Social Europe had an article by Yanis Varoufakis yesterday on what he calls 'fiscal money'. This, he argues, would be government rather than central bank created money. The idea is far from straightforward on first reading, but that's true of most ideas about money.
The theme is, however, important. First he is saying a shortage of government debt is crippling existing money supply issues because, as he rightly argues, government debt is now effectively money.
Second, he is saying that this is destroying any real notion of central bank independence because what they are supposedly controlling - the money supply - is no longer within their effective control.
This, thirdly, means that he thinks (as I do) that the whole question of central bank independence is now de facto in doubt: if they are not independent of bond creation and debt policy then they are not as a matter of fact independent.
But (and here's the twist) he argues that removing central bank independence may not be possible for political reasons. In that case his suggestion is that it is better to just let it wither and instead take back the whole issue of money creation for the government itself.
To this point I get his logic. Whether he is then right to argue that this new money should be issued for advance payment of tax is where, as yet, I am not convinced of his argument, not least because of the extraordinary discount rates he suggests should apply for reasons I cannot fathom as yet. I welcome his explicit linkage between money creation and tax payment. But thereafter I am going to have to muse on this. There seem to be so many simpler solutions than the one he is suggesting that I cannot see the merit in his proposal. But he's a clever guy: maybe I have missed the point, of just need another coffee as yet.
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Bill Mitchell blogged in great detail on a similar subject yesterday (though from a more eurosceptic viewpoint than YV, as you’d expect) :
http://bilbo.economicoutlook.net/blog/?p=36809
Good blog
Flipping heck! I’ll get back to you……………..
“an economic axiom: that money and debt (or credit) are strictly separable.”
I do not understand this. All money is debt. Money is simply a record of an unbalance exchange. It has no intrinsic value other than the promises we all made to repay.
All money (notes, coins, numbers in a computer) is the same because they are exchangeable for one another, and created and destroyed in the same way in the government and bank money circuits. As Stephanie Kelton says if you pay your tax in dollar bills then the Revenue will burn them as they have completed their life. Something that is not money has a value that floats relative to money. Gold, bitcoin, etc are commodities that could be used for exchange but they are not money in the same sense as pounds, euro and dollars as they are not created and destroyed in the way the fiat money is.
I do not think you can invent a new type of money that will solve anything. It is all about flow and distribution, making sure that money does not limit what we can do.
I realised this when I was in my 20s, before anyone told me:
Most of what I have done since has been based upon this basic understanding
Because I am not sure Varoufakis gets this I have reservations about his suggestion which is also absurdly complicated in a way that is wholly unnecessary
“I do not think you can invent a new type of money that will solve anything. ”
I don’t know that it will solve anything but surely bit coin is a new type of money. I’ve been told, but I ain’t sure (to quote Dumbo) that other organisations are keen to mint their own coinage. The Whoppa-coin is, apparently, just on the horizon. Whether or not you like BK it is a huge organisation with vast resources. If I’m offered Whoppa-coinage, should I accept?
eruigenus,
Bitcoin has become a speculative nonsense regardless of block chain, and I am not just referring to the rollercoaster instability of its ‘value’.
If you consider that rent-seeking is the capture of existing wealth rather than production (the creation of new wealth), then Bitcoin is is like a rent-seeker equivalent in the world of money. Unlike national currencies it bears no relation to the relative value of things in the real (production) economy.
It merely represents value that would have been represented by other real currencies had Bitcoin not existed.
I am tentatively predicting that in the future it will be remembered as a curious fad from the current era.
I think it a fraud
Who gets the ‘credit’ for its creation
No one can answer, but there is one
This is an interesting subject for us to analyze here, Richard. I am sure that Yanis Varoufakis has developed a complex financial mind in trying to hold the Greek economy together after its having been mauled by both Goldman Sachs and the ECB.
I suspect he is trying to develop a system which gives more control to the ordinary citizens and taxpayers and makes them less dependent upon remote bankers insisting on usurious terms. Most of this could be accomplished by setting up a nationalised bank running in parallel with the existing structures and which could handle all government and taxation matters for each individual including these special advance tax accounts, if chosen. At first I was also surprised by the inclusion of an interest rate at 8% pa but no doubt the Greeks have now become accustomed to seeing these higher levels.
The 8% is baffling
The UK would have peopler queuing up at that rate!
Surely the problems we have been wrestling with surround the historical opacity of the financial systems that we all depend upon. Complexity brings about a state of affairs in which a tiny number of individuals are deemed to be proficient in the workings of a system that is key to health, life and any movement towards a fairer society. We saw in 2008 that credit rating agencies, internal auditors, external auditors, audit committees and, of course, directors did not understand what they were doing.
We cannot replace one priesthood with another. We cannot replace one set of the King’s clothes with another. Even if I could understand what he is suggesting I would want to reduce the argument to a number of elementary propositions.
I do not understand why universities cannot embark upon the task of simplification. For me economic and accounting theory and practice cannot be separated when it comes to the production and cancellation of money/debt by commercial banks, central banks and government. It is time to demystify the liturgy and I fear that this can only be done by those who do not have a vested interest and who can start from first principles.
If you can’t understand the purpose and outcomes of transactions how can they be audited?
I think that I can see exactly where Yannis is coming from with this one.
Take this quote for example:
“The advantages of fiscal money are legion. It would provide a source of liquidity for governments, bypassing the bond markets. It would limit the extent to which government borrowing fuels inter-bank money creation, or at least force financiers to tie up some of their inter-bank money in the closed, domestic fiscal money system, thereby minimizing shocks from sudden capital flight.”
Yanni’s proposal is a fundamentally a reaction to the Greek crisis, the EZ sovereign debt crisis generally, the potential chaos of Brexit and the disproportionately huge, speculative farce that currency markets have become.
That interpretation on my part is reinforced by these quotes:
“fiscal money would have helped Greece resist our creditors’ encroachments in 2015” and “today, it would give Italy, France, and other eurozone members much needed fiscal space”
Yannis is looking at the fundamental disfunctionality within the Eurozone as it is. He is seeing how hard it is to withdraw from, or meaningfully reform the EZ and how long that would take – and then thinking: well, if you beat ’em then by-pass them instead.
This concept is a more intelligent version of “taking back control” – for those who really need it. Although, I don’t see his idea as as being anywhere near as relevant for the monetarily sovereign nations outside of the Eurozone.
The comments in this forum about the “8%” are peripheral. It could be 6%, 4%, 3% – that’s beside the point. At the immediate level, the point there would be in offering a rate of some sort that beats the bond market rate but is only available to the nation’s taxpayers. At the big picture level, the point of this idea generally to re-establish a form of Keynesian macroeconomics as well as independence from the ECB, the bond markets and currency markets.
I am a little concerned, however, that the idea of getting a big break in return for effectively paying one’s taxes in advance might confer yet another advantage on those who can afford to do that.
Moreover, the part of Yannis’ proposal that needs most clarification is the suggestion that his idea could:
“possibly provide a foundation for a revamped eurozone with interlocking domestic fiscal euros, rather than parallel currencies, playing a stabilizing macroeconomic role. And then, perhaps, it could become the basis for a New Bretton Woods, functioning like an overarching clearing union”
Being familiar with both EZ issues and Keynes’ Bancor proposal at Bretton Woods, I am not quite sure how Yannis proposal would work in this respect. But he has just floated that part of the idea at the end of the article and I suppose its a case of one step at a time really.
Thanks
I see his motives
And I see why he wants to walk around the euro – that makes sense
But I am not convinced he has the solution as yet, although I admire the effort
It just needs to get better
Correction: “if you can’t beat ’em then by-pass them instead”