Transition

Thanks for your thoughtful comment. My reaction is...

2012-05-16T23:02:43.493+02:00

Thanks for your thoughtful comment. My reaction is that this is an expensive educational exercise. And it may be too late, there is no longer a chance of a Greek government until after the 17 June elections. The left-wing anti-troika party Syriza is likely to be the largest party also benefiting from the 50 seats majority premium. Austerity on its own (without European resources) will not work anyway. German dogmatic and obtuse insistence on austerity is wrecking the European single currency project. And the Greeks are unwilling to learn other than through their own repeated mistakes.

I received a signed comment that I think is worth ...

2012-05-16T22:49:01.363+02:00

I received a signed comment that I think is worth sharing with others:

Professor Nuti, I read your thoughtful comments on dual currency schemes back in 2010. Things have changed since then. I very much value your expertise in perhaps the most important subject in the world at the moment. Please tell me why my formula will not work:

Life is sometimes tough. But it’s all relative. If kids complain about their bedroom, some camping out can put things in perspective. Greek citizens are complaining about the necessary cuts. I believe the austerity program involves some 20% cuts from government employees, mainly teachers. 20% is a lot to be sure - on top of tax increases. The challenge is to convince the population, especially the large government work force, that taking the tough medicine now is better than exiting from the EU.

The leaders know this, but the average person is unconvinced, or at least unwilling to take the medicine. Here is how you convince them AND have them take the medicine.

You meet with the big unions and suggest they give up a more reasonable 5% pay cut. They also have to accept new drachmas for 15% on the basis of 1 drachma = 1 euro. Thus, they are paid 80% in Euros and 15% in drachmas. This system will be in place for one year before the country reverts to one currency or the other. The population will be no worse off with drachmas than taking the austerity program as planned. They will, however, be educated over the year in exactly what it is like to live with drachmas. Some patriotic grocers and service providers may honor the initial 1:1 value for a brief period. But very soon, if not immediately, the populace will see what the drachmas will buy -- not much.

The 80% Euro bedroom will start to look much better after a little drachma camping such that they can imagine what a disaster going to 100% drachma would be. They will feel fortunate that their leaders did not abandon the house with the bedroom that is not all that uncomfortable after all.

Now I realize that there are many legal and technical hurdles to this plan. But desperate times requires desperate measures. At least this will calm the streets and perhaps for those willing to work for drachmas, may even spur some short term growth.

I think the important thing is that any nation mus...

2012-05-04T02:35:24.014+02:00

I think the important thing is that any nation must a currency that it issues itself and whose value is based on the labour performed in return for its issue and the goods and services of the nation that are an appropriate reward for that labour. Declaring it the nations own private currency liberates it from the pressures that might undermine this very clear criteria of its value. Of course you can only have a private currency if you use something else for foreign trade, like the Euro.

Having an international reserve currency as your internal currency has some problems. The US might anger China less if it were to separate its own economic problems from the value of the dollar by issuing a new internal currency.

I don't see a reason for more than two currencies if the government manages at least one currency well.

I read an essay by F. A. Hayek, “Choice in Currenc...

2012-02-06T01:12:05.034+01:00

I read an essay by F. A. Hayek, “Choice in Currency”, in which he contended that allowing the citizens of a country the choice between competing national currencies can afford them a lifeboat against inflation. I was wondering if I could get your comments on whether or not preemptively introducing a second and third currency with free floating exchange rates into the United States could protect US citizens from inflation.

The new currencies could be introduced on a 1 for 1 basis for a span of 5 years before the parities were allowed to float. The currencies volumes and reserve requirements but not their parities could be managed by different governmental bodies such as the Treasury, Congress or separate parts of a divided Federal Reserve. If the nation correlated currency strength to job performance of the managing entity this could establish a currency soundness race to the top.

In this scenario, we are not concerned with increasing liquidity, defaulting on national debt or restoring or establishing international market competitiveness. We are not attempting to permanently establish a strong and weak currency. We are fine with Gresham’s law driving out bad money or most likely establishing circulating and personal reserve currencies. We are concerned only in maintaining the buying power of one or more and ideally all of the currencies.

I was just wondering if this or a similar scenario is at all workable and if our objective of a currency inflation hedge could be established?

Many thanks for making the truthful effort to expl...

2011-12-27T11:29:29.058+01:00

Many thanks for making the truthful effort to explain this. I feel very strong about it and would like to read more. If you can, as you find out more in depth knowledge, would you mind posting more posts similar to this one with more information.

The solution I am suggesting is not about exiting ...

2011-12-12T19:16:34.406+01:00

The solution I am suggesting is not about exiting the Euro although it would provide a gradual way of doing so if it was really necessary. It is about making the best use of the Euro. It has some complexities and costs: People will have to handle two currencies, a permanent monetary balancing mechanism is required needing a lot of manpower and notes and coins will have to be issued. It is however, as I have said before, not messy. The issue of this currency does not cause defaults or anyone to be left short on existing obligations.

A much better solution would be for the ECB to evaluate the internal circulation requirements of each nation and simply provide each nation with that amount of Euros, debt free. This will be entirely fair. If the evaluation is correct then those free Euros will, on aggregate, never leave the country and therefore will not be used to purchase the wealth of other nations. If nations require Euros above those issued debt free then they must borrow, or earn them, as now and that is also fair because on aggregate these Euro will be used to purchase the wealth of other nations.

The problem with the Euro is that is cannot be a super strong world currency and at the same time serve well as the currency of circulation within Euro zone nations. Clearly the Euro was founded on an ambition to attain a trusted reserve currency status because the constitution of the ECB explicitly repudiates responsibility to the needs of Euro nations in favour of maintaining the value of the Euro.
Its strength as a world currency owes a lot to this promise therefore I see no possibility that the ECB will issue debt free Euros for internal circulation as I have suggested. From the point of view of international holders of Euro reserves, the need for Europeans to use Euros to buy their daily bread is an irritation and the ECB is committed to protecting them from this irritation.

Only a joint act of sovereignty by all Euro zone nations can change the constitution and purpose of the ECB – currently they don't even know how to talk to each other and Europe is steered by leaderless and vision-less summits of the strongest. It is for this reason that I am suggesting dual currency as a way a nation can take unilateral but benign action to at least safeguard the workings of its own internal economy.

Exit from the euro most definitely cannot provide ...

2011-12-09T10:08:26.470+01:00

Exit from the euro most definitely cannot provide a solution for the euro crisis. Public debt is denominated in euro and other foreign currencies, and the introduction of a new national currency, associated with devaluation and inflation and higher interest rates, would raise the debt/GDP ratio and lead to accelerated default, not to a solution.

Moreover exit from the euro would involve the heavy cost of leaving the Union, as well as losing access to any assistance already pledged by European institutions. Thus there is no incentive to leave unilaterally, and there is no mechanism to force an existing member of the euro-area to leave.

The introduction of a new currency(or the re-introduction of an old one) could simply be forced upon a member after default, following the resulting banking crisis and generalised illiquidity of the entire economic system due to lack of euro in an amount sufficient to keep the economy running.

A necessity imposed by a crisis if this ended in disaster, therefore, not a solution of a crisis but a desperate and costly way of coping with the consequences of failure, though better than even costlier alternatives. Let's hope that German opposition to greater latitude in ECB powers to purchase government bonds might cease at last.

I intuitively think John Morrison's ideas need...

2011-12-06T20:29:41.641+01:00

I intuitively think John Morrison's ideas need to be considered as a way out of the euro crisis.
It seems like a "National Local exchange trading scheme", and might just do the trick (to some extent)

D. Mario There is one part of the process about w...

2011-12-04T00:51:49.461+01:00

D. Mario

There is one part of the process about which I should have been more explicit. If the currency is issued as 10% of salaries then the government only has to pay 90% of its wage bill in Euros and private companies will initially have to convert 10% of their wage bill from Euros to the new currency with the government. The government retains 1 Euro for each equivalent value of national currency issued. Until the new currency find its natural circulation, the government must hold 90% of the Euros it has retained for possible redemption. The other 10% can be used to reduce debt. Permanent circulation of the currency reduces government debt because it is no longer asking to be redeemed as Euros.

The purpose is to allow Euro zone countries to develop a degree of monetary sovereignty; the power to independently provide some liquidity to their own economies that does not require external borrowing and that has no effect on the issue or value of the Euro. Accepting the status of the Euro and all obligations denominated in it has two advantages: woe betide any nation that doesn't and keeping the Euro as the strong currency relieves the internal currency of all international credibility burdens and vulnerabilities. It is a nations private currency.

The need of governments to borrow money for every action of their economy is not normal. It places nations in artificial debt and the anxiety to stay sweet with creditors causes governments to over-borrow when invited and then, when panic hits, to impose dismal austerity measures in a desperate attempt to be seen to be doing the right thing. It is destructive to democracy leaving no government able to act other than as bailiffs selling out their own people

Recent events have shouted this very loudly:
Greece explicitly threatened with withdrawal of its next operating loan.
The entire political class of Italy and Greece supplicating to direct rule by bankers.

To escape from this tyranny, Euro nations have got to move towards a position of being able to say when necessary “Have your Euros back we´ll use our own currency instead”. I am trying to find a gentle and measured way in which they they can do this.

"Work hard and produce more than we consume f...

2011-12-01T08:55:54.580+01:00

"Work hard and produce more than we consume for a while perhaps?"

For a while, yes, it would be likely to help. But as a general rule - following the advice put by Shakespeare on Polonius lips: Neither a borrower nor a lender be... - can be a poor receipe for prosperity. A more flexible rule, possibly averaging a zero deficit over the years but leaving room for anti-cyclical government policy is definitely superior.

The important thing is to avoid the danger area, of growing debt/GDP ratios up to unsustainable levels, where (approsimately)the interest rate on debt exceeds GDP growth rate.

"It need not be so." True indeed. Do w...

2011-11-29T04:25:52.647+01:00

"It need not be so." True indeed. Do we not have examples of countries that have been in similar situations? What have others done to get out of their problems?

Work hard and produce more than we consume for a while perhaps?

Good leaders of monetary policy would keep countries producing a little more than they consume all along. A country, business, or person should always operate from a position of power, not debt. Growth may be slower, but it comes with more stability.

Thanks for your links and comment, my Australian A...

2011-11-24T22:54:41.636+01:00

Thanks for your links and comment, my Australian Anon.

I am not in a position to comment on Gibson's alleged anti-Semitism or otherwise, and I won't.

But I believe you answered your own question "are the denizens that infest it very much part of the problem?".

Yes, of course they are.

Hi, I am from Australia. Is the Vatican (and Opus...

2011-11-23T06:18:06.646+01:00

Hi, I am from Australia.

Is the Vatican (and Opus Dei too) really full of good intentions?

Or are the denizens that infest it very much part of the problem?

Remembering history is never really dead, which is to say that its toxic time spirits always haunt the present

Why not check out The Criminal History of the Papacy by Tony Bushby

Plus applied christian politics 101

www.dartmouth.edu/~spanmod/mural/panel13.html

www.jesusneverexisted.com/cruelty.html

www.nobeliefs.com/nazis.htm

www.logosjournal.com/hammer_kellner

Thank you for taking the trouble to explain your p...

2011-11-21T17:56:19.034+01:00

Thank you for taking the trouble to explain your proposed scheme in such careful detail, John, and for revealing your identity.

Your parallel currency seems aimed at raising a relatively small amount of non-inflationary liquidity in a euro member-state. But as a purely internal circulation, without any impact on competitiveness or debt reduction, it seems rather limited in its capabilities and ambitions.

I am worried by your last sentence: "Any permanent circulation of the national currency is a reduction in the nations Euro borrowing requirements and the foundation of monetary sovereignty." You treat any reduction of the public's demand for money as a reduction in government borrowing requirement, but I do not see how they can be regarded as the same thing...

I am the anonymous that posted the idea for an int...

2011-11-20T15:31:39.847+01:00

I am the anonymous that posted the idea for an internal currency for Euro zone nations.

Nations that issue their own internal currency in the manner I describe will still be using Euros as their hard currency and therefore there is no need for the internal currency to have any international value. The internal currency never presents itself to the outside world, it is there to give the economy some monetary autonomy so that it depends less on borrowed Euros.

Competitiveness is not achieved by devaluing the internal currency, that would be pointless, it is achieved by reducing the Euros that the nation needs to consume. Workers become Euro competitive by being more humble in their use of Euros while the internal currency gives them access to what the nation itself can provide.

I think that rather than phase the internal currency out, each nation will find its appropriate level of use. Once it is seen to be working, no nation will want to eliminate it completely because it will be seen as a foundation of national economic security.

I have thought some more about the issue and have come up with a more concise way of expressing the essential rules and mechanisms which are necessary to ensure that it can flow as full payment for wide range of goods and services strongly related to the internal economy while all receive the same proportion of Euros and internal currency in their income. The same mechanism also avoids the distress that would make anyone want to convert internal currency into Euros at an unfavourable rate and this will keep the currency firmly off the markets.

Here it is:

The government introduces a new national currency, a modest supplementary currency to circulate alongside the Euro. Instead of making it legal tender, which is impractical with so many Euro obligations around, it decrees and enforces that:

Every wage or salary earner must receive say 10% of income as new national currency.
Every business entity whose national currency income exceeds 10% of its total income may redeem the amount over 10% with the government as Euros at a nominal loss of say 1%.
The government initially fixes and publishes the value of the new currency against the Euro for pricing purposes.
It is illegal to sell or buy goods with national currency at anything other than the published rate.
It is illegal to settle Euro obligations with the national currency.
It is illegal to exchange between national currency and Euros except with the government as part of its monetary control program.

Those are the rules. Here is the most concise description I have managed yet of how it works.

It starts with the wage and salary earners who, anxious to keep their Euros for standing Euro obligations, will want to spend their new national currency as full payment for uncommitted spending, that is shops, cinemas, zoos etc. They will be doing this constantly with 10% of their income, few will think it sensible to save it. Shops etc. will accept the national currency but they may ask the government to redeem 90% of it as Euros and accept the 1% loss of value in the exchange as the price of the extra business. Shops etc. will still be left with 10% of their income as national currency which they will have to spend purchasing from each other. Once you have businesses within the nation purchasing from each other, you have permanently circulating currency. Only 10% of the money issued, that is 1% of incomes, is coerced into permanent circulation in this way. That is good because coercion is dangerous and should be applied lightly. Permanent circulation will increase as businesses find opportunities to spend their excess national currency and avoid the 1% loss on redeeming it as Euros. Any permanent circulation of the national currency is a reduction in the nations Euro borrowing requirements and the foundation of monetary sovereignty.

Suppose ther introduction of the new currency actu...

2011-11-12T18:29:46.396+01:00

Suppose ther introduction of the new currency actually worked. This implies that its devaluation would boost net exports, GDP and employment - thanks to the ensuing rise in national competitiveness - by more, over time, than it would raise the cost of servicing a national debt also inflated by devaluation. A VERY BIG IF, UNLIKELY TO BE SATISFIED.

If the new currency did not satisfy this condition, you would be stuck weith it for ever. But if it did, phasing it out would be no problem at all. The National Central Bank that issued the new currency would simply buy it back in the market using the euro that it would have accumulated out of a persistent trade surplus. Euro circulation would be gradually restored, replacing the new currency into disappearance.

The problem therefore is not how to phase it out, but whether you ever could.

Hope I will get a reply to this even though there ...

2011-10-26T20:19:42.198+02:00

Hope I will get a reply to this even though there have been no new comments for about 2 months....

But the last Anonymous' idea seems pretty interesting, but how would the supplemental currencies be phased out once a reduction in debt and increase in competitiveness have been achieved?

Would it be that these temporary currencies would be linked to pay increases such that any pay increase would involve a reduction in the proportion of the salary paid in the supplementary temporary currency? For example, if under the scenario we say a relief of debt burden and an increase in competitiveness and down the line a salary increase of 10% is due to increased productivity then would we see the salary proportions change to 95% Euros and 5% supplemental currency (so the 10% increase comes in the form of an increase in Euros with a decrease in supplementary currency units)? If that is the case then the temporary currency could be phased out eventually yes?

And reintroduced should there be another crisis?

I like the idea because barring a social compact between the government and citizens (of all stripes), citizens generally fear wage cuts because they don't always come with price cuts. So the cost of living increases and they perceive it as being "unfair" that [place stereotype here, e.g. greedy bankers, merchants, etc] get to charge people the same prices (and thus collect the same income) but that they [the ones who are accepting "more than their fair share"] who experience wage cuts have to make due with less income. Under Anon's system, merchants would be visibly affected and would also have to accept a 15% reduction in real payments (in terms of euros) through the rebalancing mechanisms.

Italy at present is nowhere near insolvency, Moira...

2011-10-08T12:09:15.767+02:00

Italy at present is nowhere near insolvency, Moira, given the stability of its debt/GSP ratio (though high), the only primary surplus in Europe after Germany's, the relatively low private debt of households and enterprises, the long term nature of its government debt (average maturity 7 years) and an average interest rate of 4%.

Italy's fundamentals are better than Spain's, but Zapatero has stepped down and called new elections, while Berlusconi - who has lost not only regional elections but four referendums and has reconstituted his parliamentary majority through corruption and criminal complicities, is not only maintaining his bad government but is actually threatening to stand for re-election in 2013. This is why Italy's spread rose by about 70 points and overtook Spain's, as recognised by the Treasury Minister Giulio Tremonti.

As the average interest rate on government debt will rise with debt renewals and new debt, Italy will undoubtedly become insolvent before its new 10-year bonds reach maturity.

Hence the rating agencies were right in downgrading not only Italy's government bonds, but also major companies such as Eni, Enel and Finmeccanica, banks like Unicredit and Intesa, and no less than 30 local authorities starved of funds by the recent fiscal package.

Jim, I am not optimistic about the implementation of the proposals I list, hence my prospect of a more unpleasant world than it was before the crisis. I only said that "It need not be so".

You have a long "shopping list", Mario! ...

2011-10-05T16:01:32.996+02:00

You have a long "shopping list", Mario! There have been such strong negative reactions to a lot of the things you favour (retail/investment banking split, derivatives regulation, short selling restrictions) that I fear the eventual extent of regulatory change will be much smaller than we really need.

Do you think Moody's downgrading of Italy'...

2011-10-05T14:31:39.110+02:00

Do you think Moody's downgrading of Italy's government bonds by three notches, from aa2 to a2, is justified by Italy's fundamentals?

A very good point, Bob, thanks. The first thing t...

2011-10-05T13:04:12.684+02:00

A very good point, Bob, thanks.

The first thing that Christine Lagarde did, taking office at the helm of the IMF in September, was to issue a stern warning on the urgency to re=capitalise European banks, to the tune of at least €200bn. She was greated by European officials' outraged denials.

The serious crisis of the Franco-Belgian bank Dexia - that is threatening to lose France the AAA credit rating and raised the spreads of both countries - yesterday persuaded Ecofin that perhaps there was a problem and something needed to be done. But "co-ordinated but separate" national rather than European interventions are unlikely to work (see today's FT and Eurointelligence.com).

"...ultimately, a widespread crisis of sovere...

2011-10-05T04:22:11.618+02:00

"...ultimately, a widespread crisis of sovereign debt, particularly in the Euro-zone".

At the moment, in turn, this is feeding back into a new round of banking crisis, with the reduction in the value of government bonds in banks' portfolio.

thank you for this amazing article

2011-09-09T02:41:26.402+02:00

thank you for this amazing article

Re. Supplementary national currencies for Euro cou...

2011-08-22T13:52:16.595+02:00

Re. Supplementary national currencies for Euro countries.

As a currency that is supplementary to the Euro the new currency must have clearly defined limitations but as national currency it must have the full trust of the nation.

Limitations that new currency must respect:

It is not the Euro and has no validity in other Euro countries.

It is not exchangeable for Euros. The government offers no exchange outside of its rebalancing mechanisms, discourages private exchange and attempts to prevent a distressed exchange market from developing by preventing the distress that provokes a demand for it,

It cannot be used to pay off existing Euro obligations.

It may be necessary to permit refusal of it as full payment for some categories of transaction which are heavily loaded with unbreakable chains of Euro obligations. This may include housing (because of existing chains of mortgage obligations) and more appropriately wholly imported goods.

Strengths that the new currency must have:

It is the property of the nation. It is not borrowed, it does not have to be paid back and no interest is being paid for its use.

It is issued as state backed credit in wages and salaries that can be fully converted on demand to new currency banknotes and coins. Initially most of this credit will be turned into notes and coins and immediately spent.

It is subject to stricter accounting than the Euro. Demand deposits may not be lent out and lending on time deposits must be subject to strict maturity matching. There must be no duplication of access to the new currency such as occurs with fractional reserve banking.

It declares its own value with respect to the Euro within the country where it is used and has no interest in how it is valued outside of the country where its use is not intended. There is a convenience in parity but should the Euro fluctuate, it is not necessary that the new currency should follow it, it may be better to set a new value ratio.

There is very little to lose and a lot to gain with this system. It is not hostile to the Euro, it simply relieves it of a burden that it is unwilling to bear whilst allowing a country to maintain the health of its internal economy. The new currency makes no claim on the wealth of other countries.

An issue rate of 10-15% of earnings is probably about right. Any more and people and businesses will not be able to meet their Euro obligations and any less may not have enough impact. This rate, although cautious and replete with rebalancing mechanisms that can reduce its permanent effect to 2.5% of income, will make the new currency highly visible within the country. Few Euro banknotes and coins will be seen and new currency banknotes will take their place as people rush to make all small purchases out of their new currency income. Euros payments will tend to be larger commitments that are paid by credit transfer.

This much will get us out of trouble for now and produce a more civilised environment within the Euro Zone that will be more conducive to proper debate about the future of the Euro.

Re. Supplementary national currencies for Euro cou...

2011-08-22T13:40:04.606+02:00

Re. Supplementary national currencies for Euro countries.

If we could have a 2.5% increase of Euros in the domestic money supply at no cost then we would not be in crisis and the Euro would be serving us well.

That we cannot do this is understandable because Euros can be spent in other countries who would not be happy to see us creating money from nothing that is an entitlement to their wealth. This is the price of using a currency good for purchase in other countries as our day to day currency for internal trading. It is an expensive luxury, it is becoming unaffordable and it is not necessary.

If a new national currency reached 10-15% of the money circulating within a nation then it would still be well within the bounds of the proportion of money that continually circulates within the country and is never used to purchase foreign goods. It is wasteful to pay (borrow and return with interest) for this money to have foreign purchasing power when it is not used for this purpose.

Devaluing this supplementary currency would be meaningless and pointless because by its constitution and manner of issue it is not convertible. Nobody in their right mind will seek to convert the new currency into Euros at an unfavourable rate when they receive 85% of their income in Euros. Unfortunately, with everyone continuing to hold heavy Euro obligations, the only devaluation that can help us is devaluation of the Euro which is beyond the control of any nation.

This proposal is not about achieving competitiveness by currency manipulation it is about reducing Euro obligations without causing a damaging contraction of the internal economy. It is an alleviation of the immediate Euro credit crisis that demands a reduction in Euro debt. To the outside world the country simply runs on less Euros; that is it holds less entitlement to the wealth of other countries. It is no concern of any other country that this country is managing to avoid internal collapse by issuing its own internal supplementary currency. Of course not having your internal economy collapse will be a positive factor in achieving competitiveness.

The system could be described as cumbersome but it is not messy. Although more accounting is required and a new government agency will be needed to administer the authorised currency exchanges needed rebalance incomes, the aim of this agency is very clear, to prevent the distress caused by overexposure to the new currency. We should expect that the solution to such an intractable problem may require a bit of effort.

I have taken the liberty of sending another post with further important details of this proposal.