James K. Galbraith on Europe, the US, debt and money – interviewed by Roger Strassburg

In this interview James Galbraith explains our Modest Proposal for Resolving the Euro Crisis, argues that the Eurozone’s dismantling is a bad idea, discusses money and debt (in the context of Modern Money Theory) and, finally, comments on current developments in the US social economy. The interview was conducted by Roger Strassburg

RS:  So you had a fairly good conference at the beginning of the month – referring to the Eurozone Conference at the LBJ School of Public Affairs, at the University of Texas at Austin

JG:  It was excellent.  It was a very intense and lively event with a lot of serious contributions.

RS:  It seemed to me that Heiner Flassbeck made it fairly clear that it’s going to be very difficult to come up with a way to convince Germany to buy into any solution.

JG:  That is a difficulty.  However, the first path of people in our situation is to help frame what the proposal would be, and to make it as airtight and plausible as we can.

RS:  Would you care to describe that proposal again?

JG:  The Modest Proposal has by now gone through several iterations.  It was originally co-authored by Yanis Varoufakis and Stuart Holland, and I’m now a co-author. It lays out steps that should be taken within the framework of existing European treaties to deal with the major issues that are threatening the euro zone, and those are, first of all, the question of the sovereign debt, secondly the question of the banks, thirdly the need to get a round of investment going, particularly in the European periphery and fourthly, the need to deal with immediate human needs and humanitarian crises in certain parts of the euro zone. 

On debt our proposal is to have a bond issued by the European Central Bank. This is in line with established central bank practice and within the European Central Bank’s powers.  That would lower the effective borrowing costs facing any of the peripheral countries on the Maastricht-compliant portion of their debt.

RS:  The ECB issuing a bond, does that mean the ECB actually borrows money?

JG:  Sure.  And uses the proceeds to service the part of member-states’ bonds that they were allowed to have under the Maastricht Treaty. The member-states then undertake to redeem, in full, the ECB bonds upon their maturity.

So that’s point number one.

Point number two is that the banks should be dealt with – not by waiting for the banking union, which is a little bit of a mirage – but on a case-by-case basis, using European institutions to deal with insolvent banks in parts of the periphery and to break the link between those banks and their governments, a toxic link that is creating an oligarchy of kleptocrats in Greece and elsewhere.

The third piece is to enable the European Investment Bank to act on some of the plans and resources which it already has – but which it cannot use in the current conditions because recipient countries can’t meet matching fund requirements.

The fourth is a solidarity fund. This would deal particularly with food needs and some other issues like unemployment insurance, necessary to give the most stressed populations in the Eurozone a  sense that the European Union is acting to address their most urgent needs.  That would stabilize incomes to those people and their regions, helping to stabilize the larger economic situation.

RS:  These are direct transfer payments you’re talking about.

JG:  Yes.

RS:  What do you think in terms of the debt?  Are they going to have to forgive some of that debt?  Is there going to have to be a haircut?

JG:  No, I don’t think that our proposal demands a haircut on the debt.  It would, of course, lower the borrowing costs. That’s because you would be putting it through an institution that has a low borrowing cost. So it’s no more than a rolling over of debts which are largely already held by the major European institutions. In the case of Greece, most of the public debt is in public hands.

RS:  That sounds a lot like the euro bond proposal.

JG:  It’s got some differences with the eurobond proposal in that it doesn’t have this joint-and-several guarantee feature. The point is to do something that is within the framework of the existing European charter, but that does not require of Germany to guarantee anyone’s debt and does not come with the kind of financial fragility that some of the other proposals would bring.

RS:  How is it going to be secure without the joint-and-several feature?

JG:  The bonds would be a European Central Bank liability.  And each country would pay their share of the interest required, on a super-senior basis. Moreover, the ESM could guarantee this payment scheme so that the European Central Bank is certain never to be out of pocket – which then solidifies its creditworthiness.

RS:  So it is a financing through the ECB, but it’s just getting around it by buying a bond first.

JG:  Right. But do note that the ECB does not print a cent in the process. It just acts as a go-between money markets and member-states

RS:  The ECB isn’t allowed to directly buy bonds from individual countries.

JG:  That’s right.  But in our scheme it won’t have to. It will be issuing bonds, not buying them! Besides, the Greek debt is already in public hands to a large extent while the ECB’s OMT program is based on a promise to buy bonds – something the Modest Proposal does not need.

RS:  Do you think Greece is ever going to be able to pay its debt back?

JG:  No, of course not, not on the present terms. That’s the whole point of the proposal, to create a situation where you’re at least closer to debt-sustainability than you are now.

RS:  What do you think about – there’s been some different opinions on this – if push comes to shove, of having countries actually exit the euro zone.  Heiner Flassbeck has actually written a while back that – though he doesn’t think it’s a good idea – he’s beginning to think that that may be the lesser of all evils.

JG:  We are not in favor of a euro zone exit strategy on the part of any peripheral country.  The costs of that are very high and the populations of the Mediterranean countries are still strongly opposed to it.

RS:  The creditors are undoubtedly going to lose on that.  If they exit, they’re not going to pay the debt.

JG:  Right. The problem is the disorderly nature of a breakup of the euro zone.  The question of whose currency your liabilities would be denominated in is immediately posed.  How do you maintain ordinary commerce when the Greek automobile distributor wishes to pay BMW in Drachmas and BMW wishes to be paid in euros? These things tend to be very messy and they can go on for a long time. They can have very severe consequences for the financial viability of private businesses.  So that’s not an outcome that anybody should be cavalier about.

RS:  What about the possibility of Germany exiting (which I don’t think would happen, either)?

JG:  That is easier to imagine because German commercial interests are generally creditors rather than debtors, and so they would be accepting to be paid in the debtors’ issue, which would presumably be the euro, but devalued. That would mean that the debts would be easier to pay; on the other hand, they’d be worth less to the creditors.  It’s easier to imagine that being non-disruptive from a legal point of view.  However, I can’t imagine that German manufacturing interests would be very attracted to the idea of having their receivables depreciate.

RS:  No, it doesn’t seem very logical, though some businessmen are a part of the AfD, which I think you’re familiar with by now.

JG:  Yes, and depending on what the disposition of your assets and liabilities is, it might be to your advantage. If your holdings are overwhelmingly in the appreciating currency, I can see why you’d place a political bet on that outcome.

RS:  It might be okay for domestic business.

JG:  That’s right, sure.

RS:  That, in fact, would probably help them because it would appreciate the currency.

JG:  They may be looking down the road and be prepared to take some losses on their euro receivables in order to get the advantage of being in a rising currency later on.

RS:  Where is the debt, actually?  I’ve gotten the impression here that the Greek debt, for example, that was held by banks by the time of the haircut was essentially in the hands of European countries.

JG:  That’s correct.  That’s my understanding, as well.  A small amount is in the hands of the private sector and that amount can be paid.

RS:  It isn’t just government debt we’re talking about here, of course.  We have business debt, which of course would suddenly be a problem if, for example, a peripheral country were to exit.

JG:  Yes.  That is what I’m most concerned with.

RS:  They’d be immediately out of business.

JG:  Many would be. The government can negotiate down or even default on its obligations once they’re in a foreign currency, but private business becomes very disrupted.

RS:  It would help them, of course, if Germany left and their debts were still in euros.  That would be a different matter.

RS:  I wanted to talk a little bit about debt on the other side of the pond, too.  It’s been a big topic lately, as we all know, going through the shutdown last month and the repeating showdown on the debt limit and all of that.  Where do think that stands right now?  Do you think that there’s any possibility that we’re going to see a reasonable agreement being reached by the time this comes up again?

JG:  The kind of agreement that might be reached would not be reasonable, but I think the good news is that it will not happen.  We have moved quickly beyond this to the Obamacare fiasco.  The so-called debt issues are off the radar screen at the moment.  My feeling is that the terms on which they were resolved in this last go-around will be the terms on which they will be in the next one, because basic principles were conceded by all sides, that nobody is going to press the United States to a disruption in the Treasury’s legal authority to make payments, and I suspect that the reason for that is that nobody knows exactly – and not even the Treasury – what they would do under those circumstances. The Federal Reserve was still trying to figure it out as they got close to the date what they would do.  The Republicans did not have the votes to press that issue, and if they didn’t have the votes in September, they’re not going to have them in February, either.  So my view is that’s that, for the time being, on this question.  We may have another ginned-up drama for the entertainment of the population, but the outcome is no longer in doubt.

RS:  How much damage do you think there was from the shutdown?

JG:  To overall growth, the Council of Economic Advisors has made some estimates.  I imagine that they are honest estimates, and they do identify some specific level of damage due to the fact that there was some curtailment of public spending as a result of this.  That’s now being made up, so now we’ll  see a bounce back in the data.  However the sequester goes on, with depressing effect.

RS:  You’ve recently stated that a country doesn’t actually have to borrow money to pay its bills.  If I understood you correctly, it just tells a bank to credit your account.

JG:  Technically when a country wishes to make a payment, the Treasury just sends a signal to your bank to credit your account, and money is created.  The act of so-called borrowing that happens is because the bank then has a free reserve upon which it would prefer to earn interest. So the Treasury kindly makes available a bond that converts that cash at zero interest into an asset that is earning a little more than that. That’s the transaction.  The Treasury in making its payment does not consult anybody as to whether there is enough cash to do so.  It doesn’t need cash, it just consults whether it has an authorization or an order to make the payment, and it makes it.  End of story.

RS:  So you’re saying that the Treasury actually creates money.

JG:  Well of course it does.

RS:  Then it raises the question of why we get into this mess.

JG:  Well, this was not always the case, and it’s not always the case for all governments.  Back in the days of the gold standard, the Treasury issued bonds, brought in revenues and then spent them, incurring big interest charges along the way.  But that’s not the way the greenbacks worked, and not the way an electronic banking system works.  Causality, or at least the time sequence, is reversed these days. The Treasury makes a payment on an authorization, and then the money is there, which it can then issue a bond, if you like, to sop it up.

RS:  But the bond is essentially borrowed money, isn’t it?

JG:  Technically, it’s a debt, sure.  But suppose the Treasury did not issue a bond.  The free reserve would be sitting in the banking system. Suppose the Treasury, having issued the bond, finds that the Federal Reserve buys it back. Now the bond is sitting in the Federal Reserve, the Treasury owes interest to the Fed, which then returns the payment to the Treasury in a nice act of round-tripping.  And the banking system has cash. So the debt, in the formal sense of what is public debt is not in the hands of the public any more.  It’s in the hands of the Federal Reserve, and the public has cash.

RS:  Debt to the Federal Reserve counts to the debt ceiling, doesn’t it?

JG:  It does legally count against the debt ceiling.  But it is debt that the government owes to itself.  It has no economic impact at all, and in fact no financial impact on the Treasury because of this round-tripping feature. The Treasury makes payment to the Federal Reserve, the Federal Reserve then uses that for its operating expenses, which are some fraction of the interest earnings, and returns the rest of it to the Treasury on a line called surplus.

RS:  Does debt that the government owes itself, I’m talking about real internal debt.  Debt to the Social Security system, for example, is a big part of it.  Does that count as part of the indebtedness towards the debt limit?

JG:  That’s a good question. I believe it does, but I’d have to check that as a matter of law.

RS:  That seems odd, but of course on the other hand the debt is there because it is a future liability to Social Security that has been loaned.

JG:  This is just a question of what the Congress in its wisdom in 1917 defined as the debt of the United States and how that is applied.  It’s not designed to have any particular economic effect.

RS:  We’re getting a little bit into the school of MMT.  Do you consider yourself part of that school of thought?

JG:  Well, the MMT group is a group younger than myself with a certain amount of coherence that has done a lot of work explaining how the monetary system works.  I’m not a contributing member of the group, but I’m friendly to it.

RS:  It’s been fairly controversial among liberal economists who are really not that friendly toward MMT.  As I understand MMT, it is basically that the government doesn’t need to borrow money, it doesn’t need to tax.  Is that correct?

JG:  No, that’s not correct. The government certainly needs to tax.  The purpose of taxation is to control the total level of demand.  It’s very important to do so.  If you spend without taxing, then you have no reason to want to hold on to the money.  And if you don’t want to hold on to the money, but are constantly dumping it in favor of assets, then the value of the money collapses, so taxation is essential.

But the purpose of taxation is not to raise money in order that the government can spend it.  Those two activities, though both essential, are quite disconnected.

RS:  So MMT basically is that the government wouldn’t need to tax in order to fund its activities.

JG:  That is just a description of how monetary systems operate.  Spending is done by crediting accounts, and taxing is done by debiting accounts.

17 thoughts on “James K. Galbraith on Europe, the US, debt and money – interviewed by Roger Strassburg

  1. This formidable crisis that we’re having is about taxation vs. inflation as a means of surplus recycling. A handful of countries including Germany have managed to make taxation work sufficiently well for surplus recycling (sort of, given high surpluses and still rising inequality). The Germans have foolishly written that into the constitution. All other countries, including the US and Japan, find taxation politically or practically insufficient as a means of surplus recycling and make up with a measure of monetary expansion. We’ll call that inflation although it’s not the same thing.

    Monetary expansion taxes all assets denominated in a currency and is thus a form of recycling. In the US the market rises when easing is expected. Why? Because investors know that firms will have an opportunity to capture the surplus that is so recycled. Otherwise surplus will be more and more concentrated in retained profits, it won’t return to the market, and investments will have diminishing yield.

    Southern Europe and the so-called lazy Greeks have been especially bad at taxation and especially reliant on inflation, devaluation, and the like. All countries pay their way if inflation is allowed. Fiscal obligations are covered in nominal terms and purchasing power for imports diminishes. The Eurozone was created, foolishly, with a German-inspired “there shall be no inflation” clause, and foolishly Greece applied and was admitted knowing that making taxation work in the timescale was unrealistic (and it’s a tall order for any country ever). The Eurozone then persisted, foolishly, in denial. The Greeks will endure anything but make taxation work, and the Germans will contemplate any measure but admit that taxation is insufficient and monetary expansion is a necessary pillar.

    So please, let’s not moralise about lazy this and cruel that. Let’s see how we can back out of past decisions that were foolish, and that means talking about the role of both taxation and inflation (monetary expansion) in the Eurozone.

    • I don’t think I fully understand what you’re saying.
      (But please feel free to correct me if I’m wrong on the following assumptions. After all, I’m not an economist. I am just some german who doesn’t want to take his daily dosis of propaganda anymore.)

      I was always of the impression that, if anything, german fiscal policy of the last two decades was all about internal devaluation via relative cuts of unit labour costs, i.e. lowering wages, or not letting them follow an increase in overall producticity and thus leading to deflation.
      On the other hand, german taxes on corporate- and capital incomes and on high wages were cut massively while at the same time consumer taxes were raised.
      As a result german domestic income has been stagnant for some time now, while income through exports was skyrocketing.

      So, as befits a deflationary economy, german private households can not consume the german surplus, because they lack the means or just sit on them by saving whatever they can because they are afraid of spending too much. (Which, as they are being told by an increasingly propagandistic fourth estate on a daily basis, is exactly what they should be doing.)
      The same goes for the government, which has tied itself tightly to a constitutionally fixed debt ceiling and refuses to increase its income through higher taxes on corporations and their owners.
      In addition to that, the latter two also won’t invest their rising profits domestically and are rather taking them to the global financial markets or lending them out to their foreign customers.

      I don’t see how this policy can lead to anything but a recycling of surplus through foreign consumption and thus accelerating the initial problem of different levels of competitiveness in the Euro-zone.

      And I also fail to see how Germany could be recycling anything through taxes, if lowering taxes for the private sector, raising them for lower incomes via sales taxes, decreasing social security expenditures and cutting government spending has been the core of german economic policies for at least the last four federal administrations. (Again, please feel free to correct me if I’m wrong.)

      Of course you are right when you suggest that we should stop throwing morally tainted accusations at each other.
      The fact remains though that most people, including myself, lack the ability to always ignore the devastating humantitarian and socio-economic consequences of the current dominant policy towards the euro-crisis and just look at it through the impartial eye of a scientist looking at an experiment.
      Unfortunately those who share this ability to rationalize everything and take the human factor out of their equations are often times the ones profiting from the current crisis, or at least not feeling the greater impact of it yet.
      In other words, it is easy to distance oneself from a bad situation if it is others that have to suffer from it.

      Unfortunately this seems to be the case for most of my german compatriots.
      Some of those have a real knack for occupiyng the moral high-ground in every discussion and have been doing so especially since the beginning of the Euro-crisis.
      It may seem futile to try and attack them within those fortified positions, but they also have quite a talent to disguise their rather subjective and morally biased points of view as completely rational observations.
      So while everyone is certainly entitled to their own opinion – If one claims to be free of personal opinions and instead presents himself as the purest voice of reason, we should not let that stand, because it is never true and I for one don’t like to be lied to.

      I also think that rationality for its on sake in this case is a double-edged sword.
      After all, it is the seemingly impartial logic of mathematics that is being used by mainstream economics to justify any means necessary to keep the system going, regardless of the subjective consequences for the people living within that system.

  2. Pingback: Three Links on the Eurozone Crisis « Multiplier Effect

  3. Thank you Hubert Marcks. Really, thank you.

    There is much mal-information and disinformation being spread daily, month after month, year after year since 2010, always in English, and most of it directed against Greece in particular. With some justification I add – (but only some) – since our corrupt politicians were so transparently clownish and amateur in their corruption, that they provided plentiful ‘hooks’ for this type of contempt and insult. Some of this mal-information is silly and transparent, and some much more clever and insidious, including whole blogs, supposedly economic but in truth political, dedicated to the subject of Greece, or the eurozone. The point is to scapegoat, to cover-up or prevent recognition of creditor responsibility, and to forward certain political & businesse agendas. Fortunately much of this is now wearing thin, since as we enter the fourth year of austerity across the EU, the results of this disastrous and inhumane policy has already badly effected the American and world economy. Thus bigger guns are appearing at the political level and dissent in the international institutions.

    All of this energy is spent so that at the simplest level 1) the lazy and unthinking can feel good scapegoating a country or region (the ‘perifery’) without any self-examination. More important 2) to prevent examination of the ethics, practises and motives of all states involved in the euro. And 3) to create so much dust and distraction that serious debate or even recognotion of the present direction of the eurozone is prevented at all cost. Again this is wearing thin.

    So, for example, as an anglo-greek I never take “Serious Sam” seriously, having learnt through his long tedious repitition that he has nothing intelligent or well-intentioned to contribute to any discussion. Given his views and limited grasp on economic and even german issues, there is no doubt in my mind that his presence is highly dubious.

  4. I’m still curious about your opinion on MMT professor.Especially now since you have even collaborated with prof. Galbraith.
    By the way, I have an interesting quote from prof. Galbraith thay you may find interesting, especially regarding double-entry accounting.

    “”It would be useful if the basic principles of modern monetary theory, if the work of Wynne Godley and his followers insisting on models that maintain stock flow accounting consistency and if Minsky’s instability principles were at the core of understanding of these matters. But it is obvious that they are not.”

  5. Point one is nothing but an institutionalized, large-scale, elaborate permanent money transfers from the core to the periphery.

    Point two – if I recall correctly, the mp wants to install a single banking area, where every bank backstops the problems of every other bank. Instead of some dozen potentially tbtf but somehow controlable banks, we would get in effect a gigantic one which is absolutely tbtf and uncontrollable.

    Point three – well, I repeat my question: what potentially profitable projects exacly is the EIB supposed to finance in the periphery, which on top she couldn’t finance already? Want to build even more unused airports and highways in Spain, maybe?

    Point four is just another version of point one.

    Bottom line was and is: let the core subsidise the standards of living in the periphery, forever.

    • Why is it that the level of trust people like you put in other people’s ability to spend money in a sensible way and not waste it on “more unused airports and highways” always seems to be based on their nationality?
      Do you really think that only Germans, Austrians, Dutch or other ‘germanic’ folk know how to make sound investments?

      Of course there is a lot of corruption in the south, but are we northerners really so much different?
      What about german airports outside Berlin or Kassel? What about numerous accounts of municipal and state governments conspiring with members of the local business community to give major development contracts to private firms and ending up with triple or quadruple the estimated cost for the public?
      What about the toll collect system for commercial traffic on german autobahns that was installed by a Siemens-led conglomerate of major german Industry firms, which eventually turned out to be ridiculously expensive, took much longer than had been promised to complete, was paid for by tax-money and included a contract with the government of more than ten thousand pages?
      What about private puplic partnership – contracts for outsourcing public water and energy supply of major german cities to the private sector that evidently cost the average citizen and the states a lot more that if those had remained in puplic hands?
      What about the federal “Treuhand”- Agency selling off the remains of the former GDR’s industrial capacity to western investors for pocket money after the reuinion and those investors cashing in everything they could for their own profits, regardless of any further consequences for the people who used to work there, leaving eastern Germany an economic wasteland, which has still not recovered after more than twenty years? What about the fact that Germany is one of the few countries in the world – among such paragons of virtuousness, freedom and democracy as Syria and North-Korea – in which it is still not illegal to bribe members of parliament, with the latter steadily refusing any calls for officially outlawing that kind of corruption?
      I could go on for many pages like this.

      Of course, just insulting millions of people in the south by declaring them unamnimously corrupt, inefficient and generally unfit to properly invest any credit they are so generously extended by us out of the sheer kindess of our hearts is not enough. You just have to criticize the “standard of living” of those people as well, which obviously in your morally superior understanding is still not appropriately low enough.

      Certainly, in your opinion, people who stand idly by while their corrupt elites waste precious german credit on useless Airports, Highways and german submarines do not deserve to get affordable health care and those roughly sixty percent of unemployed youths obviously had it coming and are therefore unworthy of social security and other luxuries and
      thus, naturally, the EIB can not be allowed to fund investments in sustainable enrgy, useful infrastructure projects, ecological R&D and other such perquisites of decadence for the lazy little moochers.

      I can not help it – this kind of German hubris is just making me sick.

    • Thank you Hubert for this post of yours.
      I wish to only add one thing.
      To imply that only unused airports and highways may be constructed in the South, is to imply that the South has already fulfilled its development potential.If this is true, I’d like a demonstration of the truth since I’m unaware of it.

      I know, if “it” was to be useful the prv. sector would have already materialized it.
      Just like the internet, oh wait…

    • @ Hubert

      A very basic fact most people, unlike you, understand very early in their lifes is: stay on topic. Another one: don’t attempt to relativize, this makes you look stupid. And now, have a nice day!

    • @VSS

      If staying on topic means dismissing any alternative solution to the euro-crisis that doesn’t include Germany leaving everybody else behind as socialism or as a hidden transfer mechanism for german money to the profligate south, then I have absolutely no problem with looking stupid.

  6. Some of this ‘new economic thinking’ is a bit heavy for my ageing mind and I would appreciate clarifications.

    1) There is this notion that a Treasury can create money; that it can spend money without having it (“Technically when a country wishes to make a payment, the Treasury just sends a signal to your bank to credit your account, and money is created. The Treasury in making its payment does not consult anybody as to whether there is enough cash to do so. It doesn’t need cash, it just consults whether it has an authorization or an order to make the payment, and it makes it. End of story. The purpose of taxation is not to raise money in order that the government can spend it. Those two activities, though both essential, are quite disconnected”).

    My understanding is that a Treasury maintains bank accounts just like everyone else and makes its payments from them; of course electronically. If the Treasury had no overdraft and/or credit lines on their accounts, they couldn’t spend more than they have in those accounts. If everyone, including the Fed, ceased to allow the Treasury credit limits and/or ceased to buy Treasury bonds, the Treasury would run out of cash. Of course, that would never happen but my point is that the cash management of a Treasury is not different from anyone else’s cash management except that the Treasury has unlimited credit lines. The only institution which can create money is the Central Bank. Where am I wrong?

    2) “The purpose of taxation is to control the total level of demand” – I don’t believe I have heard that before. The government provides services to the economy and its people; the tax payers/voters decide how many services they want to be provided with and in what quality, and then they pay for them via taxes. Where am I wrong?

    3) Even if sovereign debt were to be not issue because the Fed buys it and the money is owed ‘to itself’, there is still the issue of interest. If I look at the amount in Austria’s budget which goes towards interest, I ponder that this money could also be spent on education, R&D, etc. Of course, the government can pay future interst by incurring more debt ‘to itself’ but one cannot totally ignore the famous ‘long run’.

    A couple of questions regarding Greece.

    4) “To enable the European Investment Bank to act on some of the plans and resources which it already has” – Is there any reason and/or regulation which limits the EIB today to extend financing for Greek projects?

    5) “How do you maintain ordinary commerce when the Greek automobile distributor wishes to pay BMW in Drachmas and BMW wishes to be paid in euros?” – I thought the whole point of a devaluation is for a country not to buy BMWs when it can’t afford them; i. e. make imports more expensive (and, vice versa, make exports cheaper so that they can be increased).

    • ” If everyone, including the Fed, ceased to allow the Treasury credit limits and/or ceased to buy Treasury bonds, the Treasury would run out of cash……..”

      The Fed is a creature of the State and it is practically a different branch of the public sector.You’re actually making the case of the state not allowing an overdraft to itself.This is a self-imposed constrain not a real constrain.

      “The government provides services to the economy and its people; the tax payers/voters decide how many services they want to be provided with and in what quality, and then they pay for them via taxes. Where am I wrong?”
      Because considering the 1st fact regarding the ability of the state to spend whatever amount it wants, taxes do not finance the services that the public sector provides.The gvt could pay the doctors,teachers,police etc anyway.But in order to keep aggregate demand below or close to full capacity it must tax to reduce disposable income and thus reduce aggregate demand.

      “Even if sovereign debt were to be not issue because the Fed buys it and the money is owed ‘to itself’, there is still the issue of interest. If I look at the amount in Austria’s budget which goes towards interest, I ponder that this money could also be spent on education, R&D, etc.”
      I’m not sure I understand this point.

    • “[…] Thus, taxes are essential because they help the government currency to circulate at par (thereby making the payment system more efficient) and because they promote price stability by removing some purchasing power from domestic economic units. This lesson was learned rapidly by the Massachusetts Bay colonies–so much so that while residents of the colonies were first skeptical about the value of the bills of credit for economic and political reasons, bills rapidly were used as currency and circulated at par:

      “When the government first offered these bills to creditors in place of coin, they were received with distrust. […] their circulating value was at first impaired from twenty to thirty per cent. […] Many people being afraid that the government would in half a year be so overturned as to convert their bills of credit altogether into waste paper, […]. When, however, the complete recognition of the bills was effected by the new government and it was realized that no effort was being made to circulate more of them than was required to meet the immediate necessities of the situation, and further, that no attempt was made to postpone the period when they should be called in, they were accepted with confidence by the entire community […] [and] they continued to circulate at par. (Davis 1901, 10, 15, 18, 20)”

      This lesson was “relearned” in WWII. As Beardsly Ruml (who headed the NYFed during the war) put it:

      “The war has taught the government, and the government has taught the people, that federal taxation has much to do with inflation and deflation, with the prices which have to be paid for the things which are bought and sold. If federal taxes are insufficient or of the wrong kind, the purchasing power in the hands of the public is likely to be greater than the output of goods and services with which this purchasing demand can be satisfied. If the demand becomes too great, the result will be a rise in prices, and there will be no proportionate increase in the quantity of things for sale. This will mean that the dollar is worth less than it was before – that is inflation. On the other hand, if federal taxes are too heavy or are of the wrong kind, effective purchasing power in the hands of the public will be insufficient to take from the producers of goods and services all the things these producers would like to make. This will mean widespread unemployment […].The dollars the government spends become purchasing power in the hands of the people who have received them. The dollars the government takes by taxes cannot be spent by the people, and therefore, these dollars can no longer be used to acquire the things which are available for sale. Taxation is, therefore, an instrument of the first importance in the administration of any fiscal and monetary policy. (Ruml 1946, 36)”

      http://neweconomicperspectives.org/2013/12/mmt-101-response-critics-part-2.html

  7. The above proposals are near useless. Essentially they just consist of generosity by the core towards the periphery. E.g. the “bond issued by the European Central Bank” simply means the EZ as a whole carrying the risk involved in holding periphery debt. In plain English: Germany subsidises Greece, Spain, etc.

    Germans might do that if they were saints. But they’re not, and nor am I.

    The EZ was set up as a system under which each country pays its own way. And that means if it becomes uncompetitive it has to cut its costs and up it’s competitiveness: e.g. go for internal devaluation. But costs are no actually falling all that fast in the periphery. So the EZ is in a bind. It’s in check mate.

    I can see just two outcomes. First, the pain continues. Second, the EZ splits into smaller currency areas.

    • You missed the point. An ECB mediated dent conversion would cost Germany not one euro. Nor would the ECB need to print a single euro.

    • As it is, Germany and the other surplus countries already subsidized the national debt of the deficit countries. Only did almost none of these tax-payer Euros ever reach the greek, portugese, or spanish people. They ended up in the already overflowing pockets of the shareholders of big finance, mainly in France and Germany.
      The whole purpose of the ESM and this heinous austerity programme is not to help the Greeks get back on their feet but to keep the organized crime syndicate that is the global banking sector, the big funds and the insurance companies from collapsing under the sheer weight of its own insatiable greed.
      It’s a giant redistribution scheme from the south to the north and from the bottom to the top.
      All this talk of increasing competitiveness via internal devaluation is a smoke screen. The only country it has ever worked for is Germany and even that is based on a lie – unless you believe all the bogus success stories and consider turning almost a third of a country’s workforce into working poor (so that the 1% can keep on feeling like they own the continent) a viable option.

  8. The above proposals are near useless. Essentially they just consist of generosity by the core towards the periphery. E.g. the “bond issued by the European Central Bank” simply means the EZ as a whole carrying the risk involved in holding periphery debt. In plain English: Germany subsidises Greece, Spain, etc.

    Germans might do that if they were saints. But they’re not, and nor am I.

    The EZ was set up as a system under which each country pays its own way. And that means if it becomes uncompetitive it has to cut costs and up it’s competitiveness: e.g. go for internal devaluation. But costs are no actually falling all that fast in the periphery. So the EZ is in a bind. It’s in check mate.

    I can see just two outcomes. First, the pain continues. Second, the EZ splits into smaller currency areas.

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