I propose the ECB distribute 1 trillion euro to the national govts on a per capita basis.
The per capita criteria means it’s not a bailout and not a ‘reward for bad behavior.’
It would immediately adjust national government debt ratios substantially downward and ease credit fears.
If there is no undesired effect on aggregate demand/inflation/etc., which there should not be, it can be repeated as desired until national government. Finances are enhanced to the point where they can take local action to support aggregate demand as desired.
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Nice for Greece. Problem is that ASSUMING Germany is coming out of recession at about the optimum rate, the result of the 1trillion distribution would be excess demand in Germany. Actually Germany could probably do with a boost because its unemployment is forcast to rise in 2010, so the 1trillion Euro boost would probably be a good idea.
But there is still the problem of how to deal with the different performances of different Euro countries. E.g. unemployment in Germany is about 8% and Spain is about 20%.
One solution is to “effectively devalue” the Greek and Spanish currency (even though they keep the Euro currency): that is, everyone in Greece and Spain takes an X% pay cut. That is difficult to manage, but Ireland is trying something of this sort in that they are trying to cut public sector pay.
Also I’m a bit doubtful about Warren’s claim that finances can be “enhanced to the point where they can take local action to support aggregate demand as desired.” If a country has some sort of temporary problem, it can “take local action” by borrowing from anyone prepared to lend (and then paying back). But this is no solution for longer term problems, e.g. a permanent deterioration in export performance. If a country borrows to deal with longer term problems, it just gets deeper and deeper into debt.
it won’t mean excess demand if it’s not spent by the national govt, but instead just used to reduce debt. which will likely happen in each nation as even with the distribution their debt levels will still be higher than allowed by the treaty.
hence the high probability of future distributions when they see it doesn’t do anything but lower debt levels without increasing spending
the benefit is the easing of credit tensions which will reduce the risk of systemic failure
Why is there no effect on inflation? Even if money is hoarded in the short term because economic agents are risk averse, this will change and money circulation will return to normality.
Whitout understanding this assumption, just “printing money” and to donate it to goverments might sound like a good idea, because one could think nobody gets hurt, everbody is better off. But I think this leads to inflation (even if gov. is not spending money, but they are repaying debt, and lenders will spend it, maybe not in the short term, but certainly in the long run), and this is the most subtle way of disappropriating people.
you need to rethink your causations. start with ‘soft currency economics’ on this website, thanks!
spending is what drives up prices (though costs can go up for their own reasons- shortages, etc.)
and repaying bank debt doesn’t cause banks to ‘spend it’
Hi Warren.
As someone with no formal economic training whatsoever and who has stumbled accross MMT by chance (Bill Mitchell’s blog) I was wondering if you could answer a question regarding the Eurozone.
I notice that while they have seriously suffered through the financial crisis, the unemplyment rates of the Netherlands and Austria appear to have been completely unaffected. Further, they appear to have been able to maintain low, stable unemployment for quite a long time, not far above the “true” full employment mark of approximately 2%.
Given that most of their neighbours have been badly hit and that some have suffered persitently high unemployment for many years, what is the secret of there two Euro countries seemingly great success at keeping unemployment low?
Charles Goodhart proposes in the Financial Times that Greece creates its own currency to run alongside the Euro. See here:
http://www.ft.com/cms/s/0/5ef30d32-0925-11df-ba88-00144feabdc0.html
That chimes with my suggestion somewhere on this blog a few weeks ago that a local currency can make sense in a particular area given high unemployment in that area.
Can we have Warren’s views on a “Goodhart currency” for Greece?