Can Sesame Street Help Europe’s Finance Ministers Understand the Debt Crisis? (Members of Congress Take Note)

By Stephanie Kelton

You might expect the head of the group of countries that use the euro to understand the common currency better than anyone. You would be wrong.

Jean-Claude Juncker, head of the Eurozone’s group of finance ministers, can’t figure out why financial markets are so anxious about Europe’s ability to service its debt and so unconcerned about debt levels in other parts of the world. He’s convinced that Europe’s fundamentals are better than ours, so he can’t figure out why investors are gobbling up Treasuries despite the “disastrous” debt level here in this United States. To him, financial markets appear to be getting it badly wrong. He said:

“The real problem is that no one can explain well why the euro zone is in the epicenter of a global financial challenge at a moment, at which the fundamental indicators of the euro zone are substantially better than those of the U.S. or Japanese economy.”

Well, Mr. Junker, not only have we – the scholars of MMT – explained why the debt crisis hit members of the Eurozone, we also predicted that the design of the euro system would lead, precisely, to this outcome. Even before the launching of the euro, people like Charles Goodhart, Wynne Godley, Jan Kregel and Warren Mosler were sounding the alarms, warning that the Maastricht Treaty contained a dangerous design flaw that would strip member nations of their power to safely expand their deficits in times of economic crises. And so while mainstream economists like Willem Buiter were busy arguing over the appropriateness of the 3% deficit-to-GDP and 60% debt-to-GDP limits established under the Stability and Growth Pact (SGP), those of us working in the MMT tradition were busy pointing out that bond markets, not the SGP, would impose the relevant constraint under the new monetary system. I wrote in 2003:

“[B]y forsaking their monetary independence and agreeing to the terms set out in Article 104 of the Maastricht Treaty …. obligations issued by EUR-11 governments begin to resemble those issued by state and local governments in the United States ….. Since markets will perceive some members of the EUR-11 as more creditworthy than others, financial markets will not view bonds issued by different nations as perfect substitutes. Therefore, high-debt countries may be unable to secure funding on the same terms as their low-debt competitors. ….. if interest payments are becoming a significant portion of a member state’s total outlays, it may be difficult to convince financial markets to accept new issues in order to service the growing debt.”

As a group, we warned that without a fiscal analogue to the ECB, the euro was essentially an accident waiting to happen – a sort of ticking bomb, ready to ignite the periphery at the slightest strain on public budgets. We wrote pamphlets, articles, chapters and books, travelled the Eurozone, met with elected officials, appeared on television, radio, and in print media.

We explained that the issuer of a non-convertible fiat currency never faces an external funding constraint. The United States, Japan, the United Kingdom, Australia and Canada can always pay their debts on time and in full. They cannot “go broke” or be forced to default on their obligations.

In contrast, we explained that Greece, Portugal, Ireland and the rest of the Eurozone nations have become users of their currency. They cannot create the euro. They can become insolvent, and they can be forced into default. And yet Mr. Junker claims that no one has been able to explain why the Eurozone remains in the epicenter of a global financial crisis.

Today, we continue to write about what went wrong and what the ECB could do to restore prosperity. William Black, Randy Wray, Marshall Auerback, William Mitchell, Warren Mosler, and I have worked tirelessly to explain that countries that are USERS of their currency just aren’t like the U.S. and Japan.

Perhaps we have been too opaque. Let’s try something simpler. Carefully study the images below.

Now watch this:

12 responses to “Can Sesame Street Help Europe’s Finance Ministers Understand the Debt Crisis? (Members of Congress Take Note)

  1. Stephanie,Isn't this just so obvious – or should be – to anyone with a vague notion of economics?Thankyou so much to you & your colleagues for speaking in Dublin last month. I wasn't able to attend, but have now seen the videos posted online. I think ordinary citizens would be far better off if your ideas were adopted. (I've been a Feasta member for some years.)At the absolute minimum, these ideas are surely deserving of thorough public debate.I did not notice any reporting of your presentations or attendance around the time. Did any of the mainstream media in Ireland report anything? Did any of Irelands prominent economists have any discussions with you? Make any public comments? Or politicians?Best wishes 🙂

  2. Mike,Yes, it is (or should be) obvious. But just look at how many economists get it wrong. Even Krugman refuses to draw sharp enough distinction between, say, the US and Greece. We made good progress in Ireland, I thought. Dan O'Brien (Irish Times) picked up some of our arguments the day after our conference in Croke Park, we met with academics from Trinity and Galway, Bill and Randy did radio interviews, we talked with David McWilliams (who also wrote a piece promoting our idea of an ECB distribution to replace lending to member governments), I did an interview that is in the current issue of the Village Magazine, and we met with THREE sitting members of Parliament. -Stephanie

  3. "We explained that the issuer of a non-convertible fiat currency never faces an external funding constraint. The United States, Japan, the United Kingdom, Australia and Canada can always pay their debts on time and in full. They cannot “go broke” or be forced to default on their obligations. In contrast, we explained that Greece, Portugal, Ireland and the rest of the Eurozone nations have become users of their currency. They cannot create the euro. They can become insolvent, and they can be forced into default. And yet Mr. Junker claims that no one has been able to explain why the Eurozone remains in the epicenter of a global financial crisis."I believe you need to go over their economic assumptions.Do they believe real aggregate demand is unlimited and/or real aggregate supply can never reach real aggregate demand?Why does all new medium of exchange have to be the demand deposits from debt the way the system is set up now?Eventually, you will need to get around to the medium of exchange problem. If more of it is needed, how should that happen and should it be currency/demand deposits with no bond/loan attached or should it be currency/demand deposits with a bond/loan attached making it debt (has an interest rate attached, repayment terms attached, and brings something from the future to the present)?Also, why should gov'ts be allowed to set up their budgets so that only interest payments can be made instead of both interest payments and principal payments? Making both interest payments and principal payments eliminates the rollover problem.Lastly, let's say the currency printing entity "bailouts" the creditors. What would be the consequences?

  4. So did you actually get to play the video to any of the members of the Troika? Or was it too advanced for them>

  5. Thanks Stephanie, it's good to know there was some engagement!I note you mention 3 members of 'parliament', not members of the 'government' (of the governing parties holding parliamentary majority). Still, better than nothing.Let's hope some sanity may infuse 😉

  6. So those who create their own currency cannot go bust? But if the currency becomes cheapened, no one will want it. Interest rates on it will go up and inflation will ensue. People will avoid it and inverstors will not hold it. They will sell it short and make it worst.It seems that anyone can face consequences of bad debts.

    • Rich Reinhofer

      You’ll need to explain the mechanism of “no one will want it” and “inflation will ensue”. You can’t have it both ways.

  7. The US treasury is a currency user. It doesn't even have a direct line of credit with the Fed.The Fed is the issuer; like the ECB.

  8. Maybe start them off with a 'who are the people in your neighbourhood' segment. Check to see if they can recognize more than just the guy who always optimizes his intertemporal consumption pattern.

  9. Could we rule out that Jean Claude is lying? He himself appears to have admitted that lying is part of the political economic game.“I'm certainly not going to go to confession because of a false denial. God understands more about the financial markets than many who write about them.”JC J in Der SpiegelSome quotes say that Jean Claude has said:"When it becomes serious, you have to lie,"The end justifies the means, Jean Claude want to protect the European citizens from the truth, it could have an detrimental effect on the European peons faith in their masters if they got the knowledge that it’s possible to have relatively high debt and low interest rates and inflation.

  10. @ MikehallThey did have some subterranean influence over here in that Dave McWilliams… erm… borrowed their ideas. Well, I think he did. A day after the conference he ran an article on his website saying that the ECB aren't revenue constrained and should just issue loads of cash to Ireland.He's a big commentator, I guess. But somehow I think that a lot of people will take this tack: simply take the MMT ideas and start saying them without reference. I don't have a huge problem with it as I'd say its the best we can hope for — but hey, I always give people a nod when they deserve it.

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