Reader AC writes …
Hello Mish
Regardless of anything else: Italians are masters in finding smart ways to circumvent rules. There is even an adage in Italy regarding this.
On that basis, I would not be surprised if at one point in time, someone in Brussels or Frankfurt will realize too late precisely what is happening.
One of the key points is that the debt of Italian state vs corporates is huge Likely, rather than waiting again and again to be paid, corporates may resolve themselves to accept MiniBots if they have reasonable expectation they can exchange them with Euros or use them against any debit to the governement in a close future.
It is much better than waiting for a bank loan that will never come or paying huge interest for credit lines.
So it is not unlikely that the minbot idea will gain momentum. Once it is fully in circulation, even without any legal obligation to accept it, who knows what can happen? Everything is possible, from the worst scenario to the best scenario.
It sounds like a way to “nationalize” public debt slowly. Nothing prevents issuance of minibots to pensions or for social subsidies.
From a purely “academic” point of view the experiment is interesting, but millions of real lives are involved in such “experiment” and if it ends badly it will be really catastrophic.
Best Regards
AC
That email was in response to a couple of previous posts of mine.
- Italy’s New Prime Minister Puppet: Time to “Ringfence” Italy? MMT to the Rescue?
- Economic Recovery in Italy: NY Times vs. Alhambra Investments’ Zombification
The problem for the Eurozone and the EU is that Italy can bring about the minibot slowly enough that it holds value. Then once it is accepted, Italy can escalate issuance.
AC noted that “everything is possible”.
Perhaps, but one thing is certain: Germany will end up paying big time one way another.
Germany gets to decide between debt mutualization or a breakup of the Eurozone and Italian default on Target2 imbalances. The only other possibility that comes to mind is the ECB prints enough to backstop Target2.
Mike “Mish” Shedlock
I hate to repeat Ad nauseam. Italy is not Greece. It’s economy is far larger. It simply can’t be ring fenced. EU is thus becoming extremely fragile. As much as Merkel and Dragni keep trying to buy time it will ultimately not matter. The dept levels are simply to large coupled with fact the Trump is essentially openly attracting Germany over it’s fuel sources. Germany is itself becoming politically unstable. Remember when folks thought the Soviet Union was here to stay.
“If there’s not the OK of Berlin, Paris or Brussels, in Italy a government cannot be formed. It’s a folly, and I ask the Italian people to stay close to us because I want to bring democracy back to this country,” Salvini told reporters. Questions are now being asked of the legitimacy of Italian institutions and it’s likely a technocrat government will be installed as a temporary measure. Should IMF become involved expect their Euro bias to show through – run by the French.
Meanwhile It’s kicking off in Spain, possible election. Rajoy days numbered.
Germany moves, Italy folds, game over.
Tony, Italy is big but its up against a machine intended to force integration irrespective of the human cost. It’s nefarious and will do whatever to protect itself. Fear will be used as a weapon, politicians paid off, threats behind closed doors, punishment beatings in Brussels, media campaigns – few modern politicians have the balls to withstand such. Italy will fold.
You want to bet. this shit show is going down. The system is not sustainable.
We will soon see what happens when the Funk plan is deeply threatened. Italians will submit. TINA to Italy in the Euro.
I doubt they will impeach,
Germany de facto owns and manages the European Union’s monetary policy, has from the start. Given that fact, what would one reasonably expect a German politician to do when faced with the stark choices of either exporting Germany’s unemployment via driving an excess debt load onto the rest of Europe and the world, or bite an extremely unpopular domestic bullet in the here and now for a sound European Union? One can look to the economies of Ireland, Greece and Italy over these past thirty years for clues.
There is an intention to make an example of Italy.
It looks like Italians won’t be given a choice on the Euro. True TINA now. Resistance is futile. They have lost self determbination to outside forces. Italy is a vassal state. Ciao Italia & buonanotte a tutti.
Italy to VOTE AGAIN. What chance the EU didn’t like the first result so put pressure on via President to force it until they get the right answer? It has all the hallmarks, the people will not be allowed to decide imho. EU/Euro/ECB at work again.
Until they do something, or the bond spread forces a problem, it’s business as usual. So far it’s all talk. Germany will cave and bail the whole lot out via some convoluted mechanism. The German electorate are brainwashed beyond understanding and will go along. Macron and the Italians will have their way and Merkel will receive some award for being the best European ever.
Did not the State of California issue IOUs for a while to vendors? It might be informative to look at how that worked out.
Of course, the basic problem is that the Political Class will always over-spend — especially if they can issue their own currency or IOUs.
If Italian politicians spent as much time and talent devising plans to strengthen Italian competitiveness as placing an additional debt shell in the European currency con game, they might eventually end up ahead, like Germany. Minibot = mini-brain = more debt, sooner.
In theory any modified currency should work as long as they float it against some benchmark. The US needs a second dollar, a ‘sweat dollar’ or the old M1. As the Fed prints digital collateral in the form of bonds, which denigrates the sweat dollars value, the exchange rate rises, so a it might take five phony Fed dollars to buy one sweat dollar instead of four. You could use a gold standard but that market has been rehypothecated and is international. The problem with minibots in Italy is simple, what are they worth?
Minibot is no worse a currency than any other fiat. Heck, if anything, it’s less economically destructive than the Dollar and Euro. As there, at least for now, is no law mandating that anyone accept them at ay particular exchange rate, and no requirement that they be used for tax payments.
From a purely operationally POV, if Italians do decide to start using them on a large scale; the massive defaulting on virtually anything that is a requirement for restoring even a semblance of dynamism (as well as basic freedom) to any developed world economy, could well be undertaken with less day to day disruption for the average Joe: Euro/Dollar debt become too onerous to service as more and more of the receipts to service them are in Minibots. Required/desired Bankruptcies result. Overpriced, pumped up ‘assets” are sold at what the rent seekers prefer crying to Massa Gommiment is “fire sale prices.” Possibly paid for with Minibots. Rinse. Repeat.
With the end result that all the same productive assets (factories, tools, infrastructure, worker skills) as before are still there; just with less of a debt load attached, and with control of them being transferred in the direction of those able to utilize them most efficiently. Rather than those who were simply handed enough free-of-charge fiat to be their current nominal owners, over the course of the past 4-5 decades’ runaway experiment in institutional scale, financialization mediated, crass theft from the competent to the connected.
This will end very badly
The bottom line is quite clearly this: Governments are inherently inclined to find mechanisms whereby they can fund existing and future expenditures. Living within your means is not something they understand nor care to give credence to.
Made “theoretically” possible by the ECB. If the ECB was not buying Italian government bonds hand-over-fist, the bond market (which no longer exists in the EZ) would be destroyed
by this.
The “mini-Bot” is a fiscal currency, or put another way, a monetary version of a tax credit. Its issuance will mean that Italian budget deficits will go to the stratosphere (in flagrant violation of Eurozone Treaty Rules) – which may still be all well and good, so long as Draghi and the ECB continue to buy ever more huge amounts of Italian Government debt. The final say thus lies with the ECB. If they declare that Italian government debt (or even a portion thereof) as a result of the mini-Bot issuance is no longer eligible for ECB purchase, then the whole scheme (along with the Italian economy and bond market) goes up in smoke. This would seem like a HUGE gamble on the Italians part. I cannot possibly see them following through on this. Please correct me if I am missing something here.