Yves here. We’ve discussed in passing the use of tax anticipation notes as a way for Greece to give itself more fiscal spending wriggle room without violating Eurozone rules. Robert Parenteau, who devised this idea, explains how they would work in this post.
Wolfgang Munchau endorsed this idea in the Financial Times this evening:
So what should the Greek government do? They should stick with their position not to accept a continuation of the existing financial support programme. By doing this they would no longer be bound by self-defeating policy targets such as the contractual requirement to run a primary budget surplus of 3 per cent of gross domestic product. For a country with mass unemployment, such a target is insane. It would, of course, be better for this nonsense to stop while Greece remains in the eurozone. But the most important thing is that it has to stop.
If this is not feasible, Athens would need to prepare a Plan B. This does not necessarily mean a formal exit from the eurozone, which would be one of the riskiest options. There are smarter choices to pursue first.
The most sensible one is the introduction of a parallel currency — not necessarily paper money, more like a government-issued debt instrument that can be used for certain purposes. A number of economists have been thinking along these lines. Robert Parenteau, a US economist, has proposed what he called “tax anticipation notes”. These are IOUs backed by future tax revenue. Such instruments exist in the US at state level. They act as a tax credit that allows governments to run a fiscal deficit until the economy recovers. With such an instrument Greece could abandon austerity without abandoning the euro.
One matter to keep in mind is that the Eurozone prohibition on issuing a domestic currency is stated in terms of “banknotes”. As Parenteau added via e-mail:
Article 128 of Lisbon Treaty deals with legal tender issue. I have structured this a zero coupon perpetual bearer bond. Not a banknote, though it is meant to be electronically credited to citizen’s accounts. Of course it gets contested, but 1) this alternative financing instrument is a little harder to contest than the various e-money, parallel currency ideas being floated, 2) the Bundesbank studied some 60 plus “complementary currencies” already in existence in the Eurozone in a 2006 paper, including one that could be used to pay regional or local taxes, and gave them their blessing, 3) by the time the case gets to the courts, the live experiment will hopefully be successful enough in reversing austerity that politically, it cannot possibly be shut down, and there are big time demonstration effects for Italy, Spain, and Portugal.
By Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge and a research associate of The Levy Economics Institute
The recent election of an explicitly anti-austerity party in Greece has upset the prevailing policy consensus in the Eurozone, and raised a number of issues that have remained ignored or suppressed in policy circles. Expansionary fiscal consolidations have proven largely elusive. The difficulty of achieving GDP growth while reaching primary fiscal surplus targets is very evident in Greece. Avoiding rapidly escalating government debt to GDP ratios has consequently proven very challenging. Even if the arithmetic of avoiding a debt trap can be made to work, the rise of opposition parties in the Eurozone suggests there are indeed political limits to fiscal consolidation. The Ponzi like nature of requesting new loans in order to service prior debt obligations, especially while nominal incomes are falling, is a third issue that Syriza has raised, and it is one that informed their opening position of rejecting any extension of the current bailout program.
The Troika has responded to these points by ignoring the substance of these direct challenges to their preferred approach, and by hardening their bargaining stance. Syriza’s opening request for debt reduction, based in part on recognition of the above points, has been summarily rejected. In addition, the ECB announced that in its estimation, Greece has failed to abide by the terms of the last bail out agreement, so the ECB will no longer accept Greek government debt as collateral for liquidity provided to Greek banks. This leaves the Greek banking system relying upon the ECB’s Emergency Liquidity Assistance (ELA) facility, which can be cut off with two weeks notice on the vote of a two-thirds majority. If the February 28th deadline for extending the existing bailout program is not met or somehow postponed, Greece is likely to face funding difficulties. Even if Syriza can find some sort of bridge loan, large debt payments loom this summer.
The nuclear option of exiting the Eurozone does exist, though Syriza did not campaign with this explicit threat, nor have polls of Greek citizens to date supported such an exit. Executing an exit would likely impose even harsher conditions on Greek citizens in the short run. The sharp decline in a newly introduced currency would be likely to significantly raise the cost of imported goods. In the case of Greece, with fuel, food, and medicine making up a large share of the import bill, this is no trivial matter. The banking system could be hamstrung with deposit flight and insolvency. Debt contracts not under Greek law could not be redenominated in the new currency, and so either default, or a very heavy servicing cost would likely result. In either case, Greece would likely find external finance effectively shut off for some time after their departure. Exiting the euro is an option, but not one without significant upfront political and economic costs.
The task for anti-austerity parties like Syriza then becomes to thread the policy needle – namely, to exit austerity, without exiting the euro. In the absence of a sufficient improvement in the current account, or a significant shift in household and business investment spending relative to their desired saving objectives, some degree of fiscal autonomy must be regained if income growth (and hence the ability to service debt) is to be accomplished. The following simple proposal introduces an alternative government financing mechanism, along with safeguards to minimize the risk of abuse of this mechanism, which may accomplish this threading of the needle.
To accomplish this return to growth through increased fiscal autonomy, an alternative public financing instrument could be unilaterally adopted. Federal governments could issue tax anticipation notes (TANs) to government employees, government suppliers, and beneficiaries of government transfer payments. These tax anticipation notes, which are a well-known instrument of public finance used by many state governments across the US, could have the following characteristics:
1) zero coupon: no interest payment is due to the holder of the TAN
2) perpetual: meaning there is no maturity date requiring repayment of principal, meaning TANs would not increase the public debt to GDP ratios, just like the issuance of perpetual debt by banks counts as equity that helps them meet capital requirements
3) transferable: can be sold onto third parties in open markets, as are bearer bonds
4) Accepted at 1 TAN = 1 euro by the federal government in settlement of private sector tax liabilities.
As the government fulfills expenditure plans, TANs could be distributed electronically to the bank accounts of firms and households due to receive these payments using an encrypted and secure transaction system. Because there are large backlogs of payments due by the Greek government, and there are also backlogs of unpaid taxes, TANs should find ready acceptance. Essentially, the government would be securitizing the future tax liabilities of its citizens, and creating what amounts to a tax credit. This tax credit will not be counted as a liability on the government’s balance sheet (British consols were are a historical example of this), and will not require a stream of future interest payments – payment that could increase fiscal expenditures, and hence fiscal deficits, in future budgets. Governments issuing TANs could thereby pursue the expansionary fiscal plans that are required to return their economies to a full employment growth path.
Questions have been raised as to whether TANs are a parallel currency in all but name, and whether TANs might “trade” at a discount to euros. As noted above, TANs are accepted by the government at 1 TAN = 1 euro. TANs are perpetual, zero coupon bearer bonds denominated in euros, not in new drachmas. Since even under the various treaties ruling the Eurozone, governments retain the right to impose taxes on its citizens, and can define what they will accept for taxes, there is a “market maker” with fairly unrestricted “buying power” to insure the 1 TAN = 1 euro link is upheld. For example, should TANs begin to trade at a persistent discount between private citizens, demand by taxpayers for TANs would increase (since this would be the less costly way to meet tax obligations), pushing the TANs back to parity with the euro.
Questions have also been raised as to whether TANs would trigger default clauses in existing government bonds. Recall that TANs were not designated for payment of interest or principal on existing debt. Citizens will also have full discretion over whether to use TANs or euros to pay taxes. There can be no argument that TANs represent a prior claim on tax revenues, thereby subordinating existing bonds.
One explicit cost of the TAN approach could be the imposition of fines if the 3% fiscal deficit to GDP ratio of the Growth and Stability Pact is violated. However, Germany and France openly violated this threshold in 2004 with no fines imposed, possibly setting a precedent for contesting any such fines. Moreover, if expansionary fiscal plans are pursued with the use of TANs, and that fiscal stimulus is successful enough to revive income growth, tax revenues will be likely to rise, and realized fiscal balances may end up above the 3% deficit threshold. After all, the outcome of recent episodes of fiscal consolidation has been rising, not falling debt to GDP ratios.
In addition, in countries with chronic current account deficits that are in excess of 3% of GDP, the simple analytics of double entry bookkeeping imply countries will need to violate the 3% fiscal deficit to GDP rule if their domestic private sectors are to be kept off of deficit spending paths. Otherwise, fiscal policy restrictions end up exacerbating household and business debt build-ups, thereby increasing financial fragility in the private sector. The authors of the fraudulently titled Stability and Growth Pact (SGP) appear to have ignored this accounting implication, and thereby introduced a different vector of financial risk into the Eurozone, and one that has revealed it devastating consequence in the aftermath of the Global Financial Crisis (GFC) of 2007-8. The fiscal deficit floor rule of the SGP deserves to be challenged and reviewed, not only because it can introduce the unintended consequence of a private sector debt build up, as was witnessed in many Eurozone peripheral nations heading into the GFC, but because it has failed so miserably in its stated purpose of reducing public debt to GDP ratios.
It is true that TANs are unlikely to be accepted by trading partners of nations adopting TANs as an alternative financing instrument, unless those trading partners face tax or tariff liabilities in the countries adopting this alternative financing mechanism. However, TANs are likely to be used in domestic market transactions, which may also free up more euros to pay for imports of essential goods like food, fuel, and medicine. Of course, to make this alternative financing mechanism work, enforcement of tax collection will need to be improved. A more equal distribution of the tax burden across citizens would also assist in the wider acceptance of these notes in private transactions.
While the onset of price deflation is more the concern in the Eurozone of late, some may fear this alternative financing mechanism would offer a quick route to accelerating inflation, if not hyperinflation, since the constraints on government budgets would be reduced. To address this issue, it might be helpful for the central bank of each country to be held responsible for monitoring domestic inflation conditions, and for creating robust early warning systems. Both exercises could be overseen and validated by an independent third party – say IMF or ECB staff. Rules could then be set in place requiring a reduction in the issuance of TANs should inflation accelerate through some predetermined ceiling over some specified duration. A provision for ratcheting TAN issuance down further if inflation is not headed back down below the target could also be designed.
In addition, specific supply bottlenecks that may be contributing to inflationary pressures could be identified and addressed through infrastructure spending, labor training, or tax incentives using TANs. TANs could also be used to implement an employer of last resort approach (ELR) to job generation, which could also have a stabilizing effect on inflation. Rania Antonopoulos, Deputy Minister of Labor and Social Solidarity in Greece, has already run a trial experiment of ELR in Greece, and is prepared to scale this up in her new post (see an outline and policy simulation of how this could be done here: http://www.levyinstitute.org/publications/after-austerity-measuring-the-impact-of-a-job-guarantee-policy-for-greece). It is not hard, in other words, to create the demand and supply side policy mechanisms that could reduce the odds of an ever-accelerating inflation. It is the outright fear of such an outcome that appears to motivate the bias toward fiscal stringency by many Eurozone policy makers. The Troika appears haunted by the hyperinflationary ghosts of the early Weimar Republic, while completely forgetting it was Bruning’s devastating fiscal austerity polices that ushered in the Third Reich. History reflects that damage was done both ways, so let’s chose to learn the full lessons of history, rather than repeat the same deadly mistakes.
Austerity has proven to be a disaster on nearly all fronts. Firms have been bankrupted, households have dropped into abject poverty, banks have lost capital to loan losses, tax revenues have come up short or have been hijacked to service debt (debt that was ultimately issued to socialize bank loan losses), and government debt to GDP ratios have risen. Economies are evidently not drawn to full employment growth paths when instruments like fiscal policy, exchange rates, and monetary sovereignty are drastically circumscribed, ostensibly so that prices are free to adjust to market forces. We should have known this from the theories of John Maynard Keynes, Irving Fisher, and Hyman Minsky, and now we should know it from historical experience. Yet this fatal neoliberal conceit in the self-adjusting properties of unfettered markets was the central premise, as well as the fundamental design flaw, behind the European Monetary Union.
Countries may be able to exit austerity policies without having to take on the many challenges of exiting the euro. It may be possible to thread the policy needle in the Eurozone. Through the alternative financing mechanism of TANs, countries like Greece may be able to counter the threat of a cut off of financing by the Troika. Policy simulations of the use of TANs by economists at the Levy Economics Institute look eminently plausible (see from p. 11 on in the Strategic Analysis from a year ago, which can be found at http://www.levyinstitute.org/publications/prospects-and-policies-for-the-greek-economy). After too many years of devastating austerity driven by misinformed and utterly misguided policy choices, countries may be able to regain some control over their fiscal policy, and finally forge a pathway back to full employment. With the ploys of the Troika revealed with the emergence of an anti-austerity party like Syriza to a position of governance, Greece has a chance to pave the way out of austerity without exiting the euro. Yanis, get a TAN.
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First of is the issue of “Perpetual”. All TANs have a stated maturity. They are, by definition, redeemed by future revenue. So this starts with something that does not exist.
Second is the issue that the Greek TANs will trade at parity. Okay, say they do. Then why would anyone go out and buy them at par and use them to pay taxes? There would be no advantage to this process, it would be simpler to just use currency to pay the taxes due. Because the are Zero’s that have no redemption date they would have to trade at deep discounts (compare them to existing debt obligations at 12% yields and what do you get?). If they did trade at deep discounts, then those holding these notes would only get a fraction of their face value. What’s the poor pensioner to do? Buy half a loaf?
These TANs would be issued ‘electronically – but they would trade over the counter similar to “bearer bonds”. Please tell me how that is going to work? I’m thinking of some old lady who gets a government pension check having to go to her computer (she doesn’t have one) and then going out on the street to find a buyer (of what?). Then she has to clear the transaction and collect the Euros from the sale. This would have to take time. The NYSE takes two days to settle a trade. How long does this lady wait before she gets cash that could be used to buy groceries?
The TAN described here is just another form of currency. This form would be unworkable in the real world – far too complicated. And because it is just a cheap effort to get around some “rules” it would be rejected by the powers that be. Sorry, TAN’s won’t fly.
Couldn’t they be used like the Nazi’s issued MEFO bills, restricted to large companies supplying services to the state. The companies could be paid in TANS about equivalent to their tax obligation. Not sure though if that’s a big enough market to account for the issue needed to stimulate the economy (say 5-10% GDP).
Carlos: There is some similarity of TANs to Mefo bills developed by German Minister of Economics Hjalmer Horace Greeley Schacht (I kid you not, and his autobiography was modestly titled, “Confessions of the Old Wizard”), who also was involved with the Bundesbank, and played an instrumental role as currency commissioner in ending the hyperinflation during the Weimar Republic. In fact, I deliberately designed TANs with Mefo bills in mind to remind people that the Germans themselves can be very skillful financial innovators when it comes to dealing with severe fiscal restraints. But on your proposal, I fear you are right, the payments of the government to corporations may not be large enough to move the needle on economic activity. Might be a place to start though, after you tighten up corporate tax collections and make sure the corporate tax burden is fairly widely distributed.
You would not typically “buy” them as much as “get” them, by transfer from a government payment, say for a public contract, subsidy, tax return or if you are a public employee.
I guess the crucial mechanism would be bank accounts that have dual accounting, in TAN and Euro, plus the ability of getting Euro as cash, maybe restricted to small amounts.
For the system to work well, some requisites are clear:
* tight taxes on companies and high income people and tax enforcement, so that they don’t empty the country of euros via profits sent offshore
* a near balance current accounts. Greece has a positive one right now, but it should be kept close to balance to avoid trouble, as fiscal expansion will make imports grow.
* Banks that will settle Euro given as cash with TAN in accounts, maybe limited, and also for payment of imports.
Santi: You are correct, TANs, like any government bond, are issued, not bought, though I anticipate there may be an active private market in TANs, especially if any discount were to arise. Dual accounting should be no problem, though it is a matter for private citizens to choose if they want to engage in the exchange of TANs for euros. Yes, the tax system and compliance must be dealt, as I make clear in my text, for TANs to work well, but this is the one place Syriza and the Troika appear to agree, and Syriza has a huge incentive to correct tax collection if they get cut off or face restricted financing or chose, as they stated, to take no more “bail out” money, which is really just Ponzi financing debt to delay, prevent, or socialize core bank losses. Tax reform may indeed get done this time. A balanced current account helps Greece earn the euros through exports that it will still need to pay for imports. A surplus would be even better, obviously. The advantage of TANs is they could be used to assist in infrastructure and R&D that will be necessary to improve Greece’s ability to sell tradable goods on world markets, and to pursue import substitution. As in other eurozone nations, the current account balances have increased because the fiscal austerity is slowing nominal income growth, or as in the case of Greece, leading to income deflation, which curtails import demand. Such is the effect of a starvation diet, officially known politely as an internal devaluation, so yes, if you plan to end starvation through fiscal stimulus, and you do not have a currency you can depreciate, you need fiscal policy to address external competitiveness. Best, Rob
‘Sorry, TAN’s won’t fly.’
Traditionally, perpetual bonds (such as British Consols) were bought for income. A zero-coupon perpetual would be an ‘IOU nothing’ — no income, no principal.
Any value of zero-coupon perpetual would derive from its 1:1 convertibility into euro banknotes. This would lend weight to the argument that zero-coupon TANS are essentially just a clever subterfuge to get round Article 16 of the ECB treaty prohibiting unauthorized note issues.
Jim: I beg to differ. TANs are not an IOU nothing. Governments tend to impose a tax liability on citizens. Governments define what they are willing to receive to clear this liability. TANs are essentially a tax credit, as the name itself suggest. The “principal” of TANs is their face value, at 1TAN = 1 euro. It is “paid back” to the holder when it is used to meet tax payments. I am not seeing the violation of Article 16. Would you be so kind as to highlight the passage you believe TANs would violate? I have identified Article 128 of the Lisbon Treaty as a possible basis for a legal challenge. This is treated in my comment to Yves which she included in the intro to this article.
Article 16, banknotes: ‘the banknotes issued by the ECB and the national central banks shall be the only such notes to have the status of legal tender within the Community.’
https://www.ecb.europa.eu/ecb/pdf/orga/escbstatutes_en.pdf??23e3230a2693935abdf505f2c8d0aa9b
TANs made ‘legal tender’ for tax payment violate the prohibition on anything but euro banknotes being legal tender, particularly since they lack the standard TAN characteristic of constituting a short-term loan. Calling it a ‘TAN’ doesn’t change the substance that these are substitute bank notes, and nothing but.
No, a banknote is something that can be used for all sorts of commercial transactions, not limited purpose. The California tax IOUs were not treated as counterfeiting or currency issuance by the US.
This is the definition of a banknote:
a piece of paper money, constituting a central bank’s promissory note to pay a stated sum to the bearer on demand.
1. It is not a promissory note, which is “a signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand.” The bearer does not receive a stated amount. He can use the TAN only as a credit against taxes, as in with the Greek Treasury
2. It is not issued by the central bank
3. It is not payable to the bearer on demand. As stated in 1, it can be used only to extinguish tax liabilities.
JIm: Ok, this is same as Article 128 in Lisbon Treaty which is treated in my comment to Yves in the intro. It says ECB reserves “exclusive right to issue euro banknotes”. TANs are not euro banknotes. Type “banknotes definition” into Google. Here is what you will find: “a piece of paper money, constituting a central bank’s promissory note to pay a stated sum to the bearer on demand.” TANs fulfill only the last condition (from “pay a stated sum” on). Banknotes are not electronic entries in a bank or other deposit account. TANs are perpetual, zero coupon, bearer bonds. Countries reserve the right to issue financing instruments of their choosing, as long as they are not euro banknotes. Now type “legal tender” into Google. This is what you will find: “coins or banknotes that must be accepted if offered in payment of a debt.” Below is a link to Article 128 for those who wish to examine the relevant provision on their own. I am not a lawyer. I have run this by lawyers and people who were instrumental in designing and negotiating the various EMU treaties. They have indicated my proposal is defendable. I think it will be contested nevertheless, and I am counting on the time it takes to contest it to allow the TAN proposal to prove its worth, and so politically, become virtually irreversible. As in rule TANs illegal, reverse the associated fiscal stimulus, and you will have riots in the streets. But let’s leave this one up to the lawyers to duke it out. They should be able to earn some hefty fees off of this one, in any case. http://www.lisbon-treaty.org/wcm/the-lisbon-treaty/treaty-on-the-functioning-of-the-european-union-and-comments/part-3-union-policies-and-internal-actions/title-viii-economic-and-monetary-policy/chapter-2-monetary-policy/396-article-128.html
Article 16 means liabilities of the central bank can only be issued by the central bank. It forbids, for example, issuing Greek euros without authorization of the governing council. So long as the Greeks make certain the instrument is only sufficient for settlement of domestic public liabilities I don’t think the wording of this section of the statute is a problem, unless an attempt is made to expand its scope via litigation.
Ben: I think I get your point now. Apologies if I misunderstood where you were going with this. TANs are, to be clear, explicitly not a liability of a National Central Bank. Nor are they banknotes. Nor are they denominated in euros. And your final sentence agrees with the opinion of other legal and treaty experts I have consulted, though I am sure somehow, somebody from the Troika will try to kill the implementation of TANs with clauses like this one. By then, though, I believe it will politically be too late to put the cat back in the bag. Best, Rob
I’m on your side, Rob, I just don’t think the EU leadership is reasonable enough to be. You’ve got a good idea they don’t have the sense to consider.
Being used to pay taxes is not enough to make something legal tender.
Case in point. One provision of the “Intolerable Acts” by the British parliament leading up to the American Revolution decreed that colonial currencies were not legal tender. OC, the Massachusetts currency could still be used to pay Massachusetts taxes, but the London landlords and creditors were under no obligation to accept it in payment for rent and debt. Nor were Massachusetts colonists.
Min – I remember reading (or maybe hearing) at one point that the Boston Tea Party was not actually over taxes, or taxation without representation per se, but about the ability to use colonial currencies as legal tender in settling obligations to the British. Now I understand that story better (though I may still have garbled it above), thank you, as I believe you have just highlighted the basis for it. I am very curious about how you came to know so much about monetary history. Few people know this stuff any more, and it is rare I meet anyone who can marshall their historical facts as well as you have in this discussion. Best, Rob
bk: First, there is no stated maturity on the TANs. They could be viewed as “maturing” at the discretion of the holder when they are used for taxes, but if that is a legal problem with using the perpetual designation for TANs, the government could also be viewed as “reissuing” the TANs in the next round of government spending. Second, the TANs are not bought, but issued with certain government expenditures. While people are free to use them in private transaction if they chose to do so, the fact the government agrees to receive TANs for taxes due at 1 TAN = 1 euro creates a “market maker”. Think about it: as mentioned in my note, there is a self-stabilizing feature. Any time TANs trade at a discount to euros, taxpayers will want to pay with TANs, creating a demand for TANs, taking them back to parity should they deviate. Fourth, as for your Old Lady Who Lives in a Shoe, please see the many up and running banking and payment systems in developing nations that nearly illiterate and very impoverished people access via cellphones. Worst case, with nearly 50% youth unemployment, some of them will find a way to make money by providing a service to the old lady, or if the free market does not deliver that, they could be employed by the ELR program to do the same. Fifth, on settlement, my ATM/debit settles instantaneously. Yours does too. Sixth, actually currency is a TAN. You have it backwards. Seventh, as stated in the text there a many complementary currencies already up and running in the eurozone. They fly. Every day. They would fly even better if they could be received by governments for taxes. Best, Rob
TANs sound very much like two historical precedents, American Greenbacks and British Tally Sticks. The greenbacks were currency, but they were, as the name indicates, distinguishable from notes redeemable in gold. They indeed traded at a discount for a time, worth as little as around 2/3 of a gold backed note (IIRC), but fairly quickly returned to parity after the war and remained at parity well into the 20th century. Tally sticks were issued as tax credits and were in use for six centuries.
“Second is the issue that the Greek TANs will trade at parity. Okay, say they do. Then why would anyone go out and buy them at par and use them to pay taxes? There would be no advantage to this process, it would be simpler to just use currency to pay the taxes due.”
The Greek economy does not have enough Euros in circulation. As you say, if you already have Euros, using them to buy TANs to pay your taxes does not make sense. However, TANs will tend to be used to pay taxes, thereby freeing up Euros for other uses. Also, TANs may end up circulating more than Euros in the domestic economy.
Min: Yes, on both your posts, you have it right, though again, to be clear, I am creating an alternative financing mechanism that takes the form of a hybrid bond instrument, with a 1 TAN = 1 euro. I am also including some proposed mechanisms to prevent TANs from fueling run away inflation, which is the fear of the Troika, and the criticism of the Greenback issuance. And yes, TANs allow the existing stock of euros held by both the government and private citizens to meet existing euro denominated liabilities and other payment obligations, and to meet payments for imports, since as mentioned in my note, foreign producers of tradable goods are unlikely to accept TANs, unless they themselves have to pay taxes or import tariffs of some sort to the government using TANs. So I believe the demand for TANs will tend to be self-reinforcing, and I expect it will end up being used in many transactions in the private marketplace as well, by consenting adults. There may be an issue about whether the existing stock of euros will last long enough to cover existing and future euro denominated payments on debt and imports. A member country of the eurozone I believe can only earn a net flow of euros if it either is a net seller of goods to holders of euros, or a net seller of assets to the same. So Greek fiscal policy must make improving trade competitiveness a priority, through trade related infrastructure projects and R&D sponsorship in tradable goods sectors, so Greece can earn a trade surplus in euros. Or the Greek central bank has to repo assets with the ECB to get euros flowing into Greece, much as they were doing until the ECB refused to accept collateral this month, though now the flows are through the ELA mechanism, which the ECB cannot stop providing with taking down the entire Greek banking system, and possibly the eurozone with it. Or banks need to make more euro denominated loans and buy more government securities. So TANs do free up euros, and there are several approaches to dealing with the need for euros to service external payments and liabilities in the future. Best, Rob
Min: I should add there is nothing in the TAN proposal that would prohibit the Greek government from continuing to issue bonds denominated in euros, in order to have enough euros to service euro denominated payment obligations. Indeed, if I am correct that Greece could revive nominal income growth and employment using TANs to pursue say a large scale ELR program, or a large push to upgrade trade related infrastructure, then tax revenues should increase, and the realized fiscal balance should increase as well. Greece, in contrast to the position left after several years of fiscal austerity, may look at lot more creditworthy after TANs have been implemented, making it easier to attract foreign investors at lower interest rates than they currently face in the marketplace. There is also nothing in the TAN proposal that would prevent Greek banks from issuing euro denominated loans to domestic companies that import. Greek banks are sitting on some huge losses and are very undercapitalized, so it is entirely possible that more than a few of them will have to be nationalized at some point. This would be yet another way to increase the supply of euros available for external trade transactions. So the issue of a diminishing reserve of euros at the government level, and amongst importers, may not be that difficult to handle. Best, Rob
Dear Rob,
Many thanks for your informative replies. :)
I hope that we do not have a real train wreck.
this post is blowing everybody’s minds away like November leaves with a gale force wind of abstractions. Taxes that aren’t collected or paid (this is Greece after all) financing TANs on which no interest is paid or principal is ever due — and yet people buy and spend with them! Wow. This is like Zero Point Energy out of a Sci Fi novel. This is like plugging your Big Screen TV right in to the Dirac Sea and laying back and watching football.
But! . . . . But! It is true. This is EXACTLY how money works. It’s all social imagination working through peoples minds as a wave function which collapses on the observation of property in the form of social cooperational structures. But what shapes the latent forms of the wave function? Deep thawts
Thhis idea can work but it’s good to have a back up in case folks are sceptical that future taxes will ever get collected. That’s why I’d modestly suggest TAN(2) == Total Acropolis Notes. There’s 1 billion rock chunks in the Acopolis if you break it down with a sledgehammer. At $350 each you could sell them like moonn rocks and raise more taxes than Greeks will every pay. That can back the TANs, but since theirs no coupon and no maturity, it’s only theoretical reality that you’ll destroy the Acropolis and not a real reality. But people needs something to look forward to, even if it’s jjust a fantasy.
hahahaha.
” But people needs something to look forward to, even if it’s just a fantasy.”
Spoken like a true financial economist. Or fiat monetary expert.
“tax anticipation notes”. hahahah. No thanks. TANs are free in AZ.
You would think economists would get more respect if all their theories didn’t require lies, deception and fraud to work. I think that’s the crux of the problem.
Politicians, bankers and economists – one big happy ménage à trois.
Cray-cray (same entity as crazy man, right?): TANs are a hybrid of features of existing financial instruments, including perpetual notes (see British consols), zero coupon bonds, tax anticipation notes issued by numerous state governments in the US and elsewhere around the globe, and bearer bonds. If TANs are a lie and a deception, then all the people dealing in these instruments are equally deceptive, and should prosecuted to the full extent of the law. And maybe that is not such a crazy idea, since fixed income holdings tend to be very concentrated in the highest end of the income distribution, and Wall Street brokerage houses are the dealers. Best, Rob
Actually, this is how bank credit-money works. When banks issue their loans through credit cards, there is no maturity, really. They’re happy to let it run in perpetuity at their usurious rates. This is a comparable scheme except that the credit is extended without interest, “forever”. Something about Ellen Brown’s “Public Banking”. Let the Lobbyist Sh*t-storm begin!
This “could” work. It’s another cover-story like the Trillion Dollar Coin. It’s a matter of the Will of the Greek Government … their desire to truly change the game.
Marty: The similarity with credit cards is indeed that the “maturity” of the debt is totally at the discretion of the owner of the credit card, with onerous results if you keep rolling it over. The difference is that TANs are an asset of holder. And yes, it is a matter of will Syriza have the courage to change the game, or is it all just rhetoric to play to their supporters. By taking euro exit off the table, and pledging to a primary fiscal surplus in perpetuity, they have severely undermined their bargaining power with the Troika already. TANs would give them a unilaterally imposed solution, and the mere threat of using TANs as a way to exit austerity without exiting the euro could help them regain much of the bargaining leverage they have unfortunately already ceded. But it is there country, and they have to make their own choices. I am just offering a proposed alternative financing instrument that just might help them thread the policy needle, but we shall see if they take it up and use it to remove the fiscal straitjacket that is contributing to the eurozone’s descent into deflation. Best, Rob
Cray-cray: Very entertaining, but your noise to signal ratio is too high for me to decipher. Sorry. No offense intended. Because you get it on money. Currency is a TAN. Best, Rob
Dear Dr. Parenteau,
In fact, we are two different people posting under pseudonyms. In realty I’m an academic, a Profeser of Contemporary Analysis at the University of Magonia, the one and only Dr. Delerious T. Tremens, NFL, GED, at your service. You may have read my research in CA Magazine on Bigfoot sightings. CB is a Professor of Robotics and Beer Making working out of a lab in Arizona using Fourier analysis to build a drone that flies in more than 4 dimensions. You can watch it disppear above your head and reappear under you if your standing on a pole.
You would be mistaken if you think I’m skeptical of your idea. In fact, I wrote plainly that it can work! CB was drinking when he posted and probably would change his mind when he sobers up.
The other idea missing in any purely economic analysis is: What are they gonna do with the money?? That’s not as self=evident as it seems. I’ve studied this problem extensively and it’s clear that money is simply energy that animates forms of cooperations (i.e. companies, governments, disribution networks, factories, etc.). These are economic structures and/or political structures. These are identified by names and also by their quantifications in money. But they don’t exist BECAUSE of money, their existence CREATES THE MONEY!!! That’s really really important. The money only has an existence because these formal structures allow money waves to collapse on observations of property.
Consider this: What if Greece was the only country in the world. What if they woke uptomorrow and the whole world was gone. Nobody know where it went. Everybody gone. No exports, no imports, no loans, no bailouts, no nothin. What would they do? How would they create cooperational structures to sustain society? This is not just an idle question. It goes to the very center of the source of the monetary wave function.
You can give them TANs but it’s no gaurantee. What is the monetary wave function doing? What forms is it making and why? QED
Sincerely yours,
Profeser D. T. Tremens, NFL, GED,. U of Magonia, Director, Institute for Contemporary Analysis
What he said.
Except that I only drink when I visit the 4th dimension and I only believe in MMT axioms and thought processes after at least one 4th dimensional 6-pack. Which is why I would never buy government bonds from somewhere that thinks they don’t need taxes and crooks can keep all the money they stole. And I mean that applies to the Troika too.
Not to say craazyman won’t convince someone else to do it.
Cray-Cray: Apologies if I was not able to decipher your support for the TAN proposal. And I wholeheartedly agree, TANs do not solve the existential question of what is the purpose of human life, and how should we best prioritize and organize our endeavors. But at least they create some breathing room to allow such questions to be asked, and a financing mechanism to allow the answers to actually be pursued (as in ELR programs) rather than just wistfully and longingly entertained. Best to you, and save a can of that PBR for the day our paths cross. Best, Rob
You were able to find a signal in there? My darling Rob, you’re a darn sight smarter than I am. Radio Luxembourg comes in clearer than these two do. But how could we possibly cope without them? It would be like The Muppet Show without Statler and Waldorf. Besides, they’re real professors so unless you’re a Nobel laureate or something, they outrank you.
Clive: At the end of the day, it is fair to say we are all a little bit crazy…and that is probably a good thing. Plus utter geniuses often appear to be muttering madmen to the rest of us. And I have had to listen to the gibberish of Wall Street economists and investment strategists, as well as neoliberal academic economist and half baked policy makers, for most of my life, which means I am well trained in discerning signals from noise. Even screeching noise. So I make the effort to understand what someone is trying to tell me, unless it is just a personal attack. There can be pearls of wisdom in there, you just have to be willing to look and listen. None of us have all the answers, but almost everybody has a piece of the puzzle…and who knows, it might just be the one you have been looking for all along. Best, Rob
This sounds plausible to me …… seems to hinge on the ECB’s definition of a parallel currency, which could go either way and would probably be a political decision. It’s a potential face saver for all concerned and it could be dressed in multiple layers of obfuscating terminology to bamboozle the general populace if neccessary.
It seems the same as issuing a small float of non-convertible Drachma at 1 to 1 against the Euro. Slightly concerned whether or not they could tax enough Euro to meet their obligations.
Carlos: TANs are tax credits. They are structured as a perpetual bond. If you think about it long enough, you will recognize that currencies have many of the characteristics of TANs. There are many parallel currency proposals floating around (Trond Andresen has done work on this, and Bossone’s proposals in Italy are of this nature). While there are many complementary currencies in use already in the eurozone, I have presumed that a New Drachma, convertible or not, is a non-starter given Article 128 of the Lisbon Treaty on prohibition of banknote issuance in anything other than euros issued by the ECB or authorized by the ECB for national central bank issuance. I expect TANs would still face legal challenges anyway, and as described in Yves lead in, my hope is their success in addressing the multiple problems introduced by chronic fiscal austerity would make them politically irreversible by the time the courts came up with a ruling. It is, in my estimation at least, worth the gamble, but Syriza and Podemos and others will have to make their own assessment of the TAN proposal. TANs will not be a “small float” either, as they will be issued to cover the bulk of fiscal expenditures. Best, Rob
Doesn’t matter whether these financial assets are legal or not. The EU leadership is not going to tolerate an alternative currency issuance and will bring every form of pressure to bear in response, lawful or not.
I’d say there are two major problems that need addressing: the ECB could kill the Greek banking system whenever they feel like it and introducing TANs might be seen as a prelude to exit and increase capital flight to capital control levels.
There is really nothing to be done about the first. You just have to hope that Draghi and the rest don’t want to risk killing the Euro. The second is more tricky. If Draghi keeps the taps open it will drive the Germans to hysterics. If they go full Cyprus some of the benefits will be neutralised. Only some though and if you avoid getting the blame for it that’s really no problem.
So what do the Greeks actually have?
First the longer they can keep up the discussion as equals the higher the pressure on the other peripherals gets. Especially when the recovery once again turns out to not have happened.
Second Junker seems to be eager to push back against Merkel’s dominance. I don’t expect him to be particularly supportive but if he sees a chance to cut her back to size he might seize it.
Third everything they say is basic common sense and Varofakis has said it consistently for years. Sadly that is only a very small plus.
Generic: If ECB kills Greek banks by withdrawing ELA, which they can do with two weeks notice after a majority vote, then the ECB faces the risk they get blamed for the collapse of the eurozone. Not a good career risk to take, but the more ideologically motivated members of the ECB might take this option. Greece then has the option of nationalizing its banks and recapitalizing them with perpetual bonds issued to “finance” fiscal stimulus, including a full employment policy. Perpetual bonds are, as stated in my text, treated as Tier 1 capital for banks. So I disagree, there is something Syriza could do to address your first concern. The introduction of TANs could potentially encourage deposit and (more generally capital flight, which is why you might need to be prepared to use capital controls, as Iceland did when its banking system collapsed. Note that even the IMF has endorsed the selective use of capital controls in recent years. The introduction of TANs might meet some initial resistance, but given the backlog of tax payments due, and given the backlog of government contracts that need to be paid, I suspect this is at best a temporary issue – especially as citizens see the government receiving TANs for taxes due on a 1TAN to 1 euro basis, and realize any discount of TANs to euros gets arbitraged away by the private marketplace pretty quickly. Syriza actually has a lot of bargaining power, as I discuss in replies above, but unfortunately, they have already pissed some of it away. TANs give them a chance to regain it, without having to renege on their pledge not to exit the euro. Best, Rob
Sorry for the late answer, but I can’t quite follow this part:
Greece then has the option of nationalizing its banks and recapitalizing them with perpetual bonds issued to “finance” fiscal stimulus, including a full employment policy. Perpetual bonds are, as stated in my text, treated as Tier 1 capital for banks. So I disagree, there is something Syriza could do to address your first concern.
Doesn’t this depend on the ECB’s willingness to accept the Greek banks as recapitalized? And if they were willing to do that they wouldn’t have pulled ELA in the first place.
If you propose that Greece could stay in the Euro against the ECB’s opposition then this is a new thought for me and I’d really like to see an outline of how this would be possible.
Generic: Right, this all goes into the grey zone when a) the eurozone does not have a legal mechanism for kicking countries out, but b) countries may refuse to play by the existing treaty rules, without choosing to exit. If the ECB pulls the ELA, Greek banks collapse, deposit and capital flight ensue, and Greece has to fend for itself. Whoever was in power then (and military juntas are not unknown in modern Greek history) would probably chose an exit, but there might be some benefits to playing hardball in the grey zone, and using the credible threat that their exit would mean the end of the euro shortly thereafter, so time for some new agreements, including definition of sufficient instruments, and sufficient amounts, required to recapitalize the banking system. But this gets tricky, as we are deep in the grey zone at that point, and I would not pretend to know how it would actually play out. Best, Rob
Did you read the intro? First, there is already precedent. Second, a senior ECB official said in the German press over the weekend that letting Greece leave the Eurozone would be a mess. The ECB is saying they don’t want to go there. If the ECB does not pull the ELA (and the ECB’s statement comes close to saying that), the process would be, as Parenteau indicates, the courts. That will take years and facts on the ground have a strong role in legal decisions. Look how the German Constitutional court came up with a pretty tortured decision not to enforce what looked to be pretty clear German constitutional provisions so as not to unduly upset the Eurozone apple cart.
With respect, Yves, you’re missing my point. TANs will not be an acceptable solution precisely because they can work. What is happening in the European Union is not based on rational or logical thought, it’s emotionalism and power relationships with a not insignificant splash of sadism for flavor. Monetary economics went out the window for them a long time ago, this is all politics now.
True enough, but I think Syriza and similar groups are getting the emotional upper hand.
“Actually, the supply-demand-price system will always balance, whatever the motives of individuals, and the economic motives per se are notoriously much less effective with most people than so-called emotional ones.” (Polanyi)
I think Rob Parenteau and Rania Antonopoulos are right on the money.
Financial: Rania was very supportive of the TAN approach when I presented it at the Levy Economics Institute in Athens in November 2013. I have been told Yanis was also shown an early sketch of the TAN approach I published here and elsewhere in December 2013. So the TAN approach may get a hearing within Syriza, especially if talks have broken down along the lines suggested by the press today. Best, Rob
Ben: See above response to Carlos, and Yves opening comments quoted from an email to her from me on Article 128 issues and TAN strategy. Best, Rob
It isn’t an issue of legality.
Ben: Please explain why you believe it is not an issue of legality. Surely if the TAN approach is contested, it would require a legal challenge. But maybe I am missing something, as I would not pretend to be lawyer, nor do I know all the Treaty provisions that might be relevant to settling this issue. Best, Rob
One positive aspect of this proposal is that it would add to the rationale for pursuing tax evaders. I’m sure Syriza doesn’t require additional incentives, but this might help to force the hand of the bourgeois parties. It’s not hard to imagine a corporation with a growing TAN account becoming politically “innovative.” Indeed, the government could force corporations to accept them.
Hemeant: Yes, you are correct, for TANs to work well, it would be best if Syriza addresses the tax compliance problem…which of course the Troika should be very happy to see. Not sure about why corporations would become politically innovative with a growing TAN account, so if you wish, please spell this out for me, as I admit I can be a little slow to see some of these angles, though I have tried to address as many intended and unintended consequences of the introduction of TANs as I can. Governments do not need to force corporations to accept TANs. Corporations have existing tax liabilities, and many of them are overdue and delinquent, subjecting them, I would imagine, to additional fines and legal action. Those companies would no doubt love to receive TANs from government expenditures and contracts to remove these liabilities. And if TANs get adopted in private transactions, they might even be willing to accept TANs from their customers as well. That is to say, the demand for TANs would well exceed the amount required to meet taxes (yet another reason to doubt they would trade at a discount to euros). Best, Rob
My idea regarding political innovation hinged on the notion that, as TANS permeated the economy, confidence in their valuation would be heightened with the prospect of increased tax revenues. I would imagine that this would lead holders of TANS, including corporations, to be more inclined to support both measures against evasion and to increase revenues. Politically, it seems this might lead to the sorts of divisions among corporations that have periodically occurred during times of political threat. (Thomas Ferguson has written of this in an article on US corporate alliances in the New Deal, “From Normalcy to New Deal…”, for example.) I’d anticipate the well-defined TAN incentives to contribute to a weakening of more or less neoliberal corporate perspectives back into something more social democratic, the sort of state-friendly ideological fuzzyness that people like Hayek loathed. So, congratulations on helping to steer us back on the road to serfdom!
Hemeant: Yes, there is a very good chance TANs would be used at the discretion of private citizens in a variety of private transactions, and so I anticipate there very well may be a positive feedback loop engaged with the introduction of TANs, much along the lines you suggest, with incomes increasing on TAN “financed” government expenditures, and so tax revenues increasing, and so demand for TANs rising commensurately. After all, fiscal austerity has managed to produce only rising government debt to GDP ratios over the past 4-5 years, so the effect should be symmetrical with respect to fiscal stimulus leading to lower public debt to GDP ratios. Paradoxical at first glance, but follows from recent practical experience with “expansionary fiscal consolidations”, which proved, in retrospect, far from expansionary for households and firms. And there is a very good chance all kinds of strategic behavior would arise around TANs. Cleavages in the elite – perhaps a welcome result for those of us with lower case d democratic allegiances – might be one of them. Best, Rob
Greece rejects EU bailout offer as ‘absurd’
Thanks /L. This is what I anticipated, and why I am out pushing the TAN approach which I first sketched out in Athens at a Levy Economics Institute conference in the fall of 2013 (see video of the presentation here: https://www.youtube.com/watch?v=teecd8mqXLU&list=PLGGYihhM4K22falJRKxXW2TSmexiiN4kS&index=8). It may be one of the few paths forward for Greece, short of an exit of the euro. Let us hope, for the sake of the people of Greece, that Syriza’s policymakers at take the TAN proposal under serious consideration. Best, Rob
Great to see an article on this again :) On the Troika appearing haunted by Weimar hyperinflation:
That didn’t stop Germany using MEFO bills (almost like their own version of TAN’s) a decade after their hyperinflation, to effectively ‘print money’ by stealth, to fund re-armament in the run-up to WWII!
John B: Yes, you are precisely right on issuance of Mefo bills…after the Weimar hyperinflation. And the irony is even deeper, since it was Hjalmer Schacht as Currency Commissioner that singlehandedly broke the hyperinflation (by the introduction of a new currency, which is also ironic), and it was Hjalmer Schacht as the Economics Minister, who designed and presided over the issuance of Mefo bills. Please see my comments on this above. As an aside, it is astounding how neoliberal policy makers (especially of German origin, though not exclusive to them, and I have great respect for many of my German colleagues and contacts) have such selective memories. They remember the lesson of Weimar hyperinflation. They ignore the exorbitant reparation payments from WWI that led up to the hyperinflation result, and are paralleled today by the interest payments on “bailout” related debt that the peripheral nations in eurozone have accrued since the Global Financial Crisis in 2007-8. They ignore the lesson of Bruning’s bone crushing fiscal austerity that led to the rise of Hitler (some believe directly so). They ignore the lesson of Mefo bills they used in the build up to WWII to create the autobahn, put Germans back to work, and create their war machine. They ignore the WWII debt write down in the early 1950’s that along with the Marshall Plan helped establish the German economic miracle. This selective memory is so obvious – and so sickening. It is regarded as impolite to bring such facts of history up. Syriza has begun to do so. But the whole neoliberal faith based approach to the policy challenges of the eurozone begins to crumble when you recognize the full history, and not just the Weimar hyperinflation. Best, Rob
Yes I saw those comments while reading through – all very interesting details (and very historically relevant, given current loggerheads, in no insignificant part between Germany/Greece) – it would be very interesting to see more historical/economic analysis of MEFO bills, like Phil’s excellent article.
It’s amazing how much critically important history like this, has been obscured or not properly understood, and how absurd it makes modern economic narrative look.
Best of luck with your current promotion of TAN’s, really hope Yanis/Syriza utilizes something like this (and indeed, he did propose something similar himself :) so I am optimistic).
JohnB: Yes, this selective use of history is very Orwellian. And once you see what has been done, you cannot believe the neoliberals get away with this crap, but then again, populations have been dumbed down in recent decades, so people get away all sorts of nefarious and dubious claims. I have never been able to find a very good account of Mefo bills. It is always rather garbled, probably because the historians do not understand finance very well. Here is an explanation by economist Bill Mitchell which I believe largely gets it right, and best of all, cuts to the essence of these financing instruments (full link to his essay, which is very relevant, is here: http://bilbo.economicoutlook.net/blog/?p=29092)
“First, the government ordered German armament manufacturers to build new weapons.
Second, the companies would draw Mefo bills of exchange (promissory notes) which the Mefo Company accepted. It was a system of deferred payments.
Third, the drawer of the bills could then present them to German banks at a discount who could also rediscount the bills with the Reichsbank (central bank).
Fourth, the government (Reich) guaranteed the bills for a period of five years after they were issued.
Effectively, while the central bank was prevented from directly funding the treasury, the Mefo bills allowed the latter to acquire huge loans from the former, which allowed it to fund the build up to 1939.” I was told Yanis has seen my original late 2013 proposal. Rania in the Ministry of Labor is very familiar with it. And Dimitri at the Levy Economics Institute, her partner, is very, very familiar with it. So with negotiations breaking down so dramatically today, maybe TANs will be under consideration by Syriza in the days to come. Best, Rob
Thanks for the link Rob, will have a read through that. That’s promising indeed, that there is already knowledge of TAN’s within some key Greek government positions :)
I remember linking Yanis to it the first time around, here – so definitely something he has seen; hopefully he will give this a renewed look!
we have been proposing this kind of mechanism in Italy, with help and inspiration from Warren Mosler, there are two books written in 2014 and 2013 (in Italian though)
see in English on Roubini’s site: http://www.economonitor.com/blog/2014/07/which-options-for-mr-renzi-to-revive-italy-and-save-the-euro/
see Bill Mitchell talking about it http://bilbo.economicoutlook.net/blog/?p=29092&cpage=1#comment-35853
http://www.lavoce.info/archives/30225/ricetta-per-eurozona-piu-pil-senza-nuovo-debito/
I run it by Nick Rowe getting an positive nod http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/07/when-is-helicopter-money-optimal.html
and by the way even John Cocrhane wrote last week about it
— Now,
1) I would think though that it would be a bond or tax credit being exchanged at a floating exchange rate to the Euro, less so than the Lira or Dracma but it has got to devalue somehow
2) it works better, in Italy at least, to cut taxes in a massive way, to workers and firms and also taxes on energy this way it duplicates a devalutation and does not send the current account in the red too much
3) it should be coupled with a provision to issue BTP or Greek bonds in the same way, “tax backed” as in previous works by Mosler and Pilkington
4) the Italian governement should nationalize a bank at least to make sure it can buy them if needed (this in Greece is tougher though now )
The fact that is in practice a parallel currency and at a floating exchange rate means though that it would be the first step toward the dissolution of the Euro. But this is OK, provided is gradual
By the way Alternative fur Deutschland is also in this direction http://www.alternativefuer.de/programm-hintergrund/fragen-und-antworten/questions-answers-qa/
Giovanni: Yes I am familiar with the Bossone et al proposal. There are many others who have proposed similar ideas (Veblen institute, Trond Andresen, Thomas Mayer). I tried to craft mine in such a way that increases the odds a country can recover a greater degree of fiscal discretion without immediately getting called offsides, legally or otherwise. The TAN approach is complementary with Mosler Bonds, except 1) Mosler bonds still need to find a buyer, TANs do not, and TANs pierce the illusion that bonds “finance” fiscal deficits, which would be a good thing to do once and for all, and 2) Mosler bonds still require future interest payments (as well as principal repayments, though public debt usually gets rolled over/refinanced) which could increase fiscal expenditures in the future, especially if interest rates spike, and hence lead to relatively nonproductive fiscal deficits in the future (since bond owning households often tend to be net savers). On your proposal, I am very opposed to the floating exchange rate idea, as you immediately and blatantly violate Article 128 of the Lisbon Treaty, and you make it very hard to get citizens to adopt your instrument, since its exchange value is uncertain. I do hear you on tax cuts as a way to improve competitiveness without an explicit currency depreciation (which as we know is impossible for nations in the eurozone) but I suspect this is a big non-starter for Greece, where tax fairness and compliance is already a major issue, and I would rather be sure that tax cuts not end up being saved by the private sector, and instead use fiscal expenditures to create income flows (through ELR) or improve competitiveness through R&D, infrastructure, and other government capital expenditures. Best, Rob
I don’t follow this much. Is it a munibond? Is it a treasury? Is it a local merchant’s currency? Which taxing authority? Local, state, national? The thing I asked was, Does this promote the fiscal-political union of the EU? and I couldn’t tell. Because we in the US have state taxing authorities which cooperate with federal taxing authorities, and etc. Our fiscal union isn’t perfect, but at least we have some sharing. The only sharing goin’ on in the EU is when Germany bonds for several billion Euros so they can give it, symbolically, to the Greeks so the Greeks can give it right back to German banks. That would be like California bailing out Illinois, when California is insolvent too. So the way around that isn’t for the most insolvent to create its own currency – at least if you want to promote some greater fiscal identity. So is the solution that each euro state does its own tax currency promisory note thing? And I can’t find a clear analogy to anything similar here, because here anything similar is secondary to and does not interfere in the USA having a sovereign fiscal policy, however flawed. And it is pretty flawed.
Susan: The TAN proposal is designed for unilateral implementation by any eurozone nation. It was designed that way because the prospect of fiscal union looks very far off (transfer payments to the periphery being a huge hot button for the core politicians and citizenry, even though something like this is required because of the absence of a mechanism to redress chronic current account imbalances, which Greece’s Finance Minister understands very clearly). I anticipated by the time one of the countries got pushed up against the wall again, there would still be slim odds for a fiscal union to occur. Jorg Bibow’s proposals along these lines have sounded the most plausible to me (he appears in the video I have linked after my presentation at the Athens November 2013 Levy Economics Institute conference), but I know of no progress on this front. The TANs allow more fiscal policy discretion for eurozone nations. It is similar to, but far from identical with, tax anticipation notes used by US state governments, and other nations around the world. I am not a municipal bond analyst, or a fixed income specialist, though I know many of them from my over three decades of working in the investment management field. I am a Chartered Financial Analyst, so I am familiar with the structure and analysis of many fixed income instruments. This is a hybrid instrument, as described above and in my various comments. Nothing like it exists as far as I know, but I would be happy to know if there is a precedent for TANs. Best, Rob
This looks promising! Thanks for the proposal and the calm, clear responses here.
Rob, we read your work here in Italy me and my colleague Marco Cattaneo, who got the idea also from Hjialmar Schacht’s Mefo bonds experience and by the way we found months ago that a former socialist economist and top official, Giorgio Ruffolo also had just written a book about solving the crisi using a scheme inspired by Schacht’s Mefo scheme. (Hjalmar Schacht’s biografy is called “The Magic of Money”, 1967, where did you find your sources about him ? there is actually so little about it…). Anyway, unfortunately we operate in a language other than English (mostly), but we have written a lot of stuff here with Biagio Bossone, Stefano Sylos Labini, Enrico Grazzini and as I say we are in touch with Mosler and the MMT guys in Italy.
Let us leave aside for now the Mosler-Pilkington tax backed bonds, that are a way to prevent a speculative attack to Italian or Greek bonds such as the one in 2011 and let us concentrate on tax credits, structured as perpetual bonds as you suggest or as two year zero coupon bonds as we did.
When we wrote our book last year we thought like you do that there would have been almost no discount betwenn these “fiscal bonds” and Euros, since people can use to settle tax liabilities all around the year.
Then I got into Nick Rowe blog and got “….If people do use them as a medium of exchange, then it is as if the individual EU countries can print their own money, at a floating exchange rate. Then they might work…”. I tought about it, discussed also with Warren and I think there is no way to avoid that they would end up as something with a floating exchange rate. Just think if, say, Belgium, France, Spain, Italy and Greece all issue them on their own because the scheme is successful and the Germans cannot stop it. Will the greek “fiscal bonds” trade at par with the belgium ones ?
Ok, if it is only a very small issue, like 1% of GDP maybe. Nut for instance here Italy we write about at least 100 billions per year to make a difference and I think also in Greece you have to talk something like at least 5% of GDP numbers, like 10 billions upward. In that case there is no way that Italy or Greece reflate the economy trough “money printing/helicopter money” (call it as you like) and that additional money does no create expectations of a possibile Euro break up. And then those “zero coupon fiscal bonds” will trade below par, maybe also 20 or 30% below par to the euro reflecting the overall expectations of markets and people about how the EU, BCE, Troika and world markets will react. I am a currency and bond trader by the way, not an economist even though I spent 5 years in a graduate school some time ago and I cannot see how the market and the public itself in Greece and Italy will not think about the uncertainty that such a move will create. You know, Greece that prints billions of its money, Italy that prints tens of billions of its own money. Sure, it will additional and in “parallel” to the Euro, but it will be additonal money created in contrast with the ECB and the EU and in the case of Greece staying in the Euro will create a current account deficit and some inflation. How can those bonds trade at par with the Euro ?
If I understand correctly you chose a perpetual bond and not a 1-2 year bond (have you seen the John Cochrane post about it ? http://johnhcochrane.blogspot.it/2015/02/beware-of-greeks-bearing-bonds.html) because you want to design something that works in the Euro, that does not create expectations of a break up. But how will it work with perpetual bonds it their issue in size by Greece will destabilize somehow the Greek financial system which is already weakend by the loss of 1/4 of its deposits ?
I would think is more realistic to use 1-2 year zero coupon bonds (tax credits….) and have more flexibility in case the situation evolves quickly toward an Euro exit. And also is more realistic to think that depending on expectations and the like they can trade at a significant discount to the Euro. This Plan has to work also if these tax credits trade at a discount to the Euro, and also if things go toward the Euro dissolution…
Giovanni: I have spent some time trying to understand Schacht and track down good descriptions of what he was up to, and honestly, I have yet to find anything adequate, though Bill Mitchell’s concise depiction of Mefo bills comes closest. I am going to respectfully disagree with your assessment with Warren that there would be a variable exchange rate between say Greek TANs and Spanish TANs. If there is a “market maker”, here the government, which has nearly unlimited buying power, here the ability to tax, and the ability to determine what can be received as taxes, then from my perspective, there is no reason why each government issuing TANs cannot maintain it 1TAN = 1 euro “fixed exchange rate”, and so 1 Greek TAN = 1 Spain TAN. But I do not see much basis for any such trades anyway: Spanish citizens will not be likely to have Greek tax liabilities, right? So why would Spaniards even think about placing a bid for Greek TANs? Now you may be right, that capital and deposit flight would ensue with the issuance of TANs…but as you point out that is already happening, and it does not change the fact there is still a “market maker” with nearly unlimited buying power (the power to tax) to ensure the 1TAN = 1 euro “exchange rate”. In addition, I would invite you to study the example of “bonos de cancelacion de deuda” which circulated from 1984-2003 in the provinces of Argentina. Or check out the history of the worgl in Austria in the Great Depression. When people are desperate to earn money, when businesses are struggling to survive, they can be open to all kinds of innovations. There is plenty of uncertainty in Greece. Arguably, after today’s negotiation break down, and Friday ultimatum by the Troika, there is even uncertainty about the ECB pulling the ELA plug on Greek banks, and the possible necessity of a Greek exit from the euro. My hunch is a Syriza committed to a plausible full employment fiscal stance, with a financing instrument to execute that stance, will profoundly reduce uncertainty in Greece. But I could be wrong about this. I chose to fashion this as a perpetual bond because a) perpetual bonds are not treated as debt, so they do not add to the government debt to GDP ratio as I understand it, b) the principal of perpetual bonds never needs to be repaid, reducing the future financing obligations of the government, c) perpetual bonds are treated as Tier 1 capital by banks, and if there is need to recapitalize the banking system, TANs might conceivably come in handy. In any case, if the eurozone is going to dissolve, it will make little difference if the bonds are 1-2 year or perpetual, right? All that will matter is whether they were issued under Greek law or not, so they can be redenominated and serviced in the new Greek currency post euro break up. Grateful for your comments Giovanni, especially your perspective as a bond and currency trader in the region. I know Warren has seen my proposals, and had proposed Mosler Bonds, which are complementary to TANs, but as I understand it, he now dismisses these intermediate steps like your proposal and mine, and argues that Greece should just exit. I believe Ed Harrison had a very good interview with Warren today on RT, and I unfortunately do not know how to find it, but I suspect Warren said something similar today during the interview, and I know Ed was going to ask him directly about the TAN proposal. Best, Rob
This is the most sensible proposal I’ve seen w.r.to Greek short-to-medium-term government financing – Greek government gets to respect the will of its people and not cave in to the Troika debt-colonialists, while also getting a strong incentive to go after the chronic scourge of Greek public finances, the tax evading class. By doing the latter while standing up to the Troika they can even credibly recast paying one’s taxes as “the patriotic thing to do” in the sense that the monies are being used to help the domestic economy rather than flowing straight to the Troika debt merchants.
There are actually so many things that are interesting and potentially important about allo this kind of plan…
From the discussions I had with Biagio and the others down here and also Mosler and from what I see also from you I get that there is fundamental question of whether is possible to make the Eurozone and the Euro work with a parallel or complementary currency like this one.
For instance if you read Bill Mitchell reaction it was…”ok, California tried also something like this, but why not go all the way and get back your Central Bank and your own money” http://bilbo.economicoutlook.net/blog/?p=29092&cpage=1#comment-35853. As you say Warren seems also to think that you have to design a sensible plan for a gradual euro-exit. I think this scheme is the right, but without illusions about making the Euro work
Let us say that Greece or Italy issue something like 5% of GDP of these perpetual bonds or 1-year zero coupon bonds and Germany and it goes well, the public accept them as medium of exchange without problems, Germany somehow decides it cannot push us out of the Euro for that and even the “markets” stay calm… Obviously, the success means that every single Eurozone members can do it then, so also Spain, Portugal, Slovenia and maybe France will issue their own parallel currency….The ECB will be de facto powerless… EZ members states will go back to the situation pre 1981 (for Italy) when they passed laws forcing them to issue debt when running a deficit…How can it last ? Target2 balances will go up again, some countries will start accumulating deficits either because of trade deficits or also because markets will become nervous if say Greece or Italy will print too much interest free bonds…. How can the ECB accept to do harakiri, to self destroy ? How can Germany and Holland accept to finance southern countries foreign deficits through Target2 ? How can big funds and banks accept that governments stop issuing debt, the beloved “safe assets” with which they build their piramide ?
In short, I would think it is an excellent plan, but to be realistic it will lead to the disintegration of the Euro anyway sooner or later, and I would think sooner. However it will give southers countries a tool to stop del depression now and also to negotiate from a position of strength.
Giovanni: Yes, these are all implications that are very useful to consider. If you are right that a TANs scheme spreads, it does disempower the ECB. If the ECB says screw you, we won’t issue euros or claims on euros to banking systems in nations with TANs, you basically go into a grey zone. You cannot, as I understand it, legally be forced out of the eurozone, but the ECB can find grounds to refuse your collateral for repo operations, and cut you off from ELA, so good luck, you can still be placed up sh*t creek without a paddle. Then you have to be prepared to escalate and make your financial system work without the ECB. Which probably means an exit, though I have to confess I have not looked this far down the chessboard yet. Though admittedly, Greece appears half way there already with the recent collateral cut off from ECB. Not sure what you mean by EZ member states passing laws forcing debt issuance with fiscal deficits – please spell this out for me when you have time. If Target 2 balances go up again, then we have to push to correct one of the major design flaws of the EMU, which was a failure to put in a place a mechanism for current account surplus recycling into productive investments in tradable goods industries in chronic current account deficit nations. Yanis seems to understand the importance of this design flaw. Whether it would be politically possible to craft a solution along Keynes’ bancor proposal, that got largely butchered in the Bretton Woods negotiations, is another matter altogether. And TANs do not necessarily require the end of government debt issuance. The proportion of government expenditures covered by TAN issuance is completely at the discretion of the issuing government. It can be reduced at any time, and probably would be, for example, in times of escalating inflation, if the safeguards I suggest fail to do the job of quelling inflation. In addition, as long as governments need to service debt denominated in euros, they will probably still need to issue government securities other than TANs to accumulate euros to cover these obligations. So I am not entirely sure all roads lead from TANs to euro disintegration, but I am sure, as you seem to agree, that TANs could break the stranglehold of fiscal austerity in very short order, that TANs gives the periphery nations more bargaining leverage with the Troika, and most importantly, that TANs begins to build a working parallel finance system alongside a full employment tool that can be ramped up if and when you decide you have to exit. To my mind, it seems real important to have confidence in those things, especially in an increasingly confrontational set up, when some actors are operating in legal grey zones, and other actors are insisting on things that are patently unsustainable, either politically, or economically. I think as a policy maker in the periphery, you want to be in a position to say to your citizens, the future is in our hands, and we have demonstrated how it can be in our hands via TANs and ELR etc., should the Troika decides it is in the best interest of the eurozone to continue starving us to death. Best, Rob
Very much appreciate Rob engaging with the thread.
Just a thought …. Why not cut straight to the chase and call them MEFO bills, if nothing else it will be worth it to watch the Germans squirm.
Carlos: I take no pleasure in making the German policy makers that are insisting on fiscal austerity squirm. And if you have ever negotiated with a German counterpart, you may be familiar with how they tend to react to attempts at humiliation – though to be clear, I am not fond of stereotypes of any sort, and responses can differ across generations. It is better, to my mind at least, to ask them to take an honest look at the lessons and precedents from their own history. Hyperinflation in the early ’20s Weimar Republic is only one lesson. The aftermath of Bruning’s austerity policies is another. Both did great damage. Both can be avoided, I believe. But you know as well as I do, humans have nearly infinite powers of denial and an uncanny ability to rationalize almost anything they do. So better not to negotiate at all. Just unilaterally implement TANs as an alternative financing mechanism, demonstrate the benefits, and expose the neoliberal lies by real actions, rather than verbal sparring and taunting. Then get on with it by either redesigning the eurozone architecture to reflect what has been learned from the TAN experiment and the contradictions exposed in the eurozone treaties, or if that is not possible, or by ending the whole ordeal of complying with misguided rules, and opting out, though with full recognition the first 24 months or so will be very, very challenging. Best, Rob
Just a stupid question: All issued TANs would become a hidden future liability as they would replace Euros in future tax collection. At the limit, if you issue too many TANs and no significant value is produced in the local economy, wouldn’t you risk both “TAN inflation” and nil tax revenues in the future (or in perpetuity)?
Pedro: Not a stupid question you ask, just maybe a confused one. Citizens are free to pay taxes in TANs or euros. There are reasons they might prefer to pay in TANs, but if TANs get used in lots of private market transactions, as I believe several similar historical examples suggest they might, it is not obvious to me that all tax payments will be in TANs only. On inflation risks, see the section in my original note above regarding measures to prevent runaway inflation when TANs are implemented. These are important parts of the proposal, especially since the fear held by th Troika of using fiscal stimulus is in part a fear of runaway inflation as a result of the fiscal stimulus. On your last point, as long as businesses have to pay taxes, and TANs can be used for taxes, and are preferred for that use, firms are likely to exchange products that holders of TANs demand, and exchange their produced output for TANs. So I am not sure how you get to the conclusion that no significant value would be produced in the local economy. Sounds like a hypothetical situation that does not necessarily flow from the implementation of TANs, which is fine for stress testing the idea, but not very applicable, I would suggest. In fact, I have argued the use of TAN’s to finance fiscal stimulus will tend to enhance business profits, and stimulate the expansion of production by the business sector. Remember, the spending of the government becomes the income of households and firms. Some of that income will be profits (depending upon how household saving decisions, the trade balance, and tax rates evolve). Higher profits tend to lead to higher profit expectations and more expansion of production through employment increases and tangible capital investment. Spending financed by TANs has the beneficial property of not requiring the household and firms to save money out of income flows in advance in order to purchase government bonds to finance the government spending. Multiplier effects should be large for TAN financed fiscal spending, and inflationary effects should be minimal, especially in an economy as far from full employment as Greece. But maybe I have misunderstood your questions, which are not stupid at all. Best, Rob
Thanks for the explanation Rob… And sorry for the confused approach to “limit situations”. :-)
On the use of Euros for taxes, I dare to state a bit of scepticism: there will be at least a small “convenience premium on TANs”, so I argue that the local market of TANs will have at least the same discount, lets say of using swiss francs in a Portuguese transaction – a few pp. In such an environment a market to cristalyse that “discount” for all taxpayments, even by euro holders would probably evolve at the cost of fiscal revenues. I guess we can argue that this is a small price for the intended benefit.
On the “taming” of inflation risks I do agree they are possible as you mention, but this is in my opinion a highly political issue – not an economics one: as it is politics that determines the depth and breadth of these controls (given the recent history of Greece we have to accept it as having “some” risk :-) )
My note on “not producing significant local value” was a “shortcut” for not entering the complexity of the expected effect of fiscal stimulus. I agree with you that it will flow through firms and households to potentially create growth, but I ladk detailed knowledge of the underlying greek economy… I do know a somewhat similar one, Portugal, and I would argue that despite significant restructuring in saving/investment and consumption patterns induced by the recent readjustments there is still an enormous potential for fiscal stimulus to materialize in foreign economies, as trade barriers are almost nil and investment attraction is slim. This would require even more care than inflationary controls as the experience of “growth funded by debt” of the 2000 decade seems to prove.
But again, I have to admit that I tend to be confused :-)
Yanis spoke about FT-coin (Future taxes coin using the bitcoin algorythms) about one year ago.
Similar proposals have been popping up in the last years. When I had been preparing this collection of proposals and ideas I obviously missed your one – sorry! However, with the help of this compendium, the approach has been discussed in conservative as well as in leftish circles, and it was also reckognized by Syrizah.
I am relieved to find many of the basic ideas from my own proposal in yours, Rob, but you thought them through in much greater detail. Thank you very much for your excellent work and for your nonviolent style of discussion. Best, Ludwig