The recent election of an explicitly anti-austerity party in Greece has upset the prevailing policy consensus in the eurozone, and raised a number of issues that have remained ignored or suppressed in policy circles. Expansionary fiscal consolidations have proven largely elusive. The difficulty of achieving GDP growth while reaching primary fiscal surplus targets is very evident in Greece. Avoiding rapidly escalating government debt to GDP ratios has consequently proven very challenging. Even if the arithmetic of avoiding a debt trap can be made to work, the rise of opposition parties in the eurozone suggests there are indeed political limits to fiscal consolidation. The Ponzi like nature of requesting new loans in order to service prior debt obligations, especially while nominal incomes are falling, is a third issue that Syriza has raised, and it is one that informed their opening position of rejecting any extension of the current bailout program.
The Troika has responded to these points by ignoring the substance of these direct challenges to their preferred approach, and by hardening their bargaining stance. Syriza’s opening request for debt reduction, based in part on recognition of the above points, has been summarily rejected. In addition, the ECB announced that in its estimation, Greece has failed to abide by the terms of the last bail out agreement, so the ECB will no longer accept Greek government debt as collateral for liquidity provided to Greek banks. This leaves the Greek banking system relying upon the ECB’s Emergency Liquidity Assistance (ELA) facility, which can be cut off with two weeks notice on the vote of a two-thirds majority. If the February 28th deadline for extending the existing bailout program is not met or somehow postponed, Greece is likely to face funding difficulties. Even if Syriza can find some sort of bridge loan, large debt payments loom this summer.
The nuclear option of exiting the eurozone does exist, though Syriza did not campaign with this explicit threat, nor have polls of Greek citizens to date supported such an exit. Executing an exit would likely impose even harsher conditions on Greek citizens in the short run. The sharp decline in a newly introduced currency would be likely to significantly raise the cost of imported goods. In the case of Greece, with fuel, food, and medicine making up a large share of the import bill, this is no trivial matter. The banking system could be hamstrung with deposit flight and insolvency. Debt contracts not under Greek law could not be redenominated in the new currency, and so either default, or a very heavy servicing cost would likely result. In either case, Greece would likely find external finance effectively shut off for some time after their departure. Exiting the euro is an option, but not one without significant upfront political and economic costs.
The task for anti-austerity parties like Syriza then becomes to thread the policy needle – namely, to exit austerity, without exiting the euro. In the absence of a sufficient improvement in the current account, or a significant shift in household and business investment spending relative to their desired saving objectives, some degree of fiscal autonomy must be regained if income growth (and hence the ability to service debt) is to be accomplished. The following simple proposal introduces an alternative government financing mechanism, along with safeguards to minimize the risk of abuse of this mechanism, which may accomplish this threading of the needle.
To accomplish this return to growth through increased fiscal autonomy, an alternative public financing instrument could be unilaterally adopted. Federal governments could issue tax anticipation notes (TANs) to government employees, government suppliers, and beneficiaries of government transfer payments. These tax anticipation notes, which are a well-known instrument of public finance used by many state governments across the US, could have the following characteristics:
- zero coupon: no interest payment is due to the holder of the TAN
- perpetual: meaning there is no maturity date requiring repayment of principal, meaning TANs would not increase the public debt to GDP ratios, just like the issuance of perpetual debt by banks counts as equity that helps them meet capital requirements
- transferable: can be sold onto third parties in open markets, as are bearer bonds
- Accepted at 1 TAN = 1 euro by the federal government in settlement of private sector tax liabilities.
As the government fulfills expenditure plans, TANs could be distributed electronically to the bank accounts of firms and households due to receive these payments using an encrypted and secure transaction system. Because there are large backlogs of payments due by the Greek government, and there are also backlogs of unpaid taxes, TANs should find ready acceptance. Essentially, the government would be securitizing the future tax liabilities of its citizens, and creating what amounts to a tax credit. This tax credit will not be counted as a liability on the government’s balance sheet (British consols were are a historical example of this), and will not require a stream of future interest payments – payment that could increase fiscal expenditures, and hence fiscal deficits, in future budgets. Governments issuing TANs could thereby pursue the expansionary fiscal plans that are required to return their economies to a full employment growth path.
Questions have been raised as to whether TANs are a parallel currency in all but name, and whether TANs might “trade” at a discount to euros. As noted above, TANs are accepted by the government at 1 TAN = 1 euro. TANs are perpetual, zero coupon bearer bonds denominated in euros, not in new drachmas. Since even under the various treaties ruling the eurozone, governments retain the right to impose taxes on its citizens, and can define what they will accept for taxes, there is a “market maker” with fairly unrestricted “buying power” to insure the 1 TAN = 1 euro link is upheld. For example, should TANs begin to trade at a persistent discount between private citizens, demand by taxpayers for TANs would increase (since this would be the less costly way to meet tax obligations), pushing the TANs back to parity with the euro.
Questions have also been raised as to whether TANs would trigger default clauses in existing government bonds. Recall that TANs were not designated for payment of interest or principal on existing debt. Citizens will also have full discretion over whether to use TANs or euros to pay taxes. There can be no argument that TANs represent a prior claim on tax revenues, thereby subordinating existing bonds.
One explicit cost of the TAN approach could be the imposition of fines if the 3% fiscal deficit to GDP ratio of the Growth and Stability Pact is violated. However, Germany and France openly violated this threshold in 2004 with no fines imposed, possibly setting a precedent for contesting any such fines. Moreover, if expansionary fiscal plans are pursued with the use of TANs, and that fiscal stimulus is successful enough to revive income growth, tax revenues will be likely to rise, and realized fiscal balances may end up above the 3% deficit threshold. After all, the outcome of recent episodes of fiscal consolidation has been rising, not falling debt to GDP ratios.
In addition, in countries with chronic current account deficits that are in excess of 3% of GDP, the simple analytics of double entry bookkeeping imply countries will need to violate the 3% fiscal deficit to GDP rule if their domestic private sectors are to be kept off of deficit spending paths. Otherwise, fiscal policy restrictions end up exacerbating household and business debt build-ups, thereby increasing financial fragility in the private sector. The authors of the fraudulently titled Stability and Growth Pact (SGP) appear to have ignored this accounting implication, and thereby introduced a different vector of financial risk into the eurozone, and one that has revealed it devastating consequence in the aftermath of the Global Financial Crisis (GFC) of 2007-8. The fiscal deficit floor rule of the SGP deserves to be challenged and reviewed, not only because it can introduce the unintended consequence of a private sector debt build up, as was witnessed in many eurozone peripheral nations heading into the GFC, but because it has failed so miserably in its stated purpose of reducing public debt to GDP ratios.
It is true that TANs are unlikely to be accepted by trading partners of nations adopting TANs as an alternative financing instrument, unless those trading partners face tax or tariff liabilities in the countries adopting this alternative financing mechanism. However, TANs are likely to be used in domestic market transactions, which may also free up more euros to pay for imports of essential goods like food, fuel, and medicine. Of course, to make this alternative financing mechanism work, enforcement of tax collection will need to be improved. A more equal distribution of the tax burden across citizens would also assist in the wider acceptance of these notes in private transactions.
While the onset of price deflation is more the concern in the eurozone of late, some may fear this alternative financing mechanism would offer a quick route to accelerating inflation, if not hyperinflation, since the constraints on government budgets would be reduced. To address this issue, it might be helpful for the central bank of each country to be held responsible for monitoring domestic inflation conditions, and for creating robust early warning systems. Both exercises could be overseen and validated by an independent third party – say IMF or ECB staff. Rules could then be set in place requiring a reduction in the issuance of TANs should inflation accelerate through some predetermined ceiling over some specified duration. A provision for ratcheting TAN issuance down further if inflation is not headed back down below the target could also be designed.
In addition, specific supply bottlenecks that may be contributing to inflationary pressures could be identified and addressed through infrastructure spending, labor training, or tax incentives using TANs. TANs could also be used to implement an employer of last resort approach (ELR) to job generation, which could also have a stabilizing effect on inflation. Rania Antonopoulos, Deputy Minister of Labor and Social Solidarity in Greece, has already run a trial experiment of ELR in Greece, and is prepared to scale this up in her new post (see an outline and policy simulation of how this could be done here). It is not hard, in other words, to create the demand and supply side policy mechanisms that could reduce the odds of an ever-accelerating inflation. It is the outright fear of such an outcome that appears to motivate the bias toward fiscal stringency by many eurozone policy makers. The Troika appears haunted by the hyperinflationary ghosts of the early Weimar Republic, while completely forgetting it was Bruning’s devastating fiscal austerity polices that ushered in the Third Reich. History reflects that damage was done both ways, so let’s chose to learn the full lessons of history, rather than repeat the same deadly mistakes.
Austerity has proven to be a disaster on nearly all fronts. Firms have been bankrupted, households have dropped into abject poverty, banks have lost capital to loan losses, tax revenues have come up short or have been hijacked to service debt (debt that was ultimately issued to socialize bank loan losses), and government debt to GDP ratios have risen. Economies are evidently not drawn to full employment growth paths when instruments like fiscal policy, exchange rates, and monetary sovereignty are drastically circumscribed, ostensibly so that prices are free to adjust to market forces. We should have known this from the theories of John Maynard Keynes, Irving Fisher, and Hyman Minsky, and now we should know it from historical experience. Yet this fatal neoliberal conceit in the self-adjusting properties of unfettered markets was the central premise, as well as the fundamental design flaw, behind the European Monetary Union.
Countries may be able to exit austerity policies without having to take on the many challenges of exiting the euro. It may be possible to thread the policy needle in the eurozone. Through the alternative financing mechanism of TANs, countries like Greece may be able to counter the threat of a cut off of financing by the Troika. Policy simulations of the use of TANs by economists at the Levy Economics Institute look eminently plausible (see from p. 11 on in the Strategic Analysis from a year ago, which can be found here). After too many years of devastating austerity driven by misinformed and utterly misguided policy choices, countries may be able to regain some control over their fiscal policy, and finally forge a pathway back to full employment. With the ploys of the Troika revealed with the emergence of an anti-austerity party like Syriza to a position of governance, Greece has a chance to pave the way out of austerity without exiting the euro. Yanis, get a TAN.
This is an excellent article. I would suggest there is historical proof that it works, namely the war time economic boom in the USA in the 40s and carried over into the 50s initiated by expenditure of US Notes by the Federal Government.
charles3000: You may be right, if you view Roosevelt’s decision to end the ability of citizens to hold gold as some sort of end of convertibility…but others argue it is until Johnson kills silver certificates in the ’60s, and Nixon exits Bretton Woods, that convertibility was over. In any case, if you think about, any country with a sovereign currency, which is most countries but with an obvious exception for eurozone nations, is proof that TANs are likely to work. After all, sovereign currencies are government liabilities that are “backed” only by their ability to be used to settle tax payments, right? Best, Rob
Quite right, Rob. I am a disciple of that point of view. However I do not see convertibility as the issue but basic seigniorage and I would add the ending of US Note distribution in 1971 to your list. We still have convertibility of sorts. You can still get a stack of coins for your paper currency. My reference to FDR in 1933 was that he did change the paper currency and did it quickly from dishonest fiat currency to honest fiat currency.
««the government would be securitizing the future tax liabilities of its citizens, »
But only of the *poorer* citizens, as the wealthier greeks have large tax-free investments and incomes abroad.»
There is an interpreation of greek government debt history that says that the wealthy greek elites are using the Dickensian strategy of begging gang leaders, where they use the poverty and despair of their poorer serfs as bait for “development loans”; when these “development loans” arrive in Greece they are mostly distributed to the wealthy greek elites, who store them away in large Swiss accounts, while usually some of that is distributed to the poor and desperate to keep them complicit in the scheme (that’s a big difference from the governments in some third world countries who have such overwhelming physical power that they don’t pass on even a part of the “development loans” to their serfs).
When then the “development loans” run out, and creditors demand payback, the greek elites are quick to point out that this would hit hard the poor and desperate and that the “development loans” should be forgiven. And soon the message becomes that the poverty and despair of the poor greeks should justify giving more “development loans”. The wealthy greek elites have defaulted many, many times on their “development loans” in the past century, and the pantomime has gone on show as many times.
Note: the poverty and desperation of the greek poor are *real*, just as the begging gang leaders in Dickens times made sure that their beggars were authentically starving and sick and desperate.
Fortunately the poveryt and desperation of poor greeks while real is not quite as awful as that of the poor in Dickens times, when piles of stick thin bodies were carted off at the end of winter from London’s parks when ther snow melted and they could be seen.
Blissex: There is good reason to believe the Greek tax system in the very near future will not look like the tax system in the past. I am afraid I do not see the relevance of the rest of your comment, but I admit, I can be a little slow on the uptake sometimes. Best, Rob
«It is not hard, in other words, to create the demand and supply side policy mechanisms»
The playbook of national bankruptcy has not been significantly updated for hundreds of years, the story always follows one of few plots since a long long time ago, and from that playbook what is critical as to:
«that could reduce the odds of an ever-accelerating inflation.»
Is always the same thing: the ability to pay for imports in hard currency. It is indeed very easy to stimulate domestic demand with newly minted TanDrachmas or whatever else, and to *some* extent *domestic* supply will respond.
The big question is always what happens to *foreign* supply and usually autarchy does not work well for small open underdeveloped countries like Greece (or Italy or Venezuela or Argentina or …).
Iceland recently went bankrupt and did pretty well because fundamentally it does not not need to import energy and can export fish.
Latvia and Lithuania recently went bankrupt and did awfully badly because they manufactured little but mortgages and exported little but young people, and therefore 15-30% of their total population emigrated.
What the Troika want is for the greeks to repeat the latvian and lithuanian experience, perhaps as a tough-love lesson :-).
That Latvia/Lithuania experience sounds a lot like what happened in Newfoundland when the cod fishery died in the early 90s. Or, for that matter, Greece in the 50s and 60s. Even with large federal payments, for Newfoundland, it didn’t start to turn around until the discovery of offshore oil a decade later. For Greece, large-scale emigration ended when northern Europe and America introduced immigration quotas in the 70s, then became return migration of people with foreign pensions with accession to the EU. Greece’s main business right now, with the collapse of shipping and tourism during the GFC, seems to be as a cheap retirement home.
entreposto: Please see my reply to Blissex at 5:11 am Feb. 18th below, as it is relevant to your points I believe. Best, Rob
Blissex: I take your point on the issue of ability to pay for imports…because I raised it in my text (you did read the text before commenting I hope)…and dealt with it there too. My approach to this issue, to summarize are 1) use of TANs credit instrument as means of settlement in tax payments and private transactions I believe as well means euros are freed up for other uses, including payment of imports, and 2) TANs can be used to improve infrastructure and R&D needed to boost Greece’s tradable goods industries, especially with regard to your point, in areas where import substitution looks feasible. Finally, Greek banks will still be making loans based in euros. Greek banks are likely to be nationalized soon. Nationalized Greek banks can be directed to issue euro loans to Greek importers for “hard currency”, as you put it, to cover the import bill. I agree with your tough love assessment, though it is not without its risks, as some believe if Greece decides it is in fact worth their while to take an exit from the euro and the EU because of tough love negotiation by the Troika (Barclays economists, after the past week, for example estimate a 50% probability of exit), then the whole euro project could go down the tubes…especially if they exit and use the return to fiscal, monetary, and foreign exchange policy autonomy to pursue full employment policies with low inflation, which there are good reasons to believe ELR approaches can accomplish. Notice Greece has already successfully run a pilot ELR program, and the person who ran it is now a Deputy Minister in the Ministry of Labor and Social Solidarity…and she is very, very eager to scale it up as soon as she gets funding…which TANs provide…as does exiting the euro. Best, Rob
From what you write, it’s really hard to see why exiting the Euro is not the best approach. The biggest issue is that the Greeks do not want to do it, and from the point of a desire for ‘unity’ and other reasons, it’s understandable. I think if the Greeks left, Spain, then Portugal, then Italy would soon follow and the ‘pain’ would be greatly reduced. Spain and Italy are not really ‘underdeveloped’ countries, and together they probably make enough of everything (including food), to be viable … they would be trading amongst themselves for a time, until their currencies returned to appropriate values … probably not long.
SteveK9: I started with where I understood Syriza and Greek citizens stood when working I started working on the TAN approach a year and a half ago. Namely, Greek polls did not show a majority preferring exit, and Syriza did not appear to be willing campaign with the possibility of an exit on the agenda. Tsipras had, I believe, publicly foresworn that option. So I said given that constraint, what can be done, and how far can it be taken with the rules and political dynamics of the situation in mind. I was frankly surprised at how far it appears you can get with exiting austerity, without needing to exit the euro, using a TANs based strategy. Now Greek citizens may change their view about exiting if the negotiations sour further and Greece gets more cut off financially. And Syriza may say screw, we really are done horse trading with devout Austerians. But we know it is not a trivial thing to introduce a new currency: many disruptions are likely, as I and others have detailed. So best to be in the best possible shape if you decide to go. I would argue using TANs to a) finance an ELR/full employment oriented fiscal policy, b) establish an instrument that works much like a parallel currency, and c) possibly even being in position to use TANs to nationalize and recapitalize the banking system BEFORE you exit the euro might be one way to mitigate your risks on the way out the door. You then take the maxi-devaluation, manage the bank solvency and liquidity issues from a position of direct control, and you are ready to scale up a full employment fiscal policy, with the assistance of your newfound monetary sovereignty. The more you have parallel institutions up and running and ironed out to some degree, the better your chances in the transition. Best, Rob
Italy is a ‘small underdeveloped country’ ?
Why did not simply accept bonds and bills (with discount) as means of tax payments instead?
The TANs, as described, would circulate as money and, by being accepted in payment for taxes, are money! By going that way Greece would be exercising their sovereign right to issue their own currency for use in their own economy while still being in the Euro zone. The idea is brilliant.
Neil Wilson has a better idea that sticks it up the IMF, using the IMF’s own currency, the Special Drawing Right (SDR). http://www.3spoken.co.uk/2015/02/greece-and-art-of-liquidity.html
Charles – I believe that is correct. Consider the following. We have centuries of examples of business issuing bills of exchange, a credit instrument largely for financing inventory and working capital, and this credit instrument was adopted as a means of settling transactions by third parties. TANs are a hybrid credit instrument…except unlike bills of exchange, they are “backed” by design by the government’s willingness to accept them as payment for taxes…at a 1 TAN = 1 euro rate. We also have the example of provincial debt settlement voucher issued by provinces and used as a means of settlement by the private sector parallel cur in Argentina for two decades from 1983 on. They were called brocades. 1 bocade was equal to 1 peso, though “convertibility” was constrained. See section III here: http://www.veblen-institute.org/IMG/pdf/a_plea_for_a_european_monetary_federalism.pdf
I could go on – for example, the US dollar is used in private market transactions, and it is a liability of the US government, with the government only liable to receive as a means of settlement for taxes, right? – but you already get it, I can see. Best, Rob
Thanks for that link. I read the first paragraph and totally buy the notion. The national TANs would acquire an exchange rate proportional to what they would buy in each country which is normal and proper. You could think of it as the EURO acting as gold in the process. Am I thinking right?
charles3000: I do not expect TANs would be very acceptable in external trade transactions, as explained in my text, unless foreign firms have Greek taxes to pay, or say Greek import surcharges of some sort to pay. But it always possible consenting adults would create exchange markets in country TANs, and then relative inflation rates would of course matter to those exchange rates. But unless I am missing something, this is a side issue, and there are much more important nuts to crack as Greece is hanging by a bit of a thread. Best, Rob
Joao: See my response to you below (some how it got placed further down in the comment section). Best, Rob
So instead of Greece using one foreign currency they would be using two foreign currencies; the Euro and the TAN! The Euro is already a “tax credit”. In fact the only thing that gives the Euro a “value” is that all Eurozone member states, insist you use it to pay your taxes.
The only place you can get Euro from is the ECB, they are the monopoly supplier (issuer) of the Euro. The ECB has a bottomless pit full of Euro that it will never empty. It costs the ECB just the price of a computer keyboard, to enable it to press a few number keys then “send” to any Bank that has a “reserve” account in the Eurosystem. It doesn’t matter how big the ECB’s balance sheet gets, it is only a scoreboard in reality, yet it makes the member state’s Treasuries “borrow” Euro from the secondary Bond market at inflated rates for “discipline” reasons.
The Eurozone does not have a workable FISCAL or MONETARY structure. A sovereign fiat currency should have one Treasury as the “spender of first resort”; the EZ has 19. A sovereign fiat currency should have one Central Bank as the “lender of last resort”; the EZ has 20. Until the EZ FISCAL and MONETARY structure is organised the same way that the US Federal Reserve organises the finances of the fifty states, the Eurozone and, in fact, the whole EU just ain’t gonna work.
acorn: Agreed on euro is also a “tax credit”, and part of the secondary goal of introducing TANs that I had in mind from the start was to use TANs to reveal the true nature of the currencies most of us use these days. On your two foreign currencies comment – I get where you are going with this but not sure the analogy quite fits. For example, would you view the US dollar as foreign currency for California, or New York, or any US state for that matter? On your last paragraph advocating fiscal and monetary integration and rationalization, logically I agree, but from a politically practical point of view I am very skeptical it will ever quite get there. I like Jorg Bibows proposal (for a summary of Jorg’s brilliantly designed proposal, see Levy Economics Institute Public Policy Brief here: http://www.levyinstitute.org/publications/the-euro-treasury-plan) and think it is plausible and logically coherent, but citizens in the countries enduring the fiscal austerity jackboot do not have the luxury or sitting around waiting for the policy makers of the core to figure this out and execute it. So the TAN proposal is by design on that any eurozone nation can impose unilaterally, if it has the political will to do so, and is willing to challenge the prevailing policy paradigm. Syriza appears to have both, as does Podemos, though that effort looks a little ragtag still to my admittedly nearsighted eyes. Best, Rob
Joao: Because if you do not accept all bonds and bills in that fashion, you are likely to trigger default clauses on the remaining outstanding bonds. And if you are still “financing” a fiscal deficit with the issuance of bonds and bills, you are still at the whims of investors, households still have to save out of income flows to buy bonds, which creates a leakage of demand from the economy in the time between when money is saved by the household and the time it is spent by the government, and you have to pay the interest rates that investors require, and you face future interest rate payments that take up a share of future expenditures and will likely go to high income households that tend to have a high propensity to save out of income flows, not spend, and you face refinancing risks in the future, as Greece is experiencing today, and you are still subject to their evaluation of credit agencies, with the possibility of being able to issue your bonds to a declining population of potential investors as credit ratings go lower (since some investors cannot own lower rated bonds) etc. So from that perspectives, TANs are a better policy solution than Mosler Bonds, which is what you are essentially advocating above. TANs also have the potential of breaking the widespread misunderstanding about the true nature of money, and they may also have the beneficial effect of revealing the fallacy that bonds and bills “finance” fiscal deficits in countries with their own sovereign currency. And Charles, thanks for the praise, and your example may be applicable, though it may be earlier in the 30s, when Roosevelt abrogated the ability of US households to hold gold, and when bank rules were changed to allow them to buy larger quantities of federal government debt, that the characteristics of US money changed, and fiscal policy was given more running room. Greenbacks in the Civil War are another example, though not obvious to me the led to any kind of subsequent boom, as 1873-1893 (roughly) was considered a period of deflation and several financial panics I believe (though admittedly this was after Greenbacks were no longer issue, – I think some were even retired- and there was less scientific progress and innovation associated with that war effort than WWII, from which I believe, for example, the airline industry emerged in a more advanced state).
Introducing forced parity with the euro would be just as having Drachma pegged to Euro. TAN would lose parity in domestic open market and if the government would attempt to prop it up by increasing taxes, that policy would be self defeating since the Greek government would no longer be able to “pursue the expansionary fiscal plans that are required to return their economies to a full employment growth path.” Which is what usually happens when pegs are introduced.
Greece should pull the plug and let Drachma or TAN float and go on from there, even if it means short term drops in standards.
«just as having Drachma pegged to Euro. TAN would lose parity in domestic open market and if the government would attempt to prop it up by increasing taxes,»
Well, part of the plan is to drastically increase the levels of taxation, which is of course a pure illusion.
«that policy would be self defeating»
The trick of course is to issue more TANs than there are taxes to pay, but not too many more so contain the devaluation of the TANs,
Also the talk by the talk by the author about avoiding default on the euro bonds is pure illusion: if the greek government collected taxes in TANs, where would it find the Euros to pay back the euro bonds?
The plan is basically to default on the euro bonds and then force the unemployed, sick, low paid workers, pensions to lend their income to the government by being paid in TAN bonds, because nobody who had the power to choose between being paid in Euros or TANs would choose the latter.
«since the Greek government would no longer be able to “pursue the expansionary fiscal plans that are required to return their economies to a full employment growth path.”»
But the TAN plan in practice is pure monetary policy as it has no credible fiscal component. It is just “helicopter money”. Indeed its entire rationale is to enable “helicopter money” because since the Euro is only issued by the ECB eurozone government cannot just print money and throw it from helicopters.
And as to “helicopter money” and how to get back the Greek economy to growth one has to be clear as to what is holding it back: are the incomes of greek citizens constrained by lack of finance or lack of imports?
Currently during a ferocious depression the greek trade balance is roughly balanced. Would higher levels of income financed by “helicopter money” result in exports growing faster than imports or viceversa?
Because if at higher levels of greek incomes imports were to grow faster than exports TANs are no good because no foreign supplier would accept them.
As I pointed out elsewheres TANs are designed as second class currency for second class citizens, it is basically company store coupons with the purpose of inflating away the payments by the greek governments to welfare recipients and other weak and poor categories who depend on the greek government for their income.
Blissex: In responses to mladefer and charles300o I argue there are several reasons to believe the demand for TANs will increase as they will finance fiscal stimulus that will raise domestic income flows and hence raise the demand for means to pay an increasing tax bill (even before tax reform occurs) And TAN demand will be a multiple of the tax bill as TANs are likely to be adopted as a means of settlement in the private marketplace as well. Through these positive feedback loops, they might even occasionally, for short periods of time, trade at a premium to euros. Please take a look, as I do not have time to repeat myself. On Greek government obligations denominated in euros, TANs will free up euro holdings of the government for this. And there is nothing in the TAN proposal that stops the Greek government from continuing to issue euro denominated bonds. In the likely case of nationalization of Greek banks, you may even have a captive buyer of sorts. I have treated the import constraint question in a prior response, so I will not repeat myself, as you seem prone to do. Again, there are multiple places where you appear to be describing a plan that bears little resemblance to the one outlined above (did you really read my original text?), which is not very helpful. Best, Rob
mladefer: Please see my above response to charles3000. The “demand” for TANs, since they will, as I argue above, and history confirms, be adopted for private market transactions by consenting adults, will be a multiple of the taxes due. TANs could arguably trade in private exchanges at a premium, though as I argue in my essay, arbitrage suggests such premiums would be short-lived. Also note if TAN finances and increase in fiscal expenditures, as we could expect with Syriza’s various campaign promises, household and business incomes will be rising commensurately. So too will required tax payments, especially if Syriza goes after tax evasion as they appear determined to do. So too will the demand for all forms of means of settlement in private transactions, including TANs. So to the contrary, I see multiple virtuous cycles supporting the “demand” for TANs. Best, Rob
«not simply accept bonds and bills (with discount) as means of tax payments instead?»
Mainly because the unspoken plan is to default on existing bonds, and to use the TanDrachmas as a way to pay the poor and weak citizens, like pensioners, low paid government employees, the unemployed, with newly issued debt.
The overall goal of the TAN plan is to create two currency economies in Greece: a hard currency one where the government pays businesses in valuable Euros, because otherwise businesses won’t sell to the government, and a soft currency one where the poor and weak who depend on the government for their income are given pieces of paper that cannot be used to buy imported stuff like food, medicine, fuel. Basically it is a neoliberal policy to cut drastically pensions, welfare, wages of government employees and other dependents.
Unless you want to believe that th government will issue so few TANdrachmas that they will maintain near parity with the Euro.
Blissex: That may be your plan. That is not the TAN implementation I have outlined above. Please read the essay before you comment on it so we can have a productive discussion about it, though I am happy to hear your recommended plan for Greece as well, since I would not pretend to have all the answers to what is admittedly a very challenging situation for Greece. Best, Rob
If the Greek government pays government employees and pensioners, and transfer-payment-recipients in G-TAN, it will be introducing enough G-TAN into the system that it will be impossible to maintain any sort of even broad-band ‘peg’ to the Euro.
The notion that euro holders in Greece will be enticed to exchange their euro for G-TAN at the G-TAN issuer’s preferred exchange rate so as to procure the necessary sums of G-TANs to pay their now G-TAN denominated tax obligations is a bit of a fantasy, given realities on the ground and historical experience. The vast majority of people who will be paying their taxes (in G-TAN or anything else) are those subject to withholding.
GrkStav: See my response to charles300 above. And I doubt the tax structure in Greece as it stands now will be the same tax structure in the future, if I understand Syriza’s platform correctly. But I could be wrong about that. And note as I detail also in the response to charles300, I see many reasons why TANs will be dispersed well beyond the direct recipients. Best, Rob
«Basically it is a neoliberal policy to cut drastically pensions, welfare, wages of government employees and other dependents»
I guess that’s what eventually Republican (and not just) governed states and municipalities in the USA will do as a rule instead of as an exception: they will pay businesses in regular liquid USA dollars, and will make payments for welfare, pensions and low wages in Special Welfare Stamps, only accepted within the state or municipality.
This will be much easier than simply cutting pensions, wages, welfare: they will instead continue to be paid at full face value in rapidly depreciating “funny money”. The result will be large tax cuts for property owners and high income recipients.
Blissex: See my reply to charles3000 above. See also “market maker” and arbitrage comments in my essay above…which you did read, right? Best, Rob
germany,holland and finland want southern european economies in austerity-debt spirals to drag down the value of the Euro against other exporting nations to make German goods cheaper and more competative.Underhand Currency Manipulation.If Greece left the Eurozone, tourism would boom with lower prices and also foreign investment, particularly from China, would take advantage of lower costs. The Troika already panicked and stopped Papandreou holding a Referendum on a Grexit before.
taxhaven: If we observe the path of the euro exchange rate, at least against the US dollar, episodes of depreciation are most correlated with a) uncertainty on intro of euro, b) episodes of austerity induced crisis, as you point out, and c) indication the ECB is headed into unconventional monetary policy tools like quantitative easing. Maybe there is a wing of core country exporters that favor currency depreciation, but then why give your central bank the single mandate of price stability? I think if you look historically you will find German policy makers have a strong preference for an appreciating currency…which might suggest the financial wing of the German ruling class has the upper hand over the export wing, though probably reveals the still ongoing scars of the Weimar hyperinflation that so horribly blind the German policy elite. I suspect a Greek exit might be a little more challenging than you posit, unless Syriza is prepared, day one, to rapidly tackle the logistics of rolling out a new currency, execute a full employment fiscal policy, recapitalize the banks, impose capital controls, and keep export earnings up high enough to support the import of necessary tradable goods. A tall order, even for a well seasoned administration filled with very adept and innovative technocrats, and enjoying widespread popular support. Best, Rob
Warren Mosler seems to think that TANs have been outlawed by the Troika -if I understand his meaning correctly.
Peter: I have run this by other legal people, and their is a good discussion in the Naked Capitalism comments on this piece (under the same name, Get a TAN, Yanis, on Monday) about running afoul of Article 128 of the Lisbon Treaty, which does not appear to apply to TANs for various reasons. I have also run TANs by Warren and never heard him get specific about the basis for a legal challenge, though you can be sure it will piss off the Troika, and there will be challenges. See the opening comments in Yves’ intro to my same article on Naked Capitalism as it deals with this issue, and using this strategically as well. Best, Rob
Peter: Also, I am afraid the Mosler Bonds Warren has proposed previously, though appears to be downplaying now that he has decided in the past week that a Greek exit is the best way forward, might be viewed as having a senior claim on tax revenues, and hence their use could trigger default clauses in other outstanding public debt. So there may be more a legal problem for Mosler Bonds straight out of the gate than for TANs, though as I wrote, we can expect the Troika will be willing to pay big money to big lawyers to take TANs to court. By the time the ruling is complete, the TAN experiment will have demonstrated its value (or so I believe for a variety of reasons stated above), and politically it will be virtually irreversible. Just take a look at how long it has taken German courts to rule on unconventional ECB monetary policies like OMT. Gotta love our sclerotic and increasingly Kafkaesque legal systems – which can come in handy from time to time. Best, Rob
Thanks all for your answers.
Any thoughts on this http://www.theguardian.com/commentisfree/2015/feb/17/currency-scheme-1930s-save-greek-economy-eurozone-crisis?CMP=share_btn_tw or this http://alt-money.tribe.net/thread/70e5eb29-853d-44ca-9faa-b789d1757037 ?
Joao: Yes, I saw this piece earlier today on complementary currencies like the worgl, and a lot of the thinking I did on the TAN approach back in the fall of 2013 was influenced by a review of the work Bernard Lietaer has done in this area. It is quite amazing what is going on, and very few people know about it, but once you begin to really think about money, what it does, and what it could do, all kinds of possibilities open up. Here is a really good place to start http://www.lietaer.com learning about this stuff. His book Rethinking Money is also a very good nontechnical review of complementary currencies in use now and through recent history, though to be clear, I do not agree with everything he advocates. The great irony is Bernard played an important role in the early design and negotiations of the EMU! Best, Rob
The first article suggests three ways: 1. making banks trust institutions, i.e. 100% reserve requirement 2. re-regulate/more regulations and 3. negative interest rate on money. E. Warren would agree with “2” but I don’t, the problem is intrinsic in fractional reserve banking and regulation will not cure it. Jamie Dimon agrees with me too based on his remark to E. Warren as quoted in her book. I would suggest the best is “1.” AND “3” not one or the other.
The second article describes a history of the success of free money with negative interest on hoarded cash.
I’m sorry if i misunderstand something, but if TANs can be used to pay taxes, won’t that mean that a decreasing amount of their tax revenue will be paid in euros, and thus they will have less of an ability to pay their euro denominated debt? If a part of their euro tax revenue needs to be used for paying euro denominated bonds, won’t that endenger a dangerous sprial were they eventually will have to use more and more of their euro tax revenue to pay debts and instead use TANs to pay normal expendetures?
Arilando: I believe I addressed this issue in one of my replies to blissex above, but in short, a) use of TANs to finance expenditures frees up existing stock of government held euros for exactly the purpose you mention, b) there is nothing to prevent citizens from paying taxes in euros, c) there is nothing in the TAN proposal to prevent the Greek government from continuing to issue euro denominated bonds (and arguably, if TANs help get economic growth back on track, investors will perceive less of a credit risk, and so demand less of a risk premium be built into the yields they require to buy these bonds), and d) TANs may facilitate the nationalization and recapitalization of the Greek banking system, which is practically unavoidable given the loan losses they are still sitting on, and new bank loans and securities purchases create new euro deposits (so government sells debt directly to banks, banks credit euro denominated deposits to government, and government services euro denominated liabilities, of which there will over time likely be a diminishing stock as TAN financing takes a large share of financing flows each year). I also believe I have addressed the issue of getting euros to buy imports above. That Greece reportedly has a current account surplus now helps, as exporters earn euros that can cover the import bill. Greece, nevertheless, has a lot of work to do to get its tradable goods sector in shape. The use of TANs to finance trade related infrastructure upgrades, and to finance R&D and technical assistance in the tradable goods sector, may help the situation in the medium to long term in any case. Best, Rob
From where will the money come to pay the tax anticipation notes? you’re squeezing the ordinary greek, many of whom were layed off from their employment situations. meanwhile the strategy of using a financing like that, was/were used in economies not bound by a currency not their own. In the case of british colonies, those were that and had commodities or other contributions to their sovereign. in this case is that Germany? Germany is on its mission to occupy and take over europe using the EU ‘free’ trade euro strategy for itself and holy roman empire vatican. this also is why greece yet again for a 3rd time is enduring a war, but in this case it’s cold, asymmetric war using the euro and a ‘free’ trade strategy favoring german national champions, rather than german panzers used ina hot war as were the 2 previous hot wars for and with its silent partner the Vatican. if the CIA is saying in an utterly idiotic, farfetched reach that Iran wants to restore the persian empire of old, the for real elephant in the room with the largest, oldest existing feudal empire in the world, is the Roman catholic church, slobbering all over greek holy shrines that belong to the Greek orthodox church.
Greece needs to restore its tariffs against german and other imports from EU ‘national champions’. in restoring tariffs against those imports, it does have to leave the EU ‘free’ trade zone. Germany at Maastrict anyway set up the EU to favor german national champions, also in order to keep germans employed in those high margin production companies. in leaving that german asymmetric war strategy ie, the EU, Greece is to restore the drachma, as well as restore tariffs against the imports, and get its feet under itself.
In the US Constitution’s Article 1 Section 8, the founders of the United States of America and earlier on the British and Dutch successfully used tariffs, rather than direct taxation ie, wage/salary tax from which TANs are hunting for money. Simon Johnson’s book, “White House Burning” (Dr Johnson is the former Chief econonomist of the IMF) addresses this.