ category of comments designed solely to spread fear. They don’t pass muster.

  24. «The reality is that the Greeks would have to accept a “real income” loss as a result of the depreciation but via import substitution this process would also be finite.»

    Yes, but it will be massive, and s “PG” and “James Schipper” argue the problem is that Greece will be required to pay for critical imports in hard currency:

    «Can one be sure that critical imports (energy, critical chemicals including pharmaceuticals, critical food, and equipment) will not be be impaired at the transition period?»
    «Greece is not like Argentina. Argentina is an exporter of grain and oil, while Greeece imports food and energy. Insuring that imports are not disrupted to such an extent that the Greek economy will suffer bottlenecks, that will be the big challenge after abandonment of the euro.»

    Argentina after the default went through one of their many phases of dollarisation, and they survived because their exports did provide enough dollars.

    MMT says that a country that can issue debt in their own currency cannot default. Sure, if a country’s currency is an international reserve currency it has the “exorbitant privilege” of issuing debt in their own currency, and MMT applies fully, but if that does not happen, they have to issue debt in another country’s currency.

    As to that Greece is like other small countries as “PZ” says:

    «Problem with national currencies has been, ever since capital movements were liberalized, growth in foreign currency lending. Thats why many eastern european countries have not devalued/floated, if for example 90% of their private sector loans are nominated in foreign currency»

    Those eastern european countries borrowed massively in yen and swiss francs because the interest rates on those were low. As a result they are all bust.

    Greece went bust borrowing in euros, and there is no chance of it being able to borrow in drachmas, or to pay for imports via drachma denominated bills of exchange or euro or dollar ones drawn on Greek banks).

    If Greece did not have a massive terms of trade problem it would not have run up such massive vendor financing debts to pay for imports, and its terms of trade problem is not a currency problem and even if it were there is no chance for Greece to trade in drachmas.

    Abandoning the euro and switching back to the drachma would only result in a massive internal redistribution of wealth between rich people with foreign euro denominated assets and poor people with drachma denominated assets (like a job), and thus instead of a savage deflation across the board it would be savager deflation for the poor, which is what happened to Argentina in the 90s.

    Since again Greece has zero chances of issuing debts or paying for international trade in drachmas, I think that it is pointless for it to exit the euro, and the solution must be a savage haircut to both its creditors and its citizens while it keeps the euro.

    Which critically depends on the government ability to squeeze hard ALL (that is including the rich insiders) their citizens with taxes, and the Greek government like the Argentine one does not have the political will to do that.

  25. @Elizabeth

    It is not because Ireland too expensive but because the salaries are too low in Britain. Spain looked very well in August with enormous influx of Russians.

  26. «Greece went bust borrowing in euros, and there is no chance of it being able to borrow in drachmas, or to pay for imports via drachma denominated bills of exchange or euro or dollar ones drawn on Greek banks).»

    Also obviously nobody, in Greece or elsewhere, would willingly accept to be paid in drachmas, or to have their euros assets redenominated in drachmas.

    Which would again imply that those with the means to resist conversion into drachmas would do so, leaving the entire cramdown for the weaker citizens, and that most of Greece would continue mostly to use euros for transactions, leaving 100% of foreign transactions in euros and the vast majority of internal transactions in euros too. All this of course assuming that the drachma would be perceived as weaker than the euro, which of course would be the whole point of the abandoning the euro.

    So Greece probably should default, but adopting a weaker currency than the euro would be pointless (Gresham law still applies) or unfair.

    Updating a statement above, MMT applies to countries that either issue an international reserve currency or issue a purely national currency AND don’t have balance of payments problems.

  27. Ralph Musgrave said: “Dimwit Geithner should get a job he is better suited to, like, er, sweeping the streets or cleaning public toilets.”

    What about tax preparer?

  28. Blissex: MMT says that a country that can issue debt in their own currency cannot default. Sure, if a country’s currency is an international reserve currency it has the “exorbitant privilege” of issuing debt in their own currency, and MMT applies fully,

    MMT applies fully to every monetary economy ever. Period. Descriptions and predictions may become more complicated if the monetary economy engages in irrational practices, like commodity standards where the state does not have good control over the commodity, currency pegs, allows unfavorable migration patterns of Austrian & neoliberal economists etc.

    but if that does not happen, they have to issue debt in another country’s currency No, basically never. It is practically always a suicidally stupid idea to issue significant debt in another country’s currency. Freely issuing debt in your own currency is not an exorbitant privilege, but something any “monetarily sovereign” state can do. Its currency that it can freely issue is itself “debt in their own currency” – so calling domestic-denominated debt issuance an exorbitant privilege is absurd.

    The exorbitant privilege is that of being a reserve currency, of running a trade deficit, of foreign savings in your currency. If you don’t have that, then you have to pay for your imports with your exports. That’s all. Most people gotta work for a living. That’s life. If you make stuff others want, are a good tourist destination (Pyramids & Acropoli are excellent long-term investments, in addition to education & health care) then there will be real demand for your currency. Readoption of the drachma would be far from pointless, it would be an enormous boon.

    Reviving the drachma would cause one-time short term problems. It would soon be more than made up by the increase in exports and employment. Staying on the euro causes Greece’s exports to be overpriced and prevents the government from fulfilling its responsibility for full employment, and causes great & pointless suffering, particularly to the poor & powerless.

  29. «The reality is that the Greeks would have to accept a “real income” loss as a result of the depreciation but via import substitution this process would also be finite.»

    You ave this backwards. All of the unemployed Greeks will see a real income gain.

  31. I am not well versed in MMT (being a sociology major with a minor in economics) or whether defaulting is a good strategy (but I have heard the Argentina example before) but I like the way Bill draws out the political implications (dare I say role of class power) of all that passes for pure ‘economics’.

  32. «MMT applies fully to every monetary economy ever.»

    But only as a set of descriptions of the meaning of ex-port accounting identities. If a country does not have the exorbitant privilege of having foreigners willing to buy their debt (whether as currency or longer term instruments) the ability to issue their own currency is just an internal policy matter. And the policy matter is about redistributing income from/to the tradable and non-tradable sectors of the economy.

    «It would soon be more than made up by the increase in exports and employment. Staying on the euro causes Greece’s exports to be overpriced»

    If Greece’s exports are to become less overpriced someone has to take a big cramdown. There is no way around it. The issue is exactly who is going to take that cramdown.

    Switching from a stronger to a weaker currency simply means that those that have no means to resist the forcible switch should take a much bigger cramdown than those who have the means to avoid it. That Greece will have two parallel economies, one euro-denominated and one drachma-denominated, and market participants in the latter will suffer the whole cramdown. That’s inescapable.

    Implicitly you make the argument that Greek exports are overpriced because Greek wage earners, particularly those in non-tradable sectors, are overpaid, and that their income should be severely cut, and that the only politically feasible way to achieve that is to force them to take payment in highly devalued drachmas, while everybody else continues to trade and be paid in euros.

    I have some sympathy for this argument, as the privileged supporters of some Greek parties have been awarded extremely well paid sinecures in the public sector, and it is practically politically impossible to cram them down without changing units of account.

    But if that is the argument, make it explicit, and also account for the pretty huge side effects, because like the economies of most “dollarised” small weak countries the Greek economy will remain largely denominated in euros.

  33. «“but if that does not happen, they have to issue debt in another country’s currency” No, basically never.»

    They are not obliged to, but then they cannot issue foreign debt at all. In practical, “political economy” terms.

    «It is practically always a suicidally stupid idea to issue significant debt in another country’s currency.»

    Sure, but it happens all the time regardless, because the alternative is often politically unpalatable. When one stops looking just at descriptions of ex-post accounting identities, one can engage in so-called “political economy” which is all about practically important real and monetary stuff like value added generation and income distribution in a given political context.

    «Freely issuing debt in your own currency is not an exorbitant privilege, but something any “monetarily sovereign” state can do.»

    Sure, in a purely ex-post accounting identity view. But what matters as to political economy is the rather practical matter whether the debt issued in own currency is internationally tradable, and if it has no foreign buyers (or no domestic buyers) that monetary sovereignty it not worth a lot. Haiti is monetarily sovereign, but there is no large eurohaitianfranc market for internationally traded debt.

    When BillM talks about the privilege of monetary sovereignty and makes the example of the USA and the UK and so on, those examples matter only because those countries have the exorbitant privilege of having willing customers for their national currency denominated debt, and can thus (once in a while, or constantly but slowly) cramming down their foreign creditors instead of cramming down one of their internal political interest groups.

    Nobody gives a damn about the monetary sovereignty of Laos or Kenya, and their ability to theoretically issue debt denominated in their own currency to “eager” foreign buyers, except insiders in those countries who can redistribute income to themselves by arbitraging between the national currency and harder foreign currencies.

    «then you have to pay for your imports with your exports. That’s all. Most people gotta work for a living.»

    That’s more or less my entire point. And it is not an MMT point: it is a point about terms of trade, and of internal income redistribution between tradable and non-tradable sectors, and who takes a cramdown. And it applies to Greece.

    In a world of easy international currency trades, one must always take into account that private market participants can and will denominate their trades in foreign currencies in most semi-advanced countries, and that therefore it is impossible to switch entirely an economy to a national currency as a means to impose a particular cramdown redistributional policy, and a partial switch is a rather different matter in practice from a full switch.

  34. Blissex wrote:

    “Implicitly you make the argument that Greek exports are overpriced because Greek wage earners, particularly those in non-tradable sectors, are overpaid,”

    Not necessarily. A currency union can be seen as a set of national currencies with a fixed exchange rate, the national denominations changed to a single denomination, and a single issuer.

    A currency union overvalues the national currencies of countries with current account deficits and undervalues the national currencies of countries with current account surpluses. Or, it overvalues the national currencies of “uncompetitive” countries and undervalues the national currencies of “competitive” countries. It is a crazy mechanism: rather than providing stabilizing negative feedback to national economies, it provides destabilizing positive feedback.

    It remembers me an old engineering joke: it is possible to make a system fail proof, but it is not possible to make a system fool proof.

  36. Some Guy: «MMT applies fully to every monetary economy ever.»

    Blissex: But only as a set of descriptions of the meaning of ex-port accounting identities.
    No, no, no, a thousand times no. MMT is a fundamental theory, although it would do better if it were exposed that way more. The core of MMT (creditary economics – which includes other allied sects, living & dead like the old Institutionalists) is that non-MMT is making a very basic category mistake about what money is. And therefore all of its thought involving money, credit, debt, banking & finance is suspect, as is any thought that has been influenced by it.

    But what matters as to political economy is the rather practical matter whether the debt issued in own currency is internationally tradable, and if it has no foreign buyers (or no domestic buyers) that monetary sovereignty is not worth a lot. No. No international tradeability, no foreign buyers means not worth a lot, more than what exports for sale in the currency can buy. Monetary sovereignty is worth at least what full employment is worth. Full employment is a practical matter that matters a great deal to political economy. That is very, very far from “not worth a lot”. As Abba Lerner said, economies using sound finance in the long run cannot compete with ones using functional finance. (from memory)

    If a country does not have the exorbitant privilege of having foreigners willing to buy their debt (whether as currency or longer term instruments) the ability to issue their own currency is just an internal policy matter. And the policy matter is about redistributing income from/to the tradable and non-tradable sectors of the economy.

    “just an internal policy matter”?!! Economics is all about internal policy matters! No, the policy matter is NOT about redistributing some fixed, determinate income between sectors. MMT is about correctly describing monetary economies. Once this is done, the MMT recommendations for full employment & price stability are obvious, and if understood would achieve 99.9% assent. The primary recommendation is full employment, which is very easy to achieve and creates enormous benefits. No cramdowns, no redistribution necessary. Just the free lunch you get from not systematically smashing the lunch you already have. Which in times like today’s is titanic. Genuine zero-sum inescapable tradeoffs come when we reach far-off true full employment. Old “Keynesian” economics collapsed because something like classical economics became truer because Keynesian economics had been applied. You argue as if full employment were automatic. And as if foreign trade had some special, overriding importance. No, the foreign sector can & should be neglected at first analysis, and then the nongovernment sector divided into domestic and foreign components. If you look at a closed economy, with no tradeable sector, then how could the MMT/MS internal policy matter be about redistributing income from/to something which doesn’t exist?

    When BillM talks about the privilege of monetary sovereignty and makes the example of the USA and the UK and so on, those examples matter only because those countries have the exorbitant privilege of having willing customers for their national currency denominated debt, and can thus (once in a while, or constantly but slowly) cramming down their foreign creditors instead of cramming down one of their internal political interest groups. Absolutely not. You may believe this to be the case, but this is not at all MMT, not at all what BillM is talking about, not at all what MMT holds to be true. “The exorbitant privilege” is what Abba Lerner called a “hostile gift” – and it can damage economies if they are moronically run without functional finance, without countering the deflationary, wealth-creation-inhibiting effect of (foreign) savings. Functional finance & MMT recommendations are not at all about cramming anyone down, about inflating or devaluing away debts or cramming down creditors, foreign or domestic. Saying “the exorbitant privilege” has fundamental importance, that it is the reason why monetary sovereignty is important is saying is “MMT is wrong”, or “I disagree with MMT”.

    Nobody gives a damn about the monetary sovereignty of Laos or Kenya, and their ability to theoretically issue debt denominated in their own currency to “eager” foreign buyers, except insiders in those countries who can redistribute income to themselves by arbitraging between the national currency and harder foreign currencies.Laotians & Kenyans do. Foreigners buying Laotian or Kenyan debt in quantity is unlikely & besides the point. Could be nice for them, but has nothing to do with MM theory & policy. Some MMTers argue on the web as if monetary sovereignty is magic, that it can make imports & foreign currencies freely available by just printing money. But monetary sovereignty is not anti-magic, either. Laotian currency is not valueless, exports paying for imports puts a floor on the international value of the Laotian currency, making imports available if there are the exports to pay for them. Again, “exorbitant privileges” “reserve currency status” “hostile gifts” have little to do with MMT. Insofar as they are saving, they just indicate that much more offsetting government spending, which is not and in no way should be considered an inflationary, devaluing, defaulting creditor cramdown.

    Greece & the other Euro countries are a special case. If you do something insane like the Euro, you should expect a trainwreck situation that is hard to resolve fairly. The ideal moving from current reality would be to either have a true united Europe with a common fiscal policy, at the very least a Euro-wide JG & no unemployment. Or failing that, the ECB doing some fiscal policy, or disguised fiscal policy that enables creditors to be paid off, the various members of the currency union to regain their own currencies, perhaps using devices like Mosler bonds to smooth the transition. Argentina is a recent example about how regaining monetary sovereignty is more important than double-edged privileges from foreign investment. Really doubt the Europeans will be as lucky & wise as the Argentines anytime soon, though.

    (Wrote this just now, wrote more on your other points before some interruptions a few weeks ago, see if I can dig it up.)

  37. if I may –
    a very funny article and a perfect example to what idiotic conclusions one comes if approaching that problem ‘political’ or with such a crazy baggage of ideology. Let the people of Greece decide to leave the Euro – or not and lets not listen anymore to American idiots who speculate what will be more ‘painful’ – and then come some predestined result – it will be just as ‘good’ as Argentina -(or whatever other crazy comparison they come up with) – Greece is Greece -and it will be a whole new game with only one -(very positive) – outcome – That this ‘money’ and ‘growth’ thing – will be questioned beyond believe. With the Euro or with the Drachmen – in the future the Greek people only will be able to ‘consumate’ as much as their wealth-creation allows – and that’s not going to be very much -(in the eyes of the money-men) – And THAT’S the good thing!
    I used to hear all these fabulous story about Greece BEFORE greed and the love for Porsche Cayennes had overtaken the Isles – and I hope with all my heart that we ALL -(probably America – last) – will be able to go back to times where a completely different value system was in place. America sucessfully has ‘poisened’ even strong tribes with the dream of getting rich as fast as possible and even the Left has bought into this monsterous idea to such an extent that if you question growth or our sick lifestyle the only people who are listening right now are the occupiers. And it’s kind of hilarious how the so called Left embraces nearly all the ‘ideas’ of OWS and writes article after article about ‘justice’ and ‘inequality’ – but if it comes to one of the core dreams of the US – the quest for a new and more human AND frugal lifestyle you won’t hear a word. -(not even from my hero Paul Krugman!)

    But ME no worry – We ALL will experience it – that’s the only thing I’m really sure about!

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