The Great Italian Money Experiment

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By J. D. Alt, author of The Architect Who Couldn’t Sing, available at or iBooks. Originally published at New Economic Perspectives

As I said, Italy, is now experimenting with paying for public services with tax credits. Presumably, this is happening because Italy doesn’t possess enough Euros to pay its citizens to provide all the goods and services needed to maintain and run the public sector of its social economy. And Italy can’t “create” the additional Euros it needs because that prerogative is the exclusive right of the EU Central Bank which Italy, even as a sovereign member of the EU, has no control over. But, as the news article explains, Italy still needs to have the grass mowed and the weeds pulled in its public gardens. So it has decided (out of desperation, the article implies) to pay the gardeners with tax-credits. The gardeners are willing to do the work in exchange for the government’s tax-credits, because it means the Euros they earn (in other ways) can then be used to purchase goods and services rather than for paying their taxes. So, in practical terms, it is “just like” getting paid in Euros.

This, in fact, is way more interesting than it seems. In fact, it might even be mind-expanding! Here’s why:

Presumably, the tax-credit payments described take the form of notations on the gardeners’ tax account. An hour’s worth of weeding is noted as 15 Euros worth of extinguished taxes. If the gardener has a tax liability of, say, €3750, her taxes would be completely paid after providing 250 hours of weeding and pruning. After that, obviously, she’d have no more incentive to provide any services in exchange for the tax-credits. So the amount of services Italy can obtain in this fashion is directly limited by the amount of tax liabilities it can impose on its citizens.

It would be possible, however, to structure the tax-credit payments in another way which would have a very different outcome. Instead of making the payment as a credit notation on a citizen’s tax account, the Italian government could issue paper tax-credits and pay them to the citizens for their gardening services. To be specific, this would be a piece of “official” paper, signed with an important signature, on which was printed something like the following:

The Sovereign Italian Government promises the bearer of this paper ONE EURO of credit on taxes owed to the Sovereign Italian Government.

This amounts to exactly the same thing as making a direct credit on a citizens’ tax account, but we now have set in motion a curious set of subsequent economic actions: Now, after an hour of weeding, upon receiving her 15 paper tax-credits―for convenience, let’s call them “PTCs” and give them the symbol β―the gardener can choose to do the following. She can put the PTCs under her mattress for safekeeping until the day her taxes must be paid. Or she can use the β15 to purchase a lasagna dinner at her neighborhood trattoria. The owner of the trattoria is willing to accept the PTCs in exchange for the lasagna, garlic bread, and wine because he, too, has to pay taxes to the Italian government. So, for all practical purposes, receiving the PTCs is just the same as receiving Euros for him as well.

Now we have to ask an important question: Is the amount of services Italy can obtain by issuing and “spending” its paper tax-credits still directly limited by the amount of tax liabilities it can impose on its citizens? In other words, if every Italian citizen theoretically has received enough PTCs to pay their taxes with—either having received them directly from the government for providing public services, or having received them from other citizens in exchange for lasagna dinners—will the citizens’ willingness to exchange real goods and services in exchange for the PTCs come to a halt?

Crucially, the answer is No. This is because the act of “embodying” the tax-credits in exchangeable pieces of paper has given the PTCs a usefulness in addition to their usefulness as tax payments: This additional usefulness, of course, is the ability to use them to buy goods and services from other Italian citizens and businesses. Thus, the number of paper tax-credits in “circulation” could vastly exceed, at any given time, the total actual tax liabilities of the Italian citizenry. The PTCs would continue to be accepted for lasagna dinners, because the Trattoria owners know they can use the PTCs they receive to subsequently buy Italian shoes and motorcycles— in addition to using them to pay their taxes.

It will no doubt have dawned on most every reader that what we’ve just created is “money.” Specifically, we’ve created what is called “fiat money”—which happens to be the kind of money the world has been using now for the past half century (ever since the U.S. formally abandoned the gold-standard in 1971). Having thus conjured a rudimentary image of fiat-money to life we should quickly make some important (and perhaps startling) observations about it.

Observation 1:  How does the PTC “currency” come into existence? The sovereign Italian government creates it. Paper tax-credits are not created by Italian banks, nor are they borrowed from China—or even the EU Central Bank. They are printed by the Italian government. Note: PTCs could also be created by the Italian government digitally—that is, with keystrokes that enter numbers in an electronic ledger of account. In either case, the point is ONLY the Italian government has the legal right to create them. Why? Because that is the prerogative of sovereignty and the definition of fiat money.

Observation 2:  How many PTCs can the Italian government create and spend? Or, to rephrase the question more precisely, how many times can the Italian government promise to accept one of its paper tax-credits in exchange for a Euro’s worth of taxes owed? The answer is simple: as many times as it wants! It doesn’t matter if all the taxes have been paid in full—it can still issue and spend the promise over and over again. The citizens will continue to accept the promise in exchange for real goods and services for two reasons: first, they know other Italian citizens and businesses will accept the promise as payment for lasagna dinners and, second, they know for sure that taxes due will come around again—and soon.

Observation 3: If (as observation 2 suggests is possible) the Italian government just keeps issuing and spending its paper tax-credits (fiat money) to buy goods and services from its citizens, won’t the number of PTCs in circulation keep growing until, inevitably, the price of things in the Italian economy begins to skyrocket? A lasagna dinner that used to cost β15 suddenly costs β150! In other words: Inflation. The answer, of course, is Yes. So what can the Italian government do to keep a lid on the inflationary pressure created by its continued issuing and spending of PTCs? Two things:

  1. The government can continue to collect taxes from the citizens (or, if necessary, even increase the taxes in collects). Taxes will remove PTCs from circulation, reducing the number of them available in the market-place to buy lasagna dinners and Italian shoes. Taxes, then, have a dual virtue in a fiat money system: they continuously reinforce the citizens’ desire to earn the government’s paper tax-credits—and they drain the paper tax-credits out of the market place, helping to keep prices stable.
  2. The government can also create special savings accounts that citizens can put their excess PTCs in. The accounts would earn interest (paid by the government with new PTCs)—but the agreement would be that the citizen would leave their “old” PTCs in the account, untouched, for a period of time—say 10 years. This means a large number of PTCs which would otherwise be competing to pay for lasagna dinners would be replaced with a much smaller number of PTCs (the interest payments). The net result will be fewer PTCs buying goods and services in the market-place. If you want, you could call these special savings accounts “government bonds.”

Historical Note:  When the U.S. was in the midst of mobilizing to fight WW2 it was issuing and spending historical quantities of U.S. paper tax-credits (fiat dollars) to pay U.S. citizens to build battleships and bombers—and to pay the recruits in its growing army and navy. Inflation was, indeed, starting to become a problem. So what did the government do? Two things: it increased taxes, and it issued War Bonds. It even imposed a requirement that workers take a percentage of their pay in War Bonds. By 1943, inflation was brought back under control.

Observation 3:  What happens to the PTCs when they are presented to the Italian government as tax payments? The mind-money framework we learn from early childhood “tells us” that the taxes collected by a national government are what the government then uses to pay for public goods and services. Crucially, however, this IS NOT TRUE with a fiat-money system. Looking at the paper tax-credit system we’ve just described, it’s clear that (by logical necessity) the government FIRST issues and spends the paper tax-credit, then it accepts it back as a tax payment. At that point of taking it back, the tax-credit is of no further use to the government. It is simply cancelled: it becomes a particular citizen’s tax liability with a line drawn through it. If the government needs to spend another paper tax-credit, it simply issues a new one. (It is actually easier and more efficient to issue new tax-credits than to “recycle” old ones.)

Observation 4:  Is it logical for a sovereign government to borrow the paper tax-credits it has issued? Please try, for a moment, to wrap your mind around this question! Here is something that ONLY the Italian government can create, and something it can create as many of as it needs, at any time it needs them. Why would it ever want, or need, to “borrow” them from the Italian citizens? It is, therefore, illogical to imagine the Italian government ever being “in debt” to its citizens! The Government Bonds we mentioned previously are not a “debt” the Italian government owes to anyone—they are savings accounts which hold the citizens’ excess PTCs for a specified period time. When the bonds “mature,” the PTCs are simply transferred back to the citizen. In a fiat money system, therefore, it is illogical (and irresponsible) to imagine or describe U.S. Government Bonds as being the government’s “debt”—or, more specifically, to talk about that “debt” as being “unsustainable,” or to suggest the government cannot pay its citizens to undertake and accomplish some important task because it will “increase the government’s debt.”

Having made these observations, it appears the Italian government has stumbled on an actual solution to the “austerity” it has been forced to impose on itself by the European Union. Except we must now confront the fact that the rules of the EU do now ALLOW Italy to issue and spend its own sovereign fiat currency! The only “money” Italy is allowed to use is the Euro—and the only way the Italian government can obtain Euros is either by collecting them as taxes from its citizens, or by borrowing them from the European Central Bank, which has the exclusive prerogative of issuing them. And these methods of obtaining Euros to spend are falling short of what Italy needs to pay its citizens to do. So…. Italy has decided to pay its citizens with tax-credits, and then (why not?) with paper tax-credits. And then, presumably, the EU says, “Whoa, hold on here! It looks like you are printing your own money, which is not allowed by our rules!”

We could then proceed to an International Court in which Italy claims it isn’t breaking the EU rules because it isn’t printing “money” but is simply issuing tax-credits. The EU would then have to argue that “tax-credits” are, in fact, what “money” is! In making that argument, it would be forced to explain everything we’ve just explained which would, in turn, reveal and establish not only the absurdity of the Eurozone monetary system, but also that the whole world (including the U.S.) is misunderstanding and mismanaging its money system—and unnecessarily making a vast majority of the world’s citizenry miserable in the process.

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  1. Rod

    Interesting! Didn’t Yanis Varoufakis come up with something similar when it seemed that Greece was going to booted out of the Eurozone..?

    1. Yves Smith Post author

      I followed the Greece negotiations intensively in 2015 as well the revelations made later. He didn’t have anything even dimly representing a plan. He at best thought about it for a few days. And he denied leaks regarding what was supposedly in the plan. See here for details.

      1. Richard H Caldwell

        Nice to hear the MMT argument recited in this context.

        My question is a legal one – are there provisions in the treaties forming the Euro that would preclude this?

      2. David

        > He didn’t have anything even dimly representing a plan. He at best thought about it for a few days.

        That’s utter nonsense, assuming you believe yanis’s account. Where are you getting that from? Why are you quoting a 2 year old press article as the final word when you have a first person account from the protagonist debunking your take on it?

        1. Yves Smith Post author

          You are utterly out of line. This site followed the Greek negotiations in excruciating detail. We also have insider information that never made the press, such as the fact that all of the memos Greece presented to the Trokia were written by a single grad student, ie, someone whop didn’t have the skills for the task. That’s an indicator of how undermanned and over their heads the Greek side was.

          Contemporary accounts are always more accurate than ones after the fact. Any lawyer or investigator will tell you that.

          At the time, Varoufakis denied having had a “Plan B”. He and other sources AT THE TIME then said they spent a week thinking about launching a new currency and Varoufakis rejected it. I can tell you given when this occurred that Greece was in the thick of negotiations and this was not a full time task. Moreover, we have written exhaustively as to what it would have taken for Greece to go to a new currency. What has leaked about their thinking shows that they hadn’t begun to grapple with any meaningful issues.

          You also forget that Varoufakis had repeatedly rejected the idea of leaving the euro for macroeconomic reasons: that it would hurt the Europe, Greece’s big trading partner, and then hurt Greece.

          And need I remind you that Varoufakis is a macroeconomist, and not a banking or payments system expert? He was starting with no base of relevant knowledge regarding implementation.

          Don’t get snippy with me when you are out of your depth.

          1. David

            I apologise for my discourtesy, but it flows from incredulity. Your contention that “he at best thought about it for three days” is trivially disproven.

            He had James Galbraith and a team of six work for six weeks on plan X. That’s something beyond a “dim representation of a plan”

            He had a technology team hack into the finance ministry to create a web based system of payments based on Tax numbers that could be activated at a flick of a switch and later expanded into smartphone apps. That could be described as grappling with meaningful issues.

            Throughout the crisis he repeatedly enthused his colleagues to be prepared to activate plan X should the backs be shit down. That’s not a three day thought.

            Where in the world are you getting your information?

            As to your other points: yes I’m sure the Greek finance ministry was under staffed and lacking competence. That’s not a surprise when your other ministries and central Bank are being run by a combination of the Troika and oligarchy-compromised officials.

            The fact varoufakis opposed leaving the euro is irrelevant considering his determination to be prepared for an exit should it become the best alternative, of his contention that the parallel payments system was intended to provoke an intervention from merkel.

            Any lawyer who tells me contemporary accounts are always more reliable is a bad lawyer.

            And finally, it’s ludicrous to criticise a finance minister for not being an expert in the technological details of implementing a parallel currency. He designed the mechanics of the plan based on Tax numbers and then left the implementation details to his tech team.

            Your arguments are really really weak Yves, your basic contention is ludicrous, and you haven’t linked to any of your sources. What is your problem with varoufakis?

    2. Peter Mott

      Yes – see pages 95-98 of his book. But he had little support (to say the least) and was a weak vacillating politician.

  2. Sokratis

    This was what Varoufakis proposed for Greece back then in 2015. Opposition parties want him to be tried for this! (Varoufakis begs to appear in such a trial to “reveal and establish not only the absurdity of the Eurozone monetary system…”).

    1. Yves Smith Post author

      Not correct. Varoufakis thought a bit about printing currency. Some claim he had a scheme which was not even remotely coherent as presented regarding accessing individual tax accounts and he vociferously denied as having considered, much the less proposing. See link in the comment above,

      1. Sokratis

        I understand that what was said and done in 2015 in Athens may have been incoherent. What I try to stress upon is that even the description by Varoufakis of a system of already existing personal tax accounts that would be used as money accounts, something like the Italian scheme mentioned in the article, was confronted as High Treason here in Greece.
        Even a theoretical, but easily applicable, use of a system of clearing that would avoid using euros is considered as a crime. Any attempt between individuals to settle their transactions without euros could be treated as fraud by political parties that want to enforce complete servitude to the ECB.

      2. David

        Where did he vociferously deny considering a scheme based on Tax accounts? He leaked his entire plan based on Tax accounts in a conference call. This is Twilight zone material.

        Seriously: quote, link, or retract.

  3. Alex Hanin

    I would love to get tax credits (I pay a massive amount of taxes here in Italy), but I’m sure European authorities would find some more or less convincing reason to veto it. After all, why have an ‘independent’ central bank if you cannot strangle member states with it?

  4. RabidGandhi

    One of the issues not addressed by Alt in the article is that even though PTCs do partially return Italy to its status as a sovereign currency issuer, Italy nevertheless has other liabilities that are not payable in PTCs: primarily for imports, payments on bonds issued in EUR, and EU obligations. By using a dual-currency system to straddle the line between sovereign and non-sovereign, Italy is still effectively decreasing the amount of Euros it takes in to pay these obligations that cannot be repaid in PTCs.

    That said, this is a problem for any economy that is not fully autarchic: you can issue as much currency as you want to manage your domestic economy, but you will still depend on a favourable balance of trade to meet obligations that can only be paid in a foreign currency. But Italy is still in a bind that other sovereign currency issuers do not have to be in: first due to having issued bonds in a currency that they do not control (the original sin of monetary policy) and secondly due to still having the straightjacket of the EU, PTCs notwithstanding.

    1. cojo

      I would have to imagine this would depend on whether Italy has a balance of trade surplus or not. My cursory internet search says it does ( therefore, it should be able to cover the decrease in Euro’s taken in, to a point.

      I think the bigger sticking point will be when and where to raise taxes for the inevitable inflationary pressures if this system becomes more wide spread.

      1. cojo

        I would also wonder what would happen to Italy’s borrowing costs as it’s sovereign bonds would likely take a hit.

    2. False Solace

      Italy has a trade surplus so it takes in more Euros than it spends.

      However, the point you raise is no different for any other country that trades with the rest of the world in a currency it doesn’t control. Using PTCs will strengthen aggregate demand by bringing underutilized resources (unemployed workers, unused manufacturing capacity) back into the economy. This will make it easier for Italy to generate import substitutes if it chooses. Italy ends up less dependent on external imports and can reserve the Euros it would have spent on them paying off preexisting debt or buying new kinds of inputs. This was the approach taken by Germany in the 30s that led to its “miraculous” economic recovery: lots of government spending to build up industry, and all foreign currency expenditures tightly managed.

      1. todde

        You got 15 years in prison if you took more than 5 marks out of Germany without authorization in the 1930s.

        And every business had a nazi party official in it’s procurement office.

  5. PlutoniumKun

    I love the last two paragraphs of this. I hope the experiment goes well.

    I would like to know from someone (Clive?) whether introducing a scheme like this gradually as a parallel ‘currency’ (i.e. with paper and electronic records parallel to the Euro) presents many of same practical IT and hardware demands which makes falling out of the Euro so difficult.

  6. Carla

    Typo: Second to last paragraph, second sentence reads in part:

    “we must now confront the fact that the rules of the EU do now ALLOW Italy to issue and spend its own sovereign fiat currency!”

    I believe the second “now” is supposed to be “not.”

    Lots of us may be sharing this post, so it could be worth fixing.

  7. ex-PFC Chuck

    Very interesting, as you say at the outset. A couple of comments/questions:
    1. Is there any barrier to the issue of PTCs by state governments here in the US of A? Or counties, cities and towns, for that matter? (And by extension provinces and smaller jurisdictions in other countries?)
    2. Am I wrong in suspecting that the issue and use of PTCs within a nation-state’s sub-jurisdiction would tend to keep more of that sub-jurisdiction’s commerce within its boundaries?

    1. RabidGandhi

      Not an effective answer to your question, but in 2009ish California did issue payments in “warrants” that were a type of IOU, but stupidly– whether by design or due to law– they couldn’t be used to pay taxes, thus meaning they weren’t currency as the PTCs are.

      1. JBird4049

        The state has used them more than once because the legislature couldn’t pass a budget and I think during the Great Depression. There was plenty of speculation in the press on good they were, along with some worries that banks would stop honoring them. Of course, if they had stopped, the economy would have crashed. Along with the banks.

        I think the tax issue is by design but I don’t know. I should find out as it is my state.

        IOUs being issued because our government could not do their job. Joy. It made some think about the shared illusion that those pieces of paper, metal, or electronic 1s and 0s have value.

    2. HotFlash

      Hmm, interesting question. PTC’s would function as a local currency, which are usually promoted as a way to promote local business, local investment, and generally keep money from being pumped out of communities. A case in point is the Brixton Pound, see here and here.

      Not all governments take kindly to this sort of community spirit. Nigeria (I think it was, or maybe Kenya?) declared it counterfeit currency. In theory a local or other complimentary currency is not much different from store coupons or airmiles, but if it got to be any kind of challenge or even inconvenience to TPTB, expect it to be criminalized.

      Sorry for all the links, I expect it’ll put me in moderation or a while.

      1. Oregoncharles

        There are a number of those around the country. The one in Corvallis is called “Hours”.

        Legally (I’ll post this under the legality discussion, too), they depend on interchangeability with dollars – that’s what makes them “complementary” (not “complimentary” – they aren’t free). You have to buy them, and the system will refund the face value. Basically, they’re coupons.

        Nonetheless, if widely accepted they would function like currency. Similar systems were used during the Depression to locally expand the money supply.

        Getting the country to take them for taxes would be a big step. Not sure if it’s legal, but worth a try.

  8. BoycottAmazon

    Could make Italy a great place to on-shore profits for European multinationals if they can buy up the notes at discounts and extract good rates from government. Germany has had a lock on that role til now due to various tax loopholes.

  9. Samuel Conner

    It seems to me that this mechanism can work at any level of government that collects taxes. For a couple of years I have wondered whether local municipalities could pay part of their expenditure budgets through credits that could be used to extinguish local property taxes. It would seem to be at least mildly stimulative in the sense that it might pull future expenditure (by the recipients of the credits) into the present and permanently increase (probably only modestly) overall activity through a multiplier effect.

    The most obvious micro/local use of PTCs (property tax credits in this context) would be to allow tax-delinquent home-owners to stay in their homes rather than losing them in tax sales. But one can also imagine them being used to pay non-delinquent tax-payers for things that the local government needs done.

    Local municipalities are “small, open economies” and so don’t have as much policy freedom as larger economies, even if they are able to function as monetary sovereigns. But this thought seemed a possible way of moving in the direction of small scale demonstration of MMT/chartalist ideas.

    It’s wonderful to see these ideas being experimented with in other countries.

    Perhaps it might even happen in US, though I suspect that my intuition is valid for US that “bottom up” may be more feasible than “top down,” at least in the near term. Our rulers seem determined to not learn anything from Europe.

    1. HotFlash

      Certainly municipalities are already issuing tax credits, but not to individuals, only to corporations, eg Walmart, Amazon. Going back 80 or so years, my farmer grandfather paid his property taxes by driving snowplow for the county. Story was that he always made sure that the County Commissioner’s road was plowed first, as well as the drive down to the house. Later a law was made that taxes must be paid in cash — dunno the why/how/when about that.

  10. Ned

    Assume a percentage of Italians pay no taxes. The PTCs would be of no value to them except as additional income that would have to be handed off to a businesses or individuals who did pay taxes.

    This scheme would tend to encourage tax compliance to take advantage of the benefits offered.

    What would the effects be on organized crime?

    1. Enquiring Mind

      Nice currency you have there, shame if something was to happen to it.

      Perhaps there are some schemes or schemers working on ways to clip off some bits and bobs as part of the friction in the process, even with some block chain implementation.

      Fiat currency obligatory reference, Fix It Again, Tony. ;p

  11. JohnB

    I’m a major fan of this policy, and similar variations of Robert Parenteau’s TAN proposal – but the question is this:
    Will it fly when (not if) it goes to court?

    I have a feeling, that it will be possible for the courts to arbitrarily decide that something has become ‘money’ – and to then shut such a program down (under threat of economic sanction) – without actually having to justify this decision in terms of economic theory – and that the courts can successfully apply this in a deliberately inconsistent way, to arbitrarily allow ‘approved’ (non-status-quo-threatening) variations of tax credits, while disallowing ‘unapproved’ (ideologically/status-quo threatening) variations of tax credits.

    The economic theory is all well and good, but the politics behind all of this will probably become exceptionally dirty – and I don’t expect any consistency in how the law is applied, because I expect that it is all going to be about enforcing the power of existing institutions/authorities in the end,

    Any government implementing something like this will ‘win’ the argument in terms of economic theory (that being a pyrrhic victory limited to the few who are economically in-the-know), but (in my opinion) is almost certainly going to lose the argument politically – and I fully expect that the legal system is completely corrupted by political motives and entrenched powers – and that this political loss, will be held as an example which discredits the economic theory behind this.

    It’s pretty easy to deny economic realities and suppress economic truths, by using political powers to prevent economic outcomes which would threaten todays current economic orthodoxy – that’s usually how it’s done – and I don’t see a reason to expect something different here.

    Still…worth a shot though, and worth its day in court – even if just to see how corrupt these institutions really are.

    1. a different chris

      I’m glad I read the comments to the end – this is the long, clear version of what I would have tried to write. The Powers-That-Be could not care less about somebody ” establish[ing]…the absurdity of the Eurozone monetary system” in court.

      Even if you could do that, and seems there is always some wack court procedure that evades presenting the truth, but even if you could it just would be BS’d over if not just ignored in the wider world. A moral victory at best.

    2. Oregoncharles

      Under US law, local currencies, mentioned above, depend on interchangeability with dollars. They are purchased to start with, then are refundable by the system. There are quite a few around the country, including a local one I’m familiar with.

      PTC’s, say from counties, might pose more of a problem. I’ve no idea how imaginative US currency law is. they might simply say nothing about it, in which case the county could pretend ignorance.

  12. Jim Haygood

    Is the amount of services Italy can obtain by issuing and “spending” its paper tax-credits still directly limited by the amount of tax liabilities it can impose on its citizens?

    ‘Crucially, the answer is No. What we’ve just created is “money” … “fiat money.”

    Back in the 1980s, the New Yorker published a fascinating (at least to those of us with criminal minds) article about check kiting.

    By replacing the routing number on a paper check with a one that didn’t correspond to the printed bank name and city, the perp realized that clearing procedures would cause the kited check to bounce between the two banks until it physically shredded, giving the perp plenty of time to move on.

    The quoted passage describes an industrial-scale version of check kiting. It’s the logic of numerate sociopathy, applied to mass embezzlement. One salutes its sheer diabolical brilliance.

    1. John

      Been going on since Babylon. Money is what the sovereign says it is. Pebbles, cowrie shells, notched sticks, gold, lead…sometimes the sovereign is even stupid enough to let others decide.

    2. David Swan

      Not “check kiting”, simple money creation. It is the nature of chartalism, expressed by all monetary systems. It’s just a question of whether states should be empowered to create their own money or should instead be subservient to bankers. Your lurid rhetoric implies that you think sovereign states should be forced to grovel to banks rather than create their own money – the EU agrees with you.

      1. Oregoncharles

        That’s just a denial, not an argument. That step in the article bothered me, too. I don’t think it’s convincing. Iif the government issued more PTC’s than they could collect in taxes, I think they’d have trouble getting them accepted. I make that point in my post below. This is misusing the “fiat” concept.

        If they DID make it a fiat currency by requiring people to take them, then the ECB would be forced to step in, much as he indicates near the end. It would then be a sovereign currency, and Italy would be on its way out of the Eurozone. As the issuance of PTC or “beta” indicates.

  13. discwrites

    So that is not an alternative currency, yet.

    But once the system is in place, it surely will not be much of a stretch to implement an alternative currency, in parallel or place of the Euro?

  14. oh

    I wonder if a large number of PTC’s would make it harder for Italy to pay for purchases and/or pay interest outside Italy and therefore would be self limiting in their use?

    1. HotFlash

      An Italian PTC would be useful to any entity, including a foreign one, that had any direct tax liability to Italy. Say, for customs, VAT, or even postage, depending on how it was framed. If PTC went all fiat, then it could be offered to Italian landlords, shippers, customs brokers and freight haulers. And think of the possibilities for FOREX!

      Prediction: Goldman-Bruges will not permit this.

  15. Wandering Mind

    The author of the article underestimates the ability of the European Court to avoid facing the reality of the situation.

    It was able to avoid the reality of what the European Central bank was doing after Monte declared his willingness to “do whatever it took” to preserve the Euro.

    And the United States Supreme Court has had at least two opportunities to delve into the deeper logic of what money is when it considered whether states issuing tax credits were issuing money. It ducked the issue both times.

    So, the most likely best outcome before the European Court of Justice is that Italy would be allowed to issued tax credits, but the fiction of “taxes pay for government” would live on.

  16. PKMKII

    Interesting idea, but wouldn’t the EU central bankers get wind of this pretty quickly? I don’t know the minutiae of the EU currency rules, but I would think there’s something in there that they would use to try and put a stop to this, as the whole exercise undermines the central bank.

    1. Samuel Conner

      Printed sovereign currency is essentially a zero interest bearer bond — a debt obligation the value of which belongs to whoever happens to be holding it at the moment it is presented for redemption.

      The government of Italy can and does issue bonds in exchange for Euros. Those could in principle be zero interest bearer bonds, though in practice it’s hard to imagine people surrendering Euros that could earn interest in bond markets or savings accounts for paper that doesn’t (perhaps NIRP will change that). I don’t see why it couldn’t simply issue zero interest bearer bonds denominated in Euros in exchange for the goods and services it needs. If those bearer bonds were officially negotiable only for repayment of taxes, that would simply be a restriction set by the issuer.

      I’m not skilled at the legalities, but it seems to me that sovereign debt of any kind is already effectively money, a point often made by MMT thinkers. An earlier comment noted that TPTB would find ways to prevent innovations that threaten their power. But from my simplistic point of view, it looks like Italy (and every debt-issuing government) is already doing something very like this, just with the fig leaf of auctions and primary bond dealers interposed.

    2. Samuel Conner

      Contra to my earlier:

      If the PTCs were regarded to be debt obligations of the Italian government, then I suppose they would come under the provisions of the austerity-biased “stability and growth pact,” which limits the size of the deficits that its signatories can run. If that happened, it would throw a wrench into the scenario envisioned by J.D. Alt.

      In that case, they would still be useful, but their principal effect might be only to lower the borrowing costs of the government of Italy, since it could pay for present services with paper that does not pay interest, unlike current arrangements.

  17. Ned

    After sleeping on this, a few more questions:

    “Paper tax-credits are not created by Italian banks, nor are they borrowed from China—or even the EU Central Bank…”
    Aren’t Euro denominated loans to European governments all private, mostly from Swedish banks, but are covered, guaranteed or paid off by the European Central Bank with austerity and draconian payback terms to the ECU?

    What happens if the Italian government makes acceptance of tax credits mandatory for all debts public and private?

    Also, if they start paying pensions in part or wholly with them?

    What about welfare benefits?

    1. HotFlash

      Indeed, you can put the money supply on the supply side or on the demand side. Our local TorontoDollars languish for lack of demand (can’t pay any taxes with ’em, they are just sort of a discount coupon *assuming* your merchant subscribes, which very few do).

      So it would seem that the upper limit for PTC in circulation without causing inflation is the amount of taxes owed for — unh, some period of time. Am trying to puzzle out how lags and inefficiencies would shake out, no idea if they might be hoarded or what.

      I love this place!

  18. Thomas A Williams

    Great piece, thanks for sharing,

    Would this approach help Catalonia in its’ separation efforts? Seems to me, banking is the biggest hurdle they face.

  19. Oregoncharles

    “Specifically, we’ve created what is called “fiat money””

    No, you haven’t, because there is no “fiat” – which means command. Citizens are not REQUIRED to accept betas as payment. Consequently, any business that’s paying attention will try to accept no more of them than it needs to pay its taxes; it MIGHT be able to pass them to someone else, but it also might not.

    This is a lot like local, alternative currencies: businesses won’t take more of them than they can spend.

    Furthermore, the gardener has a problem: where is her other income coming from? What’s the tax rate in italy? Let’s say 20%. So gardening in the public park is one fifth of a job. You’re going to need a lot of gardeners. That might work for gardeners, but for less-pleasant or more specialized jobs? And if ALL taxes are paid in betas, as suggested, the gov’t. won’t have other income to cover the other 80% of pay.

    I have some history here. I was introduced to the basic concept 50 odd years ago, when I took economics in college – Keynesian economics, then. ( The Samuelson text, i think; by coincidence, I went to high school with his son, who is now a rather conservative columnist.) That was some years BEFORE Nixon (!) introduced modern money by taking us off the gold standard. The point then was that money depended on the government’s role as the enforcer of contracts; if they said the debt was paid, by handing over currency or the equivalent, then it was paid – the counterparty couldn’t sue for further payment. Sure enough, some years later Nixon(!) proved them right.

    And to repeat previous posts: taxes, for this purpose, are just another debt, a special case of the “fiat.”

    So beta would indeed be “Modern Money,” IF the Italian government commanded that it would settle ALL debts. And I’d bet that at that point, the ECB would confirm the theory by objecting vociferously: “Hey, that’s your own currency! That’s not allowed!”

    Granted, they may object to the Italian tax credits, as well, because they partially defeat the austerity measures.

    Incidentally, this also means that Italy is officially bankrupt and the Euro is about to hit a wall.

    1. Oregoncharles

      ” It is simply cancelled” – when received in payment of taxes.

      That makes sense where electronic “money” is concerned, or even checks, which aren’t re-used; but it’s counterfactual when it comes to currency, at least in the rare event that currency is used to pay taxes, as it certainly used to be. Currency isn’t cancelled; it’s re-spent. If we argue that currency and electronic credits are the same thing (“money”), then we have a logical problem.

      Is currency sitting at the central bank worthless? Not if someone manages to steal it.

    2. Oregoncharles

      Obviously, I wrote the above before I finished the article – but hey, I anticipated his whole point about the ECB objecting! (They might not, because it solves a problem they don’t want to face. Some things are better left unacknowledged.)

    3. discwrites

      Thank you for the comment, almost as informative as the post.

      >Incidentally, this also means that Italy is officially bankrupt and the Euro is about to hit a wall.

      I suspect you are right.

    4. False Solace

      > Citizens are not REQUIRED to accept betas as payment

      No, but they certainly ARE required to pay taxes! And if they can’t get Euros they can and will go out and get PTCs. Bear in mind many citizens, right now, cannot get Euros. They’re unemployed. Under your analysis these people must all be starving to death because they have no income. Of course that’s not the case, nor is it the case the system would be limited to only providing “20% of a job” in PTCs. Go look at the section on PTC savings accounts. Is fiat currency limited to the exact same amount of taxes the issuer levies? Nope. The excess = the money supply.

      > Incidentally, this also means that Italy is officially bankrupt

      Bankrupt means “unable to pay debts as they fall due in the usual course of business” (Merriam-Webster). Does that describe Italy? No.

      > the Euro is about to hit a wall

      I think we can safely say it already has… for everyone other than Germany.

      1. Oregoncharles

        Unemployed people pay taxes in Italy?

        Wages are a debt, which they are unable to pay.

        Greece was expendable; Italy is not. Too big, too central. I agree that it’s already hit something, but it hasn’t become unavoidably obvious.

  20. discwrites

    Are there links to other sources, blogs or newpapers covering this?

    A quick check of the Italian press did not return anything.

  21. RBHoughton

    A paper tax credit is a derivative paper. Its a Euro by another name. I cannot believe for one moment that the ECB will allow that infringement of its monopoly.

    The chap to talk with, and who might be willing to write a line for NC if asked, is Richard Werner, now enlightening us Poms at Southampton U. He is already on record with doubts about the extent of independence that the ECB enjoys (greater than the old Reichsbank, he says).

  22. Edward

    If this scheme works it will disprove the notion advanced by this blog that Greece could not introduce its own currency because of the IT burden involved.

    1. todde

      It can only be used in a dual currency system.

      So that may relieve the IT burden some.

      I don’t know enough about IT to say you’re wrong though

  23. ChrisAtRU

    Thanks for this, A lot to dissect, and I wish I knew more about the actual parts of EU/Z membership rules that pertained to this. It’s also an interesting follow-on to the articles from earlier on this year about the Italian banking crisis as a catalyst for #ItaLeave/#ItalExit.

  24. srockaz

    Wow, this was a great read. A real mind expander that guided me through the initial thought process and now leaves me wonder things down several paths. Thanks!

    One such path is, if Italy doesn’t find a way to put a sales tax on the PTC transactions, they will eventually lose a lot of revenue, thereby making it’s situation worse. Maybe this is partially offset by just printing more PTCs?

    Another thought path is, that the root cause is that Italy is overspending on it’s gov’t budget (I’m guessing social programs it doesn’t want to cut). If they don’t fix that issue, they end up with a set of choices that are all bad in different ways.

    Thanks again!

  25. Norb

    This is reminiscent of the enormous tax credits local governments give to attract businesses. It is always amusing to compare the number of jobs created to the dollar amount of tax credits given. The credit always seem to exceed the job creation, so the local economy is slowly strangled, raising the question that it would be more economical to give the money/credit directly to citizens. Either way, in the end, the current system dictates that business move along onto the next victim.

    Government and private business must work in coordination to form a larger social whole. Until there is a social consciousness engrained into the marriage of government and business, common citizens will be left with forming disjointed strategies to survive the exploitation. Strong business power leads to fascism, strong government supported by the people leads to democracy.

    The rise of corporate power has lead to the worst of all possible social structures. Unaccountable power leads to the strangling of local economies and no coherent vision for a National future. A corporate vision is one-dimensional, and continues to paint an unwarranted rosy picture of the future it can deliver.

    Taxing is the most powerful tool of social engineering. Taking that power back once lost, or not paying them is what revolutions are made from.

    These creative taxing systems are a subtile way of attacking the ideology promoting private industry above all else. At the very least, they are attempts to correct injustices hardwired into the status quo without demanding radical change directly. Governments and citizens have been held hostage to the notion that private industry should hold primacy over the citizenry. Creating a healthy local economy and livable, sustainable environment, requires that the power of government and business be harmonized to support the citizenry, not exploit it.

    It is a public choice between democracy and fascism as the form of social organization.

    1. JTFaraday

      When I was growing up, it was apparent that people could work and did work in both the private sector and for the government. What held primacy over the citizenry was not one sector or the other, but work.

  26. Graham Barnes

    Nice try Italy. Lets see if we can help.

    A missing element here is the ‘first-use’ of the newly created PTC-money. One of the arguments of the whole ‘Sovereign Currency’ movement is that banks (as creators of credit-money) are very poor proxies for the priorities of the nation (and the planet), being driven by dangled profit and insider preferencing and having risk underwritten via bailouts (or bailins in future).

    In this line of thinking, some strategic direction as to preferences for the first-use of credit-money is needed. Rather than portray this as ‘picking winners’ we should see it as facilitating strategic investment, especially where there is ‘market-failure’ in critical areas. My own view is that this line between open market (yes I know – doesn’t exist) and intervention/ strategic guidance is best drawn between the stuff of life (all the things we need like food, energy, housing) and the things we want. I trust the market wholeheartedly for everything I dont need.

    The Italian government are presumably directing PTCs into some agreed portfolio of public works. So the choice of that set of first-uses is an important signal of the values underpinning the operation. If the Italian government are indiscriminate in ‘spending’ their PTCs, perhaps its more likely to be seen as a fiat-adjunct by TPTB.

    Taking this thinking a step further, if PTCs are designed to be tradable, but only for certain types of transactions, we can achieve some multiplier-liquidity, but also make the argument with the ECB or whoever that this is not simply a fiat-workaround.

    From the comments stream, I’d say there are some smart people on this thread. Maybe you have some ideas about what an implementation might look like. Maybe it has to be digital – tokens with meta information about provenance.

    Like some other posters I have limited confidence in the relevant courts and the ECB to interpret logically. They are after all captured agents of a political libertarian project. But it would be good to give them some difficult choices. And the emerging thinking might inform other solutions outwith their influence. @GrahamJBarnes

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