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May 21, 2018 | Italy’s New Prime Minister Puppet: Time to “Ringfence” Italy? MMT to the Rescue?

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Giuseppe Conte is slated to become Italy’s next prime minister. But he will not be in charge of anything.

The Financial Times calls Giuseppe Conte, Italy’s Prime Minister designate, a Political Novice.

That’s precisely the point of it all.

Conte will have no power. Instead, he will take orders from League leader Matteo Salvini and Five Star leader Luigi Di Maio.

This strange setup came about because Di Maio was not acceptable to the League, and Salvini was not acceptable to Five Star.

Eurointelligence Comments

In his Financial Times column Wolfgang Munchau writes that the Italy’s liberal elites are far too complacent about the threat – and have been for the last few years. They never saw this coming. We cannot recall the number of Italian observers we spoke who kept on assuring us that the two parties would never have a majority and would always be reigned in by their centrist coalition partners. This is Munchau’s stark conclusion:

“The truth is that there is no such thing as a technical backstop for liberal democracy. And herein lies the main lesson of the Weimar Republic. If liberal democracy fails to deliver economic prosperity for a sufficient large portion of the population over long periods, it ends – along with the financial and economic institutions it has created.”

Lars Feld (@Lars_Feld), a member of the Council of Economic Experts, reflects what we consider to be a broad policy consensus with the following tweet:

“Why should there be any risk sharing in EMU if the new Italian government asks for a €250bn haircut? It is time to ringfence instead against Italian risk.*“*

There is particular incomprehension in Berlin and other capitals about the idea of a MiniBot [parallel currency]. Europe’s policy establishment did not have that on their radar screen even though parallel currencies have been a subject of intense work by Italian economists. We would caution against an automatic reflex to dismiss the idea out of hand. The legal status is clearly questionable but, since they constitute from a legal perspective a fiscal instrument, there is no provision in the Treaty that would allow the EU to outlaw them.

The economist Daniela Gabor (@DanielaGabor) made the following point:

>”This Eurogroup/ECB tactic won’t work: MiniBots create purchasing power, and so effectively circumvent ECB monopoly. If state accepts miniBoTs at parity, I am not convinced of narrative ‘Italians will rebel against debasement’ argument, or ‘pensioners will suffer’.”

Is Gabor Right or Wrong?

The scary answer is half-right and that is how I see it. Economically, the MiniBot cannot and will not “create purchasing power”. But all it has to do is hold up for a while.

And all the while, the MiniBots will circumvent the ECB monopoly.

Meet the MiniBot

Zerohedge explains How the MiniBot Works.

MMT Magic

A more comprehensive explanation comes from Italy’s Parallel Fiscal Currency: All You Need to Know.

The introduction of a fiscal currency might help to bypass the constraint that Rome cannot print money and maintain the impression that the euro works. The fiscal money concept goes back to chartalism theorised by German economist Georg Friedrich Knapp at the beginning of 1900 and then expanded by the economists adhering to the “Modern Monetary Theory” (MMT).

The fiscal money idea is not in conflict with any existing EU legislation. It is not a currency as the law does not force its acceptance. Therefore it does not violate the principle of monetary monopoly of the ECB when it comes to emitting legal tender, the euro. It is not public debt. Eurostat rules clarify without ambiguity that it is not debt as long as the public sector is not forced to make payments in it. Fiscal money is a non-payable tax credit: it does not create a right to be paid but a right to reduce the tax payments due. There is no due date or coupon payment. When the Italian government issues 1 billion euro future tax credits, it does not increase the national debt.

Most importantly, the regulations of the Eurozone are based on the principle of not increasing the risk of default on public debt by member states. Emitting fiscal money does not conflict with this goal because no state can be forced to default on a bond that is a future fiscal discount. The Italian government will never be forced to redeem CCFs or Minibots in the euro, a currency that the Italian state has no sovereignty over and cannot create.

Naturally, the existence of fiscal money can constitute a first step for a state to leave the euro system if at a certain point the fiscal money is declared legal tender instead of the euro. The Emission of fiscal currency comes with a risk: it could be the end of the euro. However, the real risks of the end of the euro result from the design flaws of the Eurozone and are not created by the emission of fiscal money. The Eurozone problems already exist and will continue until the ongoing dysfunctions are fixed, dysfunctions that the fiscal money helps to overcome.

MMT is something for nothing idiocy that cannot possibly work. But all that is necessary (for a while) is for people to believe in it.

I do agree the euro is fatally flawed. It’s hardly surprising that charlatans propose other magic solutions that cannot possibly work.

Backdoor Exit

Eurointelligence reports that one of the candidates for the finance ministry job, Paolo Savona, is a eurosceptic. As part of the coalition agreement, the League gets that post.

Even if president Sergio Mattarella vetoes some of the choices, others with a similar position will take the role.

It was smart policy for the League and Five Star to publicly back off leaving the Eurozone.

But their policies lead to that exact event.

Italian Bonds Tank

Italian bonds tanked on the Prime Minister announcement. Yet, Complacency Still Abounds.

Time to Ringfence Italy?

That’s the curious notion of the day.

It’s impossible.

Mike “Mish” Shedlock

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May 21st, 2018

Posted In: Mish Talk

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