I generally operate on the principle that if people can show me how I’ve misunderstood something I will take that as a win. If they can do this without making me feel a complete fool, that’s an unnecessary but welcome bonus.
After blogging a couple of early (fairly negative) thoughts about miniBOTs yesterday, I had a bit of feedback. What followed was a brief epiphany during which I realised I was wrong and miniBOTs could actually be an awesome idea.
The epiphany was based on the notion that if there is slack in the Italian economy (which there surely is), and that this slack could be engaged without crowding out the private sector by the government doing generally helpful-to-long-term-human-goals-sort-of-stuff (again, likely true). This could be upgrading infrastructure, developing human capital, regional/ sectoral development financing, that sort of thing. And (importantly) the financing vehicle – miniBOTS – could be used by the government in a manner that was revenue-neutral or even revenue-accretive.
It would work like this:
- Step 1: government puts out tender for xyz contract, payable in a certain value of miniBOTs;
- Step 2: contractors bid for and win contract, then sell miniBOTs to folks owing large back-taxes at a discount.
- Step 3: government collects back-taxes (and/ or taxes on the grey/ black economy that now steps into the sunlight with lower effective tax rates) that were otherwise lost. So debt doesn’t actually rise.
Reckoning that miniBOTs might trade sub-par (because, you know, some other government might turn up and think the whole idea was a bit whacko and stop accepting them as taxes in lieu of euros), contractors would probably want a few more miniBOTs than plain old euros for a given job, implying a financing yield (in terms the ratio of miniBOTs to Euros, or rather discount to par).* In other words, I believe that this new good-for-Italy-using-up-slack expenditure would cost more in miniBOTs than it would otherwise have done in plain euros.
But costing more miniBOTs than euros could be okay if a) it deploys slack productively; b) it is making investments that are possible that would have been impossible without miniBOTs, and; c) would ultimately be financed by gathering back-taxes/ black economy taxes. (The folks owing back-taxes buy the miniBOTs because – now there is a discount to par value of a potentially temporary nature – it costs them less, and they seize their chance.)
So rather than being an interesting money thing, it could actually be a bit of an elaborate tax amnesty/ tax cut in which government contractors also get a little richer than they otherwise might.
However, this epiphany lasted only 53 seconds.
My mind had sort of taken a temporary leave of absence, and I’d forgotten Gresham’s Law: the idea that bad money drives out good.
In other words the miniBOTs get bought by ordinary folk at the point at which they pay their taxes (and they then deliver them to government in lieu of euros), and there is no reason why back-taxes/ black economy taxes ever get touched.
The government still has to pay more miniBOTs than euros for stuff (because otherwise why would people take them) and legit taxpayers would buy them at a price below par (because otherwise why bother). And so the whole thing becomes self-defeating as miniBOTs collect in the Italian treasury rather than among the population as a whole, who prefer to amass monetary assets in euros unless tempted by discounts to par (and hence higher implied financing rates for the state) on miniBOTs. (And the scheme introduces scope for political favours to be awarded to connected contractors who might even repay this political debt through future party funding.)
Meanwhile, the Commission would likely look at miniBOTs as debt (because selling future receivables look very much like debt, as any credit card receivable securitization analyst will tell you), and given they look to be zero-coupon, would likely see them as tradable to next put date (see footnote), which is to say having very short term structure no matter how irredeemable they profess to be.
There is a second way that miniBOTs are interesting, and that is as an asset conjured our of nothing that has value to people in such a way as to create demand for a permanent stock (eg, a currency). In such a light, the scheme looks pretty identical to the creation of a new form of Outside Money, but as a Chartalist myself I think that for it to actually properly work the state would need to require the payment of taxes in miniBOTs rather than simply accept the payment of taxes in miniBOTs. In accepting rather than requiring, we get back into Gresham’s Law problems: the miniBOTs would need to have an implicit financing cost. And because of this the state would endure a weaker fiscal position than it would otherwise have (paying more miniBOTs than it would have needed to pay euros, but receiving back an equal number of miniBOTs to the number of euros it would otherwise have received in tax revenue). If the state chose to only accept taxes in the form of miniBOTs this changes things. But I think that this then touches on the legal tender issues discussed in the previous blog.
I’m still up for being persuaded of their merits. And if I wanted to shoe-horn Italians out of the Euro without actually bothering to make and win the case with them that this was what they would be doing (stirring up a fight with Brussels, maybe demonizing them along the way to the domestic population), miniBOTs seem a reasonable thing to introduce.
Absent this motivation, I still can’t see these merits right now. There could be a decent portion of folks who reckon a tax amnesty or tax cut would be self-funding. I know there is a decent minority of the population who think that Italy should leave the Euro. Advocates of these positions should make their case without engaging in bait and switch tactics.
Chances are you’ve thought about this more than me. If you can communicate simply and coherently why miniBOTs make senses in a way that doesn’t involve leaving the Euro please blog it (in English, sorry).
* It has been put to me that miniBOTs won’t have a term (ie a date at which they will necessarily turn into euros) and so my whole blog is somewhat off-base. But if I bought an irredeemable zero coupon euro-denominated security that was puttable at par, I would consider the term to be the first put date, and then measure its yield as a function of the discount to par and distance from par. (To get a bit more technical the first put date is the date at which it is advantageous for the holder to put the securities to the issuer, and this will actually depend on the price of all of the other securities on that issuer’s yield curve as well as the put date). I can’t think why anyone else (including the Commission) would not do the same.
Update: the Bank of Italy has put out a PDF with their initial take on miniBOTs. It is the clearest thing I have read, and I was surprised and delighted that it did not contradict my understanding as conveyed in this blogpost and it’s predecessor.