The new Italian government is mulling the issuance of “mini-BoTs.” This will of course mean nothing to use normies out here but it’s got two groups of people enraged. One group is the bankers, the other the federasts. For what this really is is the issuance of a new currency. Not quite the welcome return of the lira but about as close to it as is possible without in fact calling it such. What worries the bankers is that this means the Italian government can now issue more money at will. What worries the federasts is that the Italian government can now issue more money at will.
All of that rather undermines the euro, which is an excellent thing. Killing off the worst economic policy imposed upon Europe since the Reichsmark is a Good Thing. But it will be a bit turbulent, to say the least:
Any move by Italy’s insurgent government to issue parallel liquidity will set off a red alert in financial markets and call into question the survival of Europe’s monetary union, Standard & Poor’s has warned.
The rating agency said the ‘minibot’ plan being prepared by anti-euro Lega nationalists and the alt-Left Five Star Movement would create a rival payment structure based on ‘IOU’ notes. This subverts the monetary control of the European Central Bank and risks a disastrous chain-reaction.
Italy isn’t allowed to print more euros. It’s also not allowed to borrow more under the Maastricht rules. And it’s most certainly not allowed to bring back the lira. So, what they’re doing is issuing small denomination BoTs. Think gilts, or Treasuries. Government debt that is, in small denominations. These will be properly printed, they won’t just exist in the electronic ether. And people can trade them between themselves. You can pay your taxes with them at face value. They are, in effect, cash, although they’ll certainly trade at a discount to face value.
Great, from one point of view. Italy has just brought the lira back. There’s a new currency, the government can issue as much as it likes, it provides a devaluation (that’s what trading at a discount means) and all is lovely. They’ve escaped the restrictions of the euro.
Which is what is worrying the bankers of course. Governments being able to print as much money as they like doesn’t have all that good a track record which is why the euro rules forbid it. It enrages the federasts because it means the Italian government is outside their control.
It’s all going to be most interesting really. One possibility is that they issue a few mini-BoTs and not much happens and that’s the end of that. The other is that they issue lots, they become a true alternative currency and Italy leaps free of the euro into inflation and economic expansion – yes, both would happen given the constraints of the Italian economy.
There’s also rather more parochial fun here. The Senior Lecturer at Islington Technical College insists that Modern Monetary Theory is where it’s at. He also insists that monetary policy has no remaining power and that fiscal policy is the only thing left that is effective. Here we’ve got what is essentially Modern Monetary Theory being applied as monetary policy. Going to be interesting to see which of his insistences crumbles first.