Tuesday, February 16, 2016

Time For Private Currency

From Real World Economic Review:

Is the EuroArea marching towards a system of private banking?

It looks as if the Euro Area is, unintendedly, changing into an ‘Austrian’ style  ‘free banking’ area where every bank issues its own money, the central bank is no lender of last resort anymore, government money does not exist  and exchange rates between bank moneys are variable. A Banco Santander Euro will be another Euro than a Deutsche bank Euro. Yanis Farouvakis gives us a taste of how this works:

“Greece today (and Cyprus before it) offers a case study of how capital controls bifurcate a currency and distort business incentives. The process is straightforward. Once euro deposits are imprisoned within a national banking system, the currency essentially splits in two: bank euros (BE) and paper, or free, euros (FE). Suddenly, an informal exchange rate between the two currencies emerges.”

Why do I think this trend might gain strength?
  1. A) At this moment there is a lobby to abolish cash. Not just the 500,– Euro note but essentially all cash. Cash is money issued by the government. The government promises that Euros created by whatever money creating bank (the so called MFI’s) has a guaranteed 1:1 exchange rate with cash. This ensures that Euro’s created by Banco Santander have the same nominal value as Euro’s created by Deutsche Bank or RABO. Without cash this promise is empty and there is no guarantee anymore that all bank moneys have equal value.
B) Bank moneys are of course indistinguishable. Nobody can tell if an electronic deposit Euro in a bank has been issued by RABO or Banco Santander. However, there is a lobby (not the same as the first one), led by mister Schauble, minister of finance of Germany, to roll back the ‘whatever it takes’ promise of Mario Draghi. The ‘whatever it takes’ promise of ensures that all government debt (except Greek debts, which are exempted) is nominally risk free. Which, as banks own quite a bit of these debts, means that all banks can use it as high quality collateral. Schauble wants to end this....MORE
Huh, time to pull 1808's "The Only Sure Guide to Bank Bills..." out of the vault.
Here's the Varoufakis piece at project Syndicate: "Greece’s Two Currencies"