The 1st curious part is that the EFSF is itself funded by the various euro country Treasury ministries. Please don't ask the obvious. There's no suitably logical answer, so just sit back and wait for the real punchline.
We now have the EFSF itself floating bonds in the private markets, which only raises further questions. For example, if the euro is indeed a fully fiat currency, not convertible upon demand into anything except the full will and backing of the issuing entity, then how, exactly is a rescue fund supposed to fund itself using a fiat currency it does not fully control? You're right to think that some things very fundamental are amiss here.
Let's compare this to the situation in the USA and, presumably, most countries issuing their own fiat currencies. In such countries, the typical process is that a Parliament or Congress appropriates funding satisfying the will of the people, and then instructs it's CB to credit it's Treasury's CB account with a fiat currency credit equal to what the people's government has appropriated.
It is after that step that the CB or Treasury in question is empowered by the people to issue some form of bond to "account" for the created currency - entirely to meet historical norms associated with double-entry accounting practices (every credit somewhere, has to have a debit somewhere else).
Who buys these bonds, and why? Typically, a range of large, publicly licensed "Primary Dealer" banks in the same country are required BY LAW to buy any & all bonds offered for sale by their country's CB/Treasury - essentially as a low yield but highly secure savings deposit. Further, the PDs are required to buy all their CB/Treasury bonds AT WHATEVER TERMS THEIR CB/Treasury SETS! The PDs can then resell those bonds to anyone wanting to safely park funds, typically other Govs with excess Fx funds, but also involving many other re-buyers. At various times in our own history, however, the US Fed has been allowed by law to simply buy and hold all the US T-bonds the country wants it to.
Let's switch back to the case of the euro and ask what their arrangement is.
Is there a EMU-wide Treasury ministry? No.
Is there a single, EMU-wide appropriations process accounting for net public initiatives? No.
Is there an obligatory relationship between appropriations - CB accounting - and issuer-bond purchases? No.
Why not? Really, you'd have to ask the boffins who half-created this half-way currency regime.
So, what, exactly, do they do when their populations want to do something with their own efforts and talents, and want to create & distribute enough fiat currency to denominate what their population wants to do? So far, nothing! The emu countries have put themselves in a position of having to ask someone else's permission to empower their own populace's activity!
You really can't make this stuff up.
So, who exactly is the issuer of the supposedly fully fiat euro? Is there one or more persons somewhere behind some curtain, responsible for this mess? More than one, apparently, and those people either are not - or are - talking to one another, and thereby orchestrating one of the most successful campaigns to strangle public initiative and enlarge a collective Output Gap in the entire history of mankind. If they want to get into either the Guinness Book of Self Destructive Records or the Darwin Awards for their efforts, they're certainly in the lead.
Given all this idiocy, by the same continent that launched the Renaissance, you may wonder if there's some clever plan behind all this brinkmanship. Hold on to your hat, there may be just that.
At a recent DC economics event, a German tv journalist informally elaborated on what he claimed was the plan - at least in the German Bundestag.
First, Chancellor Merkel and her Cabinet, he opined, fully understand what is at stake, what's needed, and what must happen. They're simply breaking the news to the full Bundestag and the volkerung in bite size steps. If that's the case, you have to wonder when they figured things out and finally started on delivering those bites. Leaving that aside, several listeners asked the German reporter what the context and plan was.
The context, supposedly, is that Merkel can't reasonably be voted out until 2013, so has plenty of political time to do as she really pleases. Before proceeding further, let me remind you not to confuse political-time with human-survival time. With that clear, you may wonder what Frau Merkel's slow-developing plan is. Who's going to appropriate for the entire emu-block, who's going to issue the currency for all, and who will legislate that designated euroT-bond buyers must buy all bonds issued (so emu countries are not dependent upon private overlords for permission to innovate, and even live)?
The German reporter's response was as follows, and keep in mind that this is so far only a planted rumor. Accordingly, however, the plan is for the ECB to remain a "fully independent" CB, not either buying member country bonds or issuing currency. Instead, the EFSF is meant - AFTER A SUITABLE LEVEL OF PANIC PUSHES EMU COUNTRIES TO THE BRINK - to be transitioned into an emu-wide official Treasury ministry, thereafter being the only agency allowed to legally issue the euro currency for all member states.
You heard that right. That's the supposed plan.
No mention yet of who will be required by law to buy any & all EFSF bonds, or who will have power to legislate the fees for holding those bonds. The plan may assume that peasant PIIG peasants will be happy to get the first crumbs, and submit to negotiating for more.
Logically, it's a plausible plan. However, logic means nothing without tempo. Hence, the obvious question is whether member countries can be pushed to a suitable leverage position that forces adoption of this plan .... before wide scale economic ruin, riots, revolt and even starvation break out.
To answer that last question, you'll have to contact Frau Merkel's office directly, and see if you get an answer within a useful time frame.
Until then, all those on the outside of the curtains are, as usual, left to fend for themselves.
Hi Roger,
ReplyDeleteThey have made overtures to China apparently at first for China to buy EFSF bonds directly with China's surplus Euro balances.
So if the Chinese agreed to buy the ESFS bonds, then the EFSF would have the Euro balances and China would hold the bonds.
Then the EFSF would take those Euro balances and buy for instance Greek govt debt and at that point the Greek Treasury would have the Euro balances (that were originally with the Chinese) and the EFSF would now hold the Greek govt bonds...
maybe they think this is better because the Chinese wont buy the greek govt bonds directly? or if the Chinese will buy them they want higher coupons?
All this is unnecessary if the ECB would just 'buy' the greek bonds themselves and set the interest rate at a low reasonable level.
Resp,
Great commentary, Roger, but:
ReplyDeleteIt is after that step that the CB or Treasury in question is empowered by the people to issue some form of bond to "account" for the created currency - entirely to meet historical norms associated with double-entry accounting practices (every credit somewhere, has to have a debit somewhere else).
No, no, no! The issuance of what is usually called a bond, interest bearing bonds, is an unnecessary policy choice, which has ABSOLUTELY NOTHING to do with double-entry accounting. One can no more escape from double entry bookkeeping than one can escape from the multiplication table. Once this unnecessary, historically rather recent thing happens, of course the accounting must uh, account for it.
True, it is done for historical reasons. When money was convertible into a commodity, it provided financial assets beyond what could instantly be converted by the state. It dates back to the formation of the Bank of England in 1694. You can make a decent case for a commodity standard back then, because England was thus able to simultaneously have the hardest money the world has ever seen, giving credence to its modern banking & the softest money the world had ever seen, which founded modern capitalism, and created the professional debtor, the capitalist.
Every credit going along with a debit is not an accounting practice or a historical norm, but a truth of logic, coming from the meaning of the near-synonyms "credit" & "debt". The Euro is itself a bond, a debt instrument, which is a credit to the holder and a debt of the issuer, exactly like a usual bond, which differs only by having a date in the future printed on it.
If they want to get into either the Guinness Book of Self Destructive Records or the Darwin Awards for their efforts, they're certainly in the lead. Spot on. Back in the Great Depression, at least the UK & the world had Keynes, who understood what was going on. The USA had its homegrown Institutionalists, whose students largely went in government and advised FDR & ran the New Deal institutions. There was 4 years under poor Hoover. But FDR immediately got things going. The world is much richer now, and can afford to be stupider - so although the remnant of the past & today's wise men & women centered on Castle Grayskull (MMT) is keeping things from getting as bad as the bottom of the GD, my bet is this one will go on for longer than 4 years before things start going as right as after 1933.
The emu countries have put themselves in a position of having to ask someone else's permission to empower their own populace's activity! Absolutely. The heart of the matter. The ECB is a mad, evil emperor that is forcing the people of the empire to NOT work. As it hides behind a curtain and worries about the debts its inferior monarchs, the individual states owe it, and their value - it prevents the people of of these states from working to pay the debts off! It demands the return of something that can only ultimately come from it - Euros, without providing them in the first place!