BITCOIN: A flawed currency blueprint with a potentially useful application for the Eurozone

The responses of many to my post on Bitcoin reveal a powerful tendency to underestimate the ill-effects of deflation on a social economy. This tendency to underestimate deflation’s deleterious impact matters beyond debates on Bitcoin per se. For example, in Europe the incapacity of the European Central Bank (ECB) to act in the face of deflationary forces has revealed the same type of misunderstanding, as many commentators fail to recognise that deflation is a very serious threat and that the ECB’s lack of weapons against it constitutes a major weakness. In this post I return to the problem of deflation in a Gold Standard-like monetary system (e.g. Bitcoin or, indeed, the Eurozone itself) but conclude that, almost paradoxically, the technology of Bitcoin, if suitably adapted, can be employed profitably in the Eurozone as a weapon against deflation and a means of providing much needed leeway to fiscally stressed Eurozone member-states.

Is deflation really a problem?

In a recent debate, I was confronted with the argument that deflation is a godsend. “Poorer people crave lower prices”, I was told, “and they cannot understand why ‘elitists’, like yourself, oppose them”. Of course people, especially those who struggle to make ends meet, prefer lower to higher prices other things being equal. But under the heavy shadow of deflation other things are not equal . Deflation is indiscriminatory. Once it sets it, all prices subside, including the price for labour. In fact, wages tend to fall faster than prices of other goods during deflationary times, leaving the weak poorer. Worse still, deflation reduces investment which, in turn, raises unemployment.

Some readers find it hard to see why wages must fall faster than prices and why jobs are jeopardised as prices fall. To see why this is invariably so, compare the degree of power over price that a corporation has (e.g. Walmart or Mercedes Benz) to the degree of power over the wage of a blue collar worker. As customers are no longer prepared to pay the same prices as before, the corporation can limit the decline in the price of its wares by restricting output. Its price will still fall, but not by as much as it would have done had the corporation not had a capacity to influence price through restricting supply. In sharp contrast, the blue collar worker has no comparable power to restrict her labour supply in order to arrest the fall in her wages. The result is twofold: As corporations restrict output (to reduce the rate at which prices fall) their demand for labour falls,  the result being even greater wage reductions accompanied by layoffs which, in a never-ending recessionary circle, reduce further the demand for goods.

Moreover, as prices fall, manufacturers face a timing problem. Assuming there is a time lag between ordering raw materials and shipping the final product to market, deflation means that firms buy their inputs when average prices were higher compared to their level at the time of shipping the final product. Thus the greater the rate of deflation the lower the profit rate and the larger the number of companies that are forced either to lay off workers or to close down completely.

Lastly, as prices fall consumers with some savings have every reason to delay the purchase of durables (e.g. white goods or cars) since they know that their saved dollars or euros will buy them a lot more (or a better model) of these goods the longer they wait. But this is terrible for the manufacturers as well as for their workers and suppliers.

On this last point, a reader challenged me that falling prices are a fact of life and they do not seem to be a problem: “I can think of many goods and situations”, he wrote “in any economy right now where if you delay a purchase, you’ll get ‘more’ for your dollar.”  Of course. But these falling prices are not a problem when it is not all prices that are falling at once. The benefit from patience in the US today comes from actively searching for a better deal in a market where information is imperfect. Deflation, on the other hand, rewards the patient just for being patient, rather than being a reward to costly searching activity. Under deflation everyone benefits from waiting and aggregate demand thus collapses (penalising us all).

If, under such deflationary circumstances, monetary policy cannot be loosened up to stop the decline of average prices, wholesale disaster is guaranteed. This was the terrible flaw of the Gold Standard, in the mid-war period. It is the Achilles Heel of Bitcoin today and, indeed, remains a design fault of the Eurozone too.

Bitcoin and the euro

Bitcoin is a hard-core version of the Gold Standard, in that the money supply is algorithmically fixed to grow at a pre-determined rate and, eventually, to reach a maximum quantity of Bitcoins that remains fixed forever. The Eurozone, on the other hand, is much closer to the original Gold Standard. The major difference with Bitcoin is that there is no fixed upper limit to the quantity of euros because private banks in the Eurozone are subsidised by member-states (through the availability of deposit insurance and the promise of bailouts, if need be) to provide credit lines (on the basis of fractional reserve banking principles). In other words, depending on the banks’ and their customers’ animal spirits (i.e. on how optimistic they are) the banking systems of the Eurozone effectively mint euros. Indeed, the private banks are responsible for more than 90% of the euro money supply.

While this is a crucial difference between Bitcoin and the euro, the two are similar in one respect: whereas in Bitcoin there exist no monetary authorities that could expand the money supply in times of deflation, in the Eurozone the existing monetary authorities are constrained by the ECB’s charter in a manner that stops them from expanding the money supply in deflationary times. At this very moment in Europe’s history, with interest rates practically on the lower zero bound, and with inflation turning negative, the ECB is not allowed (for institutional and political reasons) to effect expansionary monetary policies through quantitative easing. What use are monetary authorities in a currency union if they cannot expand money supply in response to falling prices? In this regard, the Eurozone is no different to Bitcoin, without even featuring the zero transaction costs of Bitcoin or its New Age appeal.

A potential application of Bitcoin’s technology in the Eurozone’s Periphery

Governments in Europe’s Periphery are asphyxiating in a Gold Standard-like monetary union that is buffeted by the winds of recession and outright deflation. Their economies are in desperate need of greater liquidity and of a respite from austerity. The problem is that Europe’s leadership is refusing even to enter into a rational debate of the institutional reforms that can render the Eurozone viable again. The question is: Is there something that the peripheral countries can do to give themselves a chance to breathe better and to act as a bargaining chip that will make Berlin, Frankfurt and Brussels take notice?

The answer is yes: They can create their own payment system backed by future taxes and denominated in euros. Moreover, they could use a Bitcoin-like algorithm in order to make the system transparent, efficient and transactions-cost-free. Let’s call this system FT-coin; with FT standing for… Future Taxes.

FT-coin could work as follows:

  • You pay, say, €1000 to buy 1 FT-coin from a national Treasury’s website (Spain, Italy, Ireland etc. would run their separate FT-coin markets) under a contract that binds the national Treasury: (a) to redeem your FT-coin for €1000 at any time or (b) to accept your FT-coin two years after it was issued as payment that extinguishes, say, €1500 worth of taxes.
  • Each FT-coin is time stamped i.e. in its code the date of issue is contained and can be used to check that it is not used to extinguish taxes before two years have passed.
  • Every year (after the system has been operating for at least two years) the Treasury issues a new batch of FT-coins to replace the ones that have been extinguished (as taxpayers use them, two years after the system’s inauguration, to pay their taxes) on the understanding that the nominal value of the total number of FT-coins in circulation does not exceed a certain percentage of GDP (e.g. 10% of nominal GDP so that there is no danger that, if all FT-coins are redeemed simultaneously, the government will end up, during that year, with no taxes).

Once in possession of an FT-coin, you can either keep it in your FT-coin e’wallet or you can trade it. To make sure that the system is fully transparent and that transactions are completely free, FT-coin could be run by a Bitcoin-like algorithm designed and supervised by an independent non-governmental national authority. Just as in the case of Bitcoin, the total amount of FT-coins can be fixed in advance, at least in relation to a variable not in the government’s control (i.e. nominalGDP), while every single transaction (including the tax extinction using FT-coins) is monitored fully by the community of FT-coin users on the basis of the blockchain pioneered by the infamous Mr Nakamoto.

As an FT-coin is about to ‘mature’ (i.e. to reach two years of ‘age’), the demand for it will obviously rise from those that do not possess FT-coins of that vintage (as it allows for a major reduction in their current taxes). FT-coin owners with equivalent tax liabilities will have no reason to sell (as they will want to use it themselves  to extinguish their own taxes) but those who have ‘stocked up’ on FT-coins (to a tune beyond what they need to pay their taxes), as an alternative to putting their money in the bank or in the stock exchange, will be selling; possibly with a view to buying freshly minted FT-coins.

The great advantages of such a scheme is that it creates:

  • a source of liquidity for the governments that is outside the bond markets, which does not involve the banks and which lies outside any of the restrictions imposed by Brussels or the various troikas
  • a national supply of euros that is perfectly legal in the context of the European Union’s Treaties, and which can be used to increase benefits to society’s weakest members or, indeed, as seed funding for some desperately needed public works
  • a mechanism that allows taxpayers to reduce their inter-temporal tax bill
  • a free and fully transparent payment system outside the banking system, that is monitored jointly by every citizen (and non-citizen) who participates in it.

While the Eurozone’s most stressed governments get much needed degrees of fiscal freedom, taxpayers are offered an opportunity to reduce significantly their long-term tax burden and to make electronic payments in euros that bypass banks altogether. At a time of ultra low interest rates, large tax bills and high bank fees, these are benefits not to be scoffed at. Moreover, a liquid new market for FT-coins is created, with zero transaction costs, and good prospects for gains for those who participate in it, on the back of the underlying tax savings and the state guarantee of convertibility at par.

Epilogue

In summary, while Bitcoin is too deflationary by nature to act as a widespread currency alternative to the dollar or the euro, its design can be used profitably in order to help the Eurozone’s member-states create euro-denominated electronic payment systems that help them, at least in the medium term, overcome the asphyxiating deflationary pressures imposed upon them by the Eurozone’s Gold Standard-like (and, indeed, Bitcoin-like) austerian design.

57 thoughts on “BITCOIN: A flawed currency blueprint with a potentially useful application for the Eurozone

  1. Your discussion on deflation implies that deflationary forces, once established, are boundless. In fact deflation in any one market simply corrects a market price that is out of line with the overall structure of prices and production, none of which can be centrally planned with greater efficiency than the decisions made by millions of individual agents, acting in their own best interest. Once prices have deflated to a level where the purchase of a good or service is compelling then deflation will stop at the adjusted price level. Combating deflation is like trying to prevent the tide from going out. It simply preserves the malinvestment in the system, distorts incentives and prevents prices from adjusting to an appropriate clearing level. All markets must be allowed to deflate as well as inflate to respond appropriately and efficiently to changes in market structure, pricing and participation. So I think your entire premise is wrong.

    And I am afraid I do not share your view that a centrally planned cryptocurrency, managed by an ‘independent’ agency (like a central bank?), is necessary or workable. Any such construct would be no better than the current tsunami of fake fiat money that is created every day by these same ‘independent’ agencies.

    • “Once prices have deflated to a level where the purchase of a good or service is compelling then deflation will stop at the adjusted price level. Combating deflation is like trying to prevent the tide from going out.”

      You suggest that whenever an economy suffers from deflation as a result of weak aggregate demand for example, the solution is to simply let the prices drop to the level that matches that particular weak level of aggregate demand.Never mind sticky wages/prices,administered prices and the real debt burden that increases along with deflation, is there any reason why we should not try to raise aggregate demand to the level resembled by the prices before deflation and not vice versa ?
      I assume your proposal for people in Africa that are starving is to put rings in their stomach, not find a way to eat more.

  2. Brain teaser, what if a European Bretton Woods was introduced, but one which uses the Bancor advocated originally by Keynes. We’d have a rebirth of national currencies, and the euro would be used as the Bancor. Steve Keen explains the need of the Bancor for international trade: http://www.youtube.com/watch?v=FoLyd_Hq32Q Zhou Xiaochuan, the Governor of the Central Bank of China, is in favor of this policy.

  3. On your analysis of deflation you concentrated on production alone. Somehow you ignored discussing the cause of deflation, credit contraction, which
    (a) has turned the Eurozone into a Ponzi scheme, as interest-bearing debt, private and public cannot be repaid, ensuing default and the firesale via foreclosures of real assets to those with and
    (b) is centrally (and probably deliberably) orchestrated by EZ authorities and powers-that-be, who are fully aware of the larcenous aspects of this policy, and yet moralize in its support, speaking of solidarity, frugality, unity, sustainability etc

    Why you still refuse to entertain even a thought about breaking up the common currency and instead you go into convoluted schemes, like FT-coin, to give more time to societies to sink even deeper into the Ponzi scheme–hoping what, that current mindsets will change?—is truly something I do not understand. Not from a rational perspective at least…

    Btw, as a computer scientist I do not see that Bitcoin technology is needed for FT-coin. Why not any conventional anti-counterfeit technology (like bond registration for example) via standard crypto?

    And, on economics, are you so sure that issuing this instrument is not illegal? AFAIK, at least for Greece, the loan agreements do not allow for either new debt issue (even with exotic instruments like FT-coint) or for reductions in future taxation.

    • P2P coin is overkill for this. No need for decentrallization since source and sink will be a single entity, and it can expose tax payments to public (partial though, but people may object on this). All you need is an exchange actually. oops we already have one. And Greeks badly miss a stock fever… why introduce something new, when everyone has a Σ.Α.Τ number since the good ol days.

  4. Yanis, on this bit:

    The great advantages of such a scheme is that it creates:

    a source of liquidity for the governments that is outside the bond markets, which does not involve the banks and which lies outside any of the restrictions imposed by Brussels or the various troikas
    a national supply of euros that is perfectly legal in the context of the European Union’s Treaties, and which can be used to increase benefits to society’s weakest members or, indeed, as seed funding for some desperately needed public works
    a mechanism that allows taxpayers to reduce their inter-temporal tax bill
    a free and fully transparent payment system outside the banking system, that is monitored jointly by every citizen (and non-citizen) who participates in it.

    1. What makes you think a state would use resources raised in this way to help society’s weakest members? Seems to me that is just an idealism about the state and its purposes.

    2. Taxpayers reducing intertemporal tax bill? I think you mean tax payers who can buy the things. Isnt this effectively a tax cut for those with savings?

    • 1. What makes you think a state would use resources raised in this way to help society’s weakest members? Seems to me that is just an idealism about the state and its purposes.

      I have no reason to think benevolent thoughts of a government. But then again, if we assume that governments will espouse evil, we might as well raise arms, or pack up and head for a desert island. My ‘dissertation’ had a simple purpose: How can a well meaning Peripheral government acquire important degrees of freedom to do good in the midst of a suffocating Eurozone?

      2. Taxpayers reducing intertemporal tax bill? I think you mean tax payers who can buy the things. Isnt this effectively a tax cut for those with savings?

      A large majority of taxpayers in the Eurozone Periphery have some savings (recall that the saving rate in the Periphery is higher than in the core, where public debt is lower but private debt much higher). If they know they will be paying taxes (as they do if they own a home or a business), they have an incentive to participate. Nevertheless, I take your point: FTCoins would discriminate: offering tax cuts for those with savings. But I am not perturbed: Usually, those who pay the higher taxes are those with higher savings and, in any case, encouraging citizens with higher savings to pre-fund the state, rather than send their money overseas, is not a bad idea.

  5. Any idea that provides liquidity to the periphery countries is welcome. My concern is that the FT might be selling the family silver that the family has yet to purchase. The loss of future tax revenues is a clear cause for concern that places a high coupon (50% over two years) on these FT bond equivalents.

  6. “In fact, wages tend to fall faster than prices of other goods during deflationary times, leaving the weak poorer.” – is there evidence of this happening in industries where there is price deflation, for example electronics. Are wages at Samsung reducing?

    “Worse still, deflation reduces investment which, in turn, raises unemployment.” – Is price deflation reducing the R&D spend of companies like Intel, AMD, Samsung etc. I do not know.

    “As customers are no longer prepared to pay the same prices as before, the corporation can limit the decline in the price of its wares by restricting output. ” – Is this what electronics companies doing or are they forced to produce & sell to maintain market share?

    “Assuming there is a time lag between ordering raw materials and shipping the final product to market, deflation means that firms buy their inputs when average prices were higher compared to their level at the time of shipping the final product.” – Surely companies would be forced to price this into their selling price or they would go out of business?

    “as prices fall consumers with some savings have every reason to delay the purchase of durables (e.g. white goods or cars) since they know that their saved dollars or euros will buy them a lot more (or a better model) of these goods the longer they wait.” – Surely at some point the consumer has to make the decision to buy, they are not going to put off the purchase forever are they?

    “But these falling prices are not a problem when it is not all prices that are falling at once.” – As far as Samsung electronics is concerned all prices (of mobile phones) are falling at once aren’t they? And when it comes to mobile phones, surely the customer has to pull the trigger on a mobile phone at some point even if the price of petrol is increasing?

    “Deflation, on the other hand, rewards the patient just for being patient” – People are better off if they have savings rather than spending everything they make aren’t they?

    “Under deflation everyone benefits from waiting and aggregate demand thus collapses” – Again, in the electronic industry it seems to me that demand is higher than in any other industry. Unlike washing machines for example where the price increases and performance increases are almost unnoticeable. I would say there is less aggregate demand for washing machines because the price is increasing. If prices were reducing maybe people are more likely to get a new washing machine more often because the cost is coming down. They may say, we have had this washing machine for 5 years lets get a new one because they cost less now, the new ones look more modern and they might perform a little bit better. I think at the moment people say, buy a new washing machine? What for? For the sake of looks and a little bit better performance? Yeah, but the price is 20% more, the benefits do not outweigh the price increase, let us make do for a few more years. Inflation makes washing a distress purchase instead of an affordable luxury purchase, like electronics.

    From my limited understanding it would seem inflation is a way for everyone, no matter how poor they are, to benefit from the progress of mankind without having to gamble on the stock market or invest their money in a pension funds or by giving their money to strangers. People can be safe in the knowledge that mankind will continue to progress at a massive pace and they can ride along on that progress without taking any risks or being in a disadvantaged position because they do not have all the information. I think inflation robs the least well off people in society of all the benefits of human progress.

  7. Yanis: crossover is right. It’s a 2-year zero coupon bond, paying just over 22% yield to maturity, with a put option at face value.

    Nobody will exercise that put option (unless Greek government bond yields rise above 22%).

    The lucky people who manage to buy one at E1,000 (friends of the government?) will earn an immediate profit.

    It’s a very expensive way for the Greek government to borrow Euros.

    Cut the yield to 0%, pay them as part of government salaries, hope they circulate as a medium of exchange, and it could be worth doing. Both because it helps the government’s fiscal position, and because it would help resolve the recession due to the ECB’s tight monetary policy.

  8. Pingback: La calma dei blogger e altre storie della settimana | Luca De Biase

  9. Let me say from the very start that I admire your work (as far as I can read + understand it) and most of all, your scientific ethos (i.e. bona fidae proposals + absence of presumptuousness). Nevertheless this will not work in Greece. For starters the Greek State already receives a prepayment of 55% to 80% (physical/legal person accordingly) of an individual’s current tax liabilities as a surety against his next tax liability, thus at least for the time frame of the year there is little incentive for the FT-coin. As things are, there is an extra wind fall for the State, as when the person dies/winds down, this prepayment is not set off against the inheritor’s tax liabilities. So you can rest assured that under normal circumstances when you die as a Greek citizen it will be the State that owes you money and not the other way around (i.e. FT-coins for your heirs).
    Now for the 2 year frame, you can bet your life that before the 2nd birthday of your FT-coin fund, in the meantime, your tax liabilities would have been hiked by the Greek state for the umpteenth time, making your two year dead coin close to worthless (dead because of the opportunity cost of investing it elsewhere).
    Now even if someone were foolish enough to buy it, the Greek State would never ever have used it for any growth intended purpose. It is a time honored tradition that funds earmarked for a certain purpose never fulfill their destiny (i.e. fund for the Peloponnese fire, fund for the unemployed, the list is endless) so even if such a fund existed, it would be used to fill the gap say of the collapsing pension funds. Even if a miracle happened and the Greek State resisted the obvious temptation, our “Euro Friends” would find a way to use (i.e. confiscate) the said funds as surety for the endless non-serviceable State debt. As it is evident for someone who lives and breathes in Depressionary times in a banana republic, there is no point for such a State to enter into or honour such a FT coin contracts , when it is perfectly legal to have full access to a citizens funds. The principle of our time has a neolithic simplicity; when the State goes down all citizen’s assets go down with it. You can attach any jargon to the former i.e. “national responsibility” “bail in” or whatever…

    • So much pessimism leads inexorably to the conclusion that Greece ought simply to fold its tent and disappear from the planet. Seriously now: 1. You are right that the Greek state pre-collects some taxes (though not taxes from VAT or wages). But it does so without giving taxpayers a discount. FTcoins would thus be an improvement for taxpayers while allowing for a liquidity injection into state coffers. 2. The fear of future tax hikes is real and present. But this fear makes FTCoins even more valuable (and creates a demand for them) to the extent that they offer a major tax break on those who have them. No one will fear that tax rates will increase just for those who own FTCoins! 3. We all have grave concerns about the propriety of Greek authorities. But if you take the view that they will always mess everything up, you might as well stop even thinking about Greece.

  10. I’m nervous of these “can be used to extinguish tax obligations” clauses. Taxes go to fund very inelastic expenses. If the measure is to have a noticeable effect, the risk to tax revenue will also be a problem.

    Also, is this not a dual-currency system at the bank money (M1-M2) level? I thought you didn’t like those.

    • I am more nervous about the prospect of a future that is an extension of the present!

      Is this a dual currency model? No. There is only one currency: the euro. The proposal simply allows the Greek government leeway to produce more euros, of a nominal value of up to approx. 10% of GDP. What it does do, is to create an electronic euro-denominated payments system (independent of the banks) which, if need, can be instantly re-denominated into any other (single) currency.

  11. Mr Varoufakis, maybe What you propose it’s to “stole” Bitcoin technology from the Gold Standar to retrieve it to cartalism monetary theory? I assume FT it’ s just a measure standard with a value backed by state, and with a democratically controlled emission policy. That’s brilliant, and in many ways the seed for an alternative currency system.

    • Imho the only value this scheme shares with the Chartalist view on money is that it is used to extinguish tax liabilities.However the state has no convertibility obligation towards the money of account i.e. money given to the state will be converted only to itself whereas FT’s can be converted by the holders to euros at will.Much closer to gvt debt than gvt money.

  12. There is so many problems with this solution.
    First there is a wrong determination of mechanism of wage decline. Some “other things” are still equal even tough prices and wages decline, a that is debt. While wages decline (total wages), debt does not decline, nor can nominal cost of credit follow the real interest rate into negative rate.
    While wages decline slightly, monthly payments on debt do not, so there is huge effect on discretionary spending.

    Second, capitalism does not allow for direct creation of state money which is needed to replace lack of credit money by banks in deflation. Denominating it in euro, qualifies it as direct creation of money by state. (I know that state bond is effectively the same thing but not by norms).
    To circumvent such prohibition, coins could be called just simply Points. No need to exchange it for euros, but use it only to pay for new projects and axcept taxes in it. Case closed.
    Yugoslavia had used such thing for long time for inter corporate transactions and not for taxes. It works great when there is lack of liquidity. Swizerland is using WIR credit in the same manner but more centralized around a WIR bank.

    Or you could call it Drachma and have it only in digital form. There is no need to incentivize people and make them trust it. The preassure of need is much greater then any incentive. New jobs will be created only by printing more means of exchange in deflation. Alternative means of exchange. If you need to exchange it for allready existing money then that is only replacing one form of assset with different form of asset. No change in employment.

  13. If I understood it correctly I like this Approach very much. It is identical to introducing a parallel local currency to the Euro and due ist digital (non bank) nature it removes some of the disadvantages.

    Prof. Hankel has made similar proposals in his book “Die Euro Bombe wird entschärft”. basically you allow the periphery to get out of the Euro prison and devalue their local currency and the Euro acts like a gold standard or transaction unit (ECU).

    One of his last presentations. He suddenly died in January 2014. He did not look sick in July 2013. My assumption is that Merkel7Schäuble and the other EURO Nazis had him killed.

    • “My assumption is that Merkel7Schäuble and the other EURO Nazis had him killed.”

      This is priceless!

      Although, I am a little confused about which political orientation it is exactly that you seem to be associating with the EURO. Until recently, I was under the impression that it was a SOCIALIST money-grabbing scheme that was ailing you so mercilessly.

      On the other hand, the distinction between socialists and NATIONAL-socialists (i.e. Nazis) might not be clear to someone who apparently spends most of his time sitting in the basement with a shotgun in his lap, guarding his treasure from the greedy minions of the government – figuratively speaking, of course.
      Especially if all he does while anticipating the final government assault on his property is read books and articles written by people like the late Professor Hankel, who obviously made it his life’s work to keep up the popular german tradition of instigating fear of imminent hyper-inflation caused by relentless money-printing among the good people of the fatherland.

      Speaking of which – Why on earth would the nazis have the man killed if he has proven himself many times to be at least sympathetic to the nationalist cause through numerous articles in various publications affiliated with right- wing radicalism?
      Of course he claimed that he had to resort to publishing his theories with the nationalists because nobody else would let him do so, due to his audacious critizism of the powers-that-be and their fraudulent inflationism.

      By the way – Declaring oneself a defender of freedom and putting on the guise of a dissident while affiliating with right-wing reactionaries and writing books and articles on how to save the germanic people from an international conspiracy to rob them of their riches is another time-honoured german tradition.

    • “On the other hand, the distinction between socialists and NATIONAL-socialists (i.e. Nazis) might not be clear”

      Nazis are national socialists, which is just another type of socialists, just as supra natiomal socialists (EU-Nazis)

    • FYI: Prof. Hankel was a member of the SPD, which will make the whole Situation even more confusing for you!

    • @SoundMoney

      I see. So if an ultra nationalist party of racists and warmongers uses anti-capitalism as an excuse to ‘nationalize’ the private property of millions of people by declaring them subhuman and enemies of the people, accusing them of being part of an international judeo-bolshevik conspiracy, stripping them of their human rights, seizing all their assets and eventually murdering them in cold blood, then that – in your book – constitutes just another form of socialism? And If the rich and powerful of a country, apprehending a communist revolution threatening to take away their means of production, support a fascist dictatorship which in turn lets them run their businesses as state-protected monopolies and eventually even provides them with extremely cheap labour, then that is also just another symptom of a socialist agenda ? And if these ‘socialist’ captains of industry then emerge from a devastating war, some even richer than they had been before, and get to keep the profits they made from state-sanctioned slave labour and the deaths of millions of people, having saved their money from the ultimate collapse of the economy and the ensuing hyper-inflation by converting it into precious metals or hiding it in swiss and south american bank accounts, I guess that too is just your typical run-off-the-mill socialism at work. And if those socialist(!) capitalists and their heirs then go on and make an even bigger profit by recieving foreign and domestic state subsidies to rebuild their industrial empires in order to establish an economic stronghold against socialism, then what does that make them? I really am confused.

      I must say, again, I am baffled by your ability to bend reality to your will.

      Mr Hankel having been a member of the SPD, on the other hand, does not confuse me at all. This party has been social-democrat in name only for quite some time now and there have been many other neoliberal ideologues, crypto-nationalists and even outright racists emerging from their ranks since the days when the late Professor was still working for an SPD-led federal government (By the way – doesn’t that actually make him a socialist too?).

      P.S.: I must appologize to you, Professor Varoufakis, for yet another of these off-topic rants on your blog and I would absolutely understand if you banned me from doing it, but I just can’t let this kind of german crazy talk stand unupposed.

    • Please explain to my why introducing parallel currencies is bad just because one of the people proposing it is someone you do not like?

      All Hankel says, is let the politicians keep their Euro and introduce national currencies in parallel. It would let the politicians save their face of not needing to admit that the Euro was the most stupid thing in the last 50 years. And it would let the periphery “breath”. What is bad about that?

      If Barroso says water is wet, even I would agree that water is wet.

      What is your constructive proposal?

    • I have proven time and again that I can embrace good ideas even if they are the Devil’s. The problem with parallel currencies is simple: the weaker currency will be debased within a day and the whole exercise will fail, reinforcing the dictum that TINA (that there is no alternative to the current mess).

    • I was asking HubertMarks where his constructive proposal was! Everyone here knows that you have made several proposals.

      What you propose in this discussion is similar to parallel currencies that are fixed against each other. Fixing and gradually debasing would work. Only if one let´s them trade freely they would adjust in a day.

    • It is not a parallel currency. It is another vehicle for creating liquidity in precisely the same currency. If the private banks can do it (through fractional reserve banking), so can the Eurozone governments.

    • @SoundMoney

      Even during barter systems, there was a specific commodity that prevailed and was used like currency.What makes you think this won’t happen in your “parallel currency” world?
      You have a problem with the state being the monopoly issuer of the currency but you are ok with a private entity assuming that role ?

    • What Hankel is proposing is some kind of gold standard or European Bretton-Woods System. He wants to reintroduce national currencies with flexible exchange rates and use the ECU as an anchor-currency, which has nothing in common with what is propsed in the above article and would change nothing for the deficit countries, who would just have their newly minted national currencies depreciated against this neo-Euro dominated by german export power.
      What the people listening to him in that youtube-video want is to hear is somebody telling them how to rid themselves of what they have been told to percieve as irresponsible inflationists threatening to devalue and steal their money and that is exactly what he is telling them.

      As to what my own proposal would be – You must be really desperate to ask someone like me to even have one. But I hate to say that I am considering to agree with you on the one point of abandoning the common currency.
      And I absolutely do not subscribe to the claim of Hankel and his friends from the AfD that this would help the deficit countries to become more competitive via the ensuing depreciation of their currencies and miraculously have them export goods and services like there was no tomorrow (Those people couldn’t care less about what happens to southern europe, as long as Germany doesn’t have to pay for it).
      But it might just help them to come out from under the yoke of this devastating german-led austerity scheme, which is clearly doing nothing but trying to turn whole nations into a market fundamentalist’s wet dream through some kind of economic shock-and-awe warfare.

      And because in contrast to our host, who I honestly admire for his optimism in finding a way to end this madness in a reasonable and peaceful way, I have lost all faith in the ability of the german elites and their syccophant government to appreciate or even comprehend sensible proposals like the ones he and his more level-minded colleagues are presenting to them.
      And as you and those people in that youtube-video and the people whose opinions you seem to share have proven time and again, it is also highly unlikely that even most of the opponents of the current german policy towards fixing the eurozone even give a damn about what is happening to half of the continent’s population because of the germans’ refusal to accept reality.

    • Crossover, a private monopoly is as bad as a government monopoly. I am not OK with that!

    • Hubert Marks,

      “which has nothing in common with what is propsed in the above article and would change nothing for the deficit countries, who would just have their newly minted national currencies depreciated against this neo-Euro”

      So you prefer to devalue the Euro for all member countries over this? The problem would remain the same: Germany is cheaper than the periphery.

      So I understand your proposal is to Abandon the Euro. This makes sense, it is the root cuase to the problem. But you only consider it because your wet dream of having Germans that pay taxes pay for the mess (unlike Germans as you who most likely do not pay taxes or very little), is unlikely to happen.

    • First of all – who says that the Euro is being devalued?
      I know that monetarist dogma dictates that measures like OMT are bound to result in hyper-inflation, but I have yet to see any evidence of this actually happening.
      What really seems to be your concern, judging by the teachings of those experts you constantly quote, is that savings without real investments are becoming less and less profitable because of decreasing interest rates.
      Of course, If you are of the impression that there was some constitutional right to receive guaranteed returns on those savings then you may hold on to the notion that there is some kind of illegal money-printing going on.
      But then you must clearly think that the majority of the world’s economists is dead wrong when they claim the opposite and warn about the danger of plunging the eurozone and with it the global economy into a deflationary spiral.
      And if that were true, despite the fearmongering of your favourite inflation-prophets, Germany would propably still be cheaper than the periphery, only with the added calamity of having its already receeding domestic market brought to a complete halt.

      Secondly – I am in no position to make any kind of proposal here.
      I am merely hoping that the periphery finds a way to rid itself of their german overlords, which might just be the only thing that could bring Ms. Merkel and her entourage to their senses short of a total collapse of the eurozone. Of course I would prefer for them to do so on their own volition and to start listening to honest suggestions like the modest proposal.

      By the way, my taxes have been used to rid the Banks of their toxic government bonds as well and I hate the idea of this scheme going on like this. But so were the taxes of the greek, spanish, italian, portugese, Irish, french and any other citizens of the countries involved in this mess. And I really don’t think that it befits a country like Germany, which prides itself on doing honest business all over the world, if it came to be regarded as some backstabbing bastard, who is in the habit of getting rid of his former friends once they are no longer useful to his business interests. And I say that out of concern for my own countrys reputation.

      What you, and these experts you seem to be so fond of, would prefer instead, is to do exactly that. They may or may not be conciously doing so, but they are providing their insecure listeners with a reason to feel superior by looking down on others and that, at least in my book, is certainly not the way of an honest businessman.

      Case closed.

  14. “monetary authorities are constrained by the ECB’s charter in a manner that stops them from expanding the money supply in deflationary times”

    How much has the money supply in the EZ changed from 2000 to 2010 and from 2010 until today?

  15. Very interesting proposal, and similar in ways (though implemented quite differently) to Rob Parenteau’s Tax Anticipation Note (TAN) proposal for peripheral Euro nations here:

    http://neweconomicperspectives.org/2013/12/exit-austerity-without-exiting-euro.html

    I wonder though, would these FT-coins, not create an ever-increasing shortfall in tax revenue, year-on year, if FT-coin issuance hits the limit of 10% GDP?

    In that scenario, someone exchanging €100 for FT100, can (in two years) extinguish €150 in tax liabilities, creating a revenue shortfall of €150 – but only FT100 went out of circulation, so government can only make up for €100 (66%) of the lost revenue, by recirculating FT100 (which again in two years, would incur the same penalty).

    Economic growth will of course, make that shortfall much less, but I’m just curious if I have that right, or what I may be missing there – and how this will be managed if I understand it right?

  16. Whenever government runs the monetary system, there will be corruption and excessive issuance of currency and debts. We need a competition to central banks run by governments. In my opinion, the best system would be two central banks. One responsible for managing a transaction currency with very soft limits on expansion of the money supply. The other central bank should have the responsibility to manage a competing currency with very tight limits on expanding its supply (say 1% per year). Borrowers and savers could freely decide in which currency to borrow and in which currency to save. That would effectively create a healthy competition in the market place for capital. It is not said often enough: Currencies are introduced in order to control and to manipulate the flow of savings of people. If nobody would save, there would be no need for a specific currency.

    • The only thing you need is to break up the monopoly. There needs to be currency competition. this means more than one currency in a single territory.

    • Hi Robert,

      Your idea is very interesting! Iam wondering how would we go about selecting the Chief or CEO of these institutions, what selection criteria would you suggest?? How would we structure his/her compensation or would they do it as public service. For example would this person be excluded because they had previously worked or served on boards in Finance / Banking?? As you & I know the decisions made by intelligent people (mostly insiders) appointed to these roles in Europe & US recently have made some really bad judgements!

    • The customers will do this :-). How do you select the company who should makes bred or phones?

  17. Pingback: Yanis Varoufakis: BITCOIN: A Flawed Currency Blueprint with a Potentially Useful Application for the Eurozone | naked capitalism

  18. <>
    Care to offer some hard facts on this?
    Deflation is only a problem in an system of debt based money and fractional reserve banking. When money was created from debt in the first place by the commercial banks via fractional reserve banking, and then the process reverse because there was too much debt, we have a corresponding collapse. However, letting this corrects the most rapidly is the best way to heal it back as fast as possible (check the great depression of 1921 where the gvt did the right thing: cut spending and taxes, not as in 1929).
    Why not talking about the ravage of inflation instead, which has, throughout history, been the source of problem for the poor.
    Currency inflation via the combine commercial bank and federal govt deficit will lead to price inflation, but the process manifest itself in a non-linear way, which fools people, well like you I guess.

    • Righhht, I’ve asked if you had any facts of how deflation was bad… nothing
      Nothing prevents you from creating a virtual currency that you can inflate to infinity to satisfy this lalaland view that wealth is created out of paper.
      I can bet you something: that currency won’t take off. The only currencies that are inflated forever that are used is those at the point of a gun (govt)

    • For the government it is bad, because the trock of ripping people of with progreressive taxes is reversed to ist opposite!

  19. Pingback: BITCOIN: A flawed currency blueprint with a potentially useful application for the Eurozone | Social Media Marketing 24/7

  20. I may have not understood something very well, but to me this FT-Coin is similar to a 2yr gvt. bond issuance a portion of which (the portion that will be redeemed before maturity) will be like a zero coupon bond and the remaining portion (those held until maturity) will include (according to your example of 1000FT extinguishing 1500 EUR tax liabilities) 50% coupon.

    If i am correct with this analogy then i think that:
    a) The ability to redeem the FTs at any time before maturity makes them at best useless and at worst dangerous since the gvt will never know when and how much money it will have to spend to redeem the FT’s
    b)A 50% coupon is obviously humongous and as you also know disastrous especially for a country like Greece which can’t even survive with even lower interest than the present one as long as the debt level remains at such heights.Ofcourse I understand that this was just an example but if the “coupon” rate is not as generous then there’s little incentive for people to buy FT’s in the 1st place.
    On the other hand if Greece was to issue a 50% coupon 2yr debt, why shouldn’t it choose to attempt to issue a regular 2yr bond? I agree with you that the current yields are artificial but surely they wouldn’t go over 50% right ?

    • On a second thought since no interest payments take place until maturity the annualized “coupon” in your example will be 25%.Although it seems less extreme this way I still don’t believe it makes a lot of difference if Greece issued a regular bond.

    • There is a world of difference between the proposed ‘FT-coins’ and a 2yr bond: A bond needs to be repaid with interest to anyone who bought it. FT-coins are used to extinguish tax liabilities of taxpayers only. If you are a non-taxpayer in country X, you may still buy X’s FT-coins for speculative reasons, thus increasing the government’s liquidity now. Non-taxpayers do not receive any rewards that may be thought of as a coupon-equivalent. Only tax payers get the benefits of the government’s tax break.

      To the extent that the Eurozone’s peripheral governments need breathing space NOW, so as to create growth (or arrest the recession), offering tax breaks to taxpayers who effectively pre-pay taxes is a useful way to ensure that citizens will not be taxed individually as much as they are now being taxed. At the same time, overall taxation rises in proportion to nominal GDP growth – which will be greater if the government uses its FT-coin receipts sensibly

      As for the right to redeem FT-coins before their second birthday, its purpose is simple: To give citizens (especially of a country like Greece, who are rightly suspicious of the state) a sense of trust that they can reclaim their money instantly (sans any interest). Once such trust is built (possibly by trying out the ‘system'; i.e. buying and re-deeming FT-coins a few times), no FT-coins will be redeemed given the very great value they will acquire 24 months after they are issued.

    • Οfcourse you are right, I missed the possibility that foreigners buy FTs for speculative reasons.
      However since they can only expect to profit from the price of the instrument it is safe to assume that the closer we get to maturity the larger the portion of domestic taxpayers holding FT’s over the total of holders.
      If things do go well as you describe and only few people redeem them, whereas the majority chooses to profit from paying reduced taxes, the government will have to “repay” this debt with interest included in the form of reduced tax revenue..
      It could choose to roll them over but this requires that either there’s a gap between FTs outstanding and the upper bound of 10% of gdp,that is equal to or larger than the amount of FTs maturing at that particular period, or that gdp has grown by a portion equal to or larger than the FT’s maturing at that period, or a combination of the two.
      The only difference from a regular bond would be that coupon payments will only take place when an FT matures whereas in case of a bond, coupon payments would take place annually.

    • Both are wrong.
      The coupon discount is not needed at all in order to get people to accept it. Alternative is no job. That is good enough incentive for people to accept.
      Difference should be not to sell FTcoins, but to use them to pay for projects.
      Otherwise the solution is a no solution, or it would be a solution to a newly created problem.

      I can see that you both see a problem as not used savings, so you think that distribution of savings would solve the problem. That is not only nor the biggest problem.
      That could have a one time effect while what is needed is long term investments which private sector is refusing to do. Not only that FTcoins has the prospect of future deminishing of state finances due to discount.
      To solve deflation problem, it needs replacement of growing bank money that is nonexistant now, by state money.
      But it is the capitalist rule that state can not print money directly. And denominating it in euro makes it even harder to brake such rules.

    • @ Jordan

      I’m sure prof. Varoufakis just like with the MP, tries to offer solutions within the current framework.
      And within the current framework, it indeed is a matter of idle savings.
      Nobody denies that a gvt could easily make up for the spending gap of the prv. sector.But this is impossible within the current framework and I’m sure you understand that too.

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