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.