Sunday, May 23, 2010

Is Greece like the US, or like a US State?

This was a great thread at Mosler -- be sure to read the comments that are quite excellent. The Chartalist story has been that Greece, since it cannot issue currency, is like a US State and is therefore a credit risk while the US Federal Government can (and does) issue currency all the time and therefore need never default on US$ liabilities.

The comment thread pointing out that the Greek Central Bank can mark accounts up and down, just like the Federal Reserve, and therefore the Eurozone is more like a collection of currency issuers bound by fiscal agreements, and not like US States at all. An excellent discussion followed, where a core question came up:
Since the US Treasury cannot run an overdraft at the Central Bank, is the Govt really unconstrained in spending?
Ultimately, I think this comes down to what your definition of "constraint" is. It is true that the Treasury cannot run an overdraft at the Fed, while other member banks can, and that this rule was put in place so the Govt would be spending constrained and could not "monetize" debt. It is also true that the concept of "monetizing debt" is meaningful in a gold standard world, but has no meaning in a fiat world. And it is even more true that while formally, the Treasury cannot run an overdraft in the Fed, in reality the Fed would clear a cheque from the Treasury no matter what its account balance was. The Fed bailed out the UAW, AIG, Goldman Sachs, Fannie, Freddie, Citi, GM, Chrysler, GMAC and more -- there is no way it would not bail out the US Govt over an accounting entry. And if it didn't, it's next move would be to dissolve itself since a payment clearing system that does not include the Government is useless.

MMT always prides itself on focusing on "operational reality", and I think this is a situation where the formal rules ("no Treasury overdraft at the Fed") are at odds with the informal reality ("Fed will clear Treasury checks, no matter what") and that fixating on the formal rules takes you farther away from reality, it does not bring you closer.

Changing the formal rule (enabling a Treasury overdraft at the Fed) is conceptually radical, because it means we need to know we are no longer on a gold standard, operationally simple, and a formal recognition of operational reality.

Marshall is correct. The US does not have a Greece problem, but Greece does not have a California problem either.


Blogger STF said...

Good points.

Warren made the point somewhere that the difference b/n the US Tsy and the EZ nations is that the US govt is the entity telling the Fed what to do (via legislation), so ultimately whether US govt's checks get cleared is up to the US govt. The EZ national govt's are not in this position.

EZ is like having 50 state level Fed banks at which state govt's have accounts (actually, the analogy could work even if you give them accounts at the Fed as currently constructed). Operationally, the states would spend/tax by changing reserve accounts. But those state govt's don't write the laws for the Fed and it's therefore not up to them whether they're checks are cleared if they have a negative balance.

Scott Fullwiler

9:33 PM  

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