By Warren Mosler, an investment manager and creator of the mortgage swap and the current Eurofutures swap contract and Philip Pilkington, a journalist and writer based in Dublin, Ireland
Politics in the Eurozone has turned into a strange and tragic farce in the recent weeks and months. While the peripheral countries continue to judge successful economic policy on the amount of tax liabilities they can levy to smother their depressed economies, the big dogs play various games in which they try to hide their shame behind ever more sophisticated veils.
Their ‘shame’, of course, being that the ECB, the issuer of the euro, has to ultimately write the check in order to fund the peripheral countries whether they like it or not. Being the liberated fiscal nudists that we are, we fully embrace such actions, but we recognise that our brothers and sisters within the Eurocracy may need some time and, excuse the pun, cover to adjust before they can embrace their inner MMTer.
And so we praise what works, even with the ever more bizarre choices of clothing that they care to don. This time they have chosen something akin to a shiny faux fur plastic coat in the middle of a California summer. And while they have yet to wear it with pride, we encourage them to come out of the closet and move in the said direction for all our sakes.
The latest Euro fashion is for the IMF to fund distressed sovereigns while being, in turn, funded by the ECB – while all this includes the fashiony gimmick that the IMF guarantees the loans.
The end result, of course, is that the ECB writes the check – which is precisely what it takes to make any of these schemes work. In fact, whenever you hear of any of these wacky evasions… er… sensible proposals, you can be safe in the knowledge that it will always work as long as it is the ECB writing the check. But we digress; and so here is how this latest one scheme will function.
When the ECB buys European national government bonds it credits member bank accounts on the ECB’s spreadsheet. Those accounts count as ‘money’ while the bonds did not count as ‘money’ and so, this action is said to be ‘printing money’ – and printing money is bad for some reason or other according to our German friends… and so the ECB undertakes a further step: sterilisation.
The ECB offers different euro accounts – which are also just numbers on an ECB spreadsheet – with relatively short maturities that pay interest. This is called ‘sterilisation’ because these deposits don’t technically count as money. Cool, huh?
Now, the German Eurocrats have made it clear that they do not want any of this currency issuing ‘foolishness’ no matter what amount of sterilisation is occurring. So, instead they call up their friends at the IMF.
When the ECB buys Special Drawing Rights from the IMF it credits an IMF account with the required euros. This does not count as ‘printing money’. And when the IMF loans those funds on to Italy or whoever, it does not count as ‘printing money’ either even though, when all is said and done, the same euros sit in the same ECB accounts and they effectively come from the same place. How clever.
Now stretch your mind’s logical capacity with us for a moment because the IMF was originally set up after World War II to deal with balance of payments issues. And we can kinda sorta say that various European nations suffer from balance of payment issues – so, when the IMF steps in its kinda sorta playing its supposed institutional role.
But here is the really great part: the IMF is already a well-known (and much hated) institution obsessed with imposing austerity on the countries they ‘assist’. This means that they have plenty of experience ruining economies… er… promoting ‘expansionary fiscal consolidations’. With all this experience the IMF will be in a prime position to ignore all the evidence coming out of the Eurozone and continue the drive to force the periphery into depression. Hoorah!