Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity breeds austerity and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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What would happen if Greece abandoned the euro? I don’t know. No one does, though everyone has opinions, and most of those opinions include words like “disaster,” “panic” and “bankruptcy.” So since opinions are free, I’ll give you mine, and mine does not include those words. Not at all.
The key to a smooth transition from euros to a Monetarily Sovereign currency, the drachma, is to create sufficient demand for the drachma to prevent excessive inflation.
Let’s say the Greek government announced that heretofore:
1. The drachma would be the official currency of Greece. The Greek government would exchange one drachma for one euro, in unlimited amounts. Accounts at Greek banks that currently are stated in euros, would be stated in drachmas.
2. Payments by all Greek governments, local and national, would be made in drachmas, not in euros. This would include payments on domestic and foreign debt, payments of government salaries, and payments for goods and services. The payments would be made at the rate of one drachma for one euro.
3. Domestic business must pay salaries and domestic suppliers in drachmas
4. Taxes paid to the Greek government and to any sub-governments must be made in drachmas, not in euros.
5. Greek banks would domestically lend only drachmas, and all domestic creditors, including banks, must accept drachmas in payment for debts.
6. The Greek government would continue to issue bonds, not because it needs to borrow, but to help regulate interest rates, which in turn, help regulate demand for drachmas. The bonds would carry a high enough interest rate to create demand for drachmas.
What does this accomplish? Greece would become Monetarily Sovereign. Its “debt problem” instantly would disappear, as it would have the unlimited ability to pay any bill of any size, any time. Demand for the drachma would be established, to mitigate against inflation.
So tell me, how do you feel this compares with the short-term, borrowing/austerity “solutions” advocated by the IMF and the EU? Personally, I think its much better, partly because it actually is a long-term solution, not a short-term palliative.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
This goes under the “money-doesn’t-make-you-smart” category:
He’s mad at Germany for not destroying their country in a fruitless effort to apply a Band Aid to the European crisis by extending credit to monetarily non-sovereign nations.
Rodger Malcolm Mitchell
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The obvious constraint would be for Greece to balance the current account immediately.
It is uncertain how much purchasing power Greek people would lose – would depend on the exchange rate of the new drachma.
Less obvious constraint would be to learn how to manage the reinstated national currency.
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Why would a Monetarily Sovereign nation need to balance its current account?
Rodger Malcolm Mitchell
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Because it is highly improbable that, on a sustained basis, foreigners would want to supply the nation with a yearly amount of real goods and services in exchange for a yearly amount of real goods and services demanded from the nation that they would perceive of less value .
Unless the nation’s currency enjoys status of world reserve currency. Even in this case the current account may be understood to be balanced in real terms, if not in nominal ones, as a worldwide service – providing a world reserve currency – is being supplied.
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The account would balance itself quickly, any deficit imbalance would be gravy, but unlikely as you say. The lower exchange rate would boost exports & decrease imports. The real problem is short term imported necessities. But as Bill Mitchell notes, they are already in short supply. It’s a choice between endless pain, getting worse as it is prolonged more, or roughly equivalent, maybe a little bit bigger pain for a short time, followed by the possibility of economic health.
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For all of Greece to support such a change would mean a major education effort to get some critical mass of people who understand Monetary Sovereignty.
My guess would be that the ECB and the IMF wouldn’t make it any easier for Greece even if all of Greece were to get behind this.
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This article makes a fatal error. The issue is not which currency we use, or where our central bank is located, but who owns and controls the money. That is, who has the monetary sovereignty. Switching to the drachma will make no difference if private bankers continue to own and control the currency and central bank. The horrendous system we have now is a product of private control. True freedom means that the public (or the State) has monetary sovereignty.
Everyone knows that Greece will default. The bankers just want an orderly default, with Greece’s central bank remaining under private control, in which case the Greek masses will continue to suffer, even with the drachma.
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No error in Rodger’s article. If truly crazy banksters control the central bank, yes they could make a mess. That’s what the Euro mess is about. The Eurozone countries basically made the ECB the emperor of Europe, more than Hitler or Napoleon. The structure is unworkable, making insane behavior mandatory & common sense illegal, and it is run by a crew of monsters, morons & lunatics.
Aside from that I don’t think Greece is any worse than any other country like the USA. The Fed simply is not all that important, except for the regulatory matters it disdains, the massive fraud it allows. The problem is the fraud that modern, private banking makes so very attractive & easy if unregulated, not the inherent structure of honest, boring, regulated, old-fashioned 1933-1983(say) banking. The Fed could do and has done damage by crazily raising interest rates, and maybe undo that damage later. That’s all. But, what really matters is how Congress spends, and Congress & the Executive ultimately control the Fed. The mystique & power of the “independent central bank” run by shadowy conspirators is just the biggest fraud of all.
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I don’t think it would work. Yeah, they would have monetary sovereignty but in a currency nobody wants. To finance their continuing deficits they would have to sell bonds denominated in euros at rates similar to today’s rates. On the other hand, mortgages would be made in euros or Swiss francs because the interest rates would be so much lower. There would be a divide between the lucky ones paid in euros and those who have to take drachmas. It would be better for them just to default and stay with the euro.
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I don’t know why nobody would want Greek currency. Greece would just be another one of the dozens of small nations with their own currency. Iceland, for instance, is even smaller, and though the krona is volatile, the system seems to work. Iceland is in better shape than Greece.
Rodger Malcolm Mitchell
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No, they would finance their continuing deficit by printing drachmas, the only way any deficit spending anywhere has ever been “financed”. If they needed to give more value to the drachma, they could tax their undertaxed upper classes. If they had the (popular) will to regain monetary sovereignty, they would have the political strength to fix their tax system. Others would want drachmas to the extent that they wanted to buy Greek goods or to travel to Greece.
Selling euro bonds is what got them in this mess. Nobody would buy them, and that would be all to Greece’s ultimate benefit. Greeks getting mortgages in euros & Swiss francs would be even more unlikely – because it would be too benefical to the Greeks – whose government would be unlikely to back them in case of a default. Mortgage rates, interest rates are what the government decides them to be. No reason for drachma mortgages to be at higher rates than Euro denominated ones. If the Greek government were smart, they would make the rates lower, but not too easy to obtain.
Regaining monetary sovereignty would mean that they could run their economy at full employment, not have the ECB forcing the enormous real losses of unemployment on them. Defaulting but staying on the Euro would be like a surgeon operating on a wounded patient, giving him an IV maybe, but not closing off bleeding blood vessels. The problem is the Euro. No way around it.
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It would cause some short term disruptions, and inflation in imported products, but I doubt it would be much worse than what they are going through now, and I bet they surprise everyone with how quickly they turn their economy around – setting a “bad” example to the other PIIGS… and that’s the reason I think so many of the “expert” are making dire warnings about leaving the euro, it would show that it isn’t the end of the world, and you get control of your country back from the vampire squids running the ECB & IMF, thus precipitating a rapid breakup of the currency.
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Here is just one of many questions that cristalyzes how your simple solution gaurentees cahos.
1) Greek banks own about 1 trillion euros worth of long term loans (assets) that carry a fixed interest rate.
These loans would be paid back in a new drachma at the same low interest rate currently under contract.
Yet the banks would be paying the higher interest rates for the deposits that a stable new drachma would require.
Esentialy the intrest rate differential would result in negative net intrest income effectively bankrupting every Greek bank.
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The Greek government could underwrite any difference. Supporting banks is not an alien concept these days.
Also, banks would begin to earn interest at the drachma rate. I think the banks would come out like bandits.
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