Comes back to the idea that resolving solvency issues in the euro zone doesn’t fix the economy.

And with negative growth the solvency math doesn’t work for any of the euro members.

And what’s with the ECB threatening to back away on liquidity support for the banking system?

So looks to me like the Greek resolution is not the end of the solvency issues, but that the focus simply moves on to the next weaker sister.

And, as previously discussed, the risk remains elevated that if Greece gets to haircut its obligations and gets funding, others will ask for the same, triggering a general, global, catastrophic financial meltdown.

My first order proposal remains an ECB distribution on a per capita basis to the euro member nations of maybe 10% of euro zone GDP per year to put the solvency issue behind them. Along with relaxed budget rules, maybe allowing deficits up to 6% of GDP annually, further supported by the ECB funding a transition job at a non disruptive wage to facilitate the transition from unemployment to private sector employment. I might also recommend deficits be increased by suspending VAT as a way to increase aggregate demand and lower prices at the same time.

Alternatively, the ECB could simply guarantee all national govt debt and rely on the growth and stability pact for fiscal discipline, which would probably require enhanced authorities.

And rather than trying to bring Greece’s deficit down to current target levels, they could instead relax the growth and stability pact limits to something closer to full employment levels. And, again, I’d look into suspending VAT to both increase aggregate demand and lower prices.

Meanwhile, elsewhere in today’s world news:

The likes of Ford adding to pension funds makes the point of the increasing and ongoing demand leakages putting a damper on GDP.

And oil prices have now crept up enough to materially cut into aggregate demand as well.

Nor are banks adding to capital to meet expanding demand for credit, which remains anemic.


Data Suggests Euro Zone May Slide Back Into Recession
German Manufacturing Slows as New Export Orders Fall
China’s Factory Activity Shrinks for Fourth Month
ECB Preparing to Close Liquidity Floodgates
Ford Pours $3.8 Billion Into Pension Plan
Oil Could Turn to Headwind as Dow Flirts With 13,000
UBS to Issue More Loss-Absorbing Capital
Iran ‘Winning’ on Oil Sanctions: Top Trader
Greek Bailout Puts Focus Back on Credit Default Swaps
Iran Fuels Oil-Price Rally—And Prices Could Keep Rising

12 Responses

  1. “Alternatively, the ECB could simply guarantee all national govt debt…”. The problem there is that some PIGs may default on their debts, so the “guarantee” amounts to a subsidy by Germany etc of PIGs. And Germany etc did not join the EZ on the basis that they’d have to subsidise other countries.

    The ECB have bought some PIG debt, but Germany etc are not happy with that. Germany etc prefer to go for draconian “enhanced authorities” without a guarantee. You can say that’s harsh on PIGs, but PIGs should have read the small print when joining the EZ. It said in effect, “No subsidies for countries that behave irresponsibly.”

    1. it’s only a subsidy to the extent that it’s inflationary and to the extent the inflation disproportionately works against Germany.

      So since help comes with austerity it all supports the value of the euro

      1. @WARREN MOSLER,

        I was thinking along the lines that it’s a subsidy because Germany & Co. are shareholders in the ECB, and if bonds held by the ECB become worthless, that’s nice for the PIG issuing the bonds, but Germany & Co lose out.

  2. Warren ,

    From all I have read and heard a distribution from the ECB that would bring their equity to negative is not likely to happen.
    To me this ‘requirement’ for positive equity for the currency issuer does not seem logical.

    In MMT you work with the consolidated govt , i.e. tsy and cb together when you refer to govt and/or issuer of the currency.
    Consequently the issuer of the currency, i.e. the govt on a consolidated basis, is financing a public deficit or a trade surplus.
    Since trade surpluses can only exist thanks to others running trade deficits this cannot be the model for the world as a whole. This leaves us with financing public deficits for the issuer of the currency.

    In mainstream economics the currency issuer is the cb and the tsy is a currency user. When they refer to the govt they mean the tsy.

    It brings me to the following question regarding mainstream:
    I assume that if the cb is the issuer and the tsy spends then the first issue is from cb to tsy.
    So, which booking entry (debit and credit) is made on day 1 of a new country by the currency issuer (the cb)?
    Is this first booking a loan from cb to tsy or a gift from cb to tsy?

    Note in this context: For many countries this situation is not applicable because their monetary system has evolved from gold standard and its derivatives to a fiat money system. But all European countries that gained independence end of last century (former Soviet union, former Yugoslavia etc) went thru that process quite recently.

    1. and there is no rule against the ecb running negative capital. the problem is they think it’s inflationary.

      when the tsy spends it gives instructions to the cb, such as debit my account, credit the other guy’s account. that’s all that happens

      1. @WARREN MOSLER,
        But in mainstream economics there is for the tsy, a currency user, a no overdraft rule. So that does not solve the problem of how does the tsy gets its first money under mainstream economics?
        The cb buys tsy bills directly? That is against mainstream’s rule of no monetizing debt, no monetary financing.
        The cb ‘donates’ the first money to the tsy? That is against mainstream’s rule that the issuer is not allowed to have negative equity.

      2. the tsy gets it account credited first via taxing and/or borrowing where the fed debits the taxpayer’s account and credits the tsy’s account, or debits the bond buyer’s account and credits the tsy’s account.

      3. @walter,

        But on day 1, the very beginning of a new country, there is nothing to tax or borrow. The non-govt does not have yet any money.

        Warren, I think this point is important because this is where mainstream economics goes wrong. You can’t have from day 1 in a new country simultaneously:
        1. a no-overdraft rule for the tsy
        2. prohibit the cb buying tsy bonds directly (monetizing debt, monetary financing)
        3. prohibit a negative equity for the cb (monetizing deficits)

        I also get the impression that countries like the baltic states etc that started their own currency end last century (all after 1971) all got stuck with these rules (after trying to run trade surpluses of course) and hence ran to the euro.

      4. in practice, before the Fed kept excess reserves in the banking system,
        on settlement day the fed would do repo to add/loan the clearing balances (reserves) needed to pay for the tsy secs.

      5. @walter,


        On day 1 the treasury could accept foreign currencies in payment of taxes, as well as their new sovereign currency. They may also have some foreign currency reserves on day 1, left over from the previous government. And they might sell some bonds for foreign currencies.

        Just because the government and currency are new, doesn’t mean the economy is also new.

  3. @ Ralph Musgrave

    No one behaved “irresponsibly”. All parties involved behaved according to market rules – creditors wanted to lend at low rates and debtors wanted to borrow at said rates. They both got engaged in “mutually advantageous transactions” according to (mainstream) textbook theory.

    Of course in the end the system crashed – but hey, this is how it is supposed to work – according to the great Hyman Minsky.

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