Nice to see Warren Mosler and “Modern Money Theory” mentioned in an article by David Graeber in today’s Guardian.
The article backs Mosler’s plan to have the Irish government (and perhaps other periphery countries) issue bonds which would include a proviso that in the event of default, the bonds could be used to pay Irish taxes. And that would lead according to Graeber to Irish citizens experiencing “quick relief from cuts”.
Well the first problem is that if a government feels like cheating on its creditors by refusing to give them Euros in exchange for their bonds, why would it HONOUR its agreement with creditors in the form of giving creditors what amounts Euros in the form of using bonds to pay taxes with? It’s a bit like the US government refusing to pay holders of maturing Treasuries any US dollars, while offering to pay them in Canadian dollars, Yen, or any other currency they liked. In effect, the US government would not have defaulted.
Next, Mosler and Graeber (like numerous economists) have not grasped the basic problem in the EZ, which is disparities in competitiveness as between periphery and core. The whole point of imposing austerity on the periphery is to get periphery costs down and enable them to regain competitiveness. Of course it’s a thoroughly ham-fisted way doing the job, and it involves huge social costs. But that’s common currencies for you.
Put that another way, if periphery countries are reflated via “Mosler bonds” or in any other way, that will just raise inflation in the periphery relative to the core, which just delays the date at which they finally regain competitiveness, during which time they go further into debt. And their creditors may just not be willing to lend.