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Why would the Gruro ever become worthless. Whenever the Greek banks re-open Greece will once again have a floating sovereign currency (assuming they dont introduce a peg), that will be the only way for Greek citizens to pay their taxes. Nothing really changes on tuesday\wednesday domestically, commercial bank IOUs can still be converted 1 to 1 for Greek CB IOUs either through cash withdrawals or settlement payments. The only place on Earth that Greek CB IOUs (Gruros) can come from will be Greece itself and so the Greek Govt will once again become self funding. I dont see the downside here, sure the Gruro will be volatile on the FX markets for a while but Greece will finally have its sovereignty back, what am I missing here?
The Eurozone (and increasingly that means Germany, only) must continue to export to remain solvent. As the periphery goes, exporters will have to continue cutting prices and that means a lower euro. Not worthless--okay, that was some hyperbole on my part--but significantly lower.
No need to re-denominate everything in drachma. Greek CB issued IOUs will still be called "Euros" when the banks and they will work exactly like every other floating sovereign fiat currency. There will be greek "euros" or Gruros and greater Euros, just like there are Canadian dollars and US dollars. The only thing that will change is that Gruros will no longer trade at par with the greater Euro. They'll float and find their level within and few months and in exchange Greece will once again be free of all nominal restrictions on the number of Greek IOUs it issues meaning they can finally spend their way out of their depression.
Yes, Greece needs to reform its economy, but its alot easy to reform the economy with 5% growth than with month after month of GDP contraction and deflation.
I suppose they could call it 'Greek euro' instead of 'drachma', but either way it would be a new currency, and it would plummet in value. Switching over to a new currency would also take some time, so for example there would be a period in which people wouldn't be able to withdraw cash from banks. There might be a banking system collapse.
The point is that the plan that the troika — read the creditors they represent — has demanded results in permanent depression in Greece and failed state. Any interim pain is better than that if a recovery can reasonably be foreseen — which it can, as Bill Mitchell has pointed out.
Its my understanding that the Bank of Greece was responsible for printing its own cash notes and coins within the ECB system, as all national CBs were responsible for doing.
If this is the case, then there is no problem with the Greece CB printing enough cash to settle withdrawal demands until things settle down. Which means there will be no banking system collapse.
Of course, if Greece must order new paper notes from brussels or wherever they are literally printed, then that would be a big problem. But like I said, I thought that each nation's CB was responsible for its own physical IOUs.
The national central banks are not permitted to create euros as they please as far as I'm aware. If the Greek CB started creating money it called 'euros' and printing off euro notes, despite no longer being in the euro system, I think that could cause even more problems.
Even before this moment the Greek CB was responsible for the INTRA-greek settlement system. And greek CB IOUs were and are denominated in Euro, none of that changes when the banks reopen. Banks in Greece will still settle payments with each other on the Greek CB's balance sheet just like they did last week, the Greek CB will still be responsible for providing banks in greece with the physical cash and coin needed to service customer withdrawals just like they did last week.
The only thing that will be different is that Greek CB Ious will no longer clear at par with all other Euro national CB members' IOUs via the ECB's Target 2 payments system. That peg is gone per the Troika's insistence, so now Greek CB IOUs (Gruros) will float on the FX markets. So what? A floating sovereign currency is the best policy option, and now Greece has theirs back. This is something to celebrate and whether or not Greek CB IOUs are called "gruros" or drachmas is irrelevant to the accounting and mechanics as MMT describes.
"The national central banks are not permitted to create euros as they please as far as I'm aware."
Thats right, the individual nations gave up that right when they signed those treaties, but once Greece is no longer bound by that part of those treaties because the troika has kicked them out, the Greek Legislature will once again be the only authority that can dictate policy to the Bank of Greece. And the only constraints on Greek CB IOUs will be self-imposed constraints, inflation, and FX movements...MMT 101
There might not be "the new currency" Philippe. Tsipras has asked his people yes or no. Yes means austerity. No means what? People are scared and Syriza government has not explained properly what the options are. Varoufakis and Tsipras have said that they don't want to Grexit. With all this it is pretty clear that Tsipras wants a yes in the referendum and people are probably going to say yes. Tsipras just wants to kick the can. They want to do what they have been doing so far:endless negotiations, eurogroup after eurogoup and they present each of those as a victory to their own people. So far they have created an image of themselves as anti austerity and as they are on the same side with ordinary Greeks. I think that is not going to last forever. On both side of political spectrum there are unrealistic dreamers. Groupthink and denial on a grand scale. In europe it is almost impossible to have a political conversation with the mainstream if you are against euro. Then you are considered conservative, nationalistic, you are against the great dream. One time this leftist even told me that I have gone mad because I have enjoyed this great life that euro has brought us. If I say mass forced emigration caused by economic policy then this is all they just prefer to dream away.
Although Prime Minister Alexis Tsipras urged Greeks to not approve the creditor’s bailout agreement terms, the first polls in Greece find that most Greeks favor the deal even if it includes a new memorandum.
In a poll conducted by Alco for the Greek newspaper ‘Proto Thema’, 57% of the participants said they would vote yes in the upcoming referendum, favoring a deal.
Another poll conducted by Kapa Research for ‘To Vima’ found that 47% of the population will vote yes approving the agreement, while 33% will vote ‘NO.’......
they probably want to avoid being blamed. If they were to accept the conditions of the deal, they would have surrendered and reneged on their promises. If on the other hand they refuse, that could trigger a crisis which they would be blamed for.
I agree on that one Philippe. You can't blame them of austerity after the referendum because it was the will of Greek people. It is so crazy really. The people were unhappy with previous government because of austerity. Now it seems like they are voting for it themselves.
Syriza and the Greek people seem to still want a deal that lightens austerity and gives them space to pay off the debt over time while staying in the EZ. The complaint is that the deal doesn't allow them to actually pay off the debt and get out of depression, i.e., the eurocrats plan is not workable. They just want a workable plan and the eurocrats are refusing to give to them while Syriza is in power. So it is an impasse. Syriza seems to be betting that if they show resolve the eurocrats will cave and cut them a workable deal. If I were Syriza I would be looking at the markets beginning to tank and thinking that time is running against the eurocrats and in their favor.
Yannis Varoufakis (2012), comparing a posible Grexit to the Argentinian default and peso devaluation:
"...we must not forget that the ongoing crises has led Greek savers to withdraw oodles of their savings from Greek banks and either shift them offshore (London, Geneva, Frankfurt) or stuff them in their mattresses, or hide them in their freezers (in ‘bricks’ of 500 notes). This means that, by the time we come to an exit from the euro, the stock of savings will be in euros and the flow of incomes and pensions (once the banks re-open) will be in drachmas [or new "Greek euros" in Auburn's scenario]. So, unlike in Argentina, a Greek euro-exit will drive a wedge between stocks and flows, savings and incomes; with the former revaluing massively relative to the latter. Moreover, the very availability of such large quantities of ‘hard’ currency savings, in the hands of the average Dimitri and Kiki on the street, will ensure that the decline in the value of the new drachma will be precipitous (something that did not happen in Argentina since most savings were in pesos also).
In short, even if we neglect the devastation caused by the delay in the introduction of the new currency (something Argentina did not have to worry about), the new currency will be debased ever so quickly due to this bifurcation, leading to hyperinflation and the loss of most of the competitive gains we might have hoped for from the devaluation."
"Greece is dependent on imports of essential goods. A new drachma would plummet."
How does it plummet in value? Do you have a huge stock of Drachma to sell on the foreign exchange that you're not talking about?
Can you not see a huge number of people with Euros that are suddenly going to have to start paying taxes and debts in Drachma?
Something that is scarce goes *up* in value.
The external sector is competitive and those exporters with supportive central banking systems will assist those exporters in picking up the contracts in Greece.
What causes currencies to go down is central banks and banking systems not understanding how money works, and poor contract management by the government of that nation.
In other words believing the sort of nonsense that you've just posted here.
The correct policy is to limit the banks so that they are unable to create loans for anything other than real capital development projects. Specifically you make loans to fund financial activities unenforceable and you withdraw banking licences from anybody who undertakes such an activity.
That means you can't settle FX by creating liquidity. You have to obtain liquidity from real projects.
"Moreover, the very availability of such large quantities of ‘hard’ currency savings, in the hands of the average Dimitri and Kiki on the street, will ensure that the decline in the value of the new drachma will be precipitous"
Which shows that even Varoufakis believe the nonsense.
You'll note that he states a belief, and doesn't describe the mechanism.
If your currency zone has shrunk, then you expand it by imposing taxation in Drachma on the people that currently hold Euros and are in your legal jurisdiction.
A very large Drachma VAT rate, and a very large income tax in Drachma coupled with sufficient government spending to offset that drain is what you need to get the real economy moving.
If nobody saves in Drachma then you just run a balanced budget. It doesn't matter if people save in Euros or even if half the economy is operating in Euros. What matters is kick starting the real circulation using the spare capacity. As activity increases, the pain of holding Euros will increase and the risk of holding Drachma will decrease
Seriously where do people get these ideas from. Unless you provide a way for people to get excess Drachma, in aggregate they can't sell them for Euros. There is no way to settle the exchange.
Of all the markets FX is the simplest supply and demand model. Why do economists always get it so wrong?
28 comments:
Mike-
Why would the Gruro ever become worthless. Whenever the Greek banks re-open Greece will once again have a floating sovereign currency (assuming they dont introduce a peg), that will be the only way for Greek citizens to pay their taxes. Nothing really changes on tuesday\wednesday domestically, commercial bank IOUs can still be converted 1 to 1 for Greek CB IOUs either through cash withdrawals or settlement payments. The only place on Earth that Greek CB IOUs (Gruros) can come from will be Greece itself and so the Greek Govt will once again become self funding. I dont see the downside here, sure the Gruro will be volatile on the FX markets for a while but Greece will finally have its sovereignty back, what am I missing here?
The Eurozone (and increasingly that means Germany, only) must continue to export to remain solvent. As the periphery goes, exporters will have to continue cutting prices and that means a lower euro. Not worthless--okay, that was some hyperbole on my part--but significantly lower.
Greece is dependent on imports of essential goods. A new drachma would plummet.
Plus it will take some time to convert the system over to a new drachma.
Philippe-
No need to re-denominate everything in drachma. Greek CB issued IOUs will still be called "Euros" when the banks and they will work exactly like every other floating sovereign fiat currency. There will be greek "euros" or Gruros and greater Euros, just like there are Canadian dollars and US dollars. The only thing that will change is that Gruros will no longer trade at par with the greater Euro. They'll float and find their level within and few months and in exchange Greece will once again be free of all nominal restrictions on the number of Greek IOUs it issues meaning they can finally spend their way out of their depression.
Yes, Greece needs to reform its economy, but its alot easy to reform the economy with 5% growth than with month after month of GDP contraction and deflation.
I suppose they could call it 'Greek euro' instead of 'drachma', but either way it would be a new currency, and it would plummet in value. Switching over to a new currency would also take some time, so for example there would be a period in which people wouldn't be able to withdraw cash from banks. There might be a banking system collapse.
The point is that the plan that the troika — read the creditors they represent — has demanded results in permanent depression in Greece and failed state. Any interim pain is better than that if a recovery can reasonably be foreseen — which it can, as Bill Mitchell has pointed out.
Philippe-
Its my understanding that the Bank of Greece was responsible for printing its own cash notes and coins within the ECB system, as all national CBs were responsible for doing.
If this is the case, then there is no problem with the Greece CB printing enough cash to settle withdrawal demands until things settle down. Which means there will be no banking system collapse.
Of course, if Greece must order new paper notes from brussels or wherever they are literally printed, then that would be a big problem. But like I said, I thought that each nation's CB was responsible for its own physical IOUs.
Phillipe-
Yep, each national CB prints its own physical paper and coins.
http://www.new-euro-banknotes.eu/Euro-Banknotes/PRODUCTION
So there is no reason for a banking system collapse or a shortage of paper.
The national central banks are not permitted to create euros as they please as far as I'm aware. If the Greek CB started creating money it called 'euros' and printing off euro notes, despite no longer being in the euro system, I think that could cause even more problems.
Even before this moment the Greek CB was responsible for the INTRA-greek settlement system. And greek CB IOUs were and are denominated in Euro, none of that changes when the banks reopen. Banks in Greece will still settle payments with each other on the Greek CB's balance sheet just like they did last week, the Greek CB will still be responsible for providing banks in greece with the physical cash and coin needed to service customer withdrawals just like they did last week.
The only thing that will be different is that Greek CB Ious will no longer clear at par with all other Euro national CB members' IOUs via the ECB's Target 2 payments system. That peg is gone per the Troika's insistence, so now Greek CB IOUs (Gruros) will float on the FX markets. So what? A floating sovereign currency is the best policy option, and now Greece has theirs back. This is something to celebrate and whether or not Greek CB IOUs are called "gruros" or drachmas is irrelevant to the accounting and mechanics as MMT describes.
"The national central banks are not permitted to create euros as they please as far as I'm aware."
Thats right, the individual nations gave up that right when they signed those treaties, but once Greece is no longer bound by that part of those treaties because the troika has kicked them out, the Greek Legislature will once again be the only authority that can dictate policy to the Bank of Greece. And the only constraints on Greek CB IOUs will be self-imposed constraints, inflation, and FX movements...MMT 101
The Greek banks are staying shut for a week ?
Greece crisis deepens as banks close for a week after weekend that shook euro
This cannot be good, can it ?
Auburn, either way the new currency is likely to plummet relative to foreign currencies, causing inflation via imports which Greece depends on.
There might not be "the new currency" Philippe. Tsipras has asked his people yes or no. Yes means austerity. No means what? People are scared and Syriza government has not explained properly what the options are. Varoufakis and Tsipras have said that they don't want to Grexit. With all this it is pretty clear that Tsipras wants a yes in the referendum and people are probably going to say yes. Tsipras just wants to kick the can. They want to do what they have been doing so far:endless negotiations, eurogroup after eurogoup and they present each of those as a victory to their own people. So far they have created an image of themselves as anti austerity and as they are on the same side with ordinary Greeks. I think that is not going to last forever. On both side of political spectrum there are unrealistic dreamers. Groupthink and denial on a grand scale. In europe it is almost impossible to have a political conversation with the mainstream if you are against euro. Then you are considered conservative, nationalistic, you are against the great dream. One time this leftist even told me that I have gone mad because I have enjoyed this great life that euro has brought us. If I say mass forced emigration caused by economic policy then this is all they just prefer to dream away.
"it is pretty clear that Tsipras wants a yes in the referendum"
No, his position is that they should vote no.
Is it? can you provide me with the link? Has he also explained what is his plan in case of no? I am glad to hear that Philippe.
'Greek PM Tsipras issues defiant call to reject bailout in referendum'
http://www.reuters.com/article/2015
IMO that is his talk only, they should explain that they have a future without euro
http://greece.greekreporter.com/2015/06/28/greece-referendum-polls-greeks-favor-agreement-yes/
Although Prime Minister Alexis Tsipras urged Greeks to not approve the creditor’s bailout agreement terms, the first polls in Greece find that most Greeks favor the deal even if it includes a new memorandum.
In a poll conducted by Alco for the Greek newspaper ‘Proto Thema’, 57% of the participants said they would vote yes in the upcoming referendum, favoring a deal.
Another poll conducted by Kapa Research for ‘To Vima’ found that 47% of the population will vote yes approving the agreement, while 33% will vote ‘NO.’......
I am no political scientist, but, I believe it is unheard of where a referendum is called when the ruling party isn't comfortable with the outcome?
In other words, they are all but certain that the outcome will be in their favour.
they probably want to avoid being blamed. If they were to accept the conditions of the deal, they would have surrendered and reneged on their promises. If on the other hand they refuse, that could trigger a crisis which they would be blamed for.
I agree on that one Philippe. You can't blame them of austerity after the referendum because it was the will of Greek people. It is so crazy really. The people were unhappy with previous government because of austerity. Now it seems like they are voting for it themselves.
Syriza and the Greek people seem to still want a deal that lightens austerity and gives them space to pay off the debt over time while staying in the EZ. The complaint is that the deal doesn't allow them to actually pay off the debt and get out of depression, i.e., the eurocrats plan is not workable. They just want a workable plan and the eurocrats are refusing to give to them while Syriza is in power. So it is an impasse. Syriza seems to be betting that if they show resolve the eurocrats will cave and cut them a workable deal. If I were Syriza I would be looking at the markets beginning to tank and thinking that time is running against the eurocrats and in their favor.
"workable deal" means austerity, there is no way they are going to be able to pay off that debt, eurocrats are dreamers sure but so is Syriza
Seems like none of the parties have faced up to reality, unless some are bluffing.
Yannis Varoufakis (2012), comparing a posible Grexit to the Argentinian default and peso devaluation:
"...we must not forget that the ongoing crises has led Greek savers to withdraw oodles of their savings from Greek banks and either shift them offshore (London, Geneva, Frankfurt) or stuff them in their mattresses, or hide them in their freezers (in ‘bricks’ of 500 notes). This means that, by the time we come to an exit from the euro, the stock of savings will be in euros and the flow of incomes and pensions (once the banks re-open) will be in drachmas [or new "Greek euros" in Auburn's scenario]. So, unlike in Argentina, a Greek euro-exit will drive a wedge between stocks and flows, savings and incomes; with the former revaluing massively relative to the latter. Moreover, the very availability of such large quantities of ‘hard’ currency savings, in the hands of the average Dimitri and Kiki on the street, will ensure that the decline in the value of the new drachma will be precipitous (something that did not happen in Argentina since most savings were in pesos also).
In short, even if we neglect the devastation caused by the delay in the introduction of the new currency (something Argentina did not have to worry about), the new currency will be debased ever so quickly due to this bifurcation, leading to hyperinflation and the loss of most of the competitive gains we might have hoped for from the devaluation."
http://yanisvaroufakis.eu/2012/05/16/weisbrot-and-krugman-are-wrong-greece-cannot-pull-off-an-argentina/
"Greece is dependent on imports of essential goods. A new drachma would plummet."
How does it plummet in value? Do you have a huge stock of Drachma to sell on the foreign exchange that you're not talking about?
Can you not see a huge number of people with Euros that are suddenly going to have to start paying taxes and debts in Drachma?
Something that is scarce goes *up* in value.
The external sector is competitive and those exporters with supportive central banking systems will assist those exporters in picking up the contracts in Greece.
What causes currencies to go down is central banks and banking systems not understanding how money works, and poor contract management by the government of that nation.
In other words believing the sort of nonsense that you've just posted here.
The correct policy is to limit the banks so that they are unable to create loans for anything other than real capital development projects. Specifically you make loans to fund financial activities unenforceable and you withdraw banking licences from anybody who undertakes such an activity.
That means you can't settle FX by creating liquidity. You have to obtain liquidity from real projects.
"Moreover, the very availability of such large quantities of ‘hard’ currency savings, in the hands of the average Dimitri and Kiki on the street, will ensure that the decline in the value of the new drachma will be precipitous"
Which shows that even Varoufakis believe the nonsense.
You'll note that he states a belief, and doesn't describe the mechanism.
If your currency zone has shrunk, then you expand it by imposing taxation in Drachma on the people that currently hold Euros and are in your legal jurisdiction.
A very large Drachma VAT rate, and a very large income tax in Drachma coupled with sufficient government spending to offset that drain is what you need to get the real economy moving.
If nobody saves in Drachma then you just run a balanced budget. It doesn't matter if people save in Euros or even if half the economy is operating in Euros. What matters is kick starting the real circulation using the spare capacity. As activity increases, the pain of holding Euros will increase and the risk of holding Drachma will decrease
Seriously where do people get these ideas from. Unless you provide a way for people to get excess Drachma, in aggregate they can't sell them for Euros. There is no way to settle the exchange.
Of all the markets FX is the simplest supply and demand model. Why do economists always get it so wrong?
Because they don't get supply and demand (even if they are always talking about something they don't understand).
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