Dal blog dell’attuale ministro delle finanze greco Yanis Varoufakis
The responses of many to my post on Bitcoin reveal a powerful tendency to underestimate the ill-effects of deflation on a social economy. This tendency to underestimate deflation’s deleterious impact matters beyond debates on Bitcoin per se. For example, in Europe the incapacity of the European Central Bank (ECB) to act in the face of deflationary forces has revealed the same type of misunderstanding, as many commentators fail to recognise that deflation is a very serious threat and that the ECB’s lack of weapons against it constitutes a major weakness. In this post I return to the problem of deflation in a Gold Standard-like monetary system (e.g. Bitcoin or, indeed, the Eurozone itself) but conclude that, almost paradoxically, the technology of Bitcoin, if suitably adapted, can be employed profitably in the Eurozone as a weapon against deflation and a means of providing much needed leeway to fiscally stressed Eurozone member-states.
Is deflation really a problem?
In a recent debate, I was confronted with the argument that deflation is a godsend. “Poorer people crave lower prices”, I was told, “and they cannot understand why ‘elitists’, like yourself, oppose them”. Of course people, especially those who struggle to make ends meet, prefer lower to higher prices other things being equal. But under the heavy shadow of deflation other things are not equal . Deflation is indiscriminatory. Once it sets it, all prices subside, including the price for labour. In fact, wages tend to fall faster than prices of other goods during deflationary times, leaving the weak poorer. Worse still, deflation reduces investment which, in turn, raises unemployment.
Some readers find it hard to see why wages must fall faster than prices and why jobs are jeopardised as prices fall. To see why this is invariably so, compare the degree of power over price that a corporation has (e.g. Walmart or Mercedes Benz) to the degree of power over the wage of a blue collar worker. As customers are no longer prepared to pay the same prices as before, the corporation can limit the decline in the price of its wares by restricting output. Its price will still fall, but not by as much as it would have done had the corporation not had a capacity to influence price through restricting supply. In sharp contrast, the blue collar worker has no comparable power to restrict her labour supply in order to arrest the fall in her wages. The result is twofold: As corporations restrict output (to reduce the rate at which prices fall) their demand for labour falls, the result being even greater wage reductions accompanied by layoffs which, in a never-ending recessionary circle, reduce further the demand for goods.
Moreover, as prices fall, manufacturers face a timing problem. Assuming there is a time lag between ordering raw materials and shipping the final product to market, deflation means that firms buy their inputs when average prices were higher compared to their level at the time of shipping the final product. Thus the greater the rate of deflation the lower the profit rate and the larger the number of companies that are forced either to lay off workers or to close down completely.
Lastly, as prices fall consumers with some savings have every reason to delay the purchase of durables (e.g. white goods or cars) since they know that their saved dollars or euros will buy them a lot more (or a better model) of these goods the longer they wait. But this is terrible for the manufacturers as well as for their workers and suppliers.
On this last point, a reader challenged me that falling prices are a fact of life and they do not seem to be a problem: “I can think of many goods and situations”, he wrote “in any economy right now where if you delay a purchase, you’ll get ‘more’ for your dollar.” Of course. But these falling prices are not a problem when it is not all prices that are falling at once. The benefit from patience in the US today comes from actively searching for a better deal in a market where information is imperfect. Deflation, on the other hand, rewards the patient just for being patient, rather than being a reward to costly searching activity. Under deflation everyone benefits from waiting and aggregate demand thus collapses (penalising us all).
If, under such deflationary circumstances, monetary policy cannot be loosened up to stop the decline of average prices, wholesale disaster is guaranteed. This was the terrible flaw of the Gold Standard, in the mid-war period. It is the Achilles Heel of Bitcoin today and, indeed, remains a design fault of the Eurozone too.
Bitcoin and the euro
Bitcoin is a hard-core version of the Gold Standard, in that the money supply is algorithmically fixed to grow at a pre-determined rate and, eventually, to reach a maximum quantity of Bitcoins that remains fixed forever. The Eurozone, on the other hand, is much closer to the original Gold Standard. The major difference with Bitcoin is that there is no fixed upper limit to the quantity of euros because private banks in the Eurozone are subsidised by member-states (through the availability of deposit insurance and the promise of bailouts, if need be) to provide credit lines (on the basis of fractional reserve banking principles). In other words, depending on the banks’ and their customers’ animal spirits (i.e. on how optimistic they are) the banking systems of the Eurozone effectively mint euros. Indeed, the private banks are responsible for more than 90% of the euro money supply.
While this is a crucial difference between Bitcoin and the euro, the two are similar in one respect: whereas in Bitcoin there exist no monetary authorities that could expand the money supply in times of deflation, in the Eurozone the existing monetary authorities are constrained by the ECB’s charter in a manner that stops them from expanding the money supply in deflationary times. At this very moment in Europe’s history, with interest rates practically on the lower zero bound, and with inflation turning negative, the ECB is not allowed (for institutional and political reasons) to effect expansionary monetary policies through quantitative easing. What use are monetary authorities in a currency union if they cannot expand money supply in response to falling prices? In this regard, the Eurozone is no different to Bitcoin, without even featuring the zero transaction costs of Bitcoin or its New Age appeal.
A potential application of Bitcoin’s technology in the Eurozone’s Periphery
Governments in Europe’s Periphery are asphyxiating in a Gold Standard-like monetary union that is buffeted by the winds of recession and outright deflation. Their economies are in desperate need of greater liquidity and of a respite from austerity. The problem is that Europe’s leadership is refusing even to enter into a rational debate of the institutional reforms that can render the Eurozone viable again. The question is: Is there something that the peripheral countries can do to give themselves a chance to breathe better and to act as a bargaining chip that will make Berlin, Frankfurt and Brussels take notice?
The answer is yes: They can create their own payment system backed by future taxes and denominated in euros. Moreover, they could use a Bitcoin-like algorithm in order to make the system transparent, efficient and transactions-cost-free. Let’s call this system FT-coin; with FT standing for… Future Taxes.
FT-coin could work as follows:
- You pay, say, €1000 to buy 1 FT-coin from a national Treasury’s website (Spain, Italy, Ireland etc. would run their separate FT-coin markets) under a contract that binds the national Treasury: (a) to redeem your FT-coin for €1000 at any time or (b) to accept your FT-coin two years after it was issued as payment that extinguishes, say, €1500 worth of taxes.
- Each FT-coin is time stamped i.e. in its code the date of issue is contained and can be used to check that it is not used to extinguish taxes before two years have passed.
- Every year (after the system has been operating for at least two years) the Treasury issues a new batch of FT-coins to replace the ones that have been extinguished (as taxpayers use them, two years after the system’s inauguration, to pay their taxes) on the understanding that the nominal value of the total number of FT-coins in circulation does not exceed a certain percentage of GDP (e.g. 10% of nominal GDP so that there is no danger that, if all FT-coins are redeemed simultaneously, the government will end up, during that year, with no taxes).
Once in possession of an FT-coin, you can either keep it in your FT-coin e’wallet or you can trade it. To make sure that the system is fully transparent and that transactions are completely free, FT-coin could be run by a Bitcoin-like algorithm designed and supervised by an independent non-governmental national authority. Just as in the case of Bitcoin, the total amount of FT-coins can be fixed in advance, at least in relation to a variable not in the government’s control (i.e. nominalGDP), while every single transaction (including the tax extinction using FT-coins) is monitored fully by the community of FT-coin users on the basis of the blockchain pioneered by the infamous Mr Nakamoto.
As an FT-coin is about to ‘mature’ (i.e. to reach two years of ‘age’), the demand for it will obviously rise from those that do not possess FT-coins of that vintage (as it allows for a major reduction in their current taxes). FT-coin owners with equivalent tax liabilities will have no reason to sell (as they will want to use it themselves to extinguish their own taxes) but those who have ‘stocked up’ on FT-coins (to a tune beyond what they need to pay their taxes), as an alternative to putting their money in the bank or in the stock exchange, will be selling; possibly with a view to buying freshly minted FT-coins.
The great advantages of such a scheme is that it creates:
- 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
- a national supply of euros that is perfectly legal in the context of the European Union’s Treaties, and which can be used to increase benefits to society’s weakest members or, indeed, as seed funding for some desperately needed public works
- a mechanism that allows taxpayers to reduce their inter-temporal tax bill
- a free and fully transparent payment system outside the banking system, that is monitored jointly by every citizen (and non-citizen) who participates in it.
While the Eurozone’s most stressed governments get much needed degrees of fiscal freedom, taxpayers are offered an opportunity to reduce significantly their long-term tax burden and to make electronic payments in euros that bypass banks altogether. At a time of ultra low interest rates, large tax bills and high bank fees, these are benefits not to be scoffed at. Moreover, a liquid new market for FT-coins is created, with zero transaction costs, and good prospects for gains for those who participate in it, on the back of the underlying tax savings and the state guarantee of convertibility at par.
In summary, while Bitcoin is too deflationary by nature to act as a widespread currency alternative to the dollar or the euro, its design can be used profitably in order to help the Eurozone’s member-states create euro-denominated electronic payment systems that help them, at least in the medium term, overcome the asphyxiating deflationary pressures imposed upon them by the Eurozone’s Gold Standard-like (and, indeed, Bitcoin-like) austerian design.