ITALY'S MONETARY LUNATICS HAVE INTERESTING IDEAS

Vincent Deluard

Subtitle: but no one will listen to them, The European View, May, 2018, 5 pgs., This is a private publication from INIT FCStone Financial Inc. It is not for distribution.

Reviewer comment:
The author, Vincent Deluard, presents excellent analysis of his subject, the financial ideas of two Italian "populist" academics on Italian public debt. They are Mr. Di Maio and Mr. Savini. Apparently they are well known to Deluard's readers as is the venue in which they proposed the ideas under review. I believe he is correct both in describing their ideas as interesting (even worthwhile) and that they will be ignored. He notes that their two main ideas are controversial. Read on to see why. They are meant to apply to Italy's government debt in the European context, but they apply to the United States as well, which is the point of my comments here.

The author prefaces his comment by quoting extracts from David Graeber's important book - Debt: The First 5,000 Years. The book is important because it refutes many 'standard' economic concepts about credit, debt, money, value, and related concepts. For instance, he demolishes the popular idea that societies muddled through conducting exchange (trade) using the obviously impossible 'barter' method until they finally came to turn to a solution by establishing something called 'money'. No such 'barter' method has been found in practice by anthropologists. But he devotes rather much space to tangential topics.

Mr. Deluard focuses on two proposals (theoretical concepts with practical application) offered by the two Italians, Di Maio and Savini, in the course of Italian political competition.
These are: A demand that the ECB cancel the Italian treasury bonds (notes) that it has purchased; and that the Italian government introduce a new 'non-official' yet practically useful paper currency which they designate as 'mini-BOT's'.
These paper notes (which look like bank notes but are not) obtain their 'value' because they would be issued as a 'tax credit' - that is, they would be issued by the government in exchange for goods and services provided by private contractors, but would be recognized officially only for payment of the taxes due from such private entities. Of course both ideas were roundly denounced by establishment authorities, for their good reasons.
But according to MMT - Modern Money Theory - a development of Chartalist ideas of Knapp - the recognition by governments that their 'money' is good for payment of taxes is what confers on that 'money 'its' value'.

Of course, one sees immediately that this 'miniBOT' amounts to government exchanging for a real production (of goods and services) a 'credit' against a payment back to the government of a 'tax' on that same production. Of course all governments are doing this in one way or another but it amounts to a modern version of tribute, since the government is receiving real assets and consuming them for free.

Mr. Deluard terms both ideas 'the only bright spots in an otherwise depressing election'. I know very little about the Italian election apart from general news accounts, but do, indeed, agree with him that these are 'bright spots'.

But Mr. Deluard focuses first on the idea for the ECB to simply cancel the Italian bonds in its portfolio. As he notes the ECB portfolio of European government bonds is simply an 'accounting measure' The principle could remain in the ECB portfolio forever and the annual interest paid on them is returned to the governments - in this case Italian. As he continues, the bonds have already been 'monetized' so their disappearance from ledgers would have no effect.

Now this brings to mind the US Treasuries on the books of our FED as 'debt', on which our FED also returns the annual interest back to the US Treasury (taking of course a non-nominal cut for its own expenses). The US Treasury 'debt' that is the accounting mirror image of the credit the government exchanged with the public for goods and services has also been monetized in the banking system - but in part 'sanitized' by the FED requirement that banks keep part of it in accounts.

Mr. Deluard, next, relates this proposal to the larger picture of monetary confusion that besets the Eurozone. Well, the same confusion besets American economists and monetary - fiscal policy. He explains the confusion thusly: the economists and politicians don't know whether the EURO is another paper version of the former 'gold standard'. Or is it the monetary expression of the idea of sovereignty of the European people as a whole. In other words is the EURO something external to the 'money' created by sovereign rulers which, like the former gold standard, inhibits governments from creating excess 'money' to exchange for consumption of real private production. Or is it the 'money' created by a supranational sovereign uninhibited from expanding its 'money' to suit political purposes.
This is exactly the same age-old conflict between Knapp and Menger - between Wray and Rothbard - public money and private money - central banking and free banking. The FED and its critics such as Ron Paul.

He returns to discuss the other concept - a 'jubilee proposal' that is for the ECB to cancel the 250 billion Euro Italian public bonds it holds. The nomenclature of this activity he terms a 'jubilee' referring to the periodic official events in which Biblical and Mesopotamian governments are described in literature and in clay tablets as ordered that all outstanding debt be 'forgiven'. Actually not all debt was forgiven.
Naturally this idea generated German outrage. After all, they are major creditors. Mr. Deluard, nevertheless, points out that the concept is correct since the actual debt denominated in this paper has already 'disappeared'.

He provides an excellent primer explanation about the nature of debt and the economic reality of a central bank maintaining a ledger showing the nominal 'value' of securities, issued by governments, that it has 'bought'. As he so rightly notes, (the idea is ignored by many) 'debt is the promise to pay interest when it is due, and the principal at maturity. When debt is held by a private investor, that is the end of the story. However, things are very different when that security is held by a central bank'.

Yes, but that is not the original problem. When a private party includes in an exchange his agreement to issue 'credit' to the buyer for part of the value of the items exchanged the counter party accepts a debt to that creditor, which he must pay (including interest) or be in default. But when a government exchanges either currency or 'credit' with a private counterparty when confiscating real existing goods and services, the government then takes back the currency or cancels the credit by calling that process taxation rather than tribute. However much of the created currency or 'credit' that is not returned as taxes, then constitutes the country's 'money supply' when expanded by the banking system use of 'fractional banking'. The difference between the currency issued and the credit created is that there is no promise for redemption of currency and no interest attacked, thus it typically depreciates. While the 'credit' does contain that promise, hence is called 'debt'. This process also enables the government to have flexibility to collect this 'tax' from different private parties than receive much of the 'credit' - thus achieving a redistribution of wealth.

Mr. Deluard's key conclusion is that: 'From the perspective of the national governments, that means that principals can be rolled over indefinitely, and never repaid'.
Bravo - Q. E. D.
Furthermore, he notes that 'the ECB debt jubilee already happened:'
Samo, samo for FED operations.

Next, he provides an interesting graph depicting the 'official and real public debt to GDP ration in Europe' What this shows is that this 'debt' for some countries already exceeds 100% of annual GDP and for many others it is nearing that ratio. What this means is that the country depicted there would be required to add to its annual production currently being consumed by governments a significant additional production NOT then consumed by the government but returned to the private sector to cancel the 'debt'.
Never happen.

The author then mentions 'ignorance' on the part of journalists and market pundits. Indeed, ignorance is bliss. He refers to 'seignorage' probably little understood by those unfamiliar with medieval government money creation - but even less acknowledged today as a government prerogative. He is 'skeptical' of the validity of the official explanations.

Mr. Deluard offers his own cogent explanation. It comes down to the conflict - confusion - over the meaning of 'money' that I mentioned above.
He writes: "I think the real explanation comes from two different views of money. In the German/Bundesbank / ECB view, the Euro is a new gold standard, without bullions to back it. It is an external currency, whose independence from the fiscal policy is enshrined in article 130 of the TEEU. ... " "Conversely, Italy's populists unconsciously defend a Chartalist view of the Euro. In their view, member states have given up the benefits of independent monetary policy to enjoy greater seignorage privileges in a large currency union...."
And in a very perceptive comment on American monetary system he adds: '[Southern states] have given up their ability to adjust their monetary policy to their own economic conditions."

Moreover, he understands that: "Greater seignorage is the benefit of the U.S. Dollar currency union. Because the U. S. dollar has much wider use than a hypothetical New York State of Alabama currency, its issuance can finance far more public goods, without the need for additional taxes or debt."

Mr. Deluard includes in a separate box, and excellent contract between the 'classical' and the 'Chartalist' view of the nature of money. For of the many books on this topic, one of the best is Geoffrey Ingham's The Nature of Money, in which he discusses this issue in detail.
Mr. Deluard summarizes by noting that the 'classical view' is that money developed gradually and naturally in society as a commodity to replace the barter system with a single commodity that could serve the three functions of 'store of value', 'medium of exchange', and 'unit of account'. And the 'Chartalist' view (State theory of money) is that money began as and continues to be a form of debt. "Money is whatever the Sovereign decides is necessary to pay taxes". He elaborates further and concludes that the 'collapse of the gold standard in 1973 effectively validated the State theory of money".

Well, I disagree with both these theories (see my numerous comments on books). But I do agree that governments today with their central banks do operate in practice by justifying their monetary policy on the results of using the MMT to achieve political purposes, which was the point of creating the 'Chartalist' theory originally.
1. There is no historical evidence that a social group used barter as its means for distributing production among its domestic consumers. But 2. Throughout history and today 'money' to fulfill one or another of the three functions noted has been and can be created bo other than sovereigns. Its use does not depend on its validity to pay taxes to sovereigns. Graeber devotes his book -Debt: the first 5000 years to tis topic. Numerous examples of primitive peoples distributing production without either barter or currency attest to this. There are also many historical examples of merchants - banks - others creating money. Moreover different 'things' have served the different of the three functions - they are not necessarily accomplished by the same 'money'.

Next, Mr. Deluard turns to this 'Mini-Bot idea. He describes the idea in excellent detail and provides a link to Salvini's website for further explanation. He describes the proposed benefits.
But what the Mini-Bots would provide in reality is a currency useful only in Italy for use not only in paying taxes but also for undetermined local transactions. Of course the purpose of this is to get around the EU - ECB regulation that prohibits national money since all 'money' is the EURO. This would enable the Italian government to regain control over the quantity of such 'money' in circulation in Italy. Of course it does not create debt - As I pointed out above currencies do not create debt because they are not issued on the basis of future fixed 'value' .

He notes that the concept is considered 'unacceptable'. Of course it is, since it defeats the purpose of the EU and ECB in forcing unification in Europe.
As Mr. Deluard notes, "it highlights the fundamental flaw of the European monetary union". He explains reasons for this. And he considers that the same result could be accomplished by creation of a 'cryptocurrency'.

As an extra treat, Mr. Deluard provides a brief example of a 'free money' - a 'miracle' - that actually occurred in Austria during the great depression. The occasion was when a small Austrian, lacking the ability to tap national money system, created its own local 'money' that circulated - thus fulfilling the function of medium of exchange - The local currency circulated so quickly that the function of store of value did not arise, in fact the currency was designed to loose value over time. But it did function as a local unit of account.

If one looked far one could find hundreds of similar examples (for instance in Ireland when the banks were closed).
But naturally it was soon prohibited, as Mr. Deluard points out when 'the Worgl experiment was ended after a year by the Austrian National Bank who viewed it as a violation of its monopoly over the issuance of the national currency".

For further discussion on the political reality of banking and monetary policy one can read Charles Calomiris & Stephen Haber's book - Fragile by Design: The Political Origins of Banking Crises & Scarce Credit.