Wednesday, March 4, 2015

Can a Bitcoin-style virtual currency solve the Greek financial crisis? by Paul Mason


In orthodox economics, money barely figures. It’s just there, acting as a lubricant to supply and demand. The assumption is: markets create money, and the state’s role is to make sure it’s not fake or diluted.

Bitcoin is an audacious attempt to create money beyond the control of any state. It is a digital currency, in the form of a limited number of tokens. It is championed by people who would, if they could, return to a gold standard – where states are obliged to limit the amount of money in the economy. What these money fundamentalists worry about is states creating so much money that booms and busts become inevitable and inflation erodes wealth. In this sense, Bitcoin’s aim is to function as “digital gold”.

If things go badly for Greece, finance minister Yanis Varoufakis has said he would consider creating a parallel digital currency, using Bitcoin’s digital security and transparency, but doing the exact opposite of what the money fundamentalists intend.

Let’s recap the problem. The Greek debt is unpayable; the austerity required to pay it down is socially unbearable. So whether it’s this week or in six months’ time, there will come a point when Athens cannot meet conditions acceptable to the European Central Bank. Then, the normal sequence would be: bank closures, capital controls, an angry standoff and ultimately a Greek default.
If you insert a parallel currency into this sequence, you can delay the moment of default and gain a lot of leeway.

Varoufakis outlined, in a detailed blog post 12 months ago, how a Bitcoin-like virtual currency could be used to get around the ECB’s refusal to boost demand through quantitative easing. Just like Bitcoin, it would be exchangeable one for one with euros. But it would be issued by the state – and if you were prepared to hold it for two years, you would earn a profit paid for by taxes. For this reason, Varoufakis called it “future-tax coin”.

If the Greek government issued a parallel digital currency, and forced banks and businesses to use it, this would boost the money supply in defiance of the policy of the European Central Bank, said Varoufakis. In addition, he predicted, the currency would provide “a source of liquidity for the governments that is outside the bond markets, which does not involve the banks and which lies outside any of the restrictions imposed by Brussels or the various troikas”.

It would create an extra call on the nation’s tax revenues, so would have to be capped. If you issued future-tax coins worth 10% of GDP, in two years’ time, you would lose a sizeable chunk of your tax bill, warned Varoufakis.

So another way of thinking about a parallel second currency is: it’s a way of borrowing from tax receipts tomorrow to fund a monetary stimulus today. Which, if you reduce it even further, is like getting a fiscal stimulus for free. If used in crisis mode, it would also allow Greece to survive, for a time, its banks being sunk by the withdrawal of ECB emergency aid.

If a parallel currency ever happens (I am writing this on Friday: anything could happen by Monday), it will dramatise one of the key arguments of anti-establishment economists like Varoufakis: that states – not markets – create money.

Money only has value, say these economists, because states decree it. Furthermore, the state is not just standing above the market, regulating the currency: the act of taxing and spending is what creates money, not the act of buying and selling in a marketplace. It’s called “modern monetary theory”, but it’s no mere theory.

If it is right, the obvious practical conclusion is that a state with its own currency is always solvent. It can always create more money and pay people in that money. Therefore, it can always run a deficit – always use state spending to suppress unemployment. The only condition is that people must believe the state will exist in future.

And this is where it gets dicey for both the eurozone and Greece. If the Germans kick Greece out of the euro, that raises a big question mark over whether the euro quasi-state will permanently stand behind the currency as designed. The euro might come under speculative attack, as investors seek to pick off the next Greece, and place bets on the value of any new currencies that might emerge.
But the risks are even higher for Greece, should it start issuing a parallel, digital euro. Because Varoufakis’s digital currency is only redeemable against future tax revenues, you would have to believe the Greek state could not collapse.

Given these doubts, another of Syriza’s big-hitter economists turned politicians, Costas Lapavitsas of Soas, points out, the use of a digital currency would have to be just a transition phase to euro exit and a new Greek currency.

Bizarre and mind-boggling as the parallel currency idea is, my experience in the eurocrisis makes me think it’s likely to happen at some point. So, as you observe me and my fellow eurocrisis tribespeople eking out our lives in dank hotels and lobbies, do not pity us. All the shouting and the whispering only looks like mental torture. It is, in fact, a grand philosophical debate about the nature of money.

Paul Mason is economics editor at Channel 4 News.
Follow him @paulmasonnews

1 comment:

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