Interview on Dialogos Radio with renowned economist Warren Mosler, on money, debt, how central banks operate, on Greece, on the European Union and how its policies have perpetuated the economic crisis, and on his proposed solutions.
This is a great interview and hearing Warren speak, you realize that the solutions to a lot of, if not all of, the world’s economic woes are actually very simple.
From Dialogos Radio – Aired Nov 19-25, 2015
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The transcript of Dialogos Radio’s interview with economist Warren Mosler. This interview aired on our broadcasts for the week of November 19-25, 2015. Find the podcast of this interview here.
ΜΝ: Joining us today on Dialogos Radio and the Dialogos Interview Series is economist Warren Mosler, co-founder of the Center for Full Employment And Price Stability at the University of Missouri-Kansas City and a leader in the field of Modern Monetary Theory (MMT). He will speak to us today about money, debt, Greece, the Eurozone, and much more. Warren, thank you for joining us today.
WM: Good to be here, thank you.
MN: Let’s begin with a question that might seem obvious, and yet is something that so few people actually understand. What is money, and how is it actually created?
WM: If you talk to different economists they’ll give you different definitions of what money is. I actually don’t even use the word, but our currencies, such as the euro, the dollar, the yen, those are just the things that are needed to pay taxes, they’re tax credits. They’re no different than a tax credit you might get for solar energy, where the U.S. government might give you a million dollar tax credit. It’s no different than getting a million dollars. So the currencies we generally talk about are basically just tax credits.
MN: Another topic that is often misunderstood, and it relates to this first question, is the role of the central banks, such as the ECB or the Federal Reserve. What are they, who operates them, how do they operate, and do they actually create money, or tax credits?
WM: They are like the scorekeeper for the currency, and they are the government’s fiscal agent. They have a spreadsheet, just like you set up a spreadsheet on your computer, and they put in debits and they open up accounts for the member banks, for foreign governments and a few others. When the government spends, they put credit into the appropriate account, when it taxes, they debit the appropriate account, and they also generally regulate and supervise the banking system to some degree.
Those are the two roles they generally have, and as part of the operation of the spreadsheet, the scorekeeper so to speak, they’ve also been given the job of determining what’s the appropriate interest rate. There’s no such thing as the marketing determining rates. The government has to set some rate, or the rate will just sit there as zero.
In a floating exchange rate the natural rate of interest, the rate without government intervention, is zero, and then it’s up to the government, if it wants to support a higher rate, to take some kind of action to do that, and that comes in the form of either paying interest on balances at the central bank, interest on reserves, or selling treasury securities, which are just interest-bearing accounts at the central bank.
MN: Now, having discussed this, what, then, is public debt?
WM: What we call the public debt are, for example in the U.S., the dollars spent by the government that haven’t yet been used to pay taxes. When the government spends these dollars, they credit bank accounts, they get into various bank accounts, and when they sell treasury securities, which is called borrowing, dollars shift from one type of bank account to another type of bank account called a government bond. A government bond is just a bank account at the central reserve bank, they call it securities accounts, it’s just like a savings account at a normal bank. The same is true in the Eurozone, all the government debt in the Eurozone is nothing more than savings accounts in the central bank system. You give them euro, you get them back with interest, with negative rates you have to pay a little interest, it’s the same as a savings account. That’s true in Japan and the UK and in any country that has its own currency and issues bonds.
The public debt is the money the government has spent that hasn’t been used to pay taxes and it sits in what are best thought of as either checking accounts or savings accounts at the central bank, or some of it might sit in cash. That’s the public debt.
MN: Having brought up the Eurozone, let’s look at the situation in Greece…Is the economic crisis in Greece a debt crisis, as it’s often described?
WM: It is, under the current context of the rules and regulations that have been set down. It’s a political choice to have a debt crisis. If the central bank, the ECB, guarantees the debt, then there’s no debt crisis. If they don’t guarantee the debt, there is a debt crisis. Before the debt was guaranteed in 2012, that was before Mario Draghi said “we will do what it takes to prevent default.” In saying there’s no default, they’re saying the debt is guaranteed. Before that, all the countries were about to come apart because of a “debt crisis,” but once the central bank guaranteed all the debt, the idea of the debt crisis really goes away, interest rates come down, and what they do is, they said there’s a guarantee, so there’s no debt crisis, but it’s conditional.
There’s a conditionality here, it’s conditional, you have to obey the rules, the fiscal rules of the European Union, and if you try to violate the fiscal rules, then you’re no longer under the umbrella of the central bank guarantee. So when Greece tried to, when there was some risk that they would step out of the fiscal compliance, then there was risk that the debt would not be guaranteed, and suddenly interest rates shoot up and suddenly they can’t finance themselves and suddenly you have a debt crisis. So yes, there is one potential debt crisis, but it’s a political decision, it’s not a market situation, it’s not something that happens outside of political control.
MN: You mentioned the fiscal rules that are in force in the European Union, and one set of rules has to do with the deficit levels that EU member states can maintain. You have argued that these deficit limits are the cause of the continent-wide crisis. Why do you believe this is the case, and what is the solution that you have proposed for countries like Greece, with regards to the deficit limits?
WM: There’s a theory of macroeconomics out there that says that governments should balance their budgets and then the central bank can use interest rates to control the economy. So you balance your budget and if the economy is bad, like it is today, they lower interest rates and that causes the economy to do better and everything is fine. Everybody has a balanced budget and interest rates are at the appropriate level. Interest rates are like the thermostat on the wall: if it’s too cold you use interest rates to warm things up, and if it gets too hot, you use interest rates to cool things down. And as a follow up to that, they have quantitative easing, which is just a derivative of interest rate policy, it’s basically the same thing.
What’s happened is, Japan’s tried that for 20 years and it hasn’t worked yet, and the Federal Reserve has been doing it for seven years and is still fighting deflation. Japan has been fighting deflation for 20 years, and the European Union now for six years. If you ask any one of them, they say “well, it’s just going to take a little bit more time.” So there’s one theory that says you just balance your budgets and it’s just going to take more time, you just wait, and to me, the reality is that this whole idea of using interest rates to control the economy, it just plain doesn’t work. We need to recognize that fact, and I can give you a couple of reasons why I think it doesn’t work. One of them is that governments are net payers of interest to the economy. Governments pay a lot of euro to bondholders in the European Union, and that’s income for the economy, and income is good for the economy, that’s money to spend. There I go using the word money, I use it casually. And so, when Mario Draghi said “we’ll do what it takes to prevent default,” interest rates came down. Now, that was good for the cosmetics of all the member nations. When interest rates came down, that means they pay less interest to the economy. People are earning less interest on their bonds. If you have an Italian bond now, you earn less than two percent, where you were earning over seven percent before. That’s on all the new bonds. How does cutting back on interest income paid to the economy, help the economy? What is the economy? The economy is just spending. GDP is total spending in the economy, it’s sales. A strong economy means there’s strong sales, and a weak economy means there’s weak sales, and so cutting back on income, reducing interest income, reducing rates reduces income to the economy.
When the central bank buys bonds and holds them, that’s called quantitative easing. The central bank holds those bonds, those savings accounts, instead of somebody in the economy, some entity in the economy. And so, the central bank’s earning the interest instead of the economy, and the central banks have started showing large profits, when all that interest would have been earned by the economy. What does the central bank do with the money? Well, they turn it back to the government, so to speak, but they don’t spend it. They just use it to reduce the debt. So, again, it’s a drain on income. What they call monetary policy, in the first instance drains a substantial amount of income from the real economy, and to me, that should give you a first clue as to why this policy doesn’t work to make the economy better.
The other idea that goes back 300 years in economics, it’s nothing new that I’m going to tell you here, the best way to think about it is: what if everybody decided not to spend anything, any of their income, they just stop spending any money at all? What would happen to the economy? Well, the answer is it goes to zero. There’d be nothing sold, there would be no jobs, no income, no economy. It would be a disaster. So the economy is dependent on people spending their income, and what follows from that is, for anyone who spends less than their income, somebody has to spend more than their income to make up for it, or the sales don’t hold up, the output doesn’t get sold, and you have unemployment and serious economic problems. A large part of the economy that naturally spends less than their income are people who, when they get paid, money goes into a pension fund or a contribution or it gets withheld, they don’t get all their income to spend, and they don’t spend it all anyway, they keep a little bit in cash. And then you’ve got corporations that build reserves, they don’t spend their income, insurance companies take in premiums and they don’t spend all their income, they save some for later. All the cash in circulation is income that hasn’t been spent yet. And then you have foreign central banks that will hold euros in savings. That’s income that hasn’t been spent yet. So you’ve got all these savings desires, all these entities that try to save euro and spend less than their income. Well, something has to make up for that or else you get a bad economy.
If you look at the first seven or eight years of the euro, the private sector credit expansion was the source, that’s where everyone was spending more than their income. They were borrowing for houses, Spain had a big housing boom, they were borrowing for cars, there were businesses borrowing to expand. You had all these entities in the private sector spending more than their income to make up for all of the entities that were spending less than their income. It was sort of okay, unemployment went down from eight percent to seven, there wasn’t any blood in the streets, people were sort of happy with it. But then the crisis hit in 2008, the credit crisis, and suddenly the people who were spending more than their income couldn’t do that anymore, and credit just stopped. Now, there was no one to make up for all the entities, all the people spending less than their income. There was nobody out there spending more than their income. And so, the economy stalled and unemployment went straight up.
Now, governments could very easily make an adjustment to spend more than their income. They could lower taxes and they could increase public spending, public services, and the government could make up for the lost spending, make up for people’s savings, spend more than their income and fill that gap. And by cutting taxes, they could allow the private sector to have more income, to have more spending, and again fill up the gap. Depending on your politics, you could either reduce taxes or you can increase public spending. I’m not trying to take sides on the left-right debate here about which is better, but governments can’t do that in the European Union because they’re all limited by three percent deficits, and that’s not enough given the lack of private sector credit and the natural desire to save. Europeans are very good savers. It’s not enough to make up for the people not spending their income, so all this income goes unspent and the economy suffers.
MN: We are speaking with economist Warren Mosler here on Dialogos Radio and the Dialogos Interview Series, and Warren, from what I understand, you proposed, as one solution for the European Union, the loosening of these deficit limits, to actually allow countries to run larger deficits…
WM: They don’t want to do that because they think we just have to wait longer for interest rates to work. What I’m just saying is: let’s use the deficit limit as the thermostat on the wall to control the economy. It’s ice cold right now, so you reduce the limit from three to maybe eight percent. Now, with the central bank guarantee in place, you don’t have to worry about markets. The interest rate is going to stay at the ECB policy rate, so the markets have nothing to say about this. So, you change the deficit limit from, let’s say, three to eight, you just add five percent, and that will add approximately three, four, five percent to GDP. Economists might disagree on that, but they’ll all agree it will add a lot. And then, each member can decide to either reduce taxes or to increase public spending. They could have a big debate about how to get to the new limit, if they want to. If they don’t want to they could stay where they are, but they have the option to increase the deficit limit. Unemployment will, every forecast will immediately drop from wherever it is now, somewhere around eleven percent, to probably nine or maybe even less. So unemployment would come down pretty dramatically, by full points, and GDP will go up from near zero to maybe three, four, five percent, and the European Union will be deemed a big success, and there will be big parties and the streets and the crisis will be over.
It’s not hard and there’s no economist who would not have that in his forecast if that was to happen, but the policy makers don’t think it’s necessary. They believe we just have to wait more time for these interest rates to kick in, and they’re willing to do that, and they’ve been waiting, again, 20 years in Japan, seven years in the U.S., and six years in the European Union. What I’m saying is, make the fiscal adjustment, if the interest rates do kick in like you think, just reverse the fiscal adjustments. If the economy starts getting too hot and unemployment drops too far and everybody is worried about inflation, then go back to three percent. You don’t have to stay there forever if things heat up too much for you–I don’t think they will, but should that happen, it’s just as easy to go back in the other direction. But I’m just one person here saying this, that’s my proposal.
MN: Now, what is the real debt solution for Greece, as you have proposed it? Does it involve Greece paying off its debt, or perhaps does it involve a so-called haircut such as the PSI in 2011-12?
WM: Look, in the last PSI the debt was reduced by 100 billion euros or something, right? And what happened to the economy? It got worse. Why? Because what was the debt? The debt is Greek bonds. What are Greek bonds? Greek bonds are savings accounts in the European Central Bank system, at the Bank of Greece, and some person, some corporation, some entity, that’s their money. They’ve got a million euro in the Bank of Greece earning interest in a savings account called a Greek bond. When you take that away, when you reduce the debt by 100 billion, you’ve reduced the money supply, an important part of the money supply, what I call base money, by 100 billion. It’s like a tax. You’ve taxed the economy by 100 billion euro when they removed the 100 billion euro of Greek debt. So, the answer is not, right now, to remove the money supply to tax the economy. Taxing will make it worse, and debt reduction is a tax, it makes it worse.
The Greek debt now is not any kind of a burden to Greece. It’s maybe a psychological burden, but it’s not an economic burden. First of all, the maturity rate is 20 years. Second of all, the interest rate is almost nothing, so there’s no annual tax, so to speak, that’s dedicated to debt reduction right now. Whatever debt service is there just gets refinanced and piled on to the end. So for all practical purposes, there is no debt burden for Greece right now. That is not the problem. Debt reduction would only make it worse.
What Greece actually needs is to have more debt. That’s the answer. The answer is, they need to reduce taxes or increase public spending, one of the two or some combination. You reduce taxes to increase private sector spending, or you increase public sector spending, but the problem in Greece is the Greeks are very, very good savers. They save a higher portion of their income than other Europeans. Where does that come from? There has to be some entity that’s allowed to spend more than its income to make up for the people spending less than their income, otherwise the output doesn’t get sold. It comes back to the same thing. Because they’re good savers, they should be entitled to having a larger budget deficit. They should be able to have lower taxes and higher public spending because the private sector is not doing the spending. They’re defaulting the spending to the public sector.
The irony is that the deficit limits in the European Union are rewarding the bad savers and punishing the good savers. The three percent increase in debt allowed every year means that savings, net savings of financial assets in the European Union are only allowed to grow at three percent per year, and any country that requires larger savings than that because of its institutional structure suffers the consequences of high unemployment. And, the countries that have high private sector debt growth and therefore don’t have high net savings desires, they benefit. What sense does that make? The European Union’s savings is a virtue.
The public sector finances, they are just the accounting record of what’s going on in the private sector. They account for what’s happening in the private sector. When the public sector spends a euro, then they say, there’s public sector spending of one euro, that means there’s private sector income of one euro. So the public sector spending is the accounting record of the private sector income. When they say there’s public sector debt of 100 billion euro, that means there’s private sector savings of 100 billion euro. The public sector debt is the accounting record, it’s the number of euro in bank accounts at the ECB system, of the private sector. That’s how accounting works, there’s a debit on one side and a credit on the other side of the ledger. The public sector is one side of the ledger, the private sector is the other side, it’s a mirror image, it has to be, or some accountant’s made an arithmetic mistake and he’s got to stay late and find his error.
So yes, savings is a good thing. The European Union is a union of people, it’s a union of businesses, it’s a union of private entities. The government is there to service the private sector and to support it. So savings is a good thing, and that means we want to encourage private sector savings. There’s too much private sector debt, we want private sector savings, and the accounting record, the evidence of private sector savings is public sector debt. If you look at the countries that have the highest private sector savings, it’s always the countries that have the highest public sector debt. So it’s Greece and Italy, which had the highest debt. Why? Because that’s how you accounted for the high private savings. That’s how you funded the savings. Loans create deposits. Debt funds savings. It’s not the other way around.
MN: We are on the air with economist Warren Mosler here on Dialogos Radio and the Dialogos Interview Series, and Warren, you have described modern economics as “Banana Republic economics.” What do you make of the economic policies that are currently being implemented across the European Union, and of agreements such as the recent memorandum agreement between Greece and the so-called troika?
WM: What’s happened is that the third leg we have to talk about is exports and the foreign sector. The European Union has decided that export-led growth is the way to go, and they kind of looked to Germany as the example for this model. Everybody is trying to do that to be competitive. All these programs are designed to reduce costs in Greece, to make them more competitive so that they can export. Now, a couple of issues with that, and one of them is a macro issue: the whole world can’t be exporters, because everybody can’t export, somebody’s got to import, where is it going to go, to the moon or something? Wherever it goes, there’s somebody importing. At best, all the trade in the world adds up to zero. For every export there’s an import.
Apart from that, there’s another aspect before I get to the more serious problem, not that this is any less serious, and that is: exports are real costs and imports are real benefits. The real wealth of any region is everything you produce domestically plus everything the rest of the world sends to you, minus what you send to them. Production makes your pile bigger, imports make your pile bigger, and exports make your pile smaller, you’re sending that away. In effect, if you look at war reparations, when you win the war, the other country sends things to you, you don’t send things to them. When Caesar conquered Gaul, Gaul sent grain to Rome, Rome didn’t start sending grain to Gaul as war reparations. Imports are real benefits, exports are real costs, and you use the monetary system to optimize that, and that used to be called real terms of trade. You try to get the most for the least. If you’re going to export, the whole point is to get imports, and you try to get as many imports as possible for your exports. So the idea that export-led growth makes any sense, it’s completely out of context with today’s realities. That did make some sense under what was called mercantilism, where the game was to get as much gold as possible, whoever had the most gold wins, so the exporters were getting the money, which was gold, and they were building gold stocks, and whoever got the most gold won. It was just an arbitrary game, and going into World War II, the United States had won the game, it had more gold than anybody else, except we didn’t have any tanks or planes or guns and it took four years to mount a counterattack.
So anyway, back to today’s context: exports are real costs and imports are real benefits, so what’s the whole point of the European Union export-led growth strategy? It doesn’t make any sense at all. But, all that aside, if you’re going to do it, the way it’s done is, and you can look at the old German export-led growth model, which was successful on its own terms. You use tight fiscal policy to suppress domestic demand and you have all kinds of structural reforms and deals with the unions and labor to keep wages down to keep competitiveness, and that helps your exports. Now suddenly you’re competitive and you can export. What that does is it makes your currency go up, and so what the exporters did, what Germany used to do is, they would buy dollars to keep the Mark down, so Marks to buy dollars. They even bought lira to export to Italy, to keep the Mark down versus the lira. So part of the export-led growth strategy is, you have to buy the other guy’s currency whether you like it or not to keep your competitiveness, otherwise your currency appreciates and your policy is self-defeating. That’s happened a couple of times over the years in the European Union, when just as exports get going a little bit the euro goes up, and then they go down and you lose your advantages.
Now, the problem in the European Union with this strategy is that buying dollars, for example, ideologically they can’t do it because then it would look like the ECB is building dollar reserves and in fact they would be building dollar reserves. It would give the appearance that the dollar is backing the euro and they want the euro to be the reserve currency, not the dollar, and so they’d be supporting the dollar’s role in the world, whatever that means, so they just don’t do it, they can’t do it. And so instead, they just generally let the euro go up.
More recently, what the central bank has been doing, what Draghi’s been doing, has been tricking the world’s portfolio managers into selling euro by doing things that they think are inflationary, that they think are expansionary, things that cause a currency to go down, and those are negative interest rates and quantitative easing. All the world’s Western-educated now, they’ve all gone to The University of Chicago and Stanford and the London School of Economics, and they all know that pumping up the money supply through quantitative easing and negative rates makes the currency to go down and it causes inflation. They’re wrong, because it doesn’t, as I explained before. In fact, those policies remove interest income, they’re taxes on the economy, they actually cause the currency to get stronger, they cause the price pressures to go lower, you get deflationary pressures instead of inflationary pressures. We’ve seen the deflationary pressures on the euro right now, bordering on deflation. And the policies of quantitative easing and negative rates have done nothing to ease that.
Now, why has the euro gone down? It’s because they’ve frightened portfolio managers around the world into selling their euro. So you’ve got even the Swiss National Bank buy Swiss Francs with the euro, the Swiss National Bank takes the euro and they’ve kept 33% in dollars, so they’ve sold euro to buy dollars. I’m sure they’re scared to death of holding the euro because of the quantitative easing and negative rates. Same with the Bank of China or Bank of Japan. They’ve got all of these mainstream-type, traditionally-trained central bankers in just blind fear of holding euro right now, and so that’s temporarily kept the euro from appreciating, which it would have otherwise done because the lower euro has driven trade into massive surplus. I think the last numbers were a 31 billion euro trade surplus, for the last month.
The competitiveness is causing a trade surplus, which is sort of the point of the policy, but what that means is that when Americans buy an Audi or a Volkswagen…they take their dollars, they give them to the dealer, the dealer gives them to Mercedes or to Volkswagen, then they sell their dollars, buy euro, meet their payroll and build their reserves, whatever they do with their money. What happens when you are running a trade surplus is the world is selling dollars to buy euro, to buy products. Selling yen to buy euro to buy products. So it puts continuous upward pressure on the euro, which in this case has been offset by massive portfolio selling. You can look at the drops in central bank holdings from near 30 percent to under 20 percent reserves in euro right now. At some point that dries up.
An analogy would be if the corn crop failed because it didn’t rain and there was a drought. You would think that the price would go up because of supply and demand, but if a big company…had a huge warehouse full of corn, and had it backwards and decided to believe that the drought was going to cause prices to go down instead of up and they started selling their warehouse full of corn, well the price would go down even though there was a drought and a shortage, because all of the supply is coming out of the warehouse. That’s portfolio selling, so to speak. Eventually they’re going to run out, and there is a shortage, people are eating more than is being grown and the price is going to go up at some point, but depending on the size of their warehouse, the price can go down for a long time. It can go down for a year or two years, I can’t tell you the timing. But you can see the flows when you see the international accounts. You can see it’s going down and you can see the euro reserves are dropping all over the world in all of these official types of accounts, and they can only drop so far and then they’re gone. And as they do drop, they’re keeping the euro at levels that’s supporting a growing trade surplus, which is trading the euros out as fast as they’re selling them, and then they’re gone and then everybody’s underweight in euro or short, and they are no euro to buy back. Then it goes the other way.
MN: The Greek government is intending to proceed with a recapitalization of the country’s banks, with the threat of a “bail-in” if this does not take place. What would the impact of either option be for Greece and for its depositors?
WM: A bail-in is just a tax on depositors, so it’s another tax, it just removes more euro from the economy, reduces sales and makes things worse. I don’t think any of them understand the role of bank capital. I guess they’re looking at it from a safety point of view. But you’ve got the European Union now regulating and supervising the banking system, so they’re examining every loan for safety. And you’ve had years, tens of years, decades of public banks in Europe, that ran with no capital. Central banks can run with no capital. The banking system doesn’t need capital to operate. Capital is a political decision based on the amount of risk that the regulators they decide they want to take on the bank’s loan portfolio. But they’re supervising and regulating that loan portfolio on a day-to-day basis, so it’s kind of like their own loan portfolio. So it’s just as easy to regulate risk on the regulatory side as it is on the capital side.
It doesn’t seem to come into the conversation at all, but I don’t see any problem with requiring higher capital ratios if they want. And, in an environment where banking is profitable, raising capital is not a problem for those ratios. But in the European Union, the problem is that it’s not a profitable environment for banking. Therefore, it’s hard for banks or nearly impossible to raise capital. It’s a self-defeating policy. If they were to relax the deficit limits from three to eight percent, for example, and the European Union was growing at three percent, banking would be profitable and then there’d be no issue about raising capital. There’d be capital waiting in line to get in. They’d have to be restricting bank licenses. So you create a weak economy with a low aggregate demand and then you wonder why you can’t capitalize your banks…they’re speaking out of both sides of their mouth.
MN: We are speaking with economist Warren Mosler here on Dialogos Radio and the Dialogos Interview Series, and Warren, you have presented a solution regarding how Greece could exit the Eurozone in an orderly fashion and without an explosive devaluation of its new currency. Tell us how this could take place.
WM: I wouldn’t call it necessarily a solution, but it’s an option. The solution is larger deficits. If the European Union won’t allow a larger deficit, if they force spending cuts, if they force taxes, if they cut spending more, then the option is one, to just sit there and suffer and then watch your civilization be destroyed, or two, to do it on your own, to go back to your own currency.
If you’re going to do it on your own currency, I have proposals on how to do that in a way that actually, I think, works. The first thing you do is, you just start taxing and spending in the new currency, the new drachma. When you do that, you’re not “leaving” the euro, you’re not doing anything, you’re not abandoning anything, you’re just changing your tax liability from euro to drachma. And you leave the number the same: if it was 100 euro, it’s now 100 drachma. Then, you start paying your public employees in drachma, and if it was 100 euro, it’s now 100 drachma. You haven’t left anything, you haven’t broken any promises or bent any treaties or defaulted on any debt. You haven’t converted any bank deposits, and specifically, I say don’t convert any bank deposits. If the banks have euro deposits, just leave them alone. If the debt is in euro, just leave it alone.
The easiest way to explain that is to make an assumption that–it’s just an arbitrary number now– but let’s say half the people want to hold the euro but half the people want to hold the new drachma. Half the bank depositors want to keep the euro and half of them want the drachma. If you convert everything to drachma, now you’ve got half the money supply, half the funds in the banking system, that are very unhappy. They wanted the euro, they don’t want the drachma, so they will sell the drachma to buy euro. That will drive the new currency down 30, 40, 50 percent, just like everyone predicts, and then you start getting inflation in terms of importing prices, and then the central bank doesn’t know how to deal with this so they raise rates, and unemployment goes up and you’re right back in this disaster that the Greeks have known so well, which is why they’d rather have high unemployment but let the Germans run the money rather than let the local government run the money, because they’ve seen what happened before when the local government ran the money. That’s what happens when you convert deposits, you get right back into that mess that politicians and technocrats just can’t deal with, and the government collapses and falls apart, and you’ve got blood in the streets again.
If, on the other hand, you don’t convert the deposits, you leave them in euro, now you’ve got half of those people, the people who wanted euro, they’re okay, but the other half need drachma to run their businesses, run their lives, pay their kids’ tuition, pay their taxes, and they have euro. So they need to sell the euro to buy drachma to run their lives, because there aren’t any drachma out there. So they’re selling euro to buy drachma, and now the drachma is a strong currency. You’ve created probably the biggest short squeeze in the history of the world, because everybody needs this stuff and there isn’t any. That allows the government to sell drachma at a slight premium to the euro, maybe 1.01 or something small, so that people can sell their euro, buy drachma at a reasonable price to run their lives, and that keeps the currency stable and it gives the government a source of euro income to pay down and service their euro debt for some period of time, and it gives them three months, six months or a year’s breathing space to deal with the new economy and the new realities without having to deal with a currency that’s collapsing. And, it gives them a source of euro income to deal with it.
Now, I’m not saying that there won’t be other problems, like corruption and whatnot, but at least you’re working in the context of a firm currency and euro income to deal with your issues. The most important thing about conversion is to not convert the bank deposits, just leave them alone. And don’t convert the public debt, which is just bank deposits in the central bank. Just leave it alone, and that will give you a smooth, or much, much smoother transition period towards running an independent nation. Now here’s the thing: every proposal I’ve seen says convert all the bank deposits so you have control over them, whatever that means. If they do go to the drachma, any of the proposals I’ve seen are going to be a disaster.
MN: Well Warren, thank you very much for taking the time to speak with us today here on Dialogos Radio and the Dialogos Interview Series, and for sharing your insights with our listeners.
WM: Thanks for having me on.