By Francesco Papadia and Alexander Roth. Papadia was the chair of the Selection Panel of the Hellenic Financial Stability Fund (HFSF). He was, between 1998 and 2012, Director General for Market Operations at the European Central Bank. He worked previously at the Banca d´Italia, first as Director of the International Section of the Research Department and then as deputy head of the Foreign Department. Roth is a Research Intern at Bruegel and previously worked for the European Commission, the Centre for European Economic Research, Commerzbank AG and the University of Mannheim. Originally published at Bruegel
The economic evaluation of mini-BOT very much depends on its specific characteristics. Overall it appears to be a blend of an inferior security and inferior money. More important than its specific characteristics is the message that the implementation of the mini-BOT would send about Ital-exit: inevitably, given what the League and its representatives have said and written, the mini-BOT would be seen as a first step in the exit of Italy from the euro, rekindling denomination risk attached to Italian securities.
Italians, fellow Europeans, savers and financial markets as well as the entire global community are eagerly looking at Italian political developments to try to understand the direction the country with the third largest economy in the euro area will take. Among the issues on which they are seeking more clarity, there is one that has taken different names over time: It started with the pompous and threatening denomination of parallel currency before it was more modestly renamed as the mini-BOT by Claudio Borghi Aquilini of the League. Finally, it was further downgraded to “government bonds of small cut” in the latest “contract” agreed to as a basis of the new Italian government.
As we could not find an official English translation of the program agreed to between the League (La Lega) and the Five Star Movement (Movimento 5 Stelle or M5S), we provide below our translation of its part on mini-BOT, which proposes:
“… instruments such as government bonds of small cut, even by evaluating the definition of public debt in the appropriate instances.”
Description of the Proposal (as Far as We Know)
We present here the mini-BOT proposal drawing principally from the book of Borghi Aquilini.
Mini-BOT are planned to be a type of IOU (“I owe you”) that will be issued in paper form and small denominations (€1 to €500). Borghi even presents facsimiles of the new mini-BOT mimicking the euro banknote in his book. In a first step, the government would use mini-BOTs to pay public arrears. Mini-BOT, unlike traditional BOT, would pay no interest and would have no maturity.
The government would guarantee accepting mini-BOT for future tax payments, thereby implicitly safeguarding, according to its proponents, its value. Proponents also hope that mini-BOT would be used for payments between private agents. That being said, parties other than the government would not be obliged to accept mini-BOT. It is planned, however, to accept mini-BOT as legitimate mode of payment to settle energy bills or buy train tickets or other goods and services supplied by publicly owned companies.
The crucial idea of the mini-BOT is that it would be used as means of payment. Due to their character (paper form, small denominations) it is hoped that they will be spent locally, thereby stimulate growth in the Italian economy. Thus, Borghi sees mini-BOT as a tool of fiscal expansion without relying on the euro.
However, there is also another side to the mini-BOT which is important to highlight. Borghi explicitly points out that mini-BOT are seen as a necessary step to the abandonment of the euro by Italy: “It’s true that mini-BOTs are in euro but once they will be widespread they will form a sort of ‘spare wheel’ that will make the transition to our currency much easier. [ …] the day of the passage [to the new currency] it will suffice to declare the mini-BOT the new money.”
Literature and Precedents
Economic commentary on parallel currencies is mixed
Bossone and Cattaneo (in a paper (n.d.) as well as in a 2016 VoxEU article) in addition to Amato et al. (2016) already presented concepts similar to Borghi’s mini-BOT. Specifically, Bossone and Cattaneo (n.d.) have introduced “Tax Rebate Certificate” (TRC) while Amato et al. (2016) have proposed introducing the “geuro”. These constructs share many, but not all, of the characteristics of mini-BOT.
Unlike Borghi on mini-BOT, Bossone and Cattaneo’s TRC will be circulated electronically (“provided that the payment infrastructure allows for [it]”) and TRC can be used to pay taxes with a delay of two years after their issue.
Bossone and Cattaneo summarize the nature of the TRC in one concise paragraph in their paper:
Essentially, the TRC proposal involves an inter-temporal resource transfer from the public to the private sector, through future tax rebates that can be liquidated in the market today (or at any time) at a discount. The liquidity so generated can be spent and support higher demand today. Increased spending, in turn, increases employment and output and generates the fiscal revenues needed to pay for the future tax rebates.
Bossone and Cattaneo argue that the spending stimulus by the TRC would lead to increased output and employment. Moreover, the two-year delay would be sufficient to increase tax revenues to offset future tax losses because of the TRC.
Amato et al. propose introducing a parallel electronic currency: the “geuro”. They argue that the “geuro” would have positive economic effects, similar to those claimed by the proponents of the Mini-BOT and the TRC. In the short and medium-term, the “geuro” would foster demand, growth, and employment. In the long-run, the parallel currency could transform the euro into a “common clearing currency” while the “geuro” would be used for payment between private agents. As long as the government could keep the credibility of the new currency, prices in euro or in a new currency would have no reason to differ.
Varoufakis’s “Plan B” (2017) foresaw the introduction of a parallel electronic currency set on the already existing identity card system. Any Greek person that had financial relations with the state, namely pensioners, public-sector workers, people on benefits, and government suppliers, could have used that payment system to settle financial transactions and tax payments not only between themselves and the state, but also with other private agents. The core idea was that individuals could use governmental arrears (taxes, pensions) to pay for daily goods and services independently of banks. Varoufakis claimed that this system would have would have expanded the fiscal space of the government, helped the poor and would have worked even in the situation of illiquid banks.
Financial analysts (Bertacche et al.) express a rather critical view about mini-BOT. All financial analysts mentioned in the cited article share a fear that the introduction of the mini-BOT, in their view a de facto parallel currency, would fuel concerns about Italy’s fiscal sustainability. The introduction of mini-BOT would also be regarded as a sign to start preparations to leave the euro, especially taking into account that talks of a possible exit of the euro area of a similar nature took place in Greece in 2015.
Cannata (2018) argues, contrary to Borghi and Bossone, that mini-BOT would count as debt. Regardless of its duration and financial characteristics, it would be hard not to qualify the Mini-BOT as security, and therefore, debt. At the same time, if mini-BOT were to be issued in paper form, they would fall into the “currency” category. Hence, Cannata believes that the mini-BOT is incompatible with European law if introduced in the form proposed in the papers cited above.
Past evidence is mixed
A recent Reuters article by Canepa (2018) provides an overview of past experiences of parallel currencies and state-backed IOUs which were quite mixed.
In the chaotic years of 2001-02, Argentina experimented with parallel currencies. Several Argentinian provinces as well as the federal government started to print new currencies in order to create an alternative to the official peso which was, at the time, bound to the US-Dollar and overvalued. Similarly to the planned mini-BOT, these parallel currencies were issued at a one-to-one exchange rate to the peso. Overall, the entire experiment did not work as expected as the new currencies did not devalue as hoped and therefore partially lost its purpose. Part of the reason, as pointed out by de la Torre, Yeyati, and Schmukler (2010) was that the demand for the parallel currencies was high in order to pay taxes since pesos were undersupplied. In the end, the parallel currencies were abandoned after a short amount of time.
In 2009, the State of California was in fiscal troubles and issued IOUs to pay short-term financial obligations. The IOUs paid an interest of 3.75% but the success of the IOUs was limited, as they were not generally accepted. In the end, the Californian state was able to raise revenues and cut expenses thereby meeting its fiscal obligations. The remaining IOUs were bought back by the government at par. The measure was not supposed to be permanent and it may have helped bridging over temporary difficulties.
A contiguous phenomenon to that of the nationally issued parallel currency mentioned above is often referred to as dollarization or euroisation, whereby a foreign currency – specifically the dollar or the euro – is used in parallel with the national currency. This is mostly done in cases where the national currency is affected by very high inflation. Martin Hellwig was recently quoted as referring to the case of Israel when the shekel suffered very high inflation and the dollar was used for high value transactions. On the basis of his personal experience, rather than of a specific piece of research, he assessed the Israeli experience as unsustainable.
Economic Analysis of the Proposal
As mentioned above, the characteristics of the mini-BOT are not fully clear as of yet. Their economic consequences will depend on some critical characteristics and, even more importantly, on the message they could give on the continued participation of Italy in the euro area.
The most important issues to be clarified to understand what could be the impact of mini-BOT are dealt with below.
The first point to clarify is whether the mini-BOT would be more like money or a debt security.
The main characteristics of money are the following:
- Zero nominal return,
- No convertibility at fixed price into any other asset (unlike in the gold standard), and thus no commitment of the issuer to redeem it at any point in time,
- Provision of liquidity services (medium of exchange),
- Numeraire, or unit of account (i.e. unit in which prices of all goods and services are denominated).
The main characteristics of securities are:
- Financial return (in nominal or real terms),
- Commitment of the issuer to redeem it, normally against money,
- Limited liquidity before redemption by means of exchanges in the market.
As argued below, from a technical point of view, the mini-BOT would be inferior as a security to the traditional BOT issued by the Italian state and, as money, they would be inferior to euro cash. One could indeed conclude that it is neither fish nor fowl.
While mini-BOT share with money the characteristic of having a zero financial return, they appear more like securities insofar as the other two characteristics mentioned above are concerned. In fact, the government would commit to take the mini-BOT as payment of taxes and possibly some other public goods or services. This means that there is a kind of redemption obligation, but not directly against euro, and therefore, of lower value. While the mini-BOT could have some liquidity by being exchanged in the market, the liquidity of this market is uncertain. Overall, mini-BOT are likely to be dominated by traditional securities, especially short-term ones. Unlike the mini variety, traditional BOTs provide a financial return. Their value in the market is anchored by clauses establishing early redemption in euro and they are exchanged in a reasonably liquid market. One alleged advantage of mini-BOT is their small denomination, but it is unlikely that this will offset their competitive disadvantage towards traditional BOT. It remains also to be seen which transaction costs will apply to mini-BOT and how they will compare with the very low transactions costs prevailing for traditional BOTs.
On the other hand, the mini-BOT’s ability to provide liquidity services is bound to be limited. Money’s appeal is that it can be exchanged at its nominal value against all goods and services produced in the national economy. For the euro this appeal is enhanced by the fact that it can be used all over the euro area and indeed also beyond it, given the euro’s international role. Mini-BOTs could only be exchanged at face value against future tax obligations towards the Italian state and possibly some goods and services provided by publicly owned Italian producers, which are relevant but still a tiny fraction of the overall transactions in an economy.
In case the mini-BOT could only be used to pay taxes after a certain period of time (as proposed by Bossone and Cattaneo’s TRC), mini-BOT holders would either be forced to trade them against goods and services in case of financial need (provided private parties would accept them), hold them until they could be used for tax payment, or sell them for euros (most likely at a discount). Mini-BOT would face the same dilemma other parallel currencies have faced in the past. If the mini-BOT devalued against the euro, their holders would hold them to lower their future tax burden or sell them at a discount to risk-loving traders. In the first case, the mini-BOT would be nothing else but another delayed debt repayment by the government. In the second, the mini-BOT would even shift wealth from budget-constrained tax-payers towards agents that can afford to speculate on the value of mini-BOT. If the value of the mini-BOT stayed close to the Euro, its potential economic benefits would not unfold. Local consumption might expand in the short-run as a one-time effect, but there would be no competitiveness gain as the wage level would remain unchanged. Therefore, the mini-BOT could suffer from its own success.
Overall, looking at them from a technical point of view, there seems to be no space between euro-cash and short-term securities to be filled in by the mini-BOT.
More important than the purely technical considerations would be the message that mini-BOT are just a preparation for a parallel currency and an eventual abandonment of the euro by Italy. This is unavoidable given the earlier declarations of both M5S and of the League as well as the physical similarity of mini-BOT to banknotes. In addition, it is obvious that market participants understand that Ital-exit proponents realize that they should camouflage preparations for Ital-exit in the eventually vain attempt to try and avoid anticipations by the market. A newly elected senator of the League made this point very clear in a book (Bagnai, 2016): Phase one: we will attack at dawn… The exit must, as far as possible, hit without warning, coming unexpected”. Even if not stated explicitly in the program, the link between the mini-BOT and Ital-exit is strong in the view of savers and market participants, especially given that the League has suggested Italy should abandon the euro. This leads to a preoccupation of market participants fearing that the introduction of the mini-BOT is a preparation to introduce of a parallel currency.
A second important point to clarify about the mini-BOT is whether it would be a tool to increase the government deficit or not. This is very clear in the proposal of Bossone and Cattaneo as well as in that of Amato  – even if they promise that any initial additional deficit would be repaid over time from the additional revenue deriving from the higher level of economic activity caused in turn by the initial fiscal expansion.The increase of the deficit would result from the subsidy nature of TRC allocations (but the same argument could apply to the mini-BOT), which would be distributed without any counter-payment from its receivers. If the mini-BOT would lead to an increased deficit, they should be assessed because of this effect: would it be useful for Italy to decrease and possibly change the sign of its primary surplus? Of course, the fiscal intentions of the two parties that tried to form the new government would reinforce expectations that mini-BOT would fund additional deficits.
In the interpretation of the League supporters, instead there would be no increase of government deficits because of the presence of mini-BOT. In a way, a liability of the state in the form of unpaid invoices would be substituted by another liability in the form of mini-BOT. The advantage would be, in the view of its proponents, the higher liquidity of mini-BOT with respect to non-securitized claims towards the government. But the same point made above would become relevant here: in what way would mini-BOT be superior to other short-term securities like traditional BOTs? The government could pay its unpaid invoices by issuing more BOTs, with the advantage that these would be bought by willing investors and not forced upon creditors who would rather prefer to be paid in cash.
A third important point is to foresee whether the mini-BOT would trade at par (according to the League and Amato (2016)) or at a variable discount (as concluded by Bossone and Cattaneo). The points made above – namely limited liquidity, no financial return, no redemption in euro – lead to believe that they would trade at a discount, possibly a large and variable one. Changes in the size of the discount over time will basically depend on the amount issued, the debt sustainability prospects of Italy, the credibility of the Italian government to accept the mini-BOT in the future as tax payments, and, most importantly, the risk that the mini-BOT would just be the first phase of Ital-exit.
A fourth issue of more limited impact but still important, is whether the mini-BOT would be in electronic form, as designed in the Amato (2016) and Varoufakis plans, or in paper form, as envisaged by the League. In the latter case mini-BOT would favour the irregular and criminal economy, especially if there would be no limits to their acceptance for payments, as there exists for payment in cash. In addition, the paper form would of course further reduce the “moneyness” of mini-BOT: how to compare Euro-cash, with universal and constant purchasing power, which can take physical as well as many convenient electronic forms, with mini-BOT, disposing of limited exchangeability, possibly a variable discount and no handy electronic format?
Institutional Analysis of the Proposal
If mini-BOT became a legal tender, they would be illegal under European law, as only the European Central has the right to issue and print money in the euro area. The proponents of the Mini-BOT argue that these cannot be classified as legal tenders, since mini-BOT will not be officially backed by the government as legal tender but only by future tax revenue.
If unpaid invoices are substituted by mini-BOTs there would be an increase in the deficit/debt according to financial accounts. Commercial public debt is not included into public deficit and debt as they are measured for the Maastricht criteria. The impact of the mini-BOT will depend on whether the market will give more importance to the accounting treatment, whereby the deficit and the debt will increase, or to the economic considerations, whereby one form of public debt, like commercial debt, will be substituted by another form, like the mini-BOT, with no change on the overall debt level. The same uncertainty would arise if commercial debt was paid by issuing normal securities, so there would be no difference between the two forms of funding in this respect.
Based on our analysis, the following conclusions can be drawn:
- The outcome of the few precedents of parallel currencies is mixed, however they only lasted for a short period of time,
- While so called “fiscal currencies” are sometimes put forward as a panacea, more sober assessments show their limitation and even dangers,
- The economic evaluation of mini-BOT depends on their specific characteristics, overall they appear to be a blend of an inferior security and an inferior money,
- If mini-BOT would allow increasing the budget deficit, they should be evaluated as fiscal expansions, not just as a technical change in the funding of a given deficit,
- More important than their specific characteristics would be the message that mini-BOT would send about Ital-exit. Inevitably, given what the League and its representatives have said and written, mini-BOT would be seen as a first step in the exit of Italy from the euro, reinforcing denomination risk attached to Italian securities and thus increasing their yield, even if eventually Ital-exit and its huge negative effects were avoided,
- The mini-BOT would not break any EU or Italian law if they were just a security, but would be inconsistent with the existing European legal framework if they would become a parallel currency.
 Mini is a reference to the small denomination of the proposed instruments, BOT refer to “Buoni Ordinari del Tesoro”, i.e. Italian Treasury Bills with a maturity of 3, 6 or 12 months.
 The Italian version is as follows: “… strumenti quali titoli di stato di piccolo taglio, anche valutando nelle sedi opportune la definizione stessa di debito pubblico.”
 Claudio Borghi Aquilini is Responsabile Economico della Lega Nord (Economic Speaker for Lega Nord).
 IOU are an informal acknowledgment of debt.
 The Italian original is as follows: “È vero i minibot sono in euro ma una volta capillarmente diffusi costituiranno una specie di “ruota di scorta” che renderà molto più agevole l’ eventuale passaggio alla nostra moneta. …il giorno del passaggio [alla nuova moneta] basterà dichiarare i minibot nuova moneta.” Page 26.
 “geuro” stands for Greek-euro, since Amato et al. proposed the introduction of the parallel country in Greece.
 Eurointelligence of May 25 2018.
 Characteristics 1 and 2 derive from the “fiat” nature of non-metallic money; characteristics 3 and 4 are two of the canonical functions of money, the third one being the store of value function.
 The Italian original is: “La fase uno: attaccheremo all’alba…L’uscita deve, nella misura del possibile, cogliere alla sprovvista, giungendo inaspettata”. (Page 325).
 As mentioned below, Mini-BOT would in any case increase the deficit in accounting terms, but the effects on the deficit measured according to economic criteria may be different.
 Bossone and Cattaneo (n.d.), Amato (2016)
 As pointed out by Ramey (2011), fiscal multipliers are difficult to estimate and it “is a nebulous concept that depends very much on the type of government spending, its persistence, and how it is financed.” Therefore, it remains highly unclear to which extend a fiscal stimulus can pay for itself.
See original post for references
Hitler’s minister of finance (iirc) did something similar back in the ’30s to create money were none was to be had. IIRC, he was quite successful with it, but it never appears in any textbook because ‘Hitler’.
Does anyone have an analysis handy, or can compare to these miniBOTs?
This notion that Hjalmar Schacht, Hitler’s finance minister up until a year or so before the outbreak of war, was somehow able to shift some basic rules (they’re not “laws” or scientific-standard theories but they hold true in most circumstances) of economics is widely debunked.
Hjalmar Schacht’s policies cannot be viewed in isolation only in an academic or theoretical basis for study. Like all economics, they existed in a broader societal context. In Nazi Germany this was to include forced labour, expropriation or seizure of property and businesses (Jewish especially of course, but not limited to companies owned by Jewish proprietors) and repression of workers’ organisations to achieve wage and price controls.
Not, I would argue, a society which most of us would like to live in.
The more oppressive aspects of his policies are covered in this article http://www.larouchepub.com/eiw/public/2005/eirv32n08-20050225/eirv32n08-20050225_012-hjalmar_horace_greeley_schacht_a.pdf
MMT theory is above my pay grade, so I don’t want to say that “unconventional” fiscal policy is a Bad Thing. But never, ever, forget that it is a policy and like all policies, it is played out on the people and their environment it is applied in. How the people and the environment react is subject to variations; the reaction is not something that is fixed, predictable and immutable.
MMT is not a policy. It is a description.
The description has policy implications. That is all.
True! But a theory without a corresponding policy to bring it in to being is merely some interesting words in a textbook; it doesn’t manifest itself into anyone’s reality.
eg is entirely correct.
So much misunderstanding of what MMT is.
MMT can’t be “implemented”, it is already happening in real time every time a monetary transaction occurs. Accounting cannot “not exist”. We can ignore it, but numbers ((currency units) are still flowing from account to account in a virtual world that is tied inextricably to the real one.
What can be implemented are policy choices that MMT theory tells us are possible, i.e. there are no constraints on spending other than the availability of resources for sale in the currency of issue.
Public debt is not a burden on our grandchildren.
It is nearly impossible for a monetary sovereign to default on liabilities in it’s own currency. The one exception would be voluntary default – a political decision not to satisfy said liabilities. Default can never be a consequence of limited supply.
Money (state currency) is not a scarce resource for a monetary sovereign, unlike countries in the Eurozone.
I’d respectfully disagree with Clive. My mom asked me what countries were implementing MMT. I said it was the same ones following the law of gravity.
We can accommodate gravity in our actions, or have gravity remind us who is in charge just as we can serve money or have money serve us. MMT is a description, not necessarily a set of policies, although it certainly suggests policies more graceful than those currently serving our plutocratic masters.
As for public “debt”…it’s not like household debt, it’s like bank debt. Your bank account is your asset, but the bank’s liability. Imagine a crowd of depositors going down to the bank to demand it increase its fees, or decrease the interest paid on its accounts so it would diminish its “debt” (i.e. the depositors’ accounts).
But most people don’t bank at the Bank of Crazy, even though calls to diminish National “Debt” are legion.
Good analogy. MMT is viewed as theory by many (unfortunate the word is in the name, which was unintended) when in fact there is nothing theoretical about it.
Maybe policy choices made based on MMT principles are theoretical.
What is obvious is that modern economic theory doesn’t come close to accounting for the outcomes it was “designed” to predict. An Engineer responsible for those kinds of outcomes would be quickly ruined professionally if not in prison.
Why is there nothing theoretical about it? Everything in science is a theory. Gravity is a theory. There are multiple conflicting descriptions for how it works, including Newton’s theory (highly accurate in day to day scenarios, wrong for extremely massive/dense objects or at high relative speeds) and general relativity (right in more scenarios than Newton, but still incompatible with some equally well-established theories such as quantum mechanics, so it might need more work).
‘Theory’ is not a dirty word. Theories are the building blocks of science. Having the world ‘theory’ in the title is an assertion that MMT is founded in scientific practice and can be used to (for example) make predictions that are falsifiable based on evidence or observation. Asserting that your preferred description of reality is based on absolute truth and not subject to experimental confirmation is a characteristic of religion, not science. Mainstream economists do this all the time. MMT advocates should resist the temptation to follow suit.
MMT is initially a normative choice–to focus primarily on the mechanics of State money creation rather than, for example, primarily on the mechanics of money creation in the private banking sector.
This initial choice is normative not descriptive. It embraces the concept of state money creation as primary and then goes on to describe it.
That is all.
I remember this was written about here at NC a while ago https://www.nakedcapitalism.com/2013/12/philip-pilkington-hjalmar-schacht-mefo-bills-restoration-german-economy-1933-1939.html. I found it fascinating at the time, but I don’t think it really took account of the (ahem!) “broader social context” (slave labor etc.).
Wow, well remembered Oguk.
As noted in that piece:
Yes, context is indeed everything. Most things are theoretically possible. But it all depends on the pressure which can be exerted (and I’ll side step the very vexed questions of who applies the pressure and how that pressure is applied and transmitted) to achieve to aims intended.
I agree that’s a key point, Clive. Since that time I’ve read Liaquat Ahamad’s Lords of Finance, and given the portrayal of Schacht in that book, I think Pilkington is soft on Schacht, who moved steadily to the right in the 20’s and embraced, or courted, or allowed himself to be courted by, successive rightwing parties, including the NSDAP. Enabling the war machine for the Nazis was not an innocent job.
That was indeed the article I was looking for, and Schacht’s MeFo bills as described therein.
I’d suggest reading “wages of Destruction” by Adam Tooze. IT fairly well debunks lots of 1930s/40s economic myths, including that it was Nazi’s who caused the unemployment to go down (hint, it started to go down before they took power), and a number of other things.
The main point is that German economy was severely restricted by its need for resources – say that iron ore and coal in Rurh were not that great, that there were major problems with transportation including lack of rolling stock etc. etc.
That said, it’s not a book you’d ready unless you like perusing a number of tables and similar statistics..
(also people with some knowledge about the historically possible accuracy of strategic bombing may take more than a few exception to some conclusions in the book).
Wasn’t there a strategic bombing survey held after WW2 which concluded that the target most hit was not railways or factories but open farmlands as so many bombs missed their targets? Lots of myths with the German economy.
The Allies bombed the place assuming that the Germans were so efficient that the economy would be as tight as a drum and any strategic bombing would disrupt the German war effort. Thus when they bombed the ball-bearing works at Schweinfurt they thought that it would be a game changer. Turned out that the Germans were so slack that they found a month’s worth of spares in the system to tide them over until they could rebuild the factories.
The strategic bombing was IMO pretty much waste, for a number of reasons. The failure of “precision” bombing was one, although the USAAF claimed that they could still bomb well, and didn’t believe the recon photos. Bomber Harris figured this one out, which is why he switched to terror bombing. Terror bombing undoubtedly had some impact, as it did generate refugees and caused logistical problems to the German army. But there’s a good argument to be made that the resources that went to strategic bombing would have been much better deployed to to tactical/close air support bombing (which admittedly required more pilots, so was less capital intensive while more skilled-manpower intensive), especially since Allies had pretty much uncontested air superiority over the continent from mid 1944 onwards. Destroying low-level infra via tactical/CAS bombing raids would have been at least as efficient. Less spectacular though, and here’s something we cannot ignore – the Allied population clamored for revenge, so Harris’s raids gave the people what they wanted.
Thank you, Vlade.
Also, to give the advancing Red Army something to think about in the future.
My paternal grandfather and his siblings and cousins served in the RAF in WW2. My father and godfather joined the RAF in the mid-1960s, when veterans of WW2 were still around.
On that note, it’s rare to read about or see how many RAF personnel were from outside the UK. Jamaica’s first PM, Michael Manley, served in the RAF.
French novelist and Free French Antoine de Saint-Exupery flew alongside RAF personnel, including my grandfather’s cousin. Many personnel in that squadron were francophones from the colonies.
Freeman Dyson worked as a boffin for Bomber Command & was appalled by the tactics used, an emotion likely heightened by the fact he had made good friends among the German scientific community. He & a small number of others considered demonstrating against it, but decided that as their job was to come up with methods to protect the crews & that they would likely be charged with treason anyway, that it would be a pointless gesture & do more harm than good..
He likened it to a machine that once set in motion just had to be fed, even in the case of Dresden & I think Cologne, which everybody knew fully well were not large industrial centres. For the majority his impression was that people came in, clocked on & did their job just as if they were working for any type of peacetime enterprise.
Poles were the largest foreign contingent in RAF during WW2.
Kiwis were the largest contingent per-population I believe (five times as many as Aussies :) ), and Keith Park was arguably the second most important person in Battle of Britain.
Josef Frantisek, a Czech, was the highest scoring non-British pilot in Battle of Britain (17 kills, DFM and bar as the first foreigner ever) – interestingly enough, the next three after him were a Kiwi, a Pole, and another Kiwi.
Kuttelwascher (another Czech, DFC and bar) was, IIRC the most successful RAF single-seater (meaning no radar) night fighter.
The only precise bombing in WW II was by the RAF’s 617 Squadron.
All other bombing was pattern bombing.
Operation Jericho (Squadrons 464 RAAF, 467 RNZAF and 21 RAF) was also precision bombing.
True, I has forgotten that.
Of course different bomber squadrons from different countries had varying abilities. I met a German WW2 combat vet once and we got to talking. He had served on both the Russian front as well as the Italian front and told me a saying that they had in Italy. Translated, he said: “When we Germans bombed, the Englander took cover. When the Englander bombed, we Germans took cover. But when the Americana bombed, everyone took cover!” He had a very droll sense of humour he did.
vlade:- “and here’s something we cannot ignore – the Allied population clamored for revenge, so Harris’s raids gave the people what they wanted”.
Spot-on vlade. I can still remember how our spirits were lifted by the sight of hundreds of flying fortresses filling the skies, on their way to bomb the hell out of the Germans. People cheered aloud. (I probably did too, but perhaps I can be absolved of war-guilt, having been only nine at the time). Also, don’t forget that that was the period when we were on the receiving-end of waves of V1s – “doodle-bugs” – not to mention the far more fearsome V2 ballistic missile bombardment which luckily for us came too late to kill very many people before the Allied advance put them out of action).
TBH, I’m not going to judge anyone on this – who knows how would I, or most people behave in the same situation with the same context?
Jeff IIRC, there were both the Wara and Wogl ‘experiments’ in Germany and Austria respectively prior to 1935 which (iirc) was when Hitler introduced the Reichsmark (apologies for spelling). Both were rather successful, but the latter was ruled illegal under Austria’s constitution.
FWIW – following the extensive problems raised by Yves etc here on the practicalities of Greece leaving the Euro, an advantage of introducing this parallele currency could be that it will spur some ‘organic’ approaches to dealing with the many issues they’ve raised.
The best analysis on the so-called MEFO bills of Schacht was presented in NC, actually:
IIRC from Tooze’s “Wages of Destruction: The Making and Breaking of the Nazi Economy”, one of Schacht’s techniques was to purchase German sovereign debt (which was trading significantly below par) from foreign creditors using the limited foreign reserves available to the German government and then recycle this into a larger amount of foreign reserves, which were desperately needed by German importers of materials that were not produced domestically). I don’t recall how the last step occurred; perhaps the repurchased bonds were traded domestically.
It is vaguely reminiscent of DJT’s 2016 remark that calling the credit-worthiness of the USG into question could be used to crash the price of Treasury debt, which would allow it to be repurchased by the USG at a discount.
Going by the description in the article, it sure sounds like money. As far as I am concerned, if you can pay taxes with it, it is money. The real test will be if people can put it to general use but if they can, it would provide a lot of resiliency into daily transactions. Stranger things have happened.
When the bank in Ireland closed in 1970, the Irish got by through writing cheques to each other which formed a defacto currency – and it worked. Also, the Wörgl experiment from back in the depression years of the early 1930s is not to be lightly dismissed as it was working until the central government shut it down.
In fact, with currencies of different countries announcing that they intend to eliminate higher value notes and inflation slowly nibbling away the value of small denomination currency, perhaps there is a call for a parallel currency that would be specific to each country to provide a bit of lubrication to local economies. At the very least it is worth trying.
Mini-Bot is a security/debt? So are all fiat notes … physical or digital. The Italians need to choose the best alternative available, and take it. And modify in mid-course thru feedback. You can’t let the unavailable “perfect” prevent the available “good enough”. The fact that the government will accept it for taxes makes it a currency, not private script. I don’t see how this will devalue Euro denominated Italian bonds.
Like Minsky said, anyone can issue an IOU, the practical difficulty is getting it accepted. This holds whether it is a fiat currency (Liability of the central bank that issues it) or, dunno, Abbot and Costello’s bot-currency. Why?
Well it gets back to the whole ‘store of value’ thing that somehow gets separated from the whole ‘means of payment’ thing.
MMT has nothing to do with it.
Money is a quantitative measurement of what one has “earned”, among other things, “store of value” not being one of them.
Money has no intrinsic value.
But but but America…we have tax credit brokers and an active market for sale of what for all practical purposes is mini-bots…
They sell regularly at 75 to 95% of par…
what we have here and what we had in varoufakis was a problem with slapping on the bernaze sauce and lipstick to sell that Cuban pulled pork and beans with yellow rice and plantains special…
The three most important things in real estate, in marketing, in securities, in fnance and probably life is…
One does not have to like reality to accept it as fact…
Italy, like all euro nations, voluntarily surrendered the single most valuable asset any nation can have: Its Monetary Sovereignty (https://mythfighter.com/2018/04/30/the-really-really-really-simple-arguments-for-monetary-sovereignty/).
Rather than allowing its elected officials to control its money supply, it gave that power to the unelected bankers of the EU.
Back in 2005, in a talk at the University of Missouri, Kansas City, I said: “Because of the Euro, no euro nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the euro.” (See: https://mythfighter.com/2010/05/12/the-meteorology-of-economics-speech-at-umkc/)
Until the euro nations return to Monetary Sovereignty, they always will be at the mercy of the EU bankers, who care nothing for the member nations, but are interested only in their own profits.
I agree. And thanks to the comparison of the miniBOT and Varoufakis’ previous parallel currency design I finally understand what Varoufakis was saying – in effect his plastic sovereign money did not depend on nor interfere with the EU/euro. Whereas Italy’s miniBOT is denominated in euro. It could be an attempt by Italy to test the waters without freaking out the EU. It could be an attempt by Italy to tap into small transactions that are under the table now. It could be both. But basically the miniBOT is a counterfeit currency.
Me thinks (apologies if this has been pointed out; I have not read the comment thread) that if the Italian Central Bank were permitted to (and committed to) support the price of mini-BOTs during the two-year “lockout” period in which they could not be used to pay taxes, then they could preserve near-parity with the Euro and function as a price-stable medium of exchange.
In practice (my speculation is that) holders of mini-BOTs would rush to convert them to euros, courtesy of the Bank of Italy, and BoI would end up holding them until the two-year window opened, at which time it could sell them, perhaps at a modest discount to incentivize sales, to entities with tax obligations. BoI might need to insist on a “haircut” in its purchases to cover its “cost of funds” (from the ECB, I assume). If it could absorb these costs, perhaps it could force parity with the Euro.
If this actually works, it would be a method for debt-funded fiscal stimulus in which the effective long-term interest rate on the new debt (2-year maturity) issued to fund the stimulus could be driven down to the Bank of Italy’s overnight cost of funds, which I think is still near zero.
To me this has the “feel” of an MMT-like idea. From what I have read in Randall Wray’s “MMT Primer”, some MMT theorists think that the Central Bank should directly monetize new Fiscal Authority debt at (or at near) zero interest rate. Perhaps this is way of doing that.
There would be no need for the BoI to sell its inventory of mini-BOTs back into the private sector for use in payment of taxes; private entities with Euros in hand and tax obligations would simply pay Euros. BoI could simply swap its mini-BOTs for Euros with the Fiscal Authority, cover its borrowings from the ECB, and the Fiscal Authority would issue new mini-BOTs to cover the loss of Euros to the BoI. Rinse and repeat.
Please correct my thinking.
Wouldn’t it mean busting the Euro area supposed limit of government deficit of 3%? Or does BOI borrowing not count towards that?
IMHO the problem is that everyone will try to pay all taxes with “mini-BOTs”, because such mini-BOTs are basically bad money relative to the euro, so government’s tax receipts will fall a lot.
The question is: who will be stuck with “mini-BOTs”? Pensioners? Government workers?
If the government pays mini-BOTs to a small number of people it’s not a big problem, but if e.g. the governments pays all government workers with mini-BOTs and the mini-BOT devalues by 50% relative to the euro, those people will suffer a fall of 50% on their not necessariously very high wages.
So this looks very dangerous, and might blow back very hard if the government is forced to print a lot of mini-BOTs and starts to pay people who have not other income with it.
Doesn’t the Italian gov’t have ways of preventing this? Can’t it establish circuits of exchange in which the value of the MBot relative to the euro is guaranteed, which is to say enforced?
They say that they won’t force private to accept mini-BOTs as a mean of payment.
So I have a mini-BOT of 50€, but then I go to the supermarket and the supermarket says:
– Thanks, but no, thanks, we only accept actual euroes.
So I have to sell the 50€ mini-BOT to someone, who will buy it at a discount (let’s say 40€). So I lost 20% of value, whe guy who bought it will presumably use it to pay taxes (as the government says that it accepts mini-BOTs at face value as taxes payments) so he in pratice has a discount in taxes, and the goverment emits a ton of mini-BOTs, but then the nex year it gets exactly 0 euroes as revenue, as all the mini-BOTs go back to the government.
So the government either goes deeper in debt in euroes or has to pay public workers, retirees etc with mini-BOTs.
This might be very dangerous, and at this point the government would be forced to impose the mini-BOTs as legal tender, thus replacing the euro.
But while the italian government can impose mini-BOTs on the italian territory, it can’t force foreign entities (such as the ECB) to accept mini-BOTs as payment, if it can’t pay in euroes it will be judged insolvent and bankrupt.
For clarity, I allways tought that the EU had to print, by wich I meant straightforward monetisation, and these mini-BOTs are really similar to it, so I’m not totally against it – but it’s a very dangerous move, the government has to calculate very well what it does.
Since the final purpose of this is to pay for a tax cut for the rich, I must say that the danger totally exceeds the “advantages” of the move, IMO.
Interesting development. As MisterMr said above, seems to me there are some potentially significant considerations associated with how and to whom mini-BOTs would be distributed and placed into circulation.
Setting that concern aside, any policies that can be implemented by the new Italian government that would mitigate the deeply damaging effects on Italian industry, banks and society of externally imposed austerity would be beneficial. Difficult for me to see how the issuance by the Italian government of these short-term zero coupon Italian government securities would be construed as an alternative currency under Maastricht, since their mandated use would be limited to payment of Italian taxes and for Italian public services, not for settlement of private debts except as agreed to or by private parties.
Mini-BOTs might mean a reasonable though temporary and partial mitigation to the current Italian problem only if Italy keeps such mini-BOTs cash, hard cash, and only physical CASH (paper bills) with NO repeat NO attempt to make such mini-BOT cash ATM-viable because the latter would require months, if not years (skeptics please ask Yves…)
As such, them strict-cash mini-BOTS might mean gaining some of the all-essential TIME required by abrupt changes in monetary policies. The Euro is not yet dead, but it is certainly sick and should be cured fast enough to avoid death.
BTW, one fail-safe possibility to solve the whole Euro shebang conundrum is for GERMANY to drop out of the Euro and leave everyone else with a flexible currency under different rules. Let´s call it the NEW EURO age (without Germany)
Listen to Warren Mosler, he’s got it down pat.
The spirit of Hitler is alive and thriving in Germany. How despicable and vile.
The statement by Günther Oettinger, one of the most senior members of the European Commission, that “markets will teach Italians how to vote” is not a reassuring one. Likewise, German Chancellor Angela Merkel’s comparison between Italy and Greece is an unveiled threat: Italians had better toe the line, or they will not be spared what the Greeks have been going through.
In Hitler’s time, Italy was a fascist power before Germany was, and they teamed up to conquer Greece, which was also a fascist dictatorship at the time.
I don’t think your analogy makes sense.