Yanis Varoufakis: BITCOIN: A Flawed Currency Blueprint with a Potentially Useful Application for the Eurozone

Lambert here: Europe such metric amaze wow (?).

By Yanis Varoufakis, professor of economics at the University of Athens. Originally published at his blog.

The responses of many to my post on Bitcoin reveal a powerful tendency to underestimate the ill-effects of deflation on a social economy. This tendency to underestimate deflation’s deleterious impact matters beyond debates on Bitcoin per se. For example, in Europe the incapacity of the European Central Bank (ECB) to act in the face of deflationary forces has revealed the same type of misunderstanding, as many commentators fail to recognise that deflation is a very serious threat and that the ECB’s lack of weapons against it constitutes a major weakness. In this post I return to the problem of deflation in a Gold Standard-like monetary system (e.g. Bitcoin or, indeed, the Eurozone itself) but conclude that, almost paradoxically, the technology of Bitcoin, if suitably adapted, can be employed profitably in the Eurozone as a weapon against deflation and a means of providing much needed leeway to fiscally stressed Eurozone member-states.

Is Deflation Really a Problem?

In a recent debate, I was confronted with the argument that deflation is a godsend. “Poorer people crave lower prices”, I was told, “and they cannot understand why ‘elitists’, like yourself, oppose them”. Of course people, especially those who struggle to make ends meet, prefer lower to higher prices other things being equal. But under the heavy shadow of deflation other things are not equal . Deflation is indiscriminatory. Once it sets it, all prices subside, including the price for labour. In fact, wages tend to fall faster than prices of other goods during deflationary times, leaving the weak poorer. Worse still, deflation reduces investment which, in turn, raises unemployment.

Some readers find it hard to see why wages must fall faster than prices and why jobs are jeopardised as prices fall. To see why this is invariably so, compare the degree of power over price that a corporation has (e.g. Walmart or Mercedes Benz) to the degree of power over the wage of a blue collar worker. As customers are no longer prepared to pay the same prices as before, the corporation can limit the decline in the price of its wares by restricting output. Its price will still fall, but not by as much as it would have done had the corporation not had a capacity to influence price through restricting supply. In sharp contrast, the blue collar worker has no comparable power to restrict her labour supply in order to arrest the fall in her wages. The result is twofold: As corporations restrict output (to reduce the rate at which prices fall) their demand for labour falls,  the result being even greater wage reductions accompanied by layoffs which, in a never-ending recessionary circle, reduce further the demand for goods.

Moreover, as prices fall, manufacturers face a timing problem. Assuming there is a time lag between ordering raw materials and shipping the final product to market, deflation means that firms buy their inputs when average prices were higher compared to their level at the time of shipping the final product. Thus the greater the rate of deflation the lower the profit rate and the larger the number of companies that are forced either to lay off workers or to close down completely.

Lastly, as prices fall consumers with some savings have every reason to delay the purchase of durables (e.g. white goods or cars) since they know that their saved dollars or euros will buy them a lot more (or a better model) of these goods the longer they wait. But this is terrible for the manufacturers as well as for their workers and suppliers.

On this last point, a reader challenged me that falling prices are a fact of life and they do not seem to be a problem: “I can think of many goods and situations”, he wrote “in any economy right now where if you delay a purchase, you’ll get ‘more’ for your dollar.”  Of course. But these falling prices are not a problem when it is not all prices that are falling at once. The benefit from patience in the US today comes from actively searching for a better deal in a market where information is imperfect. Deflation, on the other hand, rewards the patient just for being patient, rather than being a reward to costly searching activity. Under deflation everyone benefits from waiting and aggregate demand thus collapses (penalising us all).

If, under such deflationary circumstances, monetary policy cannot be loosened up to stop the decline of average prices, wholesale disaster is guaranteed. This was the terrible flaw of the Gold Standard, in the mid-war period. It is the Achilles Heel of Bitcoin today and, indeed, remains a design fault of the Eurozone too.

Bitcoin and the Euro

Bitcoin is a hard-core version of the Gold Standard, in that the money supply is algorithmically fixed to grow at a pre-determined rate and, eventually, to reach a maximum quantity of Bitcoins that remains fixed forever. The Eurozone, on the other hand, is much closer to the original Gold Standard. The major difference with Bitcoin is that there is no fixed upper limit to the quantity of euros because private banks in the Eurozone are subsidised by member-states (through the availability of deposit insurance and the promise of bailouts, if need be) to provide credit lines (on the basis of fractional reserve banking principles). In other words, depending on the banks’ and their customers’ animal spirits (i.e. on how optimistic they are) the banking systems of the Eurozone effectively mint euros. Indeed, the private banks are responsible for more than 90% of the euro money supply.

While this is a crucial difference between Bitcoin and the euro, the two are similar in one respect: whereas in Bitcoin there exist no monetary authorities that could expand the money supply in times of deflation, in the Eurozone the existing monetary authorities are constrained by the ECB’s charter in a manner that stops them from expanding the money supply in deflationary times. At this very moment in Europe’s history, with interest rates practically on the lower zero bound, and with inflation turning negative, the ECB is not allowed (for institutional and political reasons) to effect expansionary monetary policies through quantitative easing. What use are monetary authorities in a currency union if they cannot expand money supply in response to falling prices? In this regard, the Eurozone is no different to Bitcoin, without even featuring the zero transaction costs of Bitcoin or its New Age appeal.

A Potential Application of Bitcoin’s Technology in the Eurozone’s Periphery

Governments in Europe’s Periphery are asphyxiating in a Gold Standard-like monetary union that is buffeted by the winds of recession and outright deflation. Their economies are in desperate need of greater liquidity and of a respite from austerity. The problem is that Europe’s leadership is refusing even to enter into a rational debate of the institutional reforms that can render the Eurozone viable again. The question is: Is there something that the peripheral countries can do to give themselves a chance to breathe better and to act as a bargaining chip that will make Berlin, Frankfurt and Brussels take notice?

The answer is yes: They can create their own payment system backed by future taxes and denominated in euros. Moreover, they could use a Bitcoin-like algorithm in order to make the system transparent, efficient and transactions-cost-free. Let’s call this system FT-coin; with FT standing for… Future Taxes.

FT-coin could work as follows:

  • You pay, say, €1000 to buy 1 FT-coin from a national Treasury’s website (Spain, Italy, Ireland etc. would run their separate FT-coin markets) under a contract that binds the national Treasury: (a) to redeem your FT-coin for €1000 at any time or (b) to accept your FT-coin two years after it was issued as payment that extinguishes, say, €1500 worth of taxes.
  • Each FT-coin is time stamped i.e. in its code the date of issue is contained and can be used to check that it is not used to extinguish taxes before two years have passed.
  • Every year (after the system has been operating for at least two years) the Treasury issues a new batch of FT-coins to replace the ones that have been extinguished (as taxpayers use them, two years after the system’s inauguration, to pay their taxes) on the understanding that the nominal value of the total number of FT-coins in circulation does not exceed a certain percentage of GDP (e.g. 10% of nominal GDP so that there is no danger that, if all FT-coins are redeemed simultaneously, the government will end up, during that year, with no taxes).

Once in possession of an FT-coin, you can either keep it in your FT-coin e’wallet or you can trade it. To make sure that the system is fully transparent and that transactions are completely free, FT-coin could be run by a Bitcoin-like algorithm designed and supervised by an independent non-governmental national authority. Just as in the case of Bitcoin, the total amount of FT-coins can be fixed in advance, at least in relation to a variable not in the government’s control (i.e. nominalGDP), while every single transaction (including the tax extinction using FT-coins) is monitored fully by the community of FT-coin users on the basis of the blockchain pioneered by the infamous Mr Nakamoto.

As an FT-coin is about to ‘mature’ (i.e. to reach two years of ‘age’), the demand for it will obviously rise from those that do not possess FT-coins of that vintage (as it allows for a major reduction in their current taxes). FT-coin owners with equivalent tax liabilities will have no reason to sell (as they will want to use it themselves  to extinguish their own taxes) but those who have ‘stocked up’ on FT-coins (to a tune beyond what they need to pay their taxes), as an alternative to putting their money in the bank or in the stock exchange, will be selling; possibly with a view to buying freshly minted FT-coins.

The great advantages of such a scheme is that it creates:

  • a source of liquidity for the governments that is outside the bond markets, which does not involve the banks and which lies outside any of the restrictions imposed by Brussels or the various troikas
  • a national supply of euros that is perfectly legal in the context of the European Union’s Treaties, and which can be used to increase benefits to society’s weakest members or, indeed, as seed funding for some desperately needed public works
  • a mechanism that allows taxpayers to reduce their inter-temporal tax bill
  • a free and fully transparent payment system outside the banking system, that is monitored jointly by every citizen (and non-citizen) who participates in it.

While the Eurozone’s most stressed governments get much needed degrees of fiscal freedom, taxpayers are offered an opportunity to reduce significantly their long-term tax burden and to make electronic payments in euros that bypass banks altogether. At a time of ultra low interest rates, large tax bills and high bank fees, these are benefits not to be scoffed at. Moreover, a liquid new market for FT-coins is created, with zero transaction costs, and good prospects for gains for those who participate in it, on the back of the underlying tax savings and the state guarantee of convertibility at par.


In summary, while Bitcoin is too deflationary by nature to act as a widespread currency alternative to the dollar or the euro, its design can be used profitably in order to help the Eurozone’s member-states create euro-denominated electronic payment systems that help them, at least in the medium term, overcome the asphyxiating deflationary pressures imposed upon them by the Eurozone’s Gold Standard-like (and, indeed, Bitcoin-like) austerian design.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Gumbo

    If “…deflation reduces investment which, in turn, raises unemployment.” how does Japan keep a low unemployment rate?

    1. huxley

      Falling labor participation. The unemployed are undercounted, causing the numerator to fall faster than the denominator, making the rate decrease even though unemployment is actually increasing.

  2. JohnB

    Yanis’ proposal immediately made me think of Rob Parenteau’s very clever ‘Tax Anticipation Note’ idea, for peripheral EU countries (essential reading imo, for anyone who missed it last time around):

    Very interesting/promising to see Yanis’ come out with a similar proposal :) His ‘Modest Proposal‘ is excellent, but unfortunately seems politically impossible in a deadlocked Europe, so am very glad to see him move on towards ideas that EU countries can take initiative with.

    Thus far I have only seen Yanis and Rob Paranteau make such proposals (are there any others? I’d be very interested to learn of more), and I really hope that ideas like these start to act like a lightning-rod for political action in Europe, sooner rather than later – I think these ideas would be a great way, to re-empower the left in Europe – if only they can be communicated effectively.

    1. Jose

      Public pension funds could become shareholders of commercial banks in new IPOs; the banks would then have high enough capital ratios to lend to periphery governments a multiple (say, 10x) of the capital increase – and with these fresh funds in hand the Governments would be in a position to pay their debts to foreigners.

      This operation would be automatically financed by the ESCB/Bank of Greece at the low MRO rate of 0.25% a year. It would be tantamount to a swap of IOUs – foreign debt would be exchanged for internal debt, a much easier problem for periphery nations to tackle (citizens of periphery nations would end up owing the debt to themselves).

      All perfectly legal under the euro. Even not-so-defiant Periphery Governments should be able to implement this, I guess.

      1. digi_owl

        The problem is not technical, it is mental. The bankers in charge are gun shy after seeing defaults and bankruptcies, so no matter how much reserves they have they are not interested in lending except to a “sure thing”.

        Never mind that private entities are caught in a deflationary spiral, where even if they were offered loans they would not take it as they are trying to get rid of existing debt. This by saving rather than investing.

        What is need is spending on a national scale, by a entity with deep pockets. Government are such a entity, if they let go of the notion that they need to tax before they can spend.

      2. JohnB

        That’s an interesting idea alright, and it sounds a like a good way to mobilize excess savings within a local economy – might this not be quite risky for the pension funds though, since there’s still a large private debt crisis that could topple banks?

        If there was the potential for private debt writedowns or a debt jubilee, combined with this, that’d probably be a very good option – though I wonder if it’s a bit risky for the pension funds.

        1. Jose

          In itself, the operation would provide a nice profit for both the pension funds and the banks. The government would benefit by saving on pension costs.

          Take the case of Portugal, whose government issued over 3 billion euros of 10-year T-bonds a few days ago, at a rate slightly above 5.10%. It sold those bonds mainly to foreign investors thus increasing its debt burden vis-à-vis the rest of the world. It now owes more than 140 billion euros to foreign creditors, close to 90% of GDP! Of this sum, 100 billion is owed to public creditors – the troika and the ECB.

          And yet the government has already allowed the public pension funds to buy up to 4 billion euros of public debt until the end of 2015. In this case, the creditor won’t be domiciled abroad. It was a clever move, alright – but it could and should be leveraged by a factor of 5 or 10.

          If instead of the option of directly buying gov’t debt the pension funds could purchase 4 billion euros of newly-issued bank shares in IPOs, the commercial banks would then be able to lend up to 40 billion euros to the government.

          Let’s say the bank’s initial capital is 7 billion euros (the real situation at a couple of Portuguese banks). The funds would be owning 36% of total bank capital after completing the share purchase.

          Then, by lending (long-term) the above-mentioned 40 billion euro sum to the government at over 5% and getting the necessary financing from the ESCB/ECB at the 0.25% MRO rate the commercial bank would increase its annual bottom line by up to 2 billion euros, of which 1.3 billion euros would pertain to the bank’s private shareholders – and 700 million euros to the pension funds. This is a very good return on equity of 18.2%.

          And the 40 billion euros could be used by the gov’t to pay debts maturing abroad, thus reducing the government’s foreign debt burden by 30%.

          At the limit, if the real-life operation went well, the government could repeat it in subsequent years. This would ultimately provide for the following results:

          1 – substitute internal debt (much easier to manage) for foreign debt. This would also place the country in a better position to resist austerity demands from the troika.

          2 – channel practically all of the interest expenses to the internal economy (that is, the local bank’s private shareholders and the country’s pensioners). This would help to stimulate aggregate demand and thus much-needed economic growth – which also lowers the debt/GDP ratio.

          3 – solve the commercial banks’ chronic lack-of-capital problem, and increase their profit margins. This would strenghten a vital pillar of country’s private sector economy and enable a restoration of credit lines for private investment.

          4 – help to guarantee a constant demand at primary debt auctions, thus pressuring yields downwards and contributing to the long term “sustainability” of public debt.

          It would be a win-win-win situation for the government, the commercial banks and millions of pensioners. It’s certainly better than maintaining the current policies of borrowing new funds from foreign creditors. Why doesn’t the government just go for it?

          Btw – I’ve written a detailed study on this subject and published it on slideshare. It can be easily found by googling “TARGET2 and the rollover of Portugal’s Public Debt”.

          1. JohnB

            That’s an interesting proposal alright, though I’d still be worried that the pension fund investment could get caught up with future banking/private-debt crisis – combining that idea with a 100% publicly owned bank though, with no private debt issues, may allow the same benefits, but minus side-benefits like helping with banks capital constraints.

            1. José

              In a future banking/private-debt crisis if push comes to shove (and after all foreign debt has been payed off, and replaced by internal debt, via the mentioned method) the government would always have the option of re-introducing a national currency and abandon the euro.

              Then it could recapitalise (with nationalization, if needed) both banks and pension funds with freshly created “new escudos”.

              A banking/private debt crisis can be properly managed under a sovereign currency (see Sweden in the 90s). Under the euro and with a crushing external debt burden (the present situation in Portugal, Greece, etc.) it’s a hopeless situation.

          2. F. Beard

            3 – solve the commercial banks’ chronic lack-of-capital problem,

            You don’t get it. Banks will always be undercapitalized because they will always leverage as much as they think they can get away with.

            The solution then is not to save the banking cartel but to euthanize it

            1. F. Beard

              Actually, the banking cartel CANNOT be permanently saved since it is inherently wicked as history REPEATEDLY informs.

            2. José

              I’m aware of your opposition to so-called “fractional reserve” banking.

              But that’s the world we live in. Right now, the most urgent problem for the countries of periphery Europe is to escape the trap of the mountains of outstanding debt denominated in what is, effectively, a foreign currency.

              And – in the absence of a central bank issuing a sovereign currency – deposit creating commercial banks are an essential mechanism to escape that trap.

              So let periphery Europe deal with that problem first.

              Later on, when and if that matter is settled, many reforms may be envisaged for the commercial banking sector. We simply have much more pressing problems to deal with, in this particular moment.

              1. F. Beard

                We simply have much more pressing problems to deal with, in this particular moment. Jose

                All that’s needed in the short term is a ban on new credit creation, at least temporarily*, and a drop of new Euro’s on the entire population to:

                1) Counter the resulting deflation from the credit ban.
                2) Enable debtors to pay down debt without disadvantaging non-debtors.

                As for fractional reserves, let 100% private banks with 100% voluntary depositors leverage all they dare and let them be zealously liquidated the moment they can’t meet a liability.

                *till the banks are made fully private.

                1. José

                  Unfortunately, the ECB will never proceed to drop euro notes on the population.

                  Quite the contrary, they are engaged in a policy of savage austerity, designed against the interests of said populations. Fewer euros for the people, not more.

                  The periphery countries must rely on themselves to get out of their trap. That’s the simple truth.

                  No deus ex machina is going to come from core Europe to save them. That, we know, is the hope still prevailing among many left-wing intellectuals who once believed in “Europe” – a social-democratic, anti-U.S.-hegemony Europe. They now feel betrayed and long for a return to the promises of the olden days.

                  Forget it, it ain’t gonna happen.

                  1. F. Beard

                    Forget it, it ain’t gonna happen. Jose

                    Then you’re saying that a just solution is impossible? Want to explain that call to God? Hmm?

                    Ever hear of the Overton Window? A just solution should be somewhere between executing all bankers and many of the rich (Please spare doctors and dentists!) and kissing their arses.

              2. F. Beard

                And – in the absence of a central bank issuing a sovereign currency Jose

                Actually, Euros ARE sovereign since all members in the Eurozone accept them for taxes. That’s the problem. How else would Euro’s ever have been accepted in the first place?

                1. José

                  The NCBs of the euro states do not support the euro-denominated debt issued by their own governments.

                  In that sense, the euro is a foreign currency for said states.

                  Sovereign debt crises were unheard of in Europe, before the euro. Now they are crushing the economies of Greece, Spain, Portugal, Ireland, you name it.

                  Euros are the sovereign currency of the ECB and perhaps also of the core countries whose health is necessary to guarantee the continuation of the “European” project.

                  The ECB technocrats are not stupid. They are quite aware that, were core countries such as Germany to see their economies go under, the “European” project would be endangered and their own jobs might very well cease to exist.

                  The euro is a project for equals – it´s just that some of them are about 100 times more important and powerful than others.

                  1. F. Beard

                    The Euro should be an entirely private money in which case it would have to offer a genuine share* in the profits of money creation, in which case all would benefit.

                    *The Euro is not just backed by being legal tender for the member states but also by the unjust debt people have been driven into. Thus a universal bailout is also called for to reduce the Euro to a purely private money.

            3. skippy

              @thread…. Um… we are not using fractional reserve banking… its called fiat ergo MMT. I thought QE would lay that myth to bed once and for all.

              1. F. Beard

                100% private banks would fall back onto fractional reserve lending. It’s only the central bank and a default monopoly on the risk-free storage of fiat (more accurately, claims to fiat) that allow banks to operate with nearly zero reserves. That has allowed them to go from honest gamblers to almost pure counterfeiters.

                Ya see skip, when you* made the banking cartel more stable, ya made it more thieving. Kinda reminds me of Heisenberg’s Uncertainty Principle. Or “God is not mocked.”

                *Progressives that is.

                1. skippy

                  “That has allowed them to go from honest gamblers to almost pure counterfeiters.” – Huh? Gaubermint fault tropes again…

                  I thought it was the rational homo economicus synthetic action axiom vacuous vapors spewing thunkit, from that crack in the ground Delphi, some call an academic school, that enabled all the firewalls to be demolished and infected society at large with the sociopathic parasitic ideological pathogen called neoliberalism.

                  That’s your vector, if government is infected with this pathogen go look in the mirror and seek the founders – backers of this cognitive disease for agency. The institution of government has got nothing to do with it, buildings have no agency.

                  “Kinda reminds me of Heisenberg’s Uncertainty Principle” – Berado

                  skip here… incorrect application of this principle imo, it has to do with electrons and not humans ninny. The author is tired of its abuse and has publicly stated as such.

                  skippy… Anywho you’re constant bastardization of terms like counterfeiters, justice, real money, thieving, et al is just your cognitive bias – beliefs showing, only exists in your cults ideology and no where else. Good luck with that beardo.

                  PS. Money is a concept and not an object, so, how do you counterfeit it, how do you counterfeit government credit?

                  1. F. Beard

                    how do you counterfeit government credit? skippy

                    Easily – if one can make his liabilities mostly virtual via government privilege, as the banks have done, while the assets remain real then one has a license to steal via credit creation.

                    Anywho you’re constant bastardization of terms like counterfeiters, justice, real money, thieving, et al is just your cognitive bias – beliefs showing, skippy

                    Real money? Still trying to smear me as an Austrian?

                    I’m beginning to pity you.

                    Hint: The Lord can restore minds as well as bodies.

                    1. skippy

                      Huh? Again who deregulated everything, Santa or neoliberal free market dogma?

                      Issuing credit is risk, now who blew themselves sky high issuing risk and needed government to bail their sorry butts out, because CEOs need their bonuses, and the FIRE sector has become a matter of national security.

                      skippy… yes you are an Austrian, AnCap, Minarchism, or what ever your calling your self these days, as denoted by your free market libertarianism bias.

                    2. F. Beard

                      Banks could NEVER have leveraged so much without government privileges such as the lack of a Postal Savings Service and thus could never have become TBTF!

                      Can you not grasp that obvious point?

                      And if it comes to name-calling, you’re closer to a Stalinist than I am to being an Austrian.

                    1. skippy

                      Abusing a tool is completely different to counterfeiting it. When beard uses the term “counterfeit” he’s bastardizing it as a means to remotely invoke the hard – Theory of Value [money] – though the qualifier of underlining “physical assets”. Beardo is being exceeding deceptive in his construct of terms and the meaning – he – projects on them.

                      “Far from recommending perpetual deficits come what may, the functional finance approach recognizes that the private sector can become overheated, which is remedied through rising taxes to drain HPM and disposable income. Deficits can be too large, but also too small. We normally expect that a deficit will be required, however, for the simple reason that the private sector prefers to accumulate some net wealth in the form of HPM and Treasury bonds. For this reason, the government will usually be required to run a deficit, which means that its outstanding debt stock will grow over time. This is nothing to be feared. The government never faces a “financial constraint”, so long as its offers of HPM for goods and services are taken. Bond sales come after government spending, so, like taxes, cannot possibly be required to “finance” spending. Rather, bond sales are used to drain excess HPM to maintain a positive overnight interest rate. Whether that interest rate target is high or low, it must be set discretionarily by the central bank and then maintained by ensuring banks have the desired level of reserves. While taxes and bond sales both remove HPM from the economy, taxes drain income and wealth while bond sales merely offer an interest-earning alternative to non-interest-earning HPM.”


                      skippy… They blew themselves up and need a scape goat.

                    2. F. Beard

                      For this reason, the government will usually be required to run a deficit, which means that its outstanding debt stock will grow over time. This is nothing to be feared. via skippy

                      That’s fascist, Hamiltonian BS. Yes, the monetary sovereign should normally deficit spend BUT WITHOUT BORROWING.

                    3. skippy

                      You’re all over the shop beardo, that and your constant abuse of terms is indicative of a manic episode [see underlining diagnoses for that].

                      skippy… hint beardo… the year is 2014 and not 1700s or any other later date or in between.

    2. diptherio

      Check out Bernard Lietaer. He’s helped many communities around the world design alt. currency systems and is probably all about this idea as well. He helped design the Euro…until it became clear that his perspective was not going to be given serious consideration. Now he advocates for “monetary poly-culture” and “monetary ecosystems” containing multiple forms of currency. Pretty good ideas.

      1. JohnB

        Thanks – had him recommended to me elsewhere too; I think his ideas have the legal pitfall, of requiring EU support, whereas the ones Yanis and Rob Parenteau proposed, don’t seem to require this?

        I’ve been meaning, for a number of years, to learn more of Lietaer’s work, just never found the time – one thing I always wonder about what his proposes, is how the Gresham’s Dynamic affects the viability of his alternative currency ideas.

  3. Ignim Brites

    Professor Varoufakis has been proposing ways out of the Euro constraint for a few years now. Why doesn’t he expand his Euro standard future tax payment coin into a proposal for a gradual transition back to a national currency? That would give the periphery nations even greater leverage with the Euro fanatics.

  4. The Dork of Cork

    Its important to understand that Europe is in fact experiencing the early stages of hyperinflation.
    Why ?
    Wage and income deflation is inflation for that person who does not sit on a heap of a million + euros. i.e. the vast majority of people
    What is the physical cause of this deflation / inflation ?
    The nature of the real industrial supply chain in Europe does not express the true cost of its activities in euros.
    These externalties are then expressed as wage and income deflation , higher taxes and higher internal goods price inflation..
    This higher inflation of basic local goods creates living space for more complex higher input type machines such as cars (the capital goods dumping we see so often after each euro deflation event)
    Euro trade involves the long distance trade of often absurdly valued added products.
    This was caused by a extremely scarce domestic money policy in each country since the 1970s – this forces each country to trade in search of external money – but the nature of the trade was pointless -as the objective of the trade was political rather then economic.

    To bind these former national banking economies together into a modern entropic market state.

    Therefore why try to save the euro if it is the cause of our troubles ?
    national currency must be checked into each citizens account so that he can access the remaining rump local industry surplus production.
    I.e. milk consumption in Ireland will increase.
    French wine consumption will increase and so forth.

    Taxing people will obviously destroy this objective as it destroys money.
    As taxes purpose is to transfer the cost of credit banking / Industry to society as a whole.

  5. Steven Greenberg

    I like this whole idea, but I have a comment and a few questions.

    “Of course people, especially those who struggle to make ends meet, prefer lower to higher prices other things being equal. ”

    Another important point about inflation is its effect on borrowers. As we have seen, when you have a mortgage on your house and the house price drops precipitously, it can wipe out all your wealth, and still leave you owing money. Same is true for any borrower for other things – cars, home appliances, payday loans, college loans.

    I see where deflation hurts a manufacturer who buys her raw materials at a high price, but has to sell at a deflated price. You’d think then that inflation would allow a manufacturer to buy raw materials at a lower price, but sell at a higher price. I haven’t quite been able to figure out why this is not good for a manufacturer. It seems the manufacturer is squeezed in both directions. Of course the worker is also squeezed in both directions. Although borrowing on the inflated value of real estate in an inflationary period seemed to be heaven sent for a while.

    My other problem is understanding why a Bitcoin like deflationary FT-coin is a solution in times of deflation. The FT-coin would have to deflate faster than the Euro to make people want to hold it.

    1. Steven Greenberg

      Oops, a type. Should have said “Another important point about deflation is its effect on borrowers.”

    2. digi_owl

      Bingo. Deflation is pretty much a second interest rate on debt. If prices, and therefore revenue, drops fast enough the debt will in practical terms grow even if installments are being payed.

    3. F. Beard

      The FT-coin would have to deflate faster than the Euro to make people want to hold it.

      Not if, as it should be, it were the ONLY means of extinguishing tax liabilities.

  6. Steven Greenberg

    And a typo in my correction to my typo. I wish this software would allow for editing of remarks.

    1. F. Beard

      Be careful what you wish for since power to edit can EASILY be abused. Example: I say something and you refute it. I then edit my comment and say your refutation does not apply. See?

      1. Dominic Smith

        I think that edit problem is solved, F. Beard, but software that allows edits up until a reply is posted.

  7. Stapler

    A necessary condition to the really bad kind of deflation is a long period of sustained inflation driven by the impact of subsidized credit on prices, then investment, then jobs. So, in a world with an inelastic currency (or elastic only based on a change in inventories of extracted natural resources, and maybe the labor pool size), it’s hard to see how deflation would be a severe problem. Critics are comparing applies to oranges. The real issue is that to migrate from our system to such a new system would require a shocking amount of “deflation” as cheap, subsidized credit is pulled from supporting house prices, stock prices, bond prices, commodity prices, etc. That would be at the benefit of destroying the feedback loops that concentrate wealth without value creation, and slowing down incentives to over-consume the planet, but it’s not as politically feasible as using inflation to fight deflation behind the scenes and praying.

    1. digi_owl

      Err, deflation driven by a limited resource is just as good at concentrating wealth at the top as the current credit driven finance system.

      1. Stapler

        Not sure I understand your point, but I think it may be apples and oranges again. Please explain! In the current system, there’s subsidized inflation of asset prices when those asset prices represent the static savings of the wealthy (and the eventual painful reversal for a economy, which is the dangerous kind of deflation). What deflation are you referring to in the alternate regime I described – when prior inflation is not technically possible?

        Wealth concentration (whether credit fueled or by generational gifting of accumulated wealth) is a democratic matter addressed by taxes (or other means) in both systems. And competitive and/or complementary currencies can handle scarcity of currency

    2. F. Beard

      The real issue is that to migrate from our system to such a new system would require a shocking amount of “deflation” as cheap, subsidized credit is pulled from supporting house prices, stock prices, bond prices, commodity prices, etc. stapler

      Sigh. Another everyone else must must suffer because of what the banks have done? Does that sound even remotely just? Been drinking too much Austrian bilge?

      Well, you’re just flat out wrong. Here’s a way to provide restitution for bank thievery without either significant price deflation OR price inflation:

      1) Ban further credit creation, at least temporarily; this would be massivily deflationary as existing credit was repaid with no new credit to replace it.

      2) Meter out new fiat (e.g. US Notes) at a rate just slightly above the repayment of existing credit. Continue till all deposits are 100% backed by reserves less borrowed reserves less the reserves obtained by selling MBS or other private debt to the Central Bank (these should be forced back on the banks).

      And once all deposits are 100% backed by reserves then shortly thereafter abolish government deposit insurance and the Central Bank after everyone has had a chance to move to a Postal Savings Service that does not lend nor pay interest.

      1. F. Beard

        The metering out, of course, would be equally to the entire population. Means testing would not be wise politically and besides an equal distribution would add little to the rich anyway and would preclude cries of “Unfair!”, at least from the rich or wannabe rich.

      2. Stapler

        Actually, that seems both inflationary AND deflationary at the same time!! Deflationary for asset prices because so much of the market for assets is based on refinancing debt and you take that away leading to defaults (I can’t imagine that a pro data distribution of cash to the public would be enough for an institution to repay a $2bn repo liability). And inflationary because you dumping cash on the masses who will spend it on consumables in the CPI.

        And what’s with the name calling? Where do you see anything pro bank or rigidly Austrian in my posts? And where do you see anything that says I think people “should” suffer? And if you think our problems are caused simply by some bad actors in banks, you’re kidding yourself. This is systemic. And we all play our parts.

        1. F. Beard

          And where do you see anything that says I think people “should” suffer? stapler

          “The real issue is that to migrate from our system to such a new system would require a shocking amount of “deflation” as cheap, subsidized credit is pulled from supporting house prices, stock prices, bond prices, commodity prices, etc.” stapler

          And if you think our problems are caused simply by some bad actors in banks, you’re kidding yourself.

          What? Do you think I’m a Progressive? :)

          This is systemic. stapler

          Of course. I’ve never said otherwise. It’s bank DEFENDERS that try that lame excuse.

          And we all play our parts. stapler

          If you mean we’re all guilty then think again.

        2. F. Beard

          Actually, that seems both inflationary AND deflationary at the same time!! Deflationary for asset prices because so much of the market for assets is based on refinancing debt and you take that away leading to defaults (I can’t imagine that a pro data distribution of cash to the public would be enough for an institution to repay a $2bn repo liability). stapler

          I said a ban on CREDIT CREATION, not a ban on 100% reserve backed lending. And the new reserves would allow just enough of that 100% reserve lending to prevent asset deflation or if not then additional fiat could be handed out.

          And inflationary because you dumping cash on the masses who will spend it on consumables in the CPI. stapler

          Sure but they will also pay down debt and in the case of non-debtors lend it out to prop up asset prices (but at a market determined cost, of course).

        3. F. Beard

          As for name calling, it’s an insult to justice and creativity to think that cheap embezzers like the banking cartel can put us in a bind that REQUIRES pain. You might as well say that Satan is stronger than God.

          1. F. Beard

            Of course if we’re stupid and ignore justice as they did in the Great Depression, we could end up in WW III as they ended up in WW II.

  8. Dan Kervick

    The appeal to Bitcoin or Bitcoin-like payment platforms in this piece seems like a red herring to me. Isn’t he really just proposing that Greece issue its own alternative digital currency? You know, like the state currencies we already have?

    1. JohnB

      Yes, it’s interesting that Bitcoin was given precedent over the general FT-coin idea, in the article – using Bitcoin to do it, seems like the secondary/ancillary point.

      The problem the Bitcoin-like FT-coin solves though, is infrastructure. In our current system, there is a lot of work to do infrastructurally in order to make our economic/financial systems compatible with non-cryptocurrency FT-coins, but with a Bitcoin-like cryptocurrency FT-coin, you can roll it out pretty much instantly.

      That’s my take on it anyway – there are likely other good reasons too, like no transaction costs and such, as mentioned in the article – but yes it doesn’t seem essential in any way, for implementing the FT-coin idea.

      1. Dan Kervick

        Well isn’t he suggesting that these new Bitcoin-like digital coins would be issued by the Greek government, and that they would be introduced into the real economy by being purchased with Euros? In that case, the new currency is not some P2P crypto-currency. There is going to be a government planning and rollout phase, and state management, and so I don’t see why the Bitcoin-style block-chain based platform offers any advance over a more conventional digital platform with the new currency managed by the Greek government as the third party. He’s basically just saying that Greece should issue a new currency and offer to exchange it for Euros.

        1. JohnB

          Yes, that’s true enough – I guess I don’t see either, what is special about the Bitcoin/blockchain way of implementing this, versus a more standard digital currency.

  9. F. Beard

    Nice dissertation on the dangers of deflation. Thanks.

    But the 50% appreciation of the FT-coin in two years is a HUGE amount of welfare for the rich and constitutes borrowing by what should be monetarily sovereign governments; both are morally bogus.

    Moreover, a monetary sovereign should ONLY accept its own fiat (FT-coin) for taxes (increasing fiat’s value and, btw, reducing the real value of the Euro in the Eurozone – just payback, I’d bet, for the misery the Euro has caused) and recognize no other money. But how to give that fiat immeditate value is the question? Sales taxes are one way since they are needed throughout the tax year and not just after a tax year has ended. And income tax withholding should, of course, only be in FT-coin. And yes, some kind of artificial restraint on the amount of FT-coin issued relative to GDP (a fixed defict percentage) might be useful for a couple of years till the value of FT-coin has stabilized.

    Hint: Money creation is a problem in ethics (See Matthew 22:16-22 and the rest of the Bible, for that matter), not pragmatism. How can people ever think otherwise?

  10. BigRed

    Short question upon reading:

    At this very moment in Europe’s history, with interest rates practically on the lower zero bound, and with inflation turning negative, the ECB is not allowed (for institutional and political reasons) to effect expansionary monetary policies through quantitative easing.

    Given that expansionary monetary policies in the form of QE have done jack in the rest of the world (apart from keeping stock indices artificially inflated), why would it be a problem that the ECB can’t do it? The difference between not adopting smth that doesn’t work and adopting it is zero.

    1. F. Beard

      Excellent point! What is needed is a money drop on the population combined with at least a temporary ban on credit creation lest the banks inflate away the benefit of said drop.

    2. financial matters

      Great point. Housing/rental prices seem like the first and forced correction as they are necessary and now tied to real income.

      These hard assets also back some of the softer assets such as stocks and derivatives which they shouldn’t be artificially supporting anyway.

      Real growth needs to come from the ground up. Anyone can look around their town or city and see that there is useful work to be done and people around who can and want to do it for a fair wage.

      The money wasted on the FIRE sector can instead give us decent public medical care and education.

      The ECB could learn from the Fed’s mistakes by making the banks accountable rather than papering over the fraudulent practices that led to insolvency and putting employment as a priority.

  11. mac

    Are there no solutions to the Euro mess that are not extremely complex? A good solution must be easy to understand by all. This might well be a good idea but try to explain it to a person with no financial background.

  12. craazyman

    this scheme might also force them to actually collect taxes. If we assume the sun, we can develop the entire solar system, quite easily!

    I dunno about that deflation argument. There could be a point where people with cash to spend or invest say “OK, that’s low enough. Let her rip.” For example, if you could get a nice loft in New Yawk for $100,000, I’d buy one this week. But they cost about $3 million. If prices fall and people say “OK, let’s rip’ this like the Pipeline when it’s pumping, with some fresh cash” your off to another races with all sorts of new businesses and things to do. Or maybe not. It’s hard to know until it’s too late for it to matter if it doesn’t work. Lots of things are like that, actually.

    1. F. Beard

      Your fears are justified, imo. Once the banks see the economy recovering sufficiently they will pile on with credit creation. And the only way to stop it without wrecking the economy will be to ration credit by amount, not by price, since speculators profit on the SPREAD between what they can borrow at and the rise in assets prices that they themselves drive.

      1. Steven Greenberg

        The FED claims that they have made preparations to solve the problem of taking back the excess reserves they have pumped into the system once the private sector starts to go into overdrive on its own. I’d sure like to know what their plan is. Since putting the excess in didn’t seem to be too effective, I wonder if their plan to take it out will work any better?

        MMT might suggest raising taxes to cool down the economy. Running a government surplus will take savings out of the private sector.

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