Euroland Is Ponzi

I was re-watching the MMT Fiscal Sustainability Conference 2010 (which has an interesting back-story) and found a lot of gems I’d forgotten. Bill Mitchell is hilarious, in a good way.

It was one of Mosler’s though that got me thinking.

At one point Warren says the eurozone member nations are effectively in a ponzi position. That’s using a particular definition of “ponzi”, which in this case was “having to get money from someone else”.

So how is that a problem?

It’s ponzi because apart from the Germans who could continue net exporting (getting euro from someone else) none of the others can. Maybe The Netherlands net export? In any case, they cannot all be net exporters or more exactly cannot all have a positive current account in euros.

((They could all be net exporters to outside the eurozone, but they’re not. And in any case, that is not a robust way to guarantee non-ponzi.))

Such is the EMU arrangement that the more aggressive internal within-euroland net exporters in euro can effectively force another eurozone member into such a severe current account deficit (in euro), that the latter runs past the Stability and (non)Growth Pact deficit limit, meaning harsh penalties get imposed, needlessly (should they put the SGP back in place post-COVID, and post-Ukraine). (Put the “lazy” Greeks out of work because they’re not working hard enough.)

The Moral Hazard

When Warren expands upon the point he made about the EU, he talks of the problem in terms of a moral hazard. In this context it is a dynamic that can be set up when a monetary union (like Australia, or the USA or the EU) is split into competing states. If the states are then not fiscally constrained there is the potential moral hazard of a race to the bottom: who can issue the most currency and sustain inflation psychologically long enough before the others crumble.

This is why USA and Australian states are not currency issuers. But in their case the Federal government is a fiscal authority constantly injecting USD (AUD) dollars through both discretionary but crucially through several non-discretionary means, which are baked-in to law (welfare payments, pension payments, and various other long term budget commitments).

It helps to think of the central government budget as a moral document, not a financial document. There is no fiscal constraint on the government, but there is a moral constraint in a nominal or semblance of a democracy.

In a semblance of a democracy the populace will by amorphous social psychology (often like hawks) maintain the constraints your society “wants” — metaphysically speaking, it’s by definition this is “what society wants”, at least absent wild Gilens and Page effects. There are composition fallacy logics here, sometimes a collective votes against their whole interest out of self-interest.

In any case, you do not need Wall Street or bankers to impose fiscal discipline, the general population is always sufficient. The neoliberal elites of course hate the very idea of democracy (a point Randall Wray made very well at the same conference). The population at large really does not like to see the prices inflate — even when the real wage is rising! Go figure. So regardless of the bankers and elite pearl-clutchers, any reasonable democracy will constrain government. How? Vote them out of office and try the other guys.

You might think this could just be a seesaw (or in multi-party democracies a revolving door) of spend-thrift governments. But it empirically never works that way. Politicians are generally extremely venal, and like having their jobs, so the “next set of guys” invariably constrain fiscal policy. Not always in great ways, but they do it.

What about the EMU?

The member states are not fiscal authorities, so they’ve avoided the race to the bottom like Australia and the USA. But the problem is they are now in a ponzi position, because they have to get euro’s off the other guys.

The simple solution is to operate a European Parliament as a fiscal authority.

The best answer why they have not done this is usually given by Bill Mitchell (same conference again, or in many places where he writes and speaks). The EU leaders seemed to know damn well they needed a parliament, the documents, the minutes , written during the long period of formation of the EMU make this very clear.

So why did they not establish a parliament with spending authority?

From what Mitchell gleaned (he is multi-lingual) it was because they also knew damn well Europeans are not a united people. The Germans and Dutch hate the Italians and the Greeks. Not just person-to-person, but amorphously, through culture and such like, but that’s always a complex aggregate of individual prejudices and subtle hatreds. Yet they wanted some sort of cosmopolitan union to compete with the USA!

The idea of the slightly less sociopathic EU leaders was that a currency union would somehow over time force a political union.

Well, they might almost have that correct, but it’s an unstable game. Greece came very close to a Grexit, and the Brits had Charles Goodhart advising against going into the eurozone from the very beginning. (There was no need for Brexit, since the UK was always monetarily sovereign.)

Why Brexit Then?

Brexit was a pile of nonsense on all sides. The UK Parliament could have at any time lifted their deficit spending for full employment of the British. But both their Tory and Labour parties are equally neoliberal, and have no clue. So it become more an immigration fear-mongering issue (for Tories) plus a democracy issue (for Corbynites).

In any case, the UK is better out of the EU in many ways, they just don’t know it. So, personally, I have in-laws whose grant fundings have been cut, so they’re out of a nice university research job. Unemployed. It was of course previously EU funding. No one at that university is asking why the UK government cannot fund the research, or maybe they are, but they don’t seem to be demanding UK government funding. Why not? They are clueless, they do not understand MMT.

((To be fair, maybe they’re saving their energy. The UK government will not presently issue the science grant funds, and if the university professors know this you can perhaps forgive them for not being more vocal, they’d risk losing their jobs. Nevertheless it still seems a little gutless and shows total lack of solidarity for their highly skilled research technicians.))

Instead of investing in cutting edge biological research then they’re investing in making people unemployed, highly skilled people. Turning them into high school tutors. It’s all tragic and needless. Guess the UK will be importing expensive vaccines next pandemic.

They’ve Got It Backwards

The normies have it backwards in real terms of course, Germany is sending it’s stuff to Italy and Spain, a win for Italy and Spain. The problem is the political psychology. Germans can employ all their workers, whereas the Spanish and Portuguese do not know what a good thing they’ve got, and choose (needlessly) to unemploy their workers to try to vainly satisfy the self-imposed fiscal constraints. Why are they doing this to their people? (Don’t answer that, there’s no good reason.)

They should just get the hell out of the eurozone, but stay in the EU for trade liberalization reasons, just ditch the euro currency. The MMT solution. If the Germans are content to work as the slaves to the Spanish and Portuguese, let ’em.

Or it would be the “MMT solution” for as long as the Europeans hate each other. If they can learn to love each other and get along like mates then the Mosler Plan A would be fine, (short of getting yourselves a proper European Parliament) which is to have the ECB issue block grants per capita to the eurozone members, combined with risk capital full deposit insurance for all member nation banks, and unsecured loans to the member banks, all for provisioning up to full employment constraints (no one showing up for the unemployment benefit). In other words, the ECB runs the Job Guarantee program for euroland, establishing a non-inflationary de facto minimum wage, a policy choice.

Guess which EU nation does not net import from Germany? (You tell me, I looked up a few and lost patience trying to find one.) Seems people really like getting German stuff.

((Unless I’ve got a case of arithmexia and read “exports$-$imports” as “imports$- $exports”, which is always possible when not on peer review strictures.))

I’d like to see the moment when, say Portugal, decide to run full domestic employment, then the Germans bark back, “Hoy! You’re nicht aloud to treat your people zo nize with our ztuff! Ztop it!”

Of course that pretty much would be how it goes down, I imagine. German slaps trade embargo on Portugal for the punishment of employing all their workers. Portugal becomes the next mini Cuba. All tragically needless and all because the Germans do not see that currently they’re losing.

Where does an MMT activist trace this back to? It’s got to be class. The German worker-consumer is losing, the German export oligarch is winning. Since workers out-number oligarchs by about a million to one, overall Germany is losing big time.

Other Suitable Outrage

This is not a euroland topic, but you really need to watch that MMT Fiscal Sustainability Conference for the section where Mosler, Mitchell and Wray talk about the massive costs of unemployment and contrast them with the puny costs of inflation.

I cannot find any better video on youtube that talks about the insignificant “threat” of inflation. Inflation is simply not what anyone should worry about,

(a) there is always something else driving hyperinflation that’s worse than monetary (e.g., supply shock, war, pestilence, famine),
(b) there has never been an excess demand driven hyperinflation in all known history, and it’d be extremely hard to do, spend-thrifts get voted out of office if the spending is not productive,
(c) the massive, truly massive cost of unemployment dwarfs the costs of all wars in all recorded or dimly known history combined.

This last point (c) is what progressive types need to drive home daily. We can never recover the lost output sacrificed by tolerating unemployment.

The future economic prosperity you get is completely path dependent — if you lose output this year, you have to work doubly harder next year just to get back to where you could have been. If you let unemployment reign for two years then you’ll have to work quadruply harder, just to catch up to where you could have been. But you never can recover those you left for dead.

To recover the lost output that could have been gained had some moderate inflation been tolerated for just two years we’d have to grow economies at ten times the rate, or more, just to catch up with what was lost. That will never happen, it’s impossible, so by thinking inflation is a worry we’ve horrifically undermined our real wealth by tragic epic proportions.

That is because populations are normally growing at about 3%, but so is productivity, so if you go for two years at 10% unemployment (a best case scenario under neoliberalism) you are more like 19% below the potential standard of living you could have had without doing anything crazy. (The math is not exact here, just a rough back of a napkin estimate.)

And at the very least that could have knocked off 8 hours from the work week for the average worker, with no decline in their standard of living.

You can’t just ramp up productivity or population, you only have the +10% to fully employ, you’ll have to whip them like slaves to recover the output that was lost, so basically enormous real output is lost forever.

Put that in the context of that lost output could have been green jobs, or building needed sustainable energy infrastructure. Then you get a feel for the enormity of the horror show of neoliberalism.

Inflation is not the problem we face. Neoliberalism (with obsessive pointless focus on the inflation bogeyman) is the problem, it’s killing people. This does fit the present topic though, because the EU is the last bastion of neoliberalism, if it crumbles we might have some success. The path getting there being horrific notwithstanding.

NOTE: need to add this bit in the Questions section on inflation myths.
Will recycle a fair bit of the last section.

It’s always worth the time to spare to go back and read or listen to the OG MMT crowd. That Fiscal Sustainability Conference in 2010 was a massively important event of seismic proportions in world history. Registered $0.1$ on the neoclassical tectonic plate seismograph.

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