Warren Mosler’s talk in Chianciano, Italy, January 11, 2014

By Alexandria J E Angus

Warren Mosler gave this talk in Chianciano, Italy, on January 11, 2014 at the Chianciano Conference entitled Oltre L’Euro: La Sinistra. La Crisi. L’Alternativa. In English: Beyond The Euro: The Left. The Crisis. The Alternative [Google translation]. The video is embedded below, but you have to listen to a realtime translation in Italian, which doubles the listening time. I thought this talk important enough to transcribe, if not deliciously subversive on the part of Warren Mosler who offers Italians a way to save their economy. The transcription follows below the video.

Mosler describes how Italy (or any of the 17 EU countries that use the Euro) can leave the European Union safely if the EU persists, as it insists on doing, in impoverishing their country and citizens.

The subheads in blue are mine, not Mosler’s, and are designed to assist reading. Some terms Mosler refers to in the body text relate specifically to the Italian economy, and I can’t identify them because I don’t know their Italian names.


The labor market is not ‘a fair game’

As every student of game theory knows the labor market is not what they call ‘a fair game’. People have to work to eat, but businesses only hire when they want to, or when they think they can make a profit. It is not a fair confrontation. And if there isn’t some kind of support for labor, then real wages will be forced down continuously. All the way down to subsistence wages, while the share going to other sectors increases.

For example in the United States, under Reagan, we saw labor unions being dismantled or taken apart. That was the public unions. The private unions were dismantled by competition from overseas. Labor lost its support. And for the last 40 years real wages have been flat even as productivity went up sky-high. And all the gains of increased productivity, they went up to the top too. And labor was completely left behind.

And every Main Street economist knows it’s because the labor market is not a fair game. It’s not the natural consequence of free markets, it has nothing to do with it.

What a good economy should look like

I just want to say a quick word about what a good economy is because it’s been so long since we’ve had a good economy. You’ve got to be at least as old as I am to remember it. In a good economy business competes for people. There is a shortage of people to work for business. Everybody wants to hire you. They’ll train you, whatever it takes. They hire students before they get out of school. You can change jobs if you want to because other companies are always trying to hire you. That’s the way the economy is supposed to be but that’s all turned around. For one reason, which I’ll keep coming back to, the budget deficit is too small. As soon as they started tightening up on budget deficits many years ago, we transformed from a good economy where the people were the most important thing to what I call this ‘crime against humanity’ that we have today. (Clapping)

Mosler starts his slides (slides not visible on the video)

Let me start with the first slide of introduction. I don’t have time to go through the whole model, but many of you heard this. So I’ll try to bring the others up to speed as quickly as possible.

What a currency is, get this definition through your head

The currency is a tax credit. This is one US Dollar. At one time you could go to the US government and demand and get gold. You can’t do that anymore. What you can do with this is pay taxes to the government. Anything the government accepts for payment of taxes has value. If the government said this piece of paper (holds up a letter-sized sheet of paper) is worth €100 for taxes, this will be worth €100. The government grants tax credits to many corporations. They are as good as money. Not only that, they are money.

Number one, the money is a tax credit.

Number two the currency is a public monopoly.

The money to pay taxes comes only from the government, unless there is counterfeiting. You all know about counterfeiting. (Laughter) Apart from that, all the money to pay taxes comes from the government. Now you might say you can get money from the bank to pay taxes. And again very quickly, when you borrow money from the banks to pay taxes, yes, the banks create that money. But when you use it to pay taxes, the government, the central banking system, subtracts those Euro from the bank’s account. And those Euro in the bank’s account come from the government. So all you have to know is that the money to pay taxes comes from the government.

Government spends first, then collects taxes—taxes are never used for revenue

This means from inception, if you look very closely at the central bank accounts, this is absolutely true. The government has to spend first, then collect tax. The government has to spend first and then ‘borrow’ its own money back. Now the European Union has put some restrictions in this process. They are not inherent in the system. Those were added by the European Union to make it difficult.

If you go to the Parliament, if you go to the United States Congress, everyone in the U.S. Congress believes they have to collect the Dollars first before they can spend them. And what they don’t collect they have to borrow from China for the grandchildren to pay back. That’s completely impossible, and everybody in the central bank knows it. Is anybody here from the central bank? (Laughter) We could’ve used them.

If you look closely at the accounts of the central bank, if you just think it through, the government spends first and then collects the tax. The government spends first and then ‘borrows’. Not only that, we need the government’s money to spend the tax. That’s really what’s going on.

Money is a monopoly

Okay, so the money is a monopoly. What does monopoly also mean? Are there any economists in this room? (Laughter) Monopoly means you don’t get market clearing. It means it’s not a competitive situation. It’s very easy actually. When they teach Monopoly, it takes about 15 minutes. When they teach competition that takes forever, that’s complicated. Monopoly is easy: one person has it, everybody else needs it. The currency is a monopoly. It’s the easy one.

The importance of using a deficit constructively to benefit the people

So what is the deficit?

We all think it’s some kind of borrowing operation. And for the European nations it is. It’s not supposed to be that way. It didn’t start out that way. But I wrote as far back as 1994 that if the central bank did not guarantee the member nation debt, it would lead to the disaster we have today.

So, what the deficit is, is when the government spends money. When the government spends, only two things can happen to that money: that tax credit can be used to pay taxes, the money can be used to pay taxes, or it isn’t used to pay taxes. In which case, somebody out there still has it.

You spend it, somebody else has it. He spends it, somebody else has it. So it’s either used to pay taxes, or it remains in the economy as savings. And as they teach in national income accounting, the government deficit equals the savings of the economy. [ED: to the penny]

The deficit is what the government spends, and it is not used to pay taxes yet. Then the government sells bonds, sells securities, ‘borrows’ that money.

What happens when the government ‘borrows’ that money, sells those bonds? The money moves from one account at the central bank to another account at the central bank. That second account is called a PTP. It’s the same money. Okay. It’s still Euro, and when that PTP comes due, you have Euro to pay taxes. So the deficit is the money that’s spent, it hasn’t been paid in taxes, and it stays in the economy in one form or another until it is used to pay taxes.

The reality of paying back the debt

Paying back the debt just shifts the money from one account at the central bank to another. It doesn’t go anywhere. (That’s not what happens when I pay back my debt because it’s not my bank.) But when the European government, the European Union, owns the bank, paying back debt is just a debit and a credit.

Again, they’ve made this process difficult, nearly impossible, with the restrictions they put on, but that’s not inherent in the system.

The total debt is all the outstanding tax credits, the money the government has spent, and nobody has used it yet to pay taxes, that’s all. Technically, they call this cash ‘reserves’ and ‘securities’ account balances at the central bank. There is no such thing as paying it all back. It just stands out there while the government waits for somebody to use it to pay taxes.

Japan has got the highest debt in the world. Over 200% of GDP. It’s just sitting there in accounts at the Bank of Japan waiting to be used to pay taxes. And it’s somebody’s savings. Whoever’s name is on the account, it’s their savings.

The real problem is unemployment because the deficit is too small

The problem is unemployment. How many people would be here today if employment was 3%? Nobody. (Laughter) The European Union would be a resounding success. The whole world would be trying to join. At 12.2% [unemployment] it’s not so good. How bad is it? You’re all here on a Saturday afternoon, that’s bad, right. (Laughter)

So we need to know a little bit about why there’s unemployment, what it is. I’ll give you the answer first. The deficit is too small. That’s the only reason for unemployment. The currency, the money, is a tool to provision the state. The government wants people to work in the government, they want a legal system, they want healthcare, public health, they want education.

How governments provision themselves, a little history

How do you get people to come work for the government? You could ask for volunteers. People have tried that. It doesn’t work all that well. The British used to get people in the Navy by going to the bars at night, and they’d take a bottle and hit somebody on the head. Then they would wake up in the British Navy, climbing some mast. That was called impressing sailors. That’s another way to provision the public sector.

You could conquer somebody and take slaves. That used to be popular. But today we pretend to be more civilized. We tax people in something they don’t have that comes only from the government, and suddenly everybody in the country needs that currency.

Nobody needed the Euro the day before it was introduced

Nobody needed the Euro the day before it was introduced. But as soon as they switched over and the Euro was needed for tax payment, now everybody needs Euro.

When people need money and they are looking for work to earn it, what do we call that? Unemployment. Unemployment is not people looking to volunteer at the hospital. It’s not about volunteers, it’s about people looking for paid work, they need the money. If nobody needed the money, there would be no unemployment problem.

So government taxes are what causes everyone to be unemployed in that we are all out looking for work to earn the money. The government can then spend its otherwise worthless pieces of paper and hire the people to work in the government, hire the people that the tax caused to be unemployed.

If they put a tax on, and they don’t hire all the people they caused to be unemployed, why would they do that? It means the tax was too high. If they only want to hire this many people (shows shoulder-width length with hands), they shouldn’t make a tax this big (widens arms). They should either make the tax smaller, or hire more people.

The only two reasons (macroeconomic) that people work for the state’s money

There’s two reasons which I already talked about that people work for the money. And you have to think of the economy as a whole, and not just every individual, but as a whole.

So why does the economy want to work for the money? Same two reasons. When the government spends the money, it either gets used to pay taxes or somebody saves it.

If the taxes get paid and nobody wants to save it, the government wouldn’t be able to spend it. So when the government doesn’t spend enough to cover the need to pay taxes and the desire to save, that means the economy doesn’t have enough money to do what it wants to do, and there are still people looking for work who can’t find it. We call that unemployed.

What fixes unemployment? Increasing the deficit

So how do you fix the problem? You either hire the remaining people who are unemployed, or you tax less. It’s actually that simple. That means the deficit gets larger.

So what I’m saying is that unemployment is always the evidence that the deficit is too small. There are many other problems, many other economic problems, but the unemployment, which is the reason why we’re here, is because the deficit is too small.

Government policy created unemployment in the first place (President O doesn’t know)

Which brings me to one more point. It’s the government that put the tax on [the people] that created the unemployment. It’s the government that didn’t spend enough to employ all the people that its tax caused all the people to be out of work. This is a deliberate policy. Unemployment is created by government policy. It’s not a natural state. If you go to any society that doesn’t have a government with taxes and money there is no such thing as unemployment.

How the Brits got the Ghanaians to work their coffee plantations in the 1800s

I’ll give you one last quick example here. The British went into Ghana in the 1800s to grow coffee. There was no monetary system in Africa at the time. There was no unemployment when you went out and visited the population. Everybody was helping each other out with jobs to do. It was a very social place. The men would hunt and fish and build the houses, and the women would take care of the children and do the food. The grandmother would help out taking care of the children. The people were doing things and there was more to do than there was time to do it. How did the British get them to work in the coffee plantation?

They came up with this brilliant idea. They told everybody there was going to be a tax on their hut. It was called a hut tax. Everyone had to pay, what, 10 Pounds a month, something. Tax. Or they would get their house burned down by the British. What happened? Everybody said all right, what do we have to do to get the money to pay the tax? ‘Ah, if you come to the coffee plantation we’ll pay you one Pound a day to work’. Sure enough, people starting coming over to work, to earn the money, so they didn’t get their house burned down. The tax, the monetary system, created the unemployment.

Then the British hired the people so they could get the money to pay the tax so they didn’t have their house burned down. They would spend the money first and pay people, and then collect the tax, right. And they spent more than they collected because some people saved them [Pounds] for paying taxes later.

But would they let them earn enough to pay the tax, or would they say, ‘No, we’re not going to do that and go burn your house down’? Of course not. They let them come work and earn all they wanted to pay the tax, and to save, so their houses did not get burned down. If too many people came to work, they would reduce the tax. They didn’t send the people home and burn their houses down like they’re doing today in the European Union. (Clapping)

If Mosler was in charge of Italy…

If I was in charge in Italy, which I’m not, I would send some kind of ultimatum to the European Union saying you relax your deficit limit from 3% to maybe 8% of GDP so that Italy can either increase public services, cut taxes, whatever Italy wants to do. Rebuild [unintelligible] that would be nice. Then unemployment would come down, and we would see how far it would come down. I think it would come down to, maybe, 6%. That would immediately take the pressure off, and people would understand how it worked. And then they could make further adjustments.

If the ECB won’t play ball, leave the European Union and go back to the Lira

And if the European Union says no, instead we’re going to continue to make sure that you can’t earn enough money to pay the tax, and save, and so we’re going to keep burning your houses down, then there’s no choice left but to leave and start your own currency, the Lira. (Clapping)

But your problems will remain if you try to ‘balance the budget’ with Lira

But here’s the problem. If you stay with the same political leadership that you have today, and they try to balance a budget with the Lira, there’s not going to be enough Lira to pay the taxes and to save. And your own new government is going to be burning down your houses just like today. We say ‘out of the frying pan into the fire’.

Okay, so you must have leadership that understands how the currency works. Assuming you can do that, we’ll move on with the presentation.

Target full employment, then set the right size deficit to reach it

So what you do is you target full employment, because that’s the kind of economy everybody wants to live in. And the right size deficit is whatever deficit corresponds to full employment. And a little bit later I’m going to give you one more trick to make sure you don’t have an inflation problem.

Switch from Euro to Lira? Eazy-peazy, sports fans

Now, operationally, how do you switch from Euro to Lira? The good news is it’s very simple. The most important thing is that all taxes become due in Lira instead of Euro. That creates an entire nation that needs Lira to pay all kinds of taxes. The Lira is in demand, it’s strong.

Now everyone is unemployed in Lira. Everyone needs to earn Lira.

The next thing is for all Italian government employees to get paid in Lira. Now I would leave the salaries the same. So if you are earning €30,000 [per year] working for the government, you would earn 30,000 Lira per year working for the government.

And I would encourage private-sector employers also to be paying in Lira, which they will. Because if you remember when they switched to the Euro, what happened to private-sector employers? They started paying in Euro. They didn’t have to. They could’ve paid in Dollars or Yen or Pounds or anything they wanted to.

But with all the tax liabilities, including their own, and all their employees in Lira, then they will naturally switch to Lira. You don’t have to compel them to do that. They are going to get paid in Lira for everything they sell when they sell to the government which is a lot, when they sell to other people working for the government, they’re going to have Lira. They are going to want pay in Lira. The whole thing monetizes in no time.

Paying people one-to-one in Lira where they used to earn Euro is the only exchange rate…the only time the exchange rate is set by the government. And it’s not really an exchange rate. You did not fix the exchange rate in the marketplace. The government doesn’t need to intervene at this point.

What happens to the bank loans and deposits currently in Euro?

Bank deposits remain in Euro.

If you have Euro in your bank nobody is going to take them away from you and give you Lira. If you want Lira you can go to your bank, they will tell you the market price, they will do a foreign exchange rate action. They will get the Lira for you at the going rate. But you’re not forced. That’s both borrowers and depositors.

And all Lira bank deposits are fully insured by the government. But not the Euro deposits. Because the government doesn’t create the Euro, they create the Lira. When they spend, they spend in Lira.

What this does is it creates the initial conditions for a very strong Lira. Everybody needs Lira, and they are somewhat difficult to get. You get them when you get paid by the government, but that’s not everybody. You can convert your bank accounts to Lira but that makes the Lira strong because you’re selling Euro to buy Lira. This allows the government to go the opposite way. The government can sell Lira to people who need it and buy Euro, without causing the market to depreciate. Because the Lira is scarce, and strong, and trying to go up, when the government comes in to buy some Euro to service its needs, it’s just keeping it stable. The same with any appreciating currency for as long as that continues.

We’ll go to bank lending.

Banks are very dangerous gambles. We’ve all seen what private banks can do if they get out of control. We know how difficult they are to control and to regulate. Most of us have lived long enough to see what public banks can do when they get out of control. They are both highly problematic. They must be kept what we say on a very short leash. You know what that means? If you have a dog that is dangerous you don’t have a long leash, you have a very short leash. (Clapping)

Banks should operate for public purpose, not some financial index that benefits the 1%

So how do we make sure that banks operate for public purpose? There’s no question that they are public institutions, every one of them. All their deposits are insured by the government. They have a government charter. They have guaranteed government liquidity. Government regulates what they can do with their money. They are allowed to. what we call, ‘price risks at their interest rate’, and make credit decisions. But the military are allowed to aim their rifles and they are still government soldiers.

Control the banks by telling them exactly what they are allowed to do

So, banks lend only in Lira. Foreign-exchange lending gets highly problematic when it is done by a public institution. You don’t want to let that happen.

Bank lending is to be limited to public purpose, which means you cannot use financial assets as collateral. You can’t borrow against financial assets from the member banks. If somebody in the private sector wants to make a loan, that’s okay. But not the banks with insured deposits.

And lending is done by credit analysis and not market prices of the assets underneath. You must lend by credit analysis to serve public purpose. If there any questions about that later, I can go into more detail.

The big thing to remember is, you tell banks what they are allowed to do, and not what they are not allowed to do. When you tell banks what they are not allowed to do, they will always find something you forgot.

You tell banks: you can do X and nothing else

Somewhere in the world they will come up with some branch that will be doing something that you forgot to tell them they can’t do it. So instead, you tell them you can do this and nothing else. That’s the only way you can control the list of what they’re doing. (Clapping)

And you better make sure that every regulator is in place and well-trained before you shoot the gun and let the banks start running.

You need unlimited bank liquidity, unlimited deposit insurance, and a strong regulatory belt and set of suspenders

Okay, bank liquidity. Quickly.

You need continuous unlimited liquidity from the Bank of Italy, unlimited deposit insurance. When you do this, you do not need any interbank lending, so that’s done, over.

And every time a bank needs money, or has extra money, the central bank knows about it because they don’t loan to each other. They just go through this channel of the central bank so you can watch it.

At the end of the day there is no other way to do it. The countries that did this had no bank liquidity crisis in 2008. Canada, Japan, New Zealand, they had no problem like these countries that didn’t do this. But when banks have unlimited funds, and unlimited liquidity, like I said, you must regulate them and tell them only what they can do.

In technical terms, we regulate the asset side and not the liability side.

Renegotiate government contracts in Lira and set a zero interest rate policy

Additional proposals.

The government contracts will all get renegotiated to Lira. They are competitive for the most part. And the companies are going to need Lira, so there should be no problem.

Permanent zero rate policy much like we have today. Today the policy rate of the European Central Bank is very close to zero. It can just be set at zero and left at zero.

So what about inflation?

Now, some people are concerned that zero rates might cause inflation. And if you are on the gold standard they probably would. But we have been off that for a long time and it doesn’t apply anymore.

Japan has had zero rate policy for 20 years or more now. They have the highest deficit in the world, over 200% of GDP. They’ve been fighting deflation for 20 years. And they’ve had the lowest interest rates in the world. So maybe those low rates don’t cause inflation. They’ve had the strongest currency in the world. Maybe those zero rates don’t cause the currency to go down.

Are they really that dumb at the European Central Bank?

Maybe there’s some connection with the ECB, the European Central Bank, as they lower rates, the currency has been stronger. Is it possible the central banks have it backwards? With all those multiple PhD’s, and all the research, the hundreds of millions of Euro they spend on research, could they have it backwards? All the evidence says yes. And the countries with the higher rates, as they raise rates it doesn’t seem to work. It seems to make inflation worse and the currency low.

So what are they overlooking? Who is the largest payer of interest? The government. And what happens when rates go up? Government pays more interest to the economy. And when rates go down governments pay less interest to the economy.

It all comes back to the problem of a low budget deficit

The economy loses interest income when the rates go down, and everybody who has money in the bank knows that. It helps the borrower, but it hurts the saver. But there are more savers than borrowers. The government debt in Italy is over 100% of GDP. That’s mostly somebody’s savings. Okay, that’s all ‘net savings’. When the interest rates goes up, that savings earns more money. When interest rates goes down the economy earns less money on the interest. So when interest rates goes down, the budget deficit goes down, and people earn less money.

Did I tell you the low budget deficit is a problem? Yes. So you can see this channel of why it’s a problem.

Income is more important for a bank loan than lower interest rates. You need jobs.

So let’s say you go into the bank to borrow money, let’s say I’m the economy and I walk into the bank to borrow money. And the banker says well, rates are down that’s good for your loan, but your income’s down. Which is more important? The income. When incomes are going down, it’s bad.

More suggestions…

I’ll go a little more quickly. No issuance of PTP or CCT bonds. There’s no need to. Rates are zero anyway. How do we get the deficit up from 3% to 8%? I’ll just give you an example: we suspend the VAT. Now the deficit is up. It’s like giving everybody a 15% or 10% or 20% pay raise, depending on what you’re buying. So prices are lower. That’s not inflation.

Citizens come first: start a transitional Job Guarantee program to put everyone back to work

The last part here is that the Bank of Italy funds a transition job for anyone willing and able to work. This is critical. People have been unemployed too long. Business prefers to hire people already working. By having a job for anyone willing and able to work, people can show that they are working and get hired by the private sector. In addition, the government can hire people in the private sector for public health and safety, and everything else that is needed.

How to keep the Lira strong

Dynamics of the Lira.

Strong Lira from taxation without deposit conversion. If you did convert all the deposits, a lot of people are going to get very angry with Lira and they’re going to sell them for Euro, and they can drive down the currency. And it allows government to purchase the Euro it needs to service its obligations.

Full employment must drive your fiscal policy

Fiscal policy

The right size government is politically determined to meet real public service needs. You decide how many people you want in the public sector to do what you want done. Whatever it costs, that’s what it costs. The taxes are set at the right level so you have full employment. Nine times out of 10 that’s going to mean taxes will be lower than spending. There will be a deficit. There will be times when the private sector is borrowing like crazy to buy houses or cars, and you might need to run a budget surplus. But whatever it is that corresponds to full employment, that’s the right size deficit.

And I suggest you got it just about right when the number of people in the transition jobs is about 3% of the labor force. And the trade balance is allowed to adjust to full employment conditions. And I know that needs another hour of discussion, but I only have two minutes.

Some final points and a word on trade


Converting bank deposits risk currency depreciation and inflation. Same with positive interest rates. And tell the banks what they can do and not what they cannot do.

And I’m going to take one minute only on trade. Let me talk about what the real wealth of Italy is. Think of it as your pile of stuff. That’s your real wealth. Goods and services. Everything from potato chips to healthcare. Goods and services. That’s your real wealth. So your real wealth is everything you can produce when everybody’s working. That’s how you get the most real wealth. Plus whatever you import adds to your pile of stuff. Whatever you export subtracts from your pile of real stuff. Now I did not say that exports don’t help the exporters. Yeah, it helps those people. But it is a subtraction of real wealth from the entire economy. The exports are your cost of imports.

Back in the old days we called that ‘real terms of trade’. So to optimize your prosperity, you make everything you can with everybody working, and then you add to that with imports, what people export to you. Then whatever you must export, you try and get as many imports as you can.

If you can export one Ferrari and get four Mercedes, that’s good. If you can export one Ferrari and get five Mercedes, that’s better. Real terms of trade, that’s the important thing. The United States doesn’t even publish the trade deficit or surplus between the states. [The EU is like a collection of US states using a common currency.] Again, it’s a whole session in itself.

The end

I’m going to thank you all for coming out. (Standing ovation and cheers)


P.S. Someone alert the Ukrainians.

21 responses to “Warren Mosler’s talk in Chianciano, Italy, January 11, 2014