Superior debt management: solving the Eurozone crisis

Superior debt management: solving the Eurozone crisis

A sovereign funding instrument outside banking oligarchs reach

by Marco Saba, September 15, 2014 (A pseudo-satirical review of a Werner paper)

To solve once and for all the Eurozone crisis it is possible to design a national funding instrument with all desirable features, namely that it is

(a) non-tradable and would not need to be marked to market by investors, but instead could be kept on their books at face value;

(b) cheaper, requiring a lower interest rate, than the crisis-period bond market yields; 

(c) available without rating from the credit rating agencies and hence also not be affected by potential ratings downgrades; 

(d) available domestically, hence not requiring borrowing from abroad, thus resulting in lower total debt and greater fiscal and financial stability domestically and in the eurozone; 

(e) generating returns for the domestic banking sector, allowing organic growth of reserves and capital buffers; 

(f) boosting domestic demand, delivering overall economic growth, and hence lower deficit/GDP and debt/GDP ratios by increasing the denominator; such reliance on domestic demand would be superior to the reliance on external demand of IMF-style packages, as foreign demand is an exogenous factor;

(g) available without the conditionality of required deep fiscal tightening, asset sell-offs and deflationary structural reform:

(h) be available on demand by being created ex nihilo domestically, without the  need for any capital by the lenders. 

It is one of the oldest and simplest funding instrument in existence: a State Bill. In Italian: Biglietto di Stato. In French: Billet de l'État. Technically: 'zero-coupon perpetual puttable security' (Wiseman, 2000). 

  In our modern monetary system, which is dominated by digital money transactions, the total amount of digital money is actually controlled by banks and their bank credit creation (Werner, 2005; Ryan-Collins et al, 2012, Bank of England, 2014a, b). For nominal  GDP to grow, more (GDP-based) transactions must take place. This requires a larger amount of money to change hands to pay for this larger amount of transactions. The main way in our monetary system for more money to be used for transactions is for banks to create more bank credit. In other words, banks need to find borrowers willing and able to borrow from them (Werner, 2014). The State's Bill alternative is easier: the digital bills are issued upon necessity as soon as a law establishing an expenditure is promulgated by the democratic government of the country.

  Past approaches to debt management have focused on a narrow set of funding tools and debt restructuring, including complex derivative instruments. But the simplest,  most plain-vanilla of funding instruments, the BILL OF STATE, a digital Sovereign Legal Tender with his full seigniorage, has been neglected, rendering its use ‘unconventional’. 

Bibliography:

Bank of England (2014a), Money in the modern economy: an introduction, by Michael McLeay, Amar Radia and Ryland Thomas (Monetary Analysis Directorate), Bank of England Quarterly Bulletin, Q1 2014, 4-13 

Bank of England (2014b), Money creation in the modern economy, by Michael McLeay, Amar Radia and Ryland Thomas (Monetary Analysis Directorate), Bank of England Quarterly Bulletin, Q1 2014, 14-27 

Ryan-Collins, Josh, Tony Greenham, Richard A. Werner and Andrew Jackson (2012), Where Does Money Come From? London: new economics foundation, 2nd edition 

Werner Richard A. (2005). New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance, Basingstoke: Palgrave Macmillan, 2005 

Werner Richard A. (2014). Enhanced debt management: solving the Eurozone crisis by linking debt management with fiscal and monetary policy, Journal of International Money and Finance (in press)

Wiseman Julian D. A. (2000), The end of EMU: How Germany might leave, www.jdwiseman.org, October 2000