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Creative Ways to Promote MMT

We always knew our readers were a smart bunch, but we had no idea how imaginative you are! Please keep sharing your creative endeavors with us (merchandise, animated videos, signs/slogans, etc.), and please keep spreading the word about MMT and NEP.  Understanding the monetary system is the first step in a long journey toward creating a better world for us all.

Courtesy of Tschaff Reisberg

MMT in the Upper Midwest

Readers in the Rochester (Minn.), Waterloo (Iowa), and La Crosse (Wis.) area can attend a public lecture by Stephanie Kelton on Wednesday, September 28 at Luther College in Decorah, Iowa.  Stephanie’s talk is at 7:00 p.m. in the Center for Faith and Life Recital Hall.  For more information, visit the Luther College website.  http://www.luther.edu/publiclife/

Don’t forget that beginning this Friday, NEP will kick off a new series called “Say W-h-a-a-a-h-t?” We’re keeping track of the craziest, boldest, and most surprising statements, stories, and videos we run across each week and we’ll share them with you every Friday. 

Keep sending us your favorites and watch for ours beginning next Friday. Tweet your recommendations to @deficitowl, submit them through Facebook at New Economic Perspectives, or e-mail them to us at [email protected]

Beginning next week, NEP will kick off a new series called “Say What?” We’ll keep track of the craziest, boldest, and most surprising comments we run across each week and we’ll share them with you every Friday. Send us your favorites and watch for ours beginning next Friday.

Tweet your recommendations to @deficitowl, submit them through Facebook at New Economic Perspectives, or e-mail them to us at [email protected]

Join In! We’re Talking with Mark Thoma on Twitter

We engaged Mark Thoma of Economist’s View on Twitter this morning. The debate is raging. Follow both of us on Twitter to watch things unfold.  It’s not pretty.

Follow us @deficitowl

Follow him @MarkThoma

With $300 Billion, The President Could Reduce Unemployment to Zero

By L. Randall Wray and Stephanie Kelton

On Thursday night Barack Obama will deliver his highly anticipated jobs speech. At this point, only those closest to the president know exactly how he intends to help spur the economy and create jobs, but reports suggest that he is mulling a $300 billion jobs package that includes more of the same—a one-year extension of the payroll tax cut, a continuation of unemployment benefits, some additional spending on infrastructure and tax incentives to encourage businesses to hire and invest in new capital. Too little of what will work and too much of what won’t for an economy that’s teetering on the brink of a double-dip recession and a president who is running out of time to deliver jobs.  [Read the entire article here]

A Preview of Thursday’s Jobs Speech: He’s Got Nothin’

Three months ago, when the May employment report revealed that the economy added just 54,000 jobs, President Obama urged the American people “not to panic.” (I urged the opposite here.)  Now the August report is in, and oh what we wouldn’t give for 54,000 new jobs. The Republicans blame it all on uncertainty — employers are worried about the threat of new regulations and higher taxes, so they won’t risk parting with their mountains of (record-high corporate) profits (Mike Norman debunks the Republican argument here.). Obama essentially agrees with the Republicans.

First he blamed the doomsdayers for pointing out that the recovery was faltering, saying that their dismal warnings only hamper confidence, causing people to spend less and save more. Then he blamed lackluster job growth on the uncertainty that was created during the standoff over raising the nation’s debt-ceiling limit. Striking a deal to cut trillions in future demand (oops – I mean nasty deficits) was supposed to restore confidence among sellers. Like the Republicans, President Obama (is it really necessary to distinguish the two any longer?) also believes that red tape and regulation are major deterrents to the recovery and that ratifying some free trade deals and overhauling our patent laws will provide a substantial boost to the economy. Unlike the Republicans, the president also wants to see more spending on infrastructure and an extension of the payroll tax cut (possibly to include employers this time), but there is nothing truly bold or imaginative in any of this — certainly nothing that is going to prevent a double-dip (if it hasn’t happened already), and nothing that’s going to create millions of jobs within any reasonable time frame.

So what will we hear on Thursday?  Look mostly for carrots with small price tags.  Probably a lot of talk about confidence, (un)certainty and incentives.  (Don’t make a drinking game out of it, or you’re liable to miss the second half of the speech.)   
Fortunately, there’s plenty of time to craft something different.  Here  — courtesy of Warren Mosler — is a great template.  It’s the speech Warren says he would deliver if he were president.  (Hey, there’s an idea.)
My fellow Americans, 
let me get right to the point.

I have three bold new proposals to get back all the jobs we lost, and then some.
In fact, we need at least 20 million new jobs to restore our lost prosperity and put America back on top.

First let me state that the reason private sector jobs are lost is always the same.
Jobs are lost when business sales go down.  
Economists give that fancy words- they call it a lack of aggregate demand.

But it’s very simple.  
A restaurant doesn’t lay anyone off when it’s full of paying customers, 
no matter how much the owner might hate the government, 
the paper work, and the health regulations.
A department store doesn’t lay off workers when it’s full of paying customers,
And an engineering firm doesn’t lay anyone off when it has a backlog of orders.

Restaurants and other businesses lay people off when their customers stop buying, for any reason. 
So the reason we lost 8 million jobs almost all at once back in 2008 wasn’t because all of a sudden 
all those people decided they’d rather collect unemployment than work.
The reason all those jobs were lost was because sales collapsed.  
Car sales, for example, collapsed from a rate of almost 17 million cars a year to just over 9 million cars a year.
That’s a serious collapse that cost millions of jobs.

Let me repeat, and it’s very simple, when sales go down, jobs are lost, 
and when sales go up, jobs go up, as business hires to service all their new customers.

So my three proposals are specifically designed to get sales up to make sure business has a good paying job for anyone 
willing and able to work.

That’s good for businesses and all the people who work for them.

And these proposals are bipartisan.  
They are supported by Americans ranging from Tea Party supporters to the Progressive left, and everyone in between.

So listen up!

My first proposal if for a full payroll tax suspension.
That means no FICA taxes will be taken from both employees and employers.

These taxes are punishing, regressive taxes that no progressive should ever support.
And, of course, the Tea Party is against any tax.  
So I expect full bipartisan support on this proposal.

Suspending these taxes adds hundreds of dollars a month to the incomes of people working for a living.
This is big money, not just a few pennies as in previous measures.

These are the people doing the real work.  
Allowing them to take home more of their pay supports their good efforts.
Right now take home pay is barely enough to pay for food, rent, and gasoline, with not much left over.
When government stops taking FICA taxes out of their pockets, 
they’ll be able to get back to more normal levels of spending.
And many will be able to better make their mortgage payments and their car payments,
which, by the way, is what the banks really want – people who can make their payments.
That’s the bottom up way to fix the banks, and not the top down bailouts we’ve done in the past.

And the payroll tax holiday is also for business, 
which reduces costs for business, 
which, through competition,
helps keep prices down for all of us, which means our dollars buy more than otherwise.

So a full payroll tax holiday means more take home pay for people working for a living,
and lower costs for business to help keep prices and inflation down,
so sales can go up and we can finally create those 20 million private sector jobs we desperately need.

My second proposal is for a one time $150 billion Federal revenue distribution to the 50 state governments 
with no strings attached.  
This will help the states to fill the financial hole created by the recession, 
and stay afloat while the sales and jobs recovery spurred by the payroll tax holiday
restores their lost revenues.

Again, I expect bipartisan support.  
The progressives will support this as it helps the states sustain essential services, 
and the Tea Party believes money is better spent at the state level than the federal level.  

My third proposal does not involve a lot of money, 
but it’s critical for the kind of recovery that fits our common vision of America   
My third proposal is for a federally funded $8/hr transition job 
for anyone willing and able to work, 
to help the transition from unemployment to private sector employment.
The problem is employers don’t like to hire the unemployed, 
and especially the long term unemployed.
While at the same time, 
with the payroll tax holiday and the revenue distribution to the states,
business is going to need to hire all the people it can get.
The federally funded transition job allows the unemployed to get a transition job,
and show that they are willing and able to go to work every day,
which makes them good candidates for graduation to private sector employment.

Again, I expect this proposal to also get solid bipartisan support.
Progressives have always known the value of full employment, 
while the Tea Party believes people should be able to work for a living, rather than collect unemployment.

Let me add here that nothing in these proposals expands the role or scope of the federal government.
The payroll tax holiday is a cut of a regressive, punishing tax, 
that takes the government’s hand out of the pockets of both workers and business.

The revenue distribution to the states has no strings attached.  
The federal government does nothing more than write a check.

And the transition job is designed to move the unemployed, who are in fact already in the public sector,
to private sector jobs.

There is no question that these three proposals will bring the increase in sales we need to 
usher in a new era of prosperity and full employment.

The remaining concern is the federal budget deficit.  

Fortunately, with the bad news of the downgrade of US Treasury securities by Standard and Poors to AA+ from AAA,
a very important lesson was learned.

Interest rates actually came down.  And substantially.

And with that the financial and economic heavy weights from the 4 corners of the globe 
made a very important point.

The markets are telling us something we should have known all along.
The US is not Greece for a very important reason that has been overlooked.
That reason is, the US federal government is the issuer of its own currency, the US dollar.
While Greece is not the issuer of the euro.

In fact, Greece, and all the other euro nations, have put themselves in the position of the US states.
Like the US states, Greece and other euro nations are not the issuer of the currency that they spend.
So they can run out of money and go broke, and are dependent on being able to tax and borrow to be able to spend.

But the issuer of its own currency, like the US, Japan, and the UK, 
can always pay their bills.
There is no such thing as the US running out of dollars.
The US is not dependent on taxes or borrowing to be able to make all of its dollar payments.
The US federal government can not go broke like Greece.

That was the important lesson of the S and P downgrade, 
and everyone has seen it up close and personal and they all now agree.
And now they all know why, with the deficit at record high levels, interest rates remain at record low levels.

Does that mean we should spend without limit and not tax at all?
Absolutely not!
Too much spending and not enough taxing will surely drive up prices and inflation.

But it does mean that right now, 
with unemployment sky high and an economy on the verge of another recession,
we can immediately enact my 3 proposals to bring us back to 
a strong economy with good jobs for people who want them. 

And some day, if somehow there are too many jobs and it’s causing an inflation problem,
we can then take the measures needed to cool things down.

But meanwhile, as they say, to get out of hole we need to stop digging,
and instead implement my 3 proposals.

So in conclusion, let me repeat these three, simple, direct, bipartisan proposals
for a speedy recovery: 

A full payroll tax holiday for employees and employers
A one time, per-capita, $150 billion revenue distribution to the states
And an $8/hr transition job for anyone willing and able to work to facilitate 
the transition from unemployment to private sector employment as the economy recovers.

Thank you.

A Tale of Three Germanys: Is Germany Preparing to Exit the Euro?

Hans-Olaf Henkel’s piece in today’s Financial Times is making waves. Okay, Henkel is an odious man, but my view, which was once considered borderline crazy, is now getting more serious consideration. The Germans were willing to go into a currency union because by construction that agreement removed the weapon exchange rate depreciation from its competitors. German real wage discipline, labor productivity gains, and engineering innovation could not be undercut at the stroke of a pen. Recall that there are basically 3 Germanys:

Germany #1 being the Bundesbank and “finanzkapital”, which retains huge phobias about the recurrence of Weimar-style hyperinflation, and retains an almost theological belief in “sound money”.  It is the Germany of closet gold bugs and Austrian economists, who believe in hard money, “responsible” fiscal policy and the like, and who were basically always antithetical to the euro as a big and broad union.  Then you had the “Europeanists”, led by Kohl who essentially argued that you solve the “German problem” by binding Germany ever more fully into a pan-European framework, the currency union being a key part of that.  The swing vote was Germany #3, Industrial Germany which bought into the idea of the currency union precisely because it locked Germany’s industrial competitors at a fixed exchange and removed the expedient of devaluation.

It seems to me, however, that the swing vote is beginning to have 2nd thoughts, as they wrongly consider the “costs” to the country through these repeated bailouts.  This concern seems to be overriding the obvious benefits of having “profligate” Mediterranean countries buying yet more German imports.  It is striking to me that Henkel, a big player in the German industrial complex, is now leading the charge for withdrawal.  It might suggest that an important political dynamic in Germany has shifted. German policy makers would have to conclude there is no plausible exchange rate for the Neuro and the Pseudo (or Soro?) that would cause a problem for their current account surplus and their export led growth strategy. Or they would have to conclude that is the “least worst” option given the political backlash of more subsidized loans to Greece, Portugal, etc.
The other point is this:  Multinationals don’t care about where demand comes from as long as it is increasing somewhere and they are allowed to go after it. Labor arbitrage is the additional icing on the cake.  So policies that build unsustainable imbalances between countries and have bad social outcomes are fine with them as long as they can roam the globe freely to take advantage of the demand wherever it pops up.  

This probably remains true so long as the ultimate price of these polices don’t get shared with the multinational (in the form of taxation or additional regulation). So far the multinationals have it good in that costs are falling disproportionately on others. That could well change if there was a “solidarity” tax imposed on profits instead of the populace.

Jackson Hole will be a Black Hole for Those Hoping for QE3

By Marshall Auerback and Rob Parenteau

Those leading the charge for “fiscal consolidation” now seem positively shocked by the violent gyrations in the stock market, as expectations rapidly seem to be shifting toward an “L” shaped recovery or worse – a possible global recession. To those of us on this blog who have consistently downplayed the prospects of global recovery in the midst of widespread private sector AND public sector retrenchment, none of this sadly comes as a surprise.  We are, as Bill Mitchell noted recently, experiencing a “self-inflicted catastrophe”, largely because of dangerously destructive myths in regard to the efficacy (or lack of it) in regard to fiscal policy.  But in spite of the shrill rhetoric of the fiscal austerian brigades, the markets are beginning to intuit that a nation cannot have a fiscal contraction expansion when all other spending is flat or going backwards and yet that remains the general trajectory of policy. 
To reiterate, today’s growing economic malaise is unsurprising to those of us who viewed the upturn in the global economy in the aftermath of the Lehman bankruptcy largely as a consequence of the coordinated fiscal expansion that was undertaken at that time, NOT the embrace of “quantitative easing” or other forms of monetary policy ‘stimulus’.  By the same token, it is equally easy to see the current accelerating downturn as a product of the premature withdrawal of said stimulus.  

No less than the new IMF head, Christine Lagarde, has recently counseled against letting fiscal brakes stall global recovery, even though the IMF has hitherto consistently been at the forefront of calling for more “fiscal consolidation.”  Indeed, it is manifestly clear that the governments which have drunk from this particularly glass of Kool-Aid most enthusiastically – Ireland, Greece, Latvia, Spain – are now seeing depression-like economic data.

Given prevailing political paralysis and the obstinate desire of politicians to make things worse as unemployment grows and riots continue to multiply on the streets (see the UK as Exhibit A), a number of commentators and policy makers have shifted focus back to monetary policy. One picks up this kind of chatter on Wall Street, where there exists a residual hope that somehow Big Ben will use this weekend’s Jackson Hole gathering to ring the bell for a form of QE3.
It’s hard to see why this should work out any better than QE2 or other variants of quantitative easing tried before.  (See herehere and here for fuller explanations.)  As Randy Wray has pointed out several times, “quantitative easing” is a slogan, not a policy.  During the entire period in which it was implemented, US GDP grew at a sluggish 1-1.5% (or thereabouts) and unemployment actually rose. 
Notwithstanding the evidence, hope still springs eternal in the financial markets, where there remains the perennial hope that the Fed will “do something.”  And, as market practioners we hear this sort of guff every single day.  There appears little doubt that Mr. Bernanke will try to throw more spaghetti at the wall, regardless of internal discord at the Fed or the external political heat. But we are at a loss as to which strand of spaghetti will actually stick in terms of a) capturing the imagination and confidence of investors enough to put the risk on trade back on for say another 4-6 quarters (or even 4-6 months), and/or b) driving US real GDP growth above trend for 2-3 years. Which makes us think unless there is some nuclear option we believe he is prepared to launch – like pegging S&P futures for 10%+ annual appreciation or something really out of the box like that – there is not much to be gained by trying to anticipate his next flinch.
We are at the point of watching the trout thrash around at the bottom of the boat, and I think part of the higher required risk premium we are in seeing in asset markets today is that the Fed Chairman is now understood to be no more powerful than the Wizard of Oz. And this is a very, very big safety blanket that is being ripped out of the hands of a whole generation of institutional investors (especially the long only guys). Part of the severity of the recent corrections has to do with the growing recognition that the prior fiscal and monetary policy approaches have been either exhausted or politically blocked, and so now it is up to the private marketplace and the invisible hand to do its magic.
Maybe an announcement of pegging the 10 year at 1% until real GDP has grown for above 3% for 1-2 years would do it – but we are already near 2%, and people seem to realize the interest rate sensitivity of economies is lower after balance sheet recessions. Maybe an open ended QE with a similar real GDP criteria would do it; but investors must be wondering why QE2 failed to keep equity prices on a permanently higher trajectory. 
Furthermore, they may have noticed that the ensuing commodity price inflation tends to trip up consumers who face slow job growth, low wage growth, and credit contraction.  If anything, QE2’s impact was antithetical to growth prospects to the extent that it encouraged additional speculative activity in the commodities complex, helping to generate additional price pressures in food and oil at a time when stressed consumers could ill-afford such rises.  More recently, thanks to investment, speculative and manipulative demands for oil, the Brent oil price has held up recently as the stock market has swooned.  So there is a risk that the introduction of a third round of quantitative easing could well re-establish these trends.
There is something of a precedent: the first half of 2008.  The global recession and credit crisis was underway.  Stock prices were falling.  Commodity prices including the price of oil should have fallen.  Instead, thanks to the above financial market demands, the oil price soared.  Without doubt that deepened the Great Recession. In the event that a new form of QE3 was introduced this weekend, that would represent is the worst of all possible worlds in terms of global growth prospects moving forward. At the very least, if the recent incipient perverse divergence in the Brent oil price and stock prices continues, the risk of a recession in the U.S. rises. 
Maybe the announcement that the Fed disagrees with the Treasury about the wisdom of an ever strengthening dollar, and will henceforth unilaterally intervene to produce a steady 10-20% depreciation per year until the real GDP criteria is hit, is enough to capture investor imaginations, but we suspect they would then begin to wonder about where beggar thy neighbor policies lead.
The fact that the markets are now calling for more monetary stimulus (even as most quail against any additional fiscal stimulus on the misguided grounds of “national insolvency” ) simply reflects the intellectual cul de sac at the heart of most mainstream economics, with its manifestation of the neo-liberal bias towards monetary policy over fiscal policy. What will motivate consumers to borrow if they are scared of losing their jobs? Why would a company borrow if they expect their sales to be depressed? The problem is a failure of demand which has to be addressed via demand measures – that is, fiscal policy.
We think investors are realizing that is a null set, and so whatever Mr. Bernanke announces will have a very short half life, a la pegging the 2 year. Now perhaps in regard to sentiment, technicals, and the extreme gyrations of recent weeks, we might well get some recovery in the equity markets.  But given the prevailing trajectory of policy, where we are debating tax rises versus government cuts (as opposed to the more economically productive debate of government spending versus tax CUTS), it’s hard to feel optimistic about global growth going forward.  The recent turbulence witnessed in the capital markets might be a foretaste of what Main Street is about to experience again.


By Marshall Auerback

Forget about the S&P downgrade, which has had ZERO impact on the global equity markets. The downgrade was supposed to mean that it would be more likely that the US government would not be able to pay its debt than previously assumed. IF the markets took this warning seriously, then they would have attached a higher risk premium to US government bonds. Of course, the opposite occurred. US bonds soared in price. In other words, investors, both here and abroad, voted with money as loudly as possible that they view the US government debt as a very safe haven in a time of financial turmoil

So if it wasn’t the S&P downgrade which caused this downward cascade in the global equity markets, then what was it? By far, the most important factor currently driving the market’s bear trends is Europe or, more specifically, the future of the euro and the European Monetary Union. Systemic risk has migrated across the Atlantic to the euro zone.

 And after yesterday’s joke of a summit between German Chancellor Merkel and French President Nicolas Sarkozy, it appears yet again that Europe’s policy makers have comprehensively blown it. Their persistent reluctance to get ahead of the looming systemic ticking bomb at the heart of the euro project has reached the point where it is likely to doom the euro’s existence. Their repeated “rescue plans” (and equally fatuous statements about new committees and “euro solidarity) can no longer mask the central problem, which is that countries with very different economies are yoked to the same currency in the absence of a fiscal transfer union which would otherwise facilitate growth, not ongoing economic depression and political turmoil.

Rather than attempting to stave off a double-dip recession by easing fiscal and monetary policy, the European Central Bank (ECB) has gone careening off in the opposite direction. The euro project is consequently being turned into a Hooverian instrument of economic torture from sado-monetarists, such as Jean-Claude Trichet, who see each bailout as a way for irresponsible nations to offload their liabilities onto their fitter neighbors, rather than considering the flawed institutional structures which created the need for these stop-gap measures in the first place. Interest rates have been raised, and member states have been forced into self-defeating austerity programmes which, by destroying growth, have made underlying debt dynamics even worse. It is hard to imagine a more tragic and self-defeating type of policy mix. It is 1937 writ large.

How long will voters in rich countries stand for this? Perhaps not much longer as the Germans in particular appear to have no stomach to withstand the costs required to save the currency union. So what is this problem at the heart of the euro project?

 Let’s go back to first principles: it is important to recognize the difference between sovereign and non-sovereign currencies. A government with a non-sovereign currency, issuing debts either in foreign currency or in domestic currency pegged to foreign currency (or to a precious metal, such as gold), faces solvency risk. However, a government that spends by using its own floating and non-convertible currency cannot be forced into default, unless they willingly choose to do so (such as the US Congress almost prepared to contemplate during its recent debt ceiling negotiations). It is why a country like Japan can run government debt-to-GDP ratios that are more than twice as high as the “high debt” PIIGS, while enjoying extremely low interest rates on sovereign debt. A nation operating with its own currency can always spend by crediting bank accounts, and that includes spending on interest. Thus, there is no default risk in terms of a capacity to pay (as opposed to political WILLINGNESS to pay).

But as has been noted by many critics of the common currency project, the relation of member countries to the European Monetary Union (EMU) is more similar to the relation of the treasuries of member states of the United States to the Fed than it is of the US Treasury to the Fed. A country like Ireland is more like New York within the EMU than a sovereign state. This means it has little domestic policy space to use monetary or fiscal policy to deal with crisis. The upshot has been that in the face of the first large negative demand shock to hit the region, the nation states have quickly found they cannot use fiscal policy in a responsible way to protect its economy from rising unemployment and collapsing income. In a normal federation, the national government can always ensure the solvency of the constituent parts via fiscal transfers. In the legal design of the EMU, there is no such role specified and attempts by the member states to cushion the demand collapse quickly raised the ire of the Euro elites with the ECB leading the charge to impose austerity on errant governments.

In the US, states have no power to create currency; in this circumstance, taxes really do ‘finance’ state spending and states really do have to borrow (sell bonds to the markets) in order to spend in excess of tax receipts. Purchasers of state bonds do worry about the creditworthiness of states, and the ability of American states to run deficits depends at least in part on the perception of creditworthiness. While it is certainly true that an individual state can always fall back on US government help when required (although the recent experience of the debt ceiling negotiations makes that assumption less secure), it is not so clear that the individual countries in the euro zone are as fortunate. Functionally, each nation state operates the way individual American states do, but with ONLY individual state treasuries.

The euro dilemma, then, is somewhat akin to the Latin American dilemma, such as countries like Argentina regularly experienced during the time that they operated currency pegs. Given the institutional constraints, deficit spending in effect requires borrowing in a “foreign currency”, according to the dictates of private markets and the nation states are externally constrained. That’s why Ireland and Latvia are in a mess and suffer from solvency issues. It’s also why California suffers from a solvency issue or Italy or Spain. Not the US or Japan, which explains why the latter has been able to borrow money at around 1% for the past two decades, despite a public debt to GDP ratio about twice the US or the euro zone.

At this juncture, however, there isn’t enough time to create a “United States of Europe”, which is why the ECB has resumed its bond buying operations to put a floor on the bonds and alleviate concerns about the solvency issues of the individual nation states. The ECB has received a lot of criticism for this. In one sense, the criticisms are legitimate: The ECB is in effect playing a “fiscal role” for which they are ill-suited. They buy time by buying the bonds. But the bond buying attacks the symptoms, rather than the underlying problems. And it’s fundamentally undemocratic: In taking up this role – by way of the ad hoc bailouts and secondary bond market purchases the ECB has become a sort of fiscal tsar unanswerable to any national electorate.

The hope is that by backstopping the bonds, the ECB can persuade the markets that countries like Italy and Greece are not insolvent and that the markets will resume funding them. Clearly, with credit spreads blowing out again, this has proved to be a fatuous hope because the scale of the purchases have not been large enough to be credible, especially now that the contagion is spreading into core countries such as France. Europeans still have to get the institutional arrangements right and the ECB, as the sole issuer of euros, is the only instrument that today can play this role, albeit imperfectly, but there is a better way.

Immediate relief can be provided by the ECB, which should be directed to create and distribute several trillion euros across all euro zone nations on a per capita basis. This would not constitute a “bailout” as such as Germany (with the largest per capita economy) would be the largest recipient. Each individual eurozone nation would be allowed to use this emergency relief as it sees fit. Greece might choose to purchase some of its outstanding public debt; others might choose fiscal stimulus packages. While this might sound much like the current bail-out, in which the ECB buys government bonds in the secondary markets from banks (assuming the risk of a default by Greece, for example), the emergency package outlined here (first proposed by Warren Mosler) would be under the discretion of the individual nations.

Hence, the ECB would finance current government operations if national governments chose that course of action. And if they found that a country was abusing the privilege (for example, Greece being deficient in tax collection), it could withhold the payments until compliance was achieved. In effect, the sanction would be more credible as it would constitute the ECB withholding carrots, rather than beating up fiscally stressed countries with a stick and seeking compliance with a country already in dire economic straits. More significantly, the revenue sharing proposal would address the contagion impact, as the ECB could continue the distributions to other countries, even as it punished the “recalcitrant problem children”.

We emphasise that this does not address the problem of deficient aggregate demand, but does address the solvency issue, which is the main systemic threat to the euro zone right now (indeed, to the entire global economy). By persuading the markets that most of the euro zone is creditworthy, the risk of the markets shutting these countries down diminishes considerably. As these countries fund themselves on credible terms in the private markets, they can begin to grow again.

Of course, putting the problem in this context and putting out a figure that has a trillion euro handle on it, makes it harder to believe that it will be politically palatable to the ECB or its stronger creditor nations such as Germany. Which is why we think that our earlier suggestion might be the more likely endgame:

“The likely result of a German exit would be a huge surge in the value of the newly reconstituted DM. In effect, then, everybody devalues against the economic powerhouse which is Germany and the onus for fiscal reflation is now placed on the most recalcitrant member of the European Union. Germany will likely have to bail out its banks, but this is more politically palatable than, say, bailing out the Greek banks (at least from the perspective of the German populace).”

The question remains: do the Germans ultimately quit the euro to save Germany or do they take the view that their fate is too intertwined with the common currency and that departure imposes an even greater economic and political cost.

 If the latter, the Germans have to be made to understand that core problem at the heart of the euro zone is NOT a problem of “Mediterranean profligacy”. Many people, particularly in Germany, express the view that the Italian, Greek or Portuguese governments (and by association their people) are to blame for this crisis – accessing cheap loans from Northern European banks, not paying enough taxes, not working hard enough, etc (this also seems to be a common view amongst readers of this blog).

One thing is clear from the remarks that continue to emanate from Europe’s main policy makers. They do not understand basic accounting identities. They fail to see any kind of relationship between their own export model and their trading partners.

For example, it is ironic (and more than a touch hypocritical) that Germany chastises its neighbors, like Greece, or its trading partners like the U.S., for their “profligacy”, but relies on these countries “living beyond their means” to produce a trade surplus that allows its own government to run smaller budget deficits.

It’s even more extreme within the euro zone in the context of the global economy. The European Monetary Union bloc as a whole runs an approximately balanced current account with the rest of the world. Hence, within Euroland it is a zero-sum game: one nation’s current account surplus is offset by a deficit run by a neighbor. And given triple constraints — an inability to devalue the euro, a global downturn, and the most dominant partner within the bloc, Germany, committed to running its own trade surpluses — it seems quite unlikely that poor, suffering nations like Greece or Ireland could move toward a current account surplus and thereby help to reduce its own government “profligacy”.

 What about the issue of laziness, corruption, poor tax collection, all of the charges usually hurled against the so-called “PIIGS” countries? To this we would simply ask, even if the “Club Med” countries are lazy and don’t pay taxes, why did this crisis come now? As Bill Mitchell has noted these countries didn’t just become “lazy” when they joined the EMU. Why didn’t, say, the Italian government face insolvency prior to joining the EMU? The point is that it might be sensible if the Italian government could get the high income earners to pay more tax and it might be sensible to raise productivity but, as Mitchell has argued, none of these things are intrinsic to their crisis.

No, the problem is the Euro and it is a shared problem across the Euro zone. And this is what is beginning to dawn on the markets, as the contagion spreads from the periphery into the core.

Consider the chart constructed by the economist, Rebecca Braeu, of Standish Management:


The red line refers to Germany’s leading economic indicators – order books, exports, etc., and point to dramatically slower growth in the months ahead. Germany is in effect also a passenger on the Titanic, as Italian Finance Minister Guilio Tremonti recently noted. It might be in the first-class cabin, rather than steerage (or Irish stowaways, as the Germans no doubt view the former “Celtic Tiger”), but when the boat hits the iceberg, all passengers are affected.

Until now, the Eurocrats have either remained in denial about the mounting stress fractures within the system, or forced weaker countries to impose even greater fiscal austerity on their suffering populations, which has exacerbated the problems further. And there has been a complete lack of consistency of principle. When larger countries such as Germany and France routinely violated spending limits a few years ago, this was conveniently ignored (or papered over), in contrast to the vituperative criticism now being hurled at the Mediterranean profligates. The EU’s repeated tendency to make ad hoc improvisations of EMU’s treaty provisions, rather than engaging in the hard job of reforming its flawed arrangements, are a function of a silly ideology which is neither grounded in political reality, nor economic logic. As a result, a political firestorm, which completely undermines the euro’s credibility, is potentially in the offing.

And to judge from the flaccid statement that accompanied the conclusion of the Merkel-Sarkozy summit yesterday, it appears that even at this late stage, policy makers don’t get it, or just cannot summon up the political will for the huge conceptual leap forward required to save the euro. The Germans are paralysed politically and things are moving too fast for their policy makers to respond quickly. And their political leadership has neither leveled with the electorate in regard to the magnitude of the problem, nor the costs associated with ongoing punishments of the profligates. Whenever a German political leader opens his/her mouth it is to announce bad news, like the recent statement by German Finance Minister Wolfgang Schauble that the German government was opposed to any increase in the EFSF’s resources, or the creation of a euro bond, even though such a move is essential for the medium-term stabilisation of financial markets!

At this juncture, then, it seems more likely that the Germans will try to save themselves by pulling out of the euro zone (and then they recapitalise their own banks, as they did following German reunification). They take the Benelux countries with them (which have already closely converged with Germany’s economy) and have a “Greater DM” bloc and buy the rest of Europe on the cheap with their newly reconstituted DMs.

The Club Med, such as Greece, Italy, and Spain countries are saved because the euro plunges and they get to export their way out of this. The euro becomes a soft currency country again and these countries go back to living with higher inflation, higher exports and probably a generally more comfortable way of life.


Interestingly enough, the country which really gets screwed in this type of environment is France which is neither a true “Club Med” economy, but has yet to undertake many of the structural reforms of its German counterpart which it is seeking to emulate. Its economy is more akin to that of Italy, but should it seek to become part of the “greater DM bloc”, then its industrial base will likely face a huge competitive threat from Italy.

 In any case, there appear to be no happy outcomes here (although as my friend, Tom Ferguson always reminds me, “If you want to have a happy ending, go see a Disney film”). We appear to be entering most dangerous time for Europe since World War II.