Marshall Auerback on the ECB

Hedge fund manager Marshall Auerback has come up with a plan of what the ECB should do in order to resolve the euro area debt crisis. The outline of this plan was posted at Naked Capitalism as 'The ECB vs. Germany'.

Auerback begins by recounting that Germany's central bankers are isolated at the ECB. Their desire to keep monetary policy strictly outside of the realm of fiscal policy has led them to oppose the interventions in government bond markets, and since they were outvoted at the ECB, two of them (Axel Weber and Jürgen Stark) ultimately resigned because they didn't want to be associated with the policy.

To this we would note that when Axel Weber resigned, the ECB began buying the government bonds of Greece, Portugal and Ireland. The effect was…well, there was no effect beyond the very short term. All three bond markets ultimately collapsed. Currently the ECB is doing the same with Italian and Spanish bonds, and once again, there is a short term effect, which is already waning in Italy's case. Attempts to con the markets can only go so far, so we're wondering what actually the point is.

Anyway, we won't quibble with the fact that the hard money Bundesbankers find themselves outvoted at the ECB and are, to use Auerback's phrase, 'losing the battle'.

We also agree that Jörg Asmussen, Jürgen Stark's replacement at the ECB, is highly likely to be more pliable.

Then Auerback veers off into chartalist fantasy-land (just as a reminder, a chartalist was once president of the German Reichsbank. His name was Rudolf von Havenstein). He says (and here it behooves us to issue the obligatory 'put down your coffee' warning):

“The question arises as to what form this quasi-fiscal role on the part of the ECB will take going forward. Warren Mosler has come up with the idea of “revenue sharing” proposal on the part of the European Central Bank [sic, ed.], and this strikes me as the most technically feasible proposal, as well as one that will be consistent with the recent strictures set out in Germany’s Constitutional Court decision brought two weeks ago.

The proposal is for the ECB to distribute trillions of euros annually to the national governments on a per capita basis. The per capita criteria means that it is neither a targeted bailout nor a reward for bad behavior. This distribution would immediately adjust national government debt ratios downward which eases credit fears without triggering additional national government spending. This serves to dramatically ease credit tensions and thereby foster normal functioning of the credit markets for the national government debt issues.

The trillions of euros distribution would not add to aggregate demand or inflation, as member nation spending and tax policy are in any case restricted by the Maastricht criteria.”

By the time we arrived at the last sentence of the above paragraph we were wondering whether we should consider billing Auerback for a new computer keyboard, because we had indeed made mistake of sipping a cup of coffee while reading it.

The ECB should 'distribute' trillions of euros to national governments, just because it strikes Auerback as 'technically feasible'? Admittedly, all it takes to create trillions of euros from thin air in a fiat money system are a few strokes on a keyboard, we know that. So we would guess that yes, it is 'technically feasible'. The idea that 'trillions of euros would not add to aggregate demand or inflation, as member nation spending and tax policy are in any case restricted by the Maastricht criteria' is a real knee-slapper. Mr. Auerback, a second career as a stand-up comedian awaits!

Let's see, how many years did it take for the Maastricht criteria to be breached following the introduction of the euro in the form of legal tender?  How about 'zero', since it happened the very same year (Portugal was the offender in 2002 – to be followed by most of the euro area one year later).

Already from the time the treaty was adopted in 1997 several countries were in breach of its limits. Most of the euro area is in breach of the debt ceiling since 2003 and has never stopped being in breach of it – in fact, the euro-area as a whole is violating the Maastricht criterion on cumulative public debt since 2003. Moreover, everybody knows that the only reason why the bulk of the countries that have joined the currency union were able to do so was due to 'creative accounting'. Greece is only different from the rest in that it got caught.

However, let's humor Mr. Auerback's faith in the eurocracy and say that the member states' governments (12 of the 17 member nations are currently in breach of the Maastricht treaty's  public debt 'ceiling' criterion!) indeed were to suddenly become like angels and begin to hew to the treaty's criteria forthwith. Then why would they not spend money they receive from the ECB? For instance, Estonia or Finland could roughly triple, respectively double their spending if they received such a gift, since their cumulative debt and annual budget deficits are well below the maximum levels set by the treaty.

Anyone who believes you can simply 'distribute trillions' from thin air to governments and then expect them not to spend any of the money is in urgent need of some exposure to the real world.

Auerback then argues that the 'annual distribution' would actually help to ensure compliance with the Maastricht treaty criteria, as the threat of withholding them could be used. He then continues by wondering how such a plan could be 'sold' to the Germans:

“Even if you said the money credited to the national central banks could only be used to retire existing public debt (which I think is the only way you could sell it politically in Germany), you would deal effectively with the national solvency issue.”

Well, how do you 'use it to retire existing public debt' without handing the money to the current holders of said debt, who will then spend it? Obviously the euro area's money supply would quickly explode into the blue yonder and that might be found to interfere with the ECB's 'price stability mandate' somewhat.

Moreover, if the distribution became an 'annual event' based on a per capita ratio, the money would eventually pile up, wouldn't it? Taxation could eventually be dispensed with step by step, instead governments could begin to receive all their financing from the central bank's printing press. We'd all be rich! Getting around the requirement of 'using the money only to retire public debt' would be easy as pie. One could issue government notes, spend the money,  and 'retire' the notes later with the ECB's funds. The money will end up getting spent whether or not this 'restriction' is in place.

This example shows pretty clearly what is wrong with chartalism (or 'MMT' as it calls itself nowadays). It is nothing but old-fashioned, pseudo-scientific and long discredited inflationist monetary crankery. The economy is not just a 'game of numbers', it is about entrepreneurs economizing and allocating scarce resources as efficiently as possible. Anything that disturbs this process can only lead to disaster (some proposals lead to disaster faster than others – Auerback seems eager to take a short-cut).

The current monetary system is bad enough as it is, there is no need to make things even worse by repeating the mistakes made by the inflationist cranks who have held office in the past, such as the above mentioned von Havenstein.

That said, we would agree with Auerback's description of the EFSF as a 'fig leaf' that will eventually be used to enable inflationary financing of the bond markets of wobbly peripherals via the ECB – especially if the recently mooted plans of leveraging the bailout fund are put into practice.

Already the ECB's 'temporary emergency financing' of the insolvent fractionally reserved banks threatens to become a permanent feature of the financial landscape. Already government debt is monetized through the backdoor via the expedient of the repo market, where such financing is also 'temporary', but is constantly rolled over (long time readers may recall that we have always been suspicious of the 'successful bond auctions' of the likes of Ireland and Portugal).

Alas, going down the path of naked inflationism openly will only serve to accelerate the end of the euro as a viable currency. The victims will be the usual suspects who always get victimized by the schemes of inflationists: pensioners, widows and orphans and anyone else relying on their savings and fixed income to see them through.

The 'rentiers' will end up 'euthanized' – and the economy will go down the drain right with them.



Georg Friedrich Knapp, the statistician who invented chartalism, the statist monetary theory ultimately responsible for laying low the Weimar Republic. Let's try his nonsense again – this time it'll work!

(Photo via Wikimedia Commons)




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11 Responses to “Chartalist Fantasies”

  • gigi:

    I had never heard of chartalism (I am not in the economic/financial fields). I saw an article from Wray on Naked Capitalism which I thought was a joke. It talked about printing infinite quantities of money and governments never going broke. Sadly, it wasn’t a joke. And the professors goons came after me and others who refuted it or refused to accept their logic, resorting to calling people stupid and trying to intimidate them into their point of view.

    In my opinion, MMT/chartalism cannot be classified as an “honest mistake” or “difference of opinion”. It is perniciously designed to centralize power and isn’t even subtle about it, so people who believe it have to be mentally handicapped. But Yves and her group are not dumb so why are they pushing MMT? Thus Naked Capitalism and Yves Smith lost my trust.

    A real economy is about allocating resources to improve our lives. Money is a convenience; it is not the economy. Ergo, manipulating the money supply can not do anything for the real economy, at least nothing good. A government that prints infinite quantities of money is confiscating real resources in the real economy and distributing it to favored groups. Any monetary theory that encourages such action has political goals in mind, namely acquiring power over others, centralizing this power, creating dependency relationships to nurture this power, and using this power to allow its proponents complete control over the rest of us.

    • roger:

      Zerobs & you expressed my views towards NC bloggers very well. Obfuscation is the name of the game: mix up crusade against bankers, class warfare, chartalism, strong criticism towards the government, throw some prominent relatively clean but not too Austrian economists (e.g. Steve Keen), among other ingredients… then they largely get their mask well on.

      It must be noted that:
      1. Steve Keen’s analysis in itself is excellent. They mainly focus on how destabilizing large debts can be. A very worthy read.
      2. Their criticism towards government is unfortunately, in the opposite way as it should be. Auerback, for example, claimed that Obama didn’t do enough. Sounds like Krugman? Unfortunately, he’s a lot more subtle and uses much more obfuscation.

      These are some of the most pervasive centralists. They are just trying to thwart one kind of centralism and replace it with another kind. Judging by the blog ratings they achieved (voted as one of the best econ blogs out there), the future is not particularly encouraging for us free-market capitalists.

  • roger:

    Auerback was once affiliated with RAB Capital (which is now bust). Now he’s a fellow at a research institute. During the days I frequented the Naked Capitalism blog, I always had the feeling that he’s of the centralist kind (although at the time I didn’t know which centralist kind). Despite this, he kind of showcased his seemingly vast historical knowledge. This, along with the other blog contributors campaign against the bankers’ corruption & looting, and against the government, clearly deceive innocent readers — believing that they actually serve to enlighten the masses of massive corruption schemes by the government-bankers.

    A deeper look will reveal that many of the contributors are of the union supporter types, albeit in disguised forms. While their crusade against bankster corruption upon taxpayers is admirable, they support another kind of centralist views. Perhaps they conceal it as much as possible, but when you peel off little by little, it will be revealed that they are still believers of central planning: it seems they back union workers. Yves Smith is one of the strong supporters of unions. Among the main contributors: Marshall Auerback, Yves Smith, & Ed Harrison from, you can tell that they are chartalists. But this, especially for laypeople, does not come from reading one or two articles. It comes from reading numerous articles (especially the lengthy ones) and when they discuss monetary systems in the brink of disaster. To add to their disguise as centralists, they also throw Minskyism tenets along w/ chartalism.

    What I would like to say is this: there are many kinds of central planners. Some really show their faces clearly, some disguise themselves adequately, while some really pervasive ones are of the kind many Naked Capitalism bloggers are. To innocent readers, this will corrupt their minds on which economic thought is the right one. Even the obvious ones managed to escape the public views (e.g. Krugman crediting 9/11 terrorist attacks for future economic growth), how do you deal with among the most disguised forms of centralism?

    • zerobs:

      While their crusade against bankster corruption upon taxpayers is admirable, they support another kind of centralist views.

      I came to the same conclusion about 2 years ago or so. The tell was when Yves/Susan supported the “swedish solution.” Yes, I agree that bondholders should take a hit, but I was very very suspicious that any nationalization done by the US Federal Government was going to do nothing but HELP bondholders. I made the argument that nationalization of banks the size of Citi, BoA, and JPMC would distort international markets to the extent that they could not be trusted. Nationalizing them for the immediate purpose of breaking them up within WEEKS would be of value, but running them for any length of time was simply more dangerous than letting them die naturally – which the government won’t even let them do.

      She then banned me from the site for daring to question the efficacy of an otherwise acceptable alternative, accusing her of the same centralization as you describe. GMAC was nationalized, but for the most part most other banks/financial firms get immediately closed and sold to other banks, private equity is shut out of the process. The biggest ones got put into the TBTF, making them even harder to nationalize. The worst cases are the GSE’s and GM/Chrysler – I figured these would be the models of any nationalization scheme and they are the exact wrong approach; just because they are “nationalized” doesn’t mean they won’t be zombies, they’ll just be zombies with with even more state power at their disposal. At least Chrysler was sold (in part) but GM and the GSE’s operate as little more than black holes for centralization experiments. They’ll never get dealt with properly because far too many union, state, and local pensions are counting on keeping those zombies walking – and this is true for the TBTF as well.

      Basically I consider it class war; however it is not economic classes but rather political classes that are clashing.

    • You are quite correct, it often takes a while to realize what they actually advocate. I have noticed Auerback is also a major contributor to a site that calles itself ‘New Deal 2.0’ , a site that propagates the policies of FDR – the president who singlehandedly did more to dismantle liberty and free market ideals in the US than anyone else.
      What can one do? I can only occasionally write a critique and hopefully reach as many people as possible with it. It is imo definitely important to take a stand against these inflationist and statism supporting screeds.

  • They would have to do away with modern banking and leverage from the lending end for this to have any chance at all. Then again, who would want to lend any money to those that can’t pay it back? I have always had a hard time reading Auerback, though I will say that Michael Hudson, in with that group, has some idea of what the debt mess is about. This is all about bailing out bankers and little else. They owe what they can’t collect, meaning they are broke. They would take the money and buy up all the assets, then collapse the currency. The whole game is a theft by conversion game an end to the middle class and permanent bondage. May they all rot in hell.

  • amun1:

    Auerback is certainly a crank, but unfortunately he’s only slightly more addled than the people actually making global monetary decisions. Instead of the “one fell swoop” recipe for hyperinflation, central bankers have chosen the incrementalist route, presumably in an attempt to avoid the fate of late 18th century French currency debasers. They allow “markets” to signal the need for more printing, and whenever the “markets” send a distress call, printing is thereby justified and immediately ensues.

    My interpretation of the last 30 years is that interest rates must continue to fall or, in the current context, become more negative. Money supply must continue growing exponentially and at a faster rate than the underlying economic growth would warrant, even if we had some way of accurately quantifying those parameters. Since we don’t and since real growth will be further stymied by misallocation of capital and unpayable debt, money supply growth will err strongly to the positive.

    We’re on the parabola of the fiat moon shot. Politically there is no backing down now, no possible acceptance of austerity (as if the concept of austerity has a voluntary component, sort of like in a monastery). So, in answer to your earlier post “Whither Gold?”, the answer is either down and then much higher, or just much higher.

    • amun1:

      As an aside, here’s another exercise in chartalist fantasy that you might find interesting. Apparently the author is unfamiliar with the concept of velocity of money. He seems to grasp that central banks are a corrupt/inefficient way to create money and allocate capital, and then somehow came to the conclusion that elected officials were a more suitable alternative.

    • I agree with your analysis , i.e., that the reality – the ‘incermentalist approach’ of the central banks – is only slightly different from the advocacy of outright debasement by Auerback et al., as well as with your contention that there is no way out and that the policy will continue. They are in a box, and remain in it. See also my latest post on Bernanke’s recent speech. More money printing is absolutely certain to come down the pike shortly.

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