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Tax – and Spend Better

From Wessex Regionalists a plea for land value taxes

..Talk of plugging loopholes suggests that the tax system requires nothing more than a little fine-tuning. In fact, it could do with a major overhaul. A Land Value Tax to deter speculation and prevent derelict land lying idle, for the first time integrating planning policy, land ownership policy and revenue-raising across the board. Or taxation of the increase in value of housing on re-sale (at 100%, allowing for inflation and improvements), to stabilise house prices and divert speculative funds into more productive activity. High taxation of empty and second homes, to finance the repurchase of privatised council houses, avoiding the need for new housebuilding. The current Inheritance Tax threshold lowered to capture the huge wealth built up in the London suburbs by families who have done nothing more active than enjoy rising house prices brought about by the over-heated economy of the capital. And is not David Cameron’s refusal, against the wishes of most other EU countries, to impose a financial transaction tax, which would ‘hurt’ his friends and
supporters in the mainly London-based financial sector, also ‘tax avoidance’ of a sort? Finally, we learned last week that, over the past two years, HMRC has written off £10 billion in unpaid tax. Is it really that difficult to extract or does HMRC just need a good shaking?

Posted in Land Taxation, News.

Marshall Auerback Explains (Again) How to Save the Euro..

From Yanis Varoufakis BlogVery long guest post by MMTer Marshall Auerback. We don’t often see  friendly collaboration amongst economists. 

A(nother) PROPOSAL FOR SAVING THE EURO ZONE: Guest post by Marshall Auerback

…But there is a better and more transparent way: The proposal is for the ECB to create and then distribute trillions of euros annually to the national governments on a per capita basis. The per capita criteria means that it is neither a targeted bailout nor a reward for bad behavior. In fact, as the largest economy, Germany would get the largest distribution of euros from the ECB. This distribution would immediately adjust national government debt ratios downward, which eases credit fears without triggering additional national government spending. This serves to dramatically ease credit tensions and thereby foster normal functioning of the credit markets for the national government debt issues.

The trillions of euros distribution would not add to aggregate demand or inflation, as member nation spending and tax policy are in any case restricted by the Maastricht criteria. The SGP should be upheld in order to prevent the ‘race to the bottom’ whereby the most fiscally profligate derive the largest benefits. Furthermore, making this distribution an annual event greatly enhances enforcement of EU rules, as the penalty for non-compliance can be the withholding of annual payments. This is vastly more effective than the current arrangement of fines and penalties for non-compliance, which have proven themselves unenforceable as a practical matter.

There are no operational obstacles to the crediting of the accounts of the national governments by the ECB. What would likely be required is approval by the finance ministers. In theory, there should be no reason why any would object, as this proposal, which will enhance the SGP, serves to both reduce national debt levels of all member nations and at the same time tighten the control of the European Union over national government finances.

Additionally, it’s not inflationary, as it mere substitutes national bonds with reserves in the banking system and building banking reserves is not inflationary. This is confirmed by no less an authority than the BIS. So an essential part of the argument is the build-up of bank reserves is inflationary.

Posted in Money Systems, News, Resilient Investment.

Yanis compares the Greek election to the Irish vote on the Fiscal Treaty

Interesting comments on Ireland vis a vis Greece and the way we should have voted and why by Yanis Varoufakis. Its worth noting that Sinn Fein invited Yanis to Dublin last year before he won his present high profile.  It is easy to underestimate Sinn Fein’s very fast learning curve in economics and monetary systems.  Syriza shows that they might unexpectedly have use for their learning as the other Irish parties get sucked into the Germanic delusion.

Why Europe should fear Fine Gael-like ‘reasonableness’ much, much more than it fears Syriza

3 Jun

The establishment view in Europe is that the problem is too much debt (by profligate countries like Greece) and, therefore, that the solution must involve (a) austerity and (b) structural reforms (which increase the competitiveness of the weaker states). The problem, however, is that the establishment view is profoundly mistaken and, as a result, the proposed treatment poisons the patient. If this is so, Europe (and the world) have a lot more to fear from the ‘reasonableness’ of political parties like Fine Gael et al than from the ‘ultra-leftists’ of Syriza.

The other day, the Irish voted in favour of a hideous impossibility: They voted in favour of the EU’s fiscal compact which specifies that which is both impossible to attain and catastrophic if it is attained. What was that? The pledge by member-states that “general government budgets shall be balanced or in surplus”, that “the annual structural deficit must not exceed 0.5 percent of GDP”, that if “government debt exceeds the 60% reference level” it will be reduced “at an average rate of one twentieth (5%) per year as a benchmark” and that, failing all this, “the EU’s highest court will be able to fine a country”; a penalty equivalent to up to 0.1% of GDP”.

Suppose that every European citizen adopts the fiscal compact as her or his guiding principle and puts its implementation above all else in life. If Spain, Italy, Portugal, Ireland, France, Greece, Germany etc. (i.e. countries with debt well above 60% of GDP) were to reduce their debt by the specified 5% per annum, this would mean that all these nations should turn an average 2.8% primary deficit to something akin to 6% primary surplus. Suppose we could do it (which,  of course, we cannot). Were we to succeed in this endeavour, the result would be a very deep recession equal to at least -4.5% in terms of average Eurozone-wide ‘growth’. In a period when a banking crisis is in full swing, the Periphery is in free fall, US growth is tittering of the verge, China is slowing down etc., engineering such a recession via this piece of ‘legislation’ is the macroeconomic equivalent of committing suicide.

So, why did the Fine Gael-led Dublin government push so powerfully in favour of this piece of crippling idiocy? And why did the smart, decent Irish voters said Yes, despite their tradition of saying No to euro-silliness? The answer is simple: They were blackmailed. Ireland’s voters were told: Vote No and the flow of money from the troika will cease. And so they voted Yes, even though I suspect that no government minister, no rank and file Fine Gael or Labour Party member, no man or woman on the street believes that the Fiscal Compact they voted for makes sense.

Similarly in Greece today. Voters are being bombarded by the media with precisely the same dilemma: If you vote for Syriza, as opposed to one of the pro-bailout parties, the money flow from the troika will cease and then all hell will break loose. Indeed, the same scenario is played out all over the place. In Spain, the hapless government of Mr Rajoy speaks out against Eurobonds so as to stay on the ‘right’ side of Mrs Merkel in the hope that Spanish banks will be kept afloat without an ignominious inclusion in the EFSF-ESM fold. Italy’s Mr Monti is invoking the Greeks to vote for ‘reasonable’ parties even though he knows full well that this sort of ‘reasonableness’ involves policies that constitute cruel, unusual and ineffective punishment. And so on.

For two years now I have been arguing that Europe is being quickmarched, sequentially (one country after the next) off the cliff of competitive austerity – without any winners standing at the end of this gruesome process. Something must end this madness. There must be a circuit-breaker. Ireland could have been that circuit-breaker, with a resounding No to the idiotic Fiscal Pact. It did not happen. On the one hand, the fear that Ireland will be frozen out of the ESM and, on the other hand, the elevation of the troika’s ‘model prisoner’ image (for the Irish) onto the Pantheon of Irish virtues, saw to it that madness (in the form of a Yes vote to a Compact that everyone knows to be daft) prevailed. Greece is the next hope that Reason may manage to score a belated victory.

If on 17th June Greeks voted like the Irish did last week (that is, against their reasoning and guided by fear and blackmail), the Eurozone will become history, with terrible consequences for the global economy. This is not the case of the Philosopher Kings blackmailing the plebs to do what is right. This is the case of ‘madmen in authority’, to quote Keynes, who are not only steering the vessel toward the rocks but who are, in the process, punching holes in the life vests that may carry us to safety once the shipwreck is complete. Consider what they are telling the Greek people: They are saying that Greece, to remain in the Eurozone, must,

(a)  carry on borrowing from the EFSF at 4% (and thus adding to Greece’s public debt) in order to pay the ECB (which will be making a 20% profit from these payments, courtesy of the fact that it had previously bought Greece’s bonds at a 20% to 30% discount)

(b)  reduce public spending by 12 billion euros in order to be ‘allowed’ to borrow for the benefit of bolstering the ECB’s profits from these transactions involving bankrupt Greece.

If the Devil wanted to guarantee that Greece is pushed out of the Eurozone, he and his evil handmaidens could not make up the above, satanic, scenario. Meanwhile, the same happens in Spain, where the government is forced to borrow money (at nearly 7%) it can hardly raise in order to shore up banks that are borrowing from the ECB (at 1%) to lend to the Spanish government at (7%) so that the latter can… bail them out. Not even the sickest of minds could make this up!

To conclude, Europe’s peoples are being marched into a catastrophe. They know that this is their predicament. They can see their march is leading them off a mighty cliff. But they are too afraid to veer off, in case there are beaten back into line, in case they get lost in the woods, for reasons that sheep know best. However, the only way this hideous march can end is if someone summons up the courage and does it. And steps out, showing the others that this march can stop and must stop – for everyone’s benefit. Who is that someone? We, Europeans, do not have many options. As I wrote above, the Irish people had a chance but did not take it. In two weeks, the Greeks have their chance. Voting for Syriza would offer us (and by ‘us’ I mean all Europeans) a chance of this circuit-breaker. A chance to say: Enough! Time to change course in order to save the Eurozone, so as to prevent the Great Postmodern Depression which lurks once the euro-system fragments formally.

Should we be afraid of Syriza’s ‘ultra-leftism’? My answer is a resounding No. I recommend that (even those who have Greek amongst their languages) you do not read their manifesto. It is not worth the paper it is written on. While replete with good intentions, it is hort on detail, full of promises that cannot, and will not be fulfilled (the greatest one is that austerity will be cancelled), a hotchpotch of  policies that are neither here nor there. Just ignore it. Syriza is a party that had to progress, within weeks, from a fringe political agglomeration struggling to get into Parliament (at around the 4% mark) to a major party that may have to form government in a few short weeks. It is, in important ways, a ‘work in progress’; and so is its unappetising Manifesto. No, the reason it is safe to take a gamble on Syriza is threefold:

First, because it is probably the only party that ‘gets it’; that understands (a) that Greece must stay in the Eurozone (despite the latter’s obvious failures), and (b) that the Eurozone will not survive unless someone forces Europe to put an immediate halt on this “march off the cliff of competitive austerity”.

Secondly, because the small team of political economists that will negotiate on Syriza’s behalf are good. moderate people with a decent grasp of the grim reality that Greece and the Eurozone are facing (and, no, I am not part of that team – but I know the ones I am referring to).

Thirdly, because, in any case, a vote for Syriza is not going to establish a purely Syriza government. No party, including Syriza, will be in a position to form a government outright. So, the question is whether Europe is better off with a government in Athens which includes Syriza as a pivot or one which is supported by discredited pro-bailout parties, with Syriza leading from the opposition benches. I have no doubt whatsoever that Europe’s interests are best served by the first option.[1]

[1] On a humourful note, perhaps we can even enlist the Fiscal Compact as a reason to support a Syriza-based government! One of the Compact’s articles, after all, says that member-states agree to take the necessary actions and measures, which are essential to the good functioning of the euro area in pursuit of the objectives of fostering competitiveness, promoting employment, contributing further to the sustainability of public finances and reinforcing financial stability.” Well, all this, at least in my estimation, requires saying No to the ‘bailout’ logic and, thus, Yes to the Syriza’s line of argument…

Posted in Money Systems, News, Resilient Investment.

Viral Speech by George Soros Speech – “the authorities have a three months’ window during which they could still correct their mistakes”

This speech has been causing consternation amongst economists and investors.  I suppose it is because Soros is telling the truth of the situation as he sees it stripped of wishful thinking.  You will see that Europe is likely to experience an eventful three months at the end of which things will have changed fundamentally – whether for better or worse is impossible to say.  I think that Soros smart as he is, may not have spotted a third outcome – that of the recognition of the Euro as a social commons and the ECB as its trustee.  The ECB can provide the money supply that is needed to eliminate the great debt mountain in a modern day Jubilee as per Richard Douthwaite of Feasta (Deficit Easing) and the independent minded economist, Steve Keen and MMTers Marshall Auerback, Warren Mosler and later, Philip Pilkington which informed Smart Taxes budget submissions.  Citizens beneficiaries of the Euro trust would receive a disbursement of trillions on an objective or per capita basis – no German taxpayer transfer or guarantee necessary.  It would mean the reinvention of the Res Communa of ancient Rome, or  ‘commons property’ as we know it.  The concept of the ‘commons’ is growing in the youthful Occupy movement and in the likes of the unexpectedly emerging Pirate Parties of Northern Europe.  In their hearts and minds lies the final outcome of the Euro story. 

Remarks at the Festival of Economics, Trento Italy

June 02, 2012

Ever since the Crash of 2008 there has been a widespread recognition, both among economists and the general public, that economic theory has failed. But there is no consensus on the causes and the extent of that failure.

I believe that the failure is more profound than generally recognized. It goes back to the foundations of economic theory. Economics tried to model itself on Newtonian physics. It sought to establish universally and timelessly valid laws governing reality. But economics is a social science and there is a fundamental difference between the natural and social sciences. Social phenomena have thinking participants who base their decisions on imperfect knowledge. That is what economic theory has tried to ignore.

Scientific method needs an independent criterion, by which the truth or validity of its theories can be judged. Natural phenomena constitute such a criterion; social phenomena do not. That is because natural phenomena consist of facts that unfold independently of any statements that relate to them. The facts then serve as objective evidence by which the validity of scientific theories can be judged. That has enabled natural science to produce amazing results.

Social events, by contrast, have thinking participants who have a will of their own. They are not detached observers but engaged decision makers whose decisions greatly influence the course of events. Therefore the events do not constitute an independent criterion by which participants can decide whether their views are valid. In the absence of an independent criterion people have to base their decisions not on knowledge but on an inherently biased and to greater or lesser extent distorted interpretation of reality. Their lack of perfect knowledge or fallibility introduces an element of indeterminacy into the course of events that is absent when the events relate to the behavior of inanimate objects. The resulting uncertainty hinders the social sciences in producing laws similar to Newton’s physics.

Economics, which became the most influential of the social sciences, sought to remove this handicap by taking an axiomatic approach similar to Euclid’s geometry. But Euclid’s axioms closely resembled reality while the theory of rational expectations and the efficient market hypothesis became far removed from it. Up to a point the axiomatic approach worked. For instance, the theory of perfect competition postulated perfect knowledge. But the postulate worked only as long as it was applied to the exchange of physical goods. When it came to production, as distinct from exchange, or to the use of money and credit, the postulate became untenable because the participants’ decisions involved the future and the future cannot be known until it has actually occurred.

I am not well qualified to criticize the theory of rational expectations and the efficient market hypothesis because as a market participant I considered them so unrealistic that I never bothered to study them. That is an indictment in itself but I shall leave a detailed critique of these theories to others.

Instead, I should like to put before you a radically different approach to financial markets. It was inspired by Karl Popper who taught me that people’s interpretation of reality never quite corresponds to reality itself. This led me to study the relationship between the two. I found a two-way connection between the participants’ thinking and the situations in which they participate. On the one hand people seek to understand the situation; that is the cognitive function. On the other, they seek to make an impact on the situation; I call that the causative or manipulative function. The two functions connect the thinking agents and the situations in which they participate in opposite directions. In the cognitive function the situation is supposed to determine the participants’ views; in the causative function the participants’ views are supposed to determine the outcome. When both functions are at work at the same time they interfere with each other. The two functions form a circular relationship or feedback loop. I call that feedback loop reflexivity. In a reflexive situation the participants’ views cannot correspond to reality because reality is not something independently given; it is contingent on the participants’ views and decisions. The decisions, in turn, cannot be based on knowledge alone; they must contain some bias or guess work about the future because the future is contingent on the participants’ decisions.

Fallibility and reflexivity are tied together like Siamese twins. Without fallibility there would be no reflexivity – although the opposite is not the case: people’s understanding would be imperfect even in the absence of reflexivity. Of the two twins, fallibility is the first born. Together, they ensure both a divergence between the participants’ view of reality and the actual state of affairs and a divergence between the participants’ expectations and the actual outcome.

Obviously, I did not discover reflexivity. Others had recognized it before me, often under a different name. Robert Merton wrote about self-fulfilling prophecies and the bandwagon effect, Keynes compared financial markets to a beauty contest where the participants had to guess who would be the most popular choice. But starting from fallibility and reflexivity I focused on a problem area, namely the role of misconceptions and misunderstandings in shaping the course of events that mainstream economics tried to ignore. This has made my interpretation of reality more realistic than the prevailing paradigm.

Among other things, I developed a model of a boom-bust process or bubble which is endogenous to financial markets, not the result of external shocks. According to my theory, financial bubbles are not a purely psychological phenomenon. They have two components: a trend that prevails in reality and a misinterpretation of that trend. A bubble can develop when the feedback is initially positive in the sense that both the trend and its biased interpretation are mutually reinforced. Eventually the gap between the trend and its biased interpretation grows so wide that it becomes unsustainable. After a twilight period both the bias and the trend are reversed and reinforce each other in the opposite direction. Bubbles are usually asymmetric in shape: booms develop slowly but the bust tends to be sudden and devastating. That is due to the use of leverage: price declines precipitate the forced liquidation of leveraged positions.

Well-formed financial bubbles always follow this pattern but the magnitude and duration of each phase is unpredictable. Moreover the process can be aborted at any stage so that well-formed financial bubbles occur rather infrequently.

At any moment of time there are myriads of feedback loops at work, some of which are positive, others negative. They interact with each other, producing the irregular price patterns that prevail most of the time; but on the rare occasions that bubbles develop to their full potential they tend to overshadow all other influences.

According to my theory financial markets may just as soon produce bubbles as tend toward equilibrium. Since bubbles disrupt financial markets, history has been punctuated by financial crises. Each crisis provoked a regulatory response. That is how central banking and financial regulations have evolved, in step with the markets themselves. Bubbles occur only intermittently but the interplay between markets and regulators is ongoing. Since both market participants and regulators act on the basis of imperfect knowledge the interplay between them is reflexive. Moreover reflexivity and fallibility are not confined to the financial markets; they also characterize other spheres of social life, particularly politics. Indeed, in light of the ongoing interaction between markets and regulators it is quite misleading to study financial markets in isolation. Behind the invisible hand of the market lies the visible hand of politics. Instead of pursuing timeless laws and models we ought to study events in their time bound context.

My interpretation of financial markets differs from the prevailing paradigm in many ways. I emphasize the role of misunderstandings and misconceptions in shaping the course of history. And I treat bubbles as largely unpredictable. The direction and its eventual reversal are predictable; the magnitude and duration of the various phases is not. I contend that taking fallibility as the starting point makes my conceptual framework more realistic. But at a price: the idea that laws or models of universal validity can predict the future must be abandoned.

Until recently, my interpretation of financial markets was either ignored or dismissed by academic economists. All this has changed since the crash of 2008. Reflexivity became recognized but, with the exception of Imperfect Knowledge Economics, the foundations of economic theory have not been subjected to the profound rethinking that I consider necessary. Reflexivity has been accommodated by speaking of multiple equilibria instead of a single one. But that is not enough. The fallibility of market participants, regulators, and economists must also be recognized. A truly dynamic situation cannot be understood by studying multiple equilibria. We need to study the process of change.

The euro crisis is particularly instructive in this regard. It demonstrates the role of misconceptions and a lack of understanding in shaping the course of history. The authorities didn’t understand the nature of the euro crisis; they thought it is a fiscal problem while it is more of a banking problem and a problem of competitiveness. And they applied the wrong remedy: you cannot reduce the debt burden by shrinking the economy, only by growing your way out of it. The crisis is still growing because of a failure to understand the dynamics of social change; policy measures that could have worked at one point in time were no longer sufficient by the time they were applied.

Since the euro crisis is currently exerting an overwhelming influence on the global economy I shall devote the rest of my talk to it. I must start with a warning: the discussion will take us beyond the confines of economic theory into politics and the dynamics of social change. But my conceptual framework based on the twin pillars of fallibility and reflexivity still applies. Reflexivity doesn’t always manifest itself in the form of bubbles. The reflexive interplay between imperfect markets and imperfect authorities goes on all the time while bubbles occur only infrequently. This is a rare occasion when the interaction exerts such a large influence that it casts its shadow on the global economy. How could this happen? My answer is that there is a bubble involved, after all, but it is not a financial but a political one. It relates to the political evolution of the European Union and it has led me to the conclusion that the euro crisis threatens to destroy the European Union. Let me explain.

I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position.

The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.

Germany used to be in the forefront of the effort. When the Soviet empire started to disintegrate, Germany’s leaders realized that reunification was possible only in the context of a more united Europe and they were willing to make considerable sacrifices to achieve it. When it came to bargaining they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement. At that time, German statesmen used to assert that Germany has no independent foreign policy, only a European one.

The process culminated with the Maastricht Treaty and the introduction of the euro. It was followed by a period of stagnation which, after the crash of 2008, turned into a process of disintegration. The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. It took financial markets more than a year to realize the implication of that declaration, showing that they are not perfect.

The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union.

But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails – and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.

It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.

The eurozone is now repeating what had often happened in the global financial system. There is a close parallel between the euro crisis and the international banking crisis that erupted in 1982. Then the international financial authorities did whatever was necessary to protect the banking system: they inflicted hardship on the periphery in order to protect the center. Now Germany and the other creditor countries are unknowingly playing the same role. The details differ but the idea is the same: the creditors are in effect shifting the burden of adjustment on to the debtor countries and avoiding their own responsibility for the imbalances. Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed. Just as in the 1980’s all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged. Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe. That is the responsibility that Germany and the other creditor countries need to acknowledge. But there is no sign of this happening.

The European authorities had little understanding of what was happening. They were prepared to deal with fiscal problems but only Greece qualified as a fiscal crisis; the rest of Europe suffered from a banking crisis and a divergence in competitiveness which gave rise to a balance of payments crisis. The authorities did not even understand the nature of the problem, let alone see a solution. So they tried to buy time.

Usually that works. Financial panics subside and the authorities realize a profit on their intervention. But not this time because the financial problems were reinforced by a process of political disintegration. While the European Union was being created, the leadership was in the forefront of further integration; but after the outbreak of the financial crisis the authorities became wedded to preserving the status quo. This has forced all those who consider the status quo unsustainable or intolerable into an anti-European posture. That is the political dynamic that makes the disintegration of the European Union just as self-reinforcing as its creation has been. That is the political bubble I was talking about.

At the onset of the crisis a breakup of the euro was inconceivable: the assets and liabilities denominated in a common currency were so intermingled that a breakup would have led to an uncontrollable meltdown. But as the crisis progressed the financial system has been progressively reordered along national lines. This trend has gathered momentum in recent months. The Long Term Refinancing Operation (LTRO) undertaken by the European Central Bank enabled Spanish and Italian banks to engage in a very profitable and low risk arbitrage by buying the bonds of their own countries. And other investors have been actively divesting themselves of the sovereign debt of the periphery countries.

If this continued for a few more years a break-up of the euro would become possible without a meltdown – the omelet could be unscrambled – but it would leave the central banks of the creditor countries with large claims against the central banks of the debtor countries which would be difficult to collect. This is due to an arcane problem in the euro clearing system called Target2. In contrast to the clearing system of the Federal Reserve, which is settled annually, Target2 accumulates the imbalances. This did not create a problem as long as the interbank system was functioning because the banks settled the imbalances themselves through the interbank market. But the interbank market has not functioned properly since 2007 and the banks relied increasingly on the Target system. And since the summer of 2011 there has been increasing capital flight from the weaker countries. So the imbalances grew exponentially. By the end of March this year the Bundesbank had claims of some 660 billion euros against the central banks of the periphery countries.

The Bundesbank has become aware of the potential danger. It is now engaged in a campaign against the indefinite expansion of the money supply and it has started taking measures to limit the losses it would sustain in case of a breakup. This is creating a self-fulfilling prophecy. Once the Bundesbank starts guarding against a breakup everybody will have to do the same.

This is already happening. Financial institutions are increasingly reordering their European exposure along national lines just in case the region splits apart. Banks give preference to shedding assets outside their national borders and risk managers try to match assets and liabilities within national borders rather than within the eurozone as a whole. The indirect effect of this asset-liability matching is to reinforce the deleveraging process and to reduce the availability of credit, particularly to the small and medium enterprises which are the main source of employment.

So the crisis is getting ever deeper. Tensions in financial markets have risen to new highs as shown by the historic low yield on Bunds. Even more telling is the fact that the yield on British 10 year bonds has never been lower in its 300 year history while the risk premium on Spanish bonds is at a new high.

The real economy of the eurozone is declining while Germany is still booming. This means that the divergence is getting wider. The political and social dynamics are also working toward disintegration. Public opinion as expressed in recent election results is increasingly opposed to austerity and this trend is likely to grow until the policy is reversed. So something has to give.

In my judgment the authorities have a three months’ window during which they could still correct their mistakes and reverse the current trends. By the authorities I mean mainly the German government and the Bundesbank because in a crisis the creditors are in the driver’s seat and nothing can be done without German support.

I expect that the Greek public will be sufficiently frightened by the prospect of expulsion from the European Union that it will give a narrow majority of seats to a coalition that is ready to abide by the current agreement. But no government can meet the conditions so that the Greek crisis is liable to come to a climax in the fall. By that time the German economy will also be weakening so that Chancellor Merkel will find it even more difficult than today to persuade the German public to accept any additional European responsibilities. That is what creates a three months’ window.

Correcting the mistakes and reversing the trend would require some extraordinary policy measures to bring conditions back closer to normal, and bring relief to the financial markets and the banking system. These measures must, however, conform to the existing treaties. The treaties could then be revised in a calmer atmosphere so that the current imbalances will not recur. It is difficult but not impossible to design some extraordinary measures that would meet these tough requirements. They would have to tackle simultaneously the banking problem and the problem of excessive government debt, because these problems are interlinked. Addressing one without the other, as in the past, will not work.

Banks need a European deposit insurance scheme in order to stem the capital flight. They also need direct financing by the European Stability Mechanism (ESM) which has to go hand-in-hand with eurozone-wide supervision and regulation. The heavily indebted countries need relief on their financing costs. There are various ways to provide it but they all need the active support of the Bundesbank and the German government.

That is where the blockage is. The authorities are working feverishly to come up with a set of proposals in time for the European summit at the end of this month. Based on the current newspaper reports the measures they will propose will cover all the bases I mentioned but they will offer only the minimum on which the various parties can agree while what is needed is a convincing commitment to reverse the trend. That means the measures will again offer some temporary relief but the trends will continue. But we are at an inflection point. After the expiration of the three months’ window the markets will continue to demand more but the authorities will not be able to meet their demands.

It is impossible to predict the eventual outcome. As mentioned before, the gradual reordering of the financial system along national lines could make an orderly breakup of the euro possible in a few years’ time and, if it were not for the social and political dynamics, one could imagine a common market without a common currency. But the trends are clearly non-linear and an earlier breakup is bound to be disorderly. It would almost certainly lead to a collapse of the Schengen Treaty, the common market, and the European Union itself. (It should be remembered that there is an exit mechanism for the European Union but not for the euro.) Unenforceable claims and unsettled grievances would leave Europe worse off than it was at the outset when the project of a united Europe was conceived.

But the likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany. It would leave Germany with large unenforceable claims against the periphery countries. The Bundesbank alone will have over a trillion euros of claims arising out of Target2 by the end of this year, in addition to all the intergovernmental obligations. And a return to the Deutschemark would likely price Germany out of its export markets – not to mention the political consequences. So Germany is likely to do what is necessary to preserve the euro – but nothing more. That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments. That would turn the European Union into something very different from what it was when it was a “fantastic object” that fired peoples imagination. It would be a German empire with the periphery as the hinterland.

I believe most of us would find that objectionable but I have a great deal of sympathy with Germany in its present predicament. The German public cannot understand why a policy of structural reforms and fiscal austerity that worked for Germany a decade ago will not work Europe today. Germany then could enjoy an export led recovery but the eurozone today is caught in a deflationary debt trap. The German public does not see any deflation at home; on the contrary, wages are rising and there are vacancies for skilled jobs which are eagerly snapped up by immigrants from other European countries. Reluctance to invest abroad and the influx of flight capital are fueling a real estate boom. Exports may be slowing but employment is still rising. In these circumstances it would require an extraordinary effort by the German government to convince the German public to embrace the extraordinary measures that would be necessary to reverse the current trend. And they have only a three months’ window in which to do it.

We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be. The future of Europe depends on it.

Posted in Money Systems, News, Resilient Investment.

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Site Value Tax on the cards ! (I so hope that Fionnan has got this right)

Fionnan Sheehan writing in today’s Sunday Independant has given us reason for hope…


HOMEOWNERS who have not paid the €100 household charge will start receiving personal letters in the coming weeks telling them to pay up.

Environment Minister Phil Hogan is targeting the 650,000 householders who have not paid after shelving the difficult issue during the EU referendum campaign.

The first batch of letters will be aimed at landlords and second homeowners, and councils are being told to use their own local knowledge to target the tax evaders.

In these cases, councils will be expected to identify areas where there is a low level of payment and hit the property owners with reminder letters.

Later in the summer, local authorities will use the ESB’s database of properties to identify the remaining householders who have failed to pay.

The letters will tell homeowners of their obligation to pay €100, the fines they have already built up, and the further penalties that will accrue if they still don’t pay.

Anybody who has not paid already owes at least €110 and the sum increases the longer it goes unpaid.

The Government believes the letters will spark a response similar to the experience with TV licence fee defaulters – when they see they have been identified large numbers pay up.

For TV licences, two out of five people who received a letter paid up immediately.

Just under 950,000 homes have paid up for the household charge, but the remaining 650,000 have not paid.

The Coalition is also planning to take high-profile sample court cases against household charge dodgers across the country before the end of the year.

The letters will start going out from the third week in June.

“The local authorities will be writing to people. All the protocols are now in place,” a government source said last night.

The letters will be sent out by councils under the supervision of the state agency in charge of collecting the €100 tax, the Local Government Management Agency.

After keeping a low profile during the referendum campaign, Environment Minister Phil Hogan will play a prominent role for the coming period.

Over the summer months, the Coalition will also start up the septic-tank registration scheme and take steps to bring in the new property tax.

The septic-tank scheme is currently being tested and registration will begin in July, with an online and postal method.


Once registration starts, homeowners with septic tanks will have three months to register and avail of the special discounted rate of €5.

After that, the special offer ends and the remaining septic-tank owners will be liable for a €50 fee.

Meanwhile, homeowners will face the full brunt of the property tax next year as the Government is forced to fast-track the rollout of the permanent system.

The property tax will be higher for many householders than the €100 household charge.

Ministers are keen to get away from the flat-rate charge where the €100 tax is the same for all.

The new system is expected to be self-assessed and will result in the owner of a regular three-bed semi-detached home paying €200 to €300 a year.

Government sources say the property tax is expected to be in the form of a ‘site valuation tax’, which assesses the value of the site itself and ignores the value of the house built on it.

As the tax is on the raw value of the site, it takes account of the location more than the physical bricks and mortar of the house itself.

So two houses side-by-side — one rundown and one modern — on the same size site, would be levied the same amount of property tax.

An expert group is due to report back before the summer with a formula for applying the property tax.

In order to introduce it in time for next year, the Government will have to make decisions and announce the system by the autumn.

The key elements of the equation to be considered for the site valuation property tax will be the:

– Value of the property.

– Regional differences between property values.

– Methods of payment.

– Help for low-income households.

– Alleviation for those who paid high stamp duty or first-time buyers during the property boom.

– Waivers to apply for council tenants.

– Assistance for those getting state help to pay their mortgage.

The expert group also has to work out how to audit the system to ensure householders are paying the right amount and how to enforce the system with penalties for failing to pay.

The expert group on the property tax is chaired by consultant and former top civil servant, Dr Don Thornhill.

– Fionnan Sheahan

Posted in Land Taxation, News. Modern Money Theory

Link to weekly newsletter on MMT or Modern Monetary Theory

Modern Monetary Theory

Posted in Money Systems, News. Green Job Guarantee

Here is the link to a weekly newsletter on the green job guarantee

Green Job Guarantee

Posted in Green Job Guarantee, News. Land Value Tax

I am a very reluctant Facebook user but I had to sign up to use this very useful tool ‘’ that Facebook controls.  Using it, I have set up a little newsletter on Land Value Tax with stories gleaned from all over the world that I will update weekly.  I am not all sure that this link will work but have a go anyway…


Land Value Tax

Posted in Land Taxation, News.

Steve Keen in Extended Inteview on BBC Hardtalk : Brilliant!

Steve Keen on HardTalk

Posted in Money Systems, News, Resilient Investment.

The Fiscal Summit Counter-Narrative: Part Two, Defining Fiscal Sustainability

 This is a snippet from new blog source Corrente that I found recently,  spreading MMT ideas.  It gives a well recorded account of a Fiscal Counter Summit with all of the MMT big hitters.   The second part includes Bill Mitchell which I excerpt here to give some Southern hemisphere balance  on Smart Taxes.

The Fiscal Summit Counter-Narrative: Part One

The Fiscal Summit Counter-Narrative: Part Two, Defining Fiscal Sustainability.

…Because of the very great importance of the fiscal sustainability/fiscal responsibility/fiscal crisis/solvency rhetoric, the first session of the Fiscal Sustainability Teach-In Counter-Conference covered the topic “What Is Fiscal Sustainability?” and the primary speaker was Professor Bill Mitchell of the University of Newcastle. Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Bill Mitchell’s Presentation on Fiscal Sustainability

Bill Mitchell is one of the three thinkers most responsible for the development of Modern Monetary Theory (MMT) and its approach to Fiscal Sustainability. Bill’s a prolific writer and blogger whose career has been devoted to Macroeconomics and to public policy intended to achieve Full Employment and price Stability. He’s watched and lived through the growing dominance of neoliberal ideology and the developing economic inequality that belief in it has created, and he has fought it every step of the way. His presentation was a distillation of his views on fiscal sustainability fueled by his search for a new economic paradigm transcending neoliberalism. Here are his main points, supplemented by a few comments of my own.

— The last 25 years of neoliberal dominance in Australia and elsewhere was a period in which the major western governments abandoned the goal of full employment they had previously embraced in the post WWII period, in favor of the goal of “full employability.” As a result, unemployment rates have been trending upwards over the neoliberal period but also are very high now. This is how people are affected by neoliberalism, and it’s real.

— “Fiscal policy has saved the world from a Great Depression, yet, two years later… ” (now four), “… after the handouts have been gratefully received by the top end of town, after we’ve put some sort of floor into the downward spiral, we’ve now seen this mass hysteria, … We’ve completely lost track of what’s happened, and we’re basically setting ourselves up again for the next crash… .”

— All the talk now is about “financial ratios divorced from any context or what else is happening or what other goals you might have … .all applying the logic that related moralists to a monetary system that ended in 1971.”

— But this ratio fever isn’t just restricted to the hawks/austerians: “… the progressives even buy into this fiscal rule that you’ve got to balance budgets over the business cycle. … You just impose these fiscal rules out of context and with no comprehension of what it means… . “

— “You won’t find a definition of fiscal sustainability by making analogies between households and sovereign governments… . “ Those analogies are flawed because: “The household uses the currency and always has to finance their spending whether it’s through earning income, whether it’s through borrowing, whether it’s through using up past savings or running down/selling assets. A national government who issues its own currency and floats it never has to do that… .”

LetsGetItDone Comment: This is a key point which will come up again and again in these posts on the counter-narrative. Neither the austerian/deficit hawks nor, generally the deficit doves, make the distinction between Governments with non-convertible fiat currencies with freely floating exchange rates and no appreciable debts in foreign currencies (nations sovereign in their own currencies); and other nations that are either currency users, have pegged their currencies to those of other nations, or owe significant debts in foreign currencies. This distinction is of fundamental importance because all the instances of insolvency or hyperinflation we’ve seen have occurred in systems with non-fiat currencies, currencies pegged to the currencies of other nations, or appreciable quantities of external debt in currencies not their own.

The historical evidence suggests that nations sovereign in their own currencies cannot have solvency problems and are also more resistant to inflation than nations in other categories. To discuss fiscal sustainability without making this critical distinction between currency issuers and currency users ignores an issue that is central to fiscal sustainability and guarantees that good policy cannot result from such an analysis and related policy approaches. Austerity/deficit hawk analyses almost always ignore this distinction and blithely compare currency sovereign nations with others. That’s why their analyses often involve predictions that nearly always turn out to wrong, and that’s why austerity policies in currency sovereign nations like the US, Australia, Japan, Canada, and the UK only work to prolong recessions, unless the private sector blows huge debt bubbles to compensate for the failure of government to deficit spend to close output gaps caused by demand leakage, as they did during the 1990s. Back to Bill!

— “You won’t find a definition of fiscal sustainability by referring to these ratios that are now in everybody’s lounge rooms each night. These ratios are largely irrelevant.” … You won’t find a definition of fiscal sustainability in any invariant fiscal rule.”

— “So where should we start in trying to come up with a concept of fiscal sustainability? … ask yourself the question “Why do we bother to have a government in the first place? … The reason we want them is because they can advance the well-being of all of us, acting as our agents, in a way that we can’t do it individually… . And we might call that the public purpose of government.”

— “So what are the dimensions of that? … the sustainable goal of the economy should be the zero waste of the people in the economy… . as a consequence of the way we structure our economy and the way that policy intervenes to manipulate the economy.”

— “And then from my point of view, that means, we – the state – should be responsible for maximizing employment: making sure everybody who wants to work can work, with decent working conditions and wage levels that provide them with a sustainable life in the cultural and social setting that we live in.”

— “Now, what that means in a macroeconomic sense is that once the private sector has made its spending decisions … then the role of government advancing public purpose … is to ensure that its policy intervention is consistent with those private decisions such that you get full employment. … That seems to me to be a basic element of what we mean by fiscal sustainability.“

— “And so if it’s typical that the non-government sector will want to save, then there will be spending gaps … the government then has a choice. It can either fill that spending gap with fiscal policy and ensure that advanced public purpose via full employment, or it can decline to do that and either run smaller deficits than are required or even try to run surpluses, which governments have been doing prior to the crisis, and accept the fact that in taking that decision you will have persistent and chronic underutilization of labor and ultimately that strategy will be self-defeating.”

— There are bad and good deficits. The bad ones come from Government not maintaining aggregate demand through deficit spending and are produced by the automatic stabilizers. They leave a bad, depressed economy with high unemployment. Good deficits result from a government deficit spending strategy that produces high employment, high income growth, falling poverty rates, and smiling faces.

— “You can’t define fiscal sustainability independently of the real economy and what the other sectors in the economy are doing… . .” Government spending ”… constraints are voluntary… . And in a fiat monetary system, the national government doesn’t have to issue any debt at all. And so fiscal sustainability can’t be caught – a pure concept of it – can’t be caught up and tied in with any of these voluntary constraints.”

— “And we need to get the message across more vehemently that what that means is that our national governments can spend whatever they want. And it has no imperative, like a household, to facilitate funding of that spending … . The limits are clear that a sovereign government can only buy what’s available for sale. Their real limits, if there’s something out there available for sale, the government can always afford to buy it. And that’s a sovereign government… . “

— “What we’ve got to stop is news broadcasts having a barrage of these financial ratios in our face everyday. They’re largely irrelevant and they abstract and re-orient the debate away from what really matters and that’s the real side of the economy and the capacity of our national governments to work on the real side to improve our lives and advance public purpose.”

LetsgetItDone’s Comment: Bill’s bottom line is that fiscal sustainability has nothing to do with deficit and debt numbers including debt-to GDP ratios, but everything to do with whether the Government spends to achieve the economic public purpose of “the zero waste of the people in the economy.” He defines a clear line from “public purpose” to “zero waste of the people in the economy” to Government spending to enable full employment at a living wage with price stability. But why is that “fiscal sustainability”? Well, to see why, consider this alternative definition:

the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.

This one is more explicit in tying patterns of spending to maintaining the capability to spend to achieve public purposes. But it turns out that these notions are closely connected by considering what happens if Governments don’t spend to enable full employment with a living wage and price stability, but instead rely on an employment buffer stock to control inflation. I think what happens is the growth of economic inequality due to the growth of an increasing number of “wasted” people, followed by increasing political inequality in the long run.

What also happens is the degradation of skills of working people and along with it the decay of real wealth like housing stock, neighborhoods, educational systems, communities and other essential aspects of a civilized and free society. This, in turn, causes a decline in productive capacity over time, which in its turn, limits the capacity of the Government to freely spend in the short run without causing demand-pull inflation. So, austerity in its effects on productive capacity degrades fiscal sustainability, not through insolvency, but by creating additional inflation constraints on government so that it is restricted in its ability to spend to achieve for the public purpose.

Further, political inequality, in its turn, reinforces the economic inequality still further, and as the years go by, the relatively few increasingly wealthy institutions and people continually increase their control over the political process and use government spending for their own purposes rather than for the public purpose. So, it turns out that the failure to spend to achieve full employment, in the absence of aggressive policy to redistribute nominal wealth, undermines the Government’s capability to continue to spend for the public purpose, and is therefore fiscally irresponsible. I’ll have more to say about fiscal responsibility and fiscal irresponsibility later on in this series.

Bill Mitchell’s presentation was followed by a panel discussion and then a Q and A session. Both were incredibly rich and added great depth to Bill’s already excellent presentation. In the interests of space, I’ll telescope these as much as I can and also introduce comments of my own on the questions and answers. But before I do, I’ll provide some follow-up references on the Bill’s presentation. Bill’s written prolifically of fiscal sustainability. More than a hundred of his posts deal with it in some way. Here’s the link to the last page of his links. For the rest just follow the links at the bottom of each page. I’ve written a bit about fiscal sustainability too: here, here, here, here, here, here, and


Posted in Green Job Guarantee, Money Systems, News, Resilient Investment.