Mosler/Pilkington: The IMF-ECB ‘Plan’ – Fig-Leaf upon Fig-Leaf

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!

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  1. Mogden

    Personally, I’m rooting for the whole edifice of lies, greed, corruption, and fraud to detonate with maximum force.

    1. Glen

      It does seem that with all “conventional” methods of social change such as democracy or representational government currently out of play, that hoping, planning, and having the big blow up may be the only way left to get any real reform.

    2. YankeeFrank

      Count me in, I think. I wonder why NC is so supportive of all these ECB bailouts — I know Pilkington believes things will be even worse if the whole edifice collapses, and I imagine Mosler and YS believe the same. To me it seems like a worse pain but possibly of a shorter duration if we let ’em fall and start with a clean-ish slate. However, one point against our preferred course is that, when all the shit hits the fan and it all collapses, who is to say that the “reformers” won’t set up an even less democratic horror show to replace it. I mean, FDR and the New Deal were certainly no fait accompli, and he had a generation worth of labor organizing behind him. Now we have a soulless middle class that lives in fear of losing their pathetic corporate jobs and won’t speak out to save their own starving mothers, and a huge swathe of desperate and destitute folks that are too ignorant and enslaved to even begin thinking of protest. I don’t know fellas, looks like we’re headed for a dark time…

      1. jake chase

        All you Apocopalypsians really need to do some research on the French Revolution. After all, Its Only F***ing Money. Who cares how they print it, so long as they print enough to keep the food coming in and the trash going out? Do you really think Europe is going to create a depression just so it can congratulate itself on living up to a Treaty? Words and formulas are fine, but food is better. No food and you have people tearing one another to pieces.

        1. YankeeFrank

          But from what I hear the trash isn’t going out so well in Greece, though as yet I haven’t heard any stories of starvation there. But what do you think happens when long term austerity is imposed on a populace?

        2. Moneta

          I’m pretty sure they’re going to print because it’s easy and governments always take the easy way out.

          However, it all comes down to production. As nations print, there is a loss of confidence. The private side retreats and production declines. Why work when you can get some paper for nothing? Why work if government squeezes you out?

          Printing will work in the short term, until it doesn’t anymore. Only then will government make the harder choices, not before. We are still in the early innings of the great reset.

        3. Christophe

          Jack chase, current research on the French Revolution does not corroborate your hypothesis. France had made an art of printing enough (issuing debt sufficient) “to keep the food coming in and the trash going out.” That was how it funded its expansionary wars during the age of divine kingship. The Afghan and Iraqi – whoops, let me try that again. The Seven Years’ and American Revolutionary wars proved too financially burdensome, redirecting all that money for food and trash removal to interest payments on the debt. Your proposal to just keep printing is precisely what led to “people tearing one another to pieces.”

          While blowing up the global financial system to effect debt repudiation is not a particularly elegant nor peaceful solution, it does conform to the observable reality that debt that cannot be repaid will not be repaid. Fortunately, the dichotomy of increasing debt endlessly vs. financial Armageddon is a false one. We could do worse than looking in the fertile middle ground between those two positions for realistic options to addressing the current crisis.

  2. Alan von Altendorf

    I don’t think it matters what ECB or IMF or Germany does. Banks and private investors are dumping euro bonds, and there is nothing anyone can do to prevent Euro Zone from increasingly higher and higher levels of public spending. “Austerity” is an illusion, mere fantasy.

  3. Hugh

    I thought on Monday the official talk was that the IMF/ECB was just a rumor and that its only likely purpose was to pump up sinking markets.

    Beyond that, MMT fails to address the paper economy, wealth inequality, and kleptocracy generally, all of which point to an ECB bailout as an exercise of the rich, by the rich, for the rich.

    The problems with the IMF/ECB plan I addressed here:

    and subsequently.

    1. Marley

      Sadly Hugh, I do not believe that MMT can (be expected to) address the ideological belligerence and moral vacuity that is apparently pervasive within the EU leadership.

      For me personally, I hold that these idiots KNOW the truth, but simply REFUSE to accept it because it contravenes their ill-conceived notions about money, gov’t, society and “how the world works” in general. It is in one sense a crisis of denial IMHO, but also a moral one, complete with insidious insinuations of ignorance and prejudice.

    2. Lafayette

      Beyond that, MMT fails to address the paper economy, wealth inequality, and kleptocracy generally, all of which point to an ECB bailout as an exercise of the rich, by the rich, for the rich.

      You are transporting the reasons for the American financial calamity to Europe and its dead wrong.

      The reason for the debt in either instance is significantly different one from the other. The European profligacy was to support a safety-net when high unemployment prevailed, at levels even greater than the are in the US today since the early 1990s. It helped poorer families, more prone to long-term unemployment, to survive.

      The American debt is due to Toxic Waste and a Useless War over in the sandbox (whilst Lead-head lowered marginal tax rates for his “friends”).

      Let’s not confuse the two by making an amalgamation.

      The solution has been, since both the Japanese and Swedish realty bubbles to have the BadDebt assumed by the Central Banks. Even if the Central Bank must print money to do so to allow banks to lend once again.

      Too many people want vengeance, so they argue that the whole mess should simply “blow up”. But the consequence of such retribution could well be unemployment at one-quarter or even two-thirds of the population. Treasury revenues would plummet drastically and we’d dig ourselves further into the debt abyss. Which would constrain government expenditures even further, since no one would want to purchase our T-note debt.

      Pray tell, how is that outcome “just” even if the vengeance is sweet?

      We made a mistake by deregulating the banks and allowing the fusion of Investment with Commercial Banking. That mistake we can fix to prevent an asset-price bubble in the future from becoming Great Recession 2.

      But ruining people’s lives even further, for sweet revenge, is both immoral and unjust.

      If anything in history has taught us to live with a balanced budget on both state and national levels, it is this present circumstance. Let it be a lesson to us and to politicians.

      In fact, there otta be a law that institutes a limit of debt in relation to GDP. That exists in Europe since two weeks. The Brussels Commission will have the right of oversight on government spending and prohibiting any beyond the 3% of GDP limit.

      When is Washington going to wake up to that same notion?

      1. Otay

        If only we had some example of what really happens when bad dept is written off. Say like Iceland? Nah, lets give Iceland the Ron Paul treatment.

      2. Hugh

        Kleptocracy plays out differently in different economic regions, most notably in the US, Europe, and China, but it is all kleptocracy. If you fail to realize this, you fail to understand the dominant economic and political force of our times.

        As for vengeance that seems like a term come up by the class war mill, most of us would just see it as the restoration of the rule of law.

        1. Lafayette

          If you fail to realize this, you fail to understand the dominant economic and political force of our times.

          And I maintain that this “Economic Force”, brought in by Reckless Ronnie with some silly notions about Ayn Randian individualism is coming to its well-deserved end.

          Thirty years of relentless catering to the vested interests of a plutocracy must come to termination … in order to save the democracy. Or we are really a quite simple people.

          Either the country saves itself, or the brave and honest hearts had better immigrate to Canada.

          Others will remain in Europe and look across the pond with a Great Smirk and a thought, “You brought this upon yourselves”. It happened in 1929 and what ever made you (plural) think it could not happen again? Because markets had become, abracadabra, self-correcting?

          What childish nonsense.

          George Santayana summed up mankind’s self-indulgent folly with this (and I paraphrase): Those who refuse to learn from history are condemned to repeat it.

          Our history of financial crises:
          * In 1990, the Scandinavian Banks almost went under
          * In 1994, all Mexican banks failed after the sudden and drastic depreciation of the peso.
          * Many banks in Thailand, South Korea and Malaysia almost toppled from the 1997 Asian Financial Crisis.

          And yet, all those countries survived and many are doing well enough today.

          So, “What, me worry?” Pass ….

  4. financial matters

    Spot on! The IMF needs to be called out on what it is really about. Well done. Italy can do better.

  5. andrew

    Jsut so I am clear, at the end of the day, the ECB will loan money to the IMF, which will buy piigs bonds, and nothing bad will happen?

  6. Cathryn Mataga

    I kind of see a political advantage of making the IMF the bad guy rather than Germany. That if Italians hate the IMF, they’ll be like everyone else who hates the IMF. If they hate the Germans, it could tear apart the EU.

    It is going to be more of the austerity death spiral though. With the bond markets coughing up blood, I don’t think there’s going to be any fiscal stimulus for awhile over there. It’s not too surprising. I’m only amazed at how quickly this all came on.

    1. Pete

      Smart politics, I didn’t think of that.
      However, being on the US-/USbank-influenced IMF’s leash would be equally damaging to the EU, exactly the power dynamic the EU and EMU were created to prevent.

      Why not just have the ECB print, but not only give to the struggling periphery states but also give printed money to the Germans, so they stay on top of the pile, while overall debt/gdp gets diluted down. Kindof like the Steve Keen solution, but for nations?

  7. Andrew

    I’m looking forward to the MMT coming out party. The full Monti should be exciting.

    For the record…. I’m unashamedly starkers, swinging as brazenly as I possibly can.

  8. wbgonne

    The most recent balloon I’ve seen floating is for the U.S. Fed to act as Europe’s lender of last resort and begin buying all the distressed sovereign bonds. The claim is that this plan won’t put the American taxpayer at risk. I don’t quite understand the ramifications. What do y’all say to that?

    1. Philip Pilkington

      That’s what Baker and Weisbrot are pushing. Warren agrees with me when I say that it’s bizarre.

      It would lead to fairly substantial devaluation of the dollar. Baker and Wesibrot understand this well and are very sympathetic to lowering the value of the dollar as it will lead to increased exports and a closing of the trade deficit.

      Mosler and I agree about the effects, but disagree on the tactic. Mosler points out that workers’ living standards will fall as imports become more expensive. And I point out that no US administration would dare pursue such a policy — the strong dollar policy is far more than economic policy for the US.

      1. wbgonne

        Thanks. Any idea how much money we’re talking about? IOW: when you say it will lead to devaluation of the dollar, how much devaluation?

        Also, apart from the direct fiscal effects what are the implications of the U.S. Fed acting as lender of last resort for other nations? It seems pretty strange to me.

        1. Philip Pilkington

          We’re probably talking about trillions of dollars to fully backstop all the Eurozone sovereign debt that is in trouble. Beyond that, hard to say. But, as those UK supermarket ads say “Every little helps”. So, any amount of US intervention would help Europe (get off the hook).

          As for the devaluation it would be huge. Again, it’s impossible to even estimate how much. But the key point is that when QE was done, or TARP we knew there would be little devaluation. Why? Because the dollar assets just sat there or were exchanged for older, toxic assets. These new dollar assets were not traded against another currency.

          If the Fed stepped in Europe all the dollars would have to be exchanged for euros. Imagine you had a trillion dollars and you went to buy euros. The exchange rate effects would be incredible.

          As for the Fed acting as LLR for other countries that’s interesting. Europe probably wouldn’t like it. And it could go either way for the US. If the dollar bounced back they would have gained a great deal of control over much of Europe. But if the dollar didn’t bounce back — which is more likely — the US would no longer be the country it is today. Oil producers, for example, would probably move away from the dollar because it had lost so much value (this would further devalue it). In short, the dollar’s ‘unique’ status would be gone — and the US trade deficit would become a very real issue.

          1. wbgonne

            Thanks so much for the responses. My takeaway is that we are still in a world of sh*t and the Magic Fed can’t make it all go away.

          2. Philip Pilkington

            They could. But the consequences would be massive and they would never do it. The Magic ECB can make the problem go away though — and they probably will.

            But then there’s the fact that the current austerity is causing a depression in the periphery.

  9. K Ackermann

    So who sets the rates on the “IMF” loans?

    Also, on slightly different subject…

    Whatever happened to that $27b CDS protection the Greek public owned that mysteriously went private?

    Was that ever fully answered?

    1. Philip Pilkington

      Nah, it’s all pretty vague at the moment. Just rumours and the like. But it looks like it could have legs. Just look at the above: they get to claim that they’re not printing money AND they are absolved of much responsibility for the austerity-induced depression.

      Random Eurocrat: “Where do I sign up?”

      1. K Ackermann


        I just thought up a brand new saying that should catch on… Money is the root of all evil.

        The 1% would do well by buying us off, because I’m getting to the point where I think I’d vote for the first person who promises to blow up the system.

        This is how dangerous times start, and I’m saying this in a very calm state right now.

  10. Moneta

    They will keep on writing down and printing because that’s what governments do.

    The thing is that a few trillion were created in a flash and we can bet our trillion dollars that this has been the biggest misallocation of capital in history.

    And it usually takes 5-10 years to see the repercussions. We’re in year 3.

  11. Robert Asher

    Many bloggers have noted in the last month that the FED is “out of ammo.” So how could the Fed implement the plan that Dean Baker proposes? I agree with posts above that Bernanke would not dare to try such a scheme. If he did, Congressional Democrats would pressure the Republican administration to get Bernanke to resign. BTW: is it legal for two Republicans to run against each other for the Presidency?

  12. Norman

    As long a King Timmy has Uncle Ben at the printing press, then the U.S. taxpayer will be on the hook. Great, just the thing the economy of the U.S. needs today. I say, let the I.M.F. fail, as it has run its course, or should I say gone off its course a very long time ago. Let them eat cake, baked from their own stock, not ours.

  13. craazyman

    If 1) the ECB funds 2) teh IMF who funds 3) Italy, will they start calling him “Three Card Monti”.

    oh man, that wasn’t very clever. ha hahahahaha

  14. Norme

    Beautiful rendition, too bad there are so few comments. Makes me think too many people are missing out on an important issue. Thank you for putting it down in writing so cleanly. Gonna email this to some of my friends who are weary of me discussing euro oblivion at every opportunity. LOL

Comments are closed.