Ambrose Evans-Pritchard — Greece draws up drachma plans, prepares to miss IMF payment

Greece is drawing up drastic plans to nationalise the country's banking system and introduce a parallel currency to pay bills unless the eurozone takes steps to defuse the simmering crisis and soften its demands.

Sources close to the ruling Syriza party said the government is determined to keep public services running and pay pensions as funds run critically low. It may be forced to take the unprecedented step of missing a payment to the International Monetary Fund next week.
Greece no longer has enough money to pay the IMF €458m on April 9 and also to cover payments for salaries and social security on April 14, unless the eurozone agrees to disburse the next tranche of its interim bail-out deal in time.
“We are a Left-wing government. If we have to choose between a default to the IMF or a default to our own people, it is a no-brainer,” said a senior official.
“We may have to go into a silent arrears process with the IMF. This will cause a furore in the markets and means that the clock will start to tick much faster,” the source told The Telegraph.
Syriza’s radical-Left government would prefer to confine its dispute to EU creditors but the first payments to come due are owed to the IMF. While the party does not wish to trigger a formal IMF default, it increasingly views a slide into pre-default arrears as a necessary escalation in its showdown with Brussels and Frankfurt.....

Syriza sources say are they fully aware that a tough line with creditors risks setting off an unstoppable chain-reaction. They insist that they are willing to contemplate the worst rather than abandon their electoral pledges to the Greek people. An emergency fall-back plan is already in the works.

“We will shut down the banks and nationalise them, and then issue IOUs if we have to, and we all know what this means. What we will not do is become a protectorate of the EU,” said one source. It is well understood in Athens such action is tantamount to a return to the drachma, even though Syriza would rather reach an amicable accord within EMU....

“They want us to impose capital controls and cause a credit crunch, until the government becomes so unpopular that it falls," said one official.

"They want make an example of us, and demonstrate that no government in the eurozone has a right to have mind of its own. They don’t believe that we will walk away, or that the Greek people will back us, and they are wrong on both counts,” he said....

Hardball.

The Telegraph

Greece draws up drachma plans, prepares to miss IMF payment

Ambrose Evans-Pritchard

Jesse — The Great Fallacy at the Heart of Modern Monetary Theory

But here is the matter of disputation, emphasis in caps theirs, in italics mine. "The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency because it is the ISSUER of the currency, not simply the USER."

Do you see what is missing here, and more importantly, what is implied?

What is missing is the acknowledgement that the users of a currency, call them 'the market,' can and will and have quite often throughout history questioned the valuation of a currency, and often to the point of practical worthlessness, if certain actions are taken by the sovereign in creating their currency.
This speaks to a principle that I spelled out some time ago, that the practical limit on a sovereign government in printing money is the willingness of the market toaccept it at a certain value. And this applies to any sovereign, more readily perhaps if they are smaller and weaker, but always given time nonetheless.

If Russia, for example, were to merely start printing more rubles and set a target valuation for them, they could enforce this internally. And in fact, many sovereigns have done so throughout history. I remember visiting Moscow shortly after the fall of the Soviet Union, and marveling at the disconnect between the official stated valuations and the actions of the ordinary people in seeking alternatives like the US Dollar, gold, diamonds, and even Western style toilet paper, a more useful sort of paper than the ruble…

Jesse mistakes insolvency for currency depreciation. They are not the same. Conflating them is a common error. Insolvency can result in currency depreciaton as savers shun the currency, but insolvency is not the only cause of depreciation. Instability is also a chief cause. This might be political instability, inflation, or falling fx rate as foreigners  reduce saving desire in the currency. for whatever reason.

A currency sovereign is not constrained operationally by insolvency although a currency sovereign may chose voluntarily to default, as Russia did in 1998. But this is a political choice, just as would defaulting on the US public debt owing to the voluntary political imposition of a debt ceiling.

Currency depreciation can occur for many reasons, some that are potentially under the government's control or ability to influence, and some not, such as capital destruction in wartime that reduces the potential of the economy, or the changing condition of the world economy that has led to the depreciation of the currencies of countries lacking broad and deep economies that are significantlly dependent on oil exports.

Insolvency is defined as the inability to meet financial obligations as they come due. The government of a nation that is sovereign in its currency and does not borrow in a a currency that it does not control cannot become insolvency. Balance of payments issues may arise but they affect domestic firms and the government itself unless it is liable for the debts of domestic firms. Clearly, a country that issues it own currency and floats the exchange rate cannot become insolvent in this sense, although the fx rate can plunge or inflation can ensue from imprudent policy thereby debasing the currency to the degree that there is currency flight. This, however, is not insolvency.

MMT economists claim that insolvency is not an operational constraint on a currency sovereign but both the foreign exchange rate and domestic price level are operational constraints that governments must take into consideration. For example, petroleum exporters Russia and Venezuela are both adversely affected by steeply falling oil price to the degree that their fx rates are plunging and inflation rate rising, provoking currency flight as holders of the currency no longer wish to save in these currencies. This is entirely consistent with MMT analysis. MMT also observes that a falling fx rate is self-correcting to the degree that the balance of trade shift toward exports.

However, this would not greatly aid emerging countries without broad and deep economies that dependent on exporting a commodity whole value is falling. For example, Venezuela would likely be affected by a collapsing oil price than Russia, whose economy is much broader and deeper than Venezuela's. Indeed, as President Putin has observed, the fall in oil prices is a blessing in disguise since Russia has known for a decade at least that the economy is to tilted toward export of natural resources and needs to be broadened and deepened further by recapturing lost industrial potential and expanding its domestic consumer economy.

MMT also shows how a country can use currency sovereignty to address such issues. For example, Russia was pegging its currency to the USD, threatening a run on its foreign exchange reserves, so it correctly chose to drop the peg and float the ruble. This gives the central bank some leeway in curbing speculation by intervening on occasion to drive up the cost of speculation by squeezing the shorts. The ruble also gained strength at tax time when Russian exporters had to purchase rubles to pay Russian taxes that are only payable in rubles. The firms therefore sold foreign currency obtained through trade in order to meet their tax obligation. As MMT says, taxes drive a currency by creating demand for it.

Furthermore, as Warren Mosler has pointed out, governments control the own rate in setting the policy rate and controlling the yield curve if they choose by setting price and purchasing the quantity necessary to set those yields. Government also influence the price level through the prices they pay in markets, using their currency to transfer resources owned by nongovernment for the public purpose. And as the Great Depression and the aftermath of the recent crisis has shown, government has powerful tools that can be used to address emergencies through both the central bank and fiscal policy.

Then Jesse reveals his ideological concern.

Technically Russia could not become insolvent in rubles, because they could always print more of them to pay all their debts, make purchases, and salary payments. The great caveat in this is that Russia had to maintain a measure of control and enforcement to make that principle 'stick.'

And this is what probably makes MMT inadvertently statist, and dangerous. That is because this belief only works within a domain in which the state exercises complete control over valuation.

So is the "fatal flaw" in MMT that is is too "Keynesian" and not Austrian enough?  :)

I suppose that there are many other things in MMT that are correct, as it seems to be quite the usual thing in many ways, but there is an important exception in the assertion that the state has no limit to its power to set value, because that is exactly what is implied in the canard that a sovereign cannot default in its own currency. Technically it cannot because it can always print more than enough pay off debts and make more purchases. But it can create money in such a way as to break the confidence of the market, and call its valuation into question. And this is a de facto default.

De facto default in the typical Austrian rejoinder to what Austrians see as too much government control and currency profligacy. The error of this is pointed out above. MMT readily admits that there are operational constraints on a currency sovereign but insolvency and forced default are not among them. They are rather the availability of real resources and currency stability, which involves both the price level and fx rate.

Moreover, not all currency instability is the result of "debasement," as some seem to think. The West, President Obama and Prime Minister Cameron, for instance, have stated or strongly implied that the sanctions directed at Russia are design to destabilize the economy and as a consequence the political situation in Russia, with a few to regime change, just as in Cuba and Iran and now Venezuela also. This is intentional application of force majeure that is sufficient legal reason not to honor debts.

Jesse's Café Américain
The Great Fallacy at the Heart of Modern Monetary Theory

Jesse

Stephanie Kelton — How to Talk About Debt and Deficits: Don’t Think of an Elephant*

Many economists (perhaps even those who agree with us) refuse to talk about the national debt and government deficits the way we do on this blog. Instead of boldly challenging the assertion that the U.S. faces a long-run debt (or deficit) problem, headline progressives typically do what Jared Bernstein did in his column today — i.e. they pay “obligatory” tribute to the Balanced Budget Gods, thereby reinforcing the case for austerity at some point in the not-so-distant future when we will be forced to to deal with this very bad thing called the government deficit. Followers of my work here and on Twitter know that I refuse to pay homage to the Balanced Budget Gods. Instead, I prefer to shift the burden of proof onto those who contend that the U.S. faces a long-term debt or deficit problem....

Charles Hayden: "God Bless our Warrior-Queen."

Amen to that.

New Economic Perspective
How to Talk About Debt and Deficits: Don’t Think of an Elephant*
Stephanie Kelton | Associate Professor of Economic and Department Chair, University of Missouri at Kansas City

Warren Mosler — Fed up date

Fed up date
Posted by WARREN MOSLER on September 25th, 2013

So we know QE is about signaling.

And the Fed knew that tapering was a signal they were ok with the higher rates, including the already higher mortgage rates.

And they decided they didn’t want to send that signal, so they delayed the taper. They also revised down their growth forecasts, which meant the economy was performing at less than expected levels, which further pushed back against the higher rates.

And they expressed risk of continued ‘fiscal drag’ as well. It’s all about signaling their current reaction function to control the term structure of rates. And in fact the rates in question have subsequently come down, indicating tactical success. And, at least for now, the dollar is down a touch as well.
A few interesting things are not part of the discussion:

The Fed can directly set the term structure of their risk free rates by simply making a locked market on any part of the curve.

The Fed buying tsy secs is functionally the same as the tsy not issuing them in the first place.
The consequences of QE/tapering are largely the same as the issuance/non issuance of tsy secs.
Interest rate tools, operationally, also include the tsy issuing only at pre determined rates and maturities, as well as buy backs and maturity swaps.

And why is the paradox of thrift, a mainstream standard for maybe 200 years, never discussed?
By identity, if govt cuts back on its net spending, that output only gets sold if some other agent increases its net spending.

Meanwhile, the demand leakages continue to grow relentlessly. It’s all implicit in every mainstream model, but none the less left out of every public discussion.

And there’s another issue that’s internally conflicted. The Fed believes inflation is about monetary policy and the Fed, and not fiscal policy and the treasury. Hike rates until the ‘real rate’ is high enough and inflation goes down, because it makes borrowing expensive and slows the economy as well.

And lower the real rate enough and inflation goes up, though unfortunately that pesky 0 bound limits that tool, resulting in a hand off to QE and forward guidance and expanding the types of assets the Fed buys and the like.

Not to mention the key is the inflation expectations channel, which rules all, of course.

Let me conclude that today most mainstream elites have recognized there is no solvency risk for the US govt. Simplistically, ‘they can always print the money’ which is good enough for the point at hand. So with no solvency risk, the risk of too high deficits comes down to inflation, and there are no credible long term inflation forecasts flashing red.

Additionally, the Fed believes inflation is a monetary and not fiscal phenomenon. So the Fed can’t even argue against deficits on inflationary grounds, leaving it with, for all practical purposes, no argument for deficit reduction.

So as we enter the fray over deficit reduction and the risk of catastrophic systemic failure, there is no intellectual leadership coming from the Fed, and an intellectually dishonest silence from the mainstream academic and media elite.

Good luck to us!
(feel free to distribute)

The Center of the Universe
Fed up date

Warren Mosler

Benign Brodwicz — The Fed is (probably) insolvent; bank margins to suck more

MMT gets a mention.

Kind of astounds me that John Hussman thinks that a modern central bank can become insolvent operationally when it is the entity that controls the currency unless there is rule imposed politically that prevents negative equity. Operationally, there is no constraint on a central bank with negative equity since it cannot face a cash flow (liquidity) problem as currency issuer.

Animal Spirits Page

The Fed is (probably) insolvent; bank margins to suck more

Benign Brodwicz

Simon Black — Here's What Happens When A Central Bank Goes Bust

Apparently the gold bugs over at ZH haven't heard that the Fed is allowed to operate with negative equity, or Karl Whelan's argument that central bank operations are not contingent upon solvency in a non-convertible floating rate system. 

You don't even need MMT to understand this. Gold standard thinking is a zombie that refuses to die.

Zero Hedge
Here's What Happens When A Central Bank Goes Bust
Submitted by Simon Black of Sovereign Man

Marshall Auerback, Stephanie Kelton and L. Randall Wray — A Plan for All the Detroits Out There

MMT to the rescue. Pass it on.

Note that this plan is based on job guarantee but not the MMT JG in that compensation would be indexed so that the real wage would remain constant against inflation.

New Economic Perspectives
A Plan for All the Detroits Out There
Marshall Auerback, Stephanie Kelton and L. Randall Wray