Thursday, 16 September 2010

The solution to the European debt crisis?

Modern Monetary Theory (MMT) and neo-chartalism point out that essentially money is debt. The currency issuer (usually the state) issues a 'promise' in return for real goods and services from the economy. That's the reason it still says 'I promise to pay the bearer...' on the front of a twenty pound note.

So I chuckle when I hear about how Ireland and Greece have to appease the terrible market demon in case they demand a high interest rate on their bonds and therefore they have to cripple their economies with terrible measures.

And the reason is that MMT shows there is a simple solution. The Irish bank can issue debt, but also the Irish government can tax -  both independently of the European Central Bank. (It's a bit like having the Bank of Scotland able to tax the Scots as well as print those decorative fivers).

Since money is debt, all you need to do is turn this debt into money. And you do that by declaring that you will accept any Irish bond as settlement of Irish government taxes and charges at face value.

That immediately puts a floor underneath the Irish debt market and ensures that there is always a demand for the stuff - in both the primary and secondary markets. Essentially you have created a parallel currency usable only in Ireland.

And of course since taxation destroys money it would eliminate the bond reducing the stock of outstanding bonds.

No doubt there are rules against this in the EMU, but then there were rules against the Greek situation and they let them get away with it. The solution for Greece and the Greeks is the same, although they'll have to remember to collect the tax this time...

Update

Of course Professor Bill Mitchell has already blogged about this - referring to California which has the same issue.

1 comment:

Anonymous said...

THE SOLUTION

Everyone living in United States knows that our country is in trouble. We are headed towards civil unrest and rioting in the streets similar to what is happening in Greece and other areas of the world.

It is almost as if there is a dooms day scenario about to unfold and our leaders are saying run up the deficit. Who cares what our National Debt is because the world is about to end and we will never have to pay it back.

Let us put on our Nostradamus thinking caps! Imagine ourselves 100 years in the future looking back at the fall of the United States of America. What solutions will the Historians say that if we had implemented them could of saved us from destruction.

I believe that in this mindset we can easily agree that the following need to be implemented immediately. Not one or some of these solutions but all.

1) One flat rate tax of 20% for all purchases and services in the United States. Dismantle the IRS.

2) Debit cards must be used for all purchases in the United States. This would insure that taxes are being paid and help regulate any year end tax rebates.

3) For every dollar spent for any new product made in the United States the purchaser would receive a 10 cent rebate at the end of the year. This would create American jobs.

4) Any terminally diagnosed person would have an option to receive a one lump sum payment of $45,000 to go home and die with dignity as opposed to low quality life extension in a hospital at a huge cost to society. This money could be used for a spouse or to help put someone in the family thru college.

5) Legalize all drugs. Regulate this industry. This would get rid of the drug cartels and eliminate all the senseless drug related murders. For forty years the United States has been at War with Drugs and we are still loosing. Do not condone drug usage just regulate it.

Jim Burns
You Tube mynation123