Very interesting. But was it also stupid?
[Update: Here's Hugo Dixon's "snap analysis". (He also deserves a HT.)]
Leave aside the political/legal aspects. How would it work? In theory, at least. (Did I really need to add that?)
Here are some very quick thoughts:
If I hold $20 in paper currency, it is as if I have a chequing account at the central bank that issued that currency, with a positive balance of $20. And if I buy something from you for $20, and give you that $20 note, it is as if I give you a cheque for $20, and that cheque is an instruction to the central bank to transfer $20 from my account at the central bank to yours. And there is no reason why that same instruction couldn't be sent over the internet, rather than written on paper.
The physical form of money doesn't matter for the theory. (Though it does matter a lot for practical convenience, and the use of money is all about the practical convenience of one medium of exchange compared to another, or compared to direct barter.)
I can hold a negative balance in my chequing account at the bank, if the bank gives me permission to run an overdraft, and doesn't bounce my cheques until I hit that overdraft limit. I can't hold a negative amount of currency. (Though we can imagine a world with both green and red currency, where red currency notes are worth minus $1, and an overdraft limit means a limit on the number of red notes I am allowed to hold.)
As far as I can see, Greece's Plan B is simply an electronic currency. The government sets up a new central bank, that bypasses the existing central bank, and can issue new (electronic) currency. Every entity (both humans and corporations) that has a tax number is part of the network, and can make or receive payments from and to their account at the new central bank.
That electronic money could be convertible into Euros at par, if the new central bank chooses to allow people to convert their balances into Euros at par, and has the Euro reserves to be able to do so. Or it could let the exchange rate float. If it lets the exchange rate float, we will need a name for the value of the balances, and we might as well call the new electronic currency "the Drachma".
One neat thing about electronic currency, that exists only on a central computerised ledger, is that there are no practical difficulties in paying (positive or negative) interest on that currency.
It's looking very similar to Michael Woodford's Neo-Wicksellian model, where everyone has a chequing account at the central bank that they use to buy and sell goods, and the central bank controls inflation by adjusting the interest rate on balances in those chequing accounts.
But there are two big differences:
1. Taxes and transfer payments. If the government wants to tax you $100, it just deducts $100 from your account. If the government wants to give you $100 as a transfer payment (like pensions), it just adds $100 to your account. You could think of the government having an account too, but it's theoretically redundant. If the government doesn't have a big enough balance in its account, it simply adds whatever it needs, at the stroke of the keyboard. It would be very different if the central bank were independent from government, and didn't let the government print as much money as it wanted to print.
2. Overdrafts. In Woodford's model, each individual can have either a positive or negative balance, but the total quantity of positive and negative balances across all individuals must sum to zero. Which raises the obvious question: who prevents an individual simply running up an infinitely large negative balance, that he can never pay off? In Woodford's model, the answer is: Woodford himself, when he imposes the no-Ponzi condition on each individual agent. But you can't introduce a deus ex machina like that in the real world.
In Greece's Plan B, each individual starts with a zero balance (unless he owes unpaid taxes). If the government spends more than it deducts in taxes, the sum of the positive and negative balances would become increasingly positive over time. (You could say the government balance becomes increasingly negative over time, but as I argue above, the government's balance is entirely fictitious, since nobody but the government will enforce the no-Ponzi constraint on the government.)
Is it the government that decides that nobody, except the government, is allowed to hold a negative balance? It bounces your "cheque" if you try to pay more than the balance in your account, and sets the police on you if you owe taxes to the government. If so, it's just like paper currency, where you can't hold negative amounts.
What determines the inflation rate of the "Drachma" balances, in terms of real goods and services? Since the net balances will sum to a positive number, and not zero like in Woodford's model, we are in a hybrid world. It's like the Quantity Theory (because the sum of the balances is positive); but it's also like Woodford (because the central bank can vary the interest rate paid on balances, which affects the velocity of circulation, with higher interest reducing velocity).
Come to think of it, it's very much like Silvio Gesell's model. The fact that Gesell had negative interest paid on money and Woodford has positive interest paid on money, doesn't matter for the theory.
But there's also a Neo-Fisherian element too. For a given path of (real) spending and taxes and transfer payments by the government (Fiscal Theory of the Price Level), an increase in the interest rate paid on balances must mean an exactly equal increase in the growth rate of the total balances. (If you print new money to pay 1% interest per year on old money, that means the money supply growth rate is now 1% per year.) So an increase in the interest rate will increase the long run equilibrium inflation rate, simply because it must increase the money supply growth rate. That's not at all Woodfordian.
What would the money demand function look like? Just a regular one. With the minor modification that the opportunity cost would now be the nominal interest rate on alternative assets minus the interest rate paid on money. And the major shift variable being the extent to which people would actually want to hold these balances because they are useful as a medium of exchange. At one extreme, these balances could replace Euros as a medium of exchange in Greece, so the demand would be very large, the government's seigniorarge base would be very large, and they would hold their value. At the other extreme, if nobody wants to hold these balances as a medium of exchange, so they are no different from Greek government bonds, except with a flexible exchange rate into Euro bonds, they probably wouldn't be worth very much. Their value would depend totally on whether people thought the government would treat the balances as junior or senior relative to Euro bonds. My guess is junior.
Worthwhile Canadian Initiative 
I suspect the scheme is deliberately unstable. It would be a mechanism for the Greek government to go into debt more and to start capturing the control of the banks. Either the Troika lets that happen de facto bailing out Greece and keeping the banks or they shut down the banks which get taken over by Greece which exits the Euro, defaults on the debts, and every thing runs in Drachmas.
I assume Tsripas decided Syriza would take the blame for exiting the Euro and didn’t want to do that.
It looks like Tsipras want to go to Davos. Yanoufakis not so much.
What a bunch of absolute clowns and fools these people are/were.
(I’m referring to policy modus operandi)
To think they were running a country.
Jim: a few months ago, when some people were saying how clever the Greek government was, I thought they maybe had a cunning plan to turn Greece into something like Cuba, or Venezuala minus the oil. It looks like I was wrong on that. I have no idea what they are up to. Like JKH, I now think the cock-up theory looks good. But I do have some sympathy recently for the PM, who seems to be trying to make the best of things.
But forgetting Greece politics for a minute, could something like this Plan B actually work? I think it maybe could. The biggest unknown is whether people would actually use it as a MOE and MOA, given network effects and the actually existing Euro currency alternative.
And returning to Greece, they could just have accepted Schaueble’s offer of E50B bugger off money to quit the Euro.
One issue is the EU doesn’t want other countries to rack up debt. It appears our multiculturalism and floating currency helps people self organize their own income earning potential. I understand there is the issue of not originating another WW and maybe some fears of Russian invasion.
In North America, Greece would be the location of manufacturing plants for export, the same way car plants started locating to the deep South to give semi-skilled wages to semi-skilled workers. In the absence of floating rates, Grecians should move to Germany. Perhaps the countries that fund the EU should establish “Little Italys” in their cities? There could be a Division 1 of countries that utilize a devalued currency when necessary to attract export based industries. You could expand it to Jordan and Russia and Turkey one decade.
That war over Cyprus was expensive for Greece. I’d like to see Greece become the neutrino hub of archaeology and export the ancillary industry of neutrino high speed trading (through Earth) to London.
What bugs me about universal daycare in the CPC seems more concerned about punishing bad parents than ensuring toddlers have a chance to experience a stimulating childhood.
Who you blame depends absolutely on who you believe.
To not blame the Troika is to assume that austerity can be expansionary. Alternatively they didn’t care about the economics, all they wanted was regime change. Schauble seem to just want to declare the Greeks barbarians and throw them out of civilization. I’d be interested in any other argument about the Troika’s behaviour.
I think the main blunder on Syriza’a part was to assume they were negotiating with people who wanted to minimize their costs over the long term. That would mean stopping austerity, waiting a bit, and skimming the larger quantity of cream available in the future. Clearly not the Troika’s intent.
Another point wast that Syriza offered to start implementing changes as they were agreed to, presumably starting with the most important ones. If you want to fix something that is absolutely the way to go. They were denied that because the Troika wanted a big bang package. Then the Troika blamed Syriza for not doing anything. Chutzpah are us.
To complain about behaviour you have to assert they had control, what control did Syriza have over anything?
To move into areas of my more professional competence. The more lurid hacking stories seem to be out to lunch. The problem was that the designers of the alternate currency had no data on the economy. So they got a copy of the tax rolls. The legality of that is determined by who you think the rolls belonged to. They were part of the Greek government so no crime if that who owns the rolls. You would have to look at specific legislation and exactly what they did (did they strip identities?) to see if it was if it was legal.
Any change to the operation of the tax system would be in accordance to legislation (possibly ex post facto) but it never got to that point.
From my 30.000 foot view of the system issues, it would have ahd at least a reasonable probability of working, but the devil is always in the details (cf Obamacare).
Who you blame depends absolutely on who you believe.
To not blame the Troika is to assume that austerity can be expansionary. Alternatively they didn’t care about the economics, all they wanted was regime change. Schauble seem to just want to declare the Greeks barbarians and throw them out of civilization. I’d be interested in any other argument about the Troika’s behaviour.
I think the main blunder on Syriza’a part was to assume they were negotiating with people who wanted to minimize their costs over the long term. That would mean stopping austerity, waiting a bit, and skimming the larger quantity of cream available in the future. Clearly not the Troika’s intent.
Another point wast that Syriza offered to start implementing changes as they were agreed to, presumably starting with the most important ones. If you want to fix something that is absolutely the way to go. They were denied that because the Troika wanted a big bang package. Then the Troika blamed Syriza for not doing anything. Chutzpah are us.
To complain about behaviour you have to assert they had control, what control did Syriza have over anything?
To move into areas of my more professional competence. The more lurid hacking stories seem to be out to lunch. The problem was that the designers of the alternate currency had no data on the economy. So they got a copy of the tax rolls. The legality of that is determined by who you think the rolls belonged to. They were part of the Greek government so no crime if that who owns the rolls. You would have to look at specific legislation and exactly what they did (did they strip identities?) to see if it was if it was legal.
Any change to the operation of the tax system would be in accordance to legislation (possibly ex post facto) but it never got to that point.
From my 30.000 foot view of the system issues, it would have ahd at least a reasonable probability of working, but the devil is always in the details (cf Obamacare).
According to Wikipedia only 60% of people even have internet access. Right off, that would seem to me to make it a bit of non-starter.
I’m wondering if Tsipras is just buying time. Let some of the chaos settle, get some money to run the gov’t, meanwhile secretly print New Drachma and make plans to unilaterally default and bail out in a more orderly way.
The alternative would seem to be being forced out when they come hat in hand for bailout #4 and the Germans finally say “Nein!”.
Pstrick: “According to Wikipedia only 60% of people even have internet access.”
Ah. That would have been a problem.
On the other hand, in the olden days, back in the 1990’s, Carleton students were able to register for their courses by phone through a fully automated system. It wouldn’t work with a rotary dial, or carrier pigeon, and it was a bit clunky, but it still worked. You didn’t need an “app” (whatever they are). If we could do that, back then, I don’t think there would be any difficulty in setting up a similar system to transfer money. Two 9-digit numbers (payer and payee’s SIN), 4-digit pin, plus 4 digits if you are paying $99.99, and you’re done.
You young people forget that we could still do stuff like that, back in the Dark Ages before the internet.
This sort of dual currency- where the government prints one for covering its expenses and the public has a broadly accepted one for commerce- has been at the foundation of several hyperinflation events. In Germany there was the gold mark and the paper mark. The government owed France reperations in gold marks and so turned to paper marks to cover its expenses. Non hilarity ensued. In Zimbabwe the government used the Zdollar to fund the land redistribution (among other projects) while the rest of the country had access to US dollars and SA Rand. Both examples had deflation in terms of one currency (Gold, US Dollar) and hyperinflation in the other. Once you hit a point where deflation is occuring in the more stable currency then virtually all payments made in the government currency get converted ASAP. The only way for this type of scheme to work is for Greece to (almost) immediately create economic growth in terms of Euros after the switch.
Electronic transfer is a red herring. The point would have been to reopen the banks using scrip for government payments. Gresham’s law would have made it high velocity. Schauble would have made sure that Grexit followed. That is what Tsipras is unwilling to do.
Good post on Gesell, by the way.
“That electronic money could be convertible into Euros at par, if the new central bank chooses to allow people to convert their balances into Euros at par, and has the Euro reserves to be able to do so. Or it could let the exchange rate float. If it lets the exchange rate float, we will need a name for the value of the balances, and we might as well call the new electronic currency “the Drachma”.”
The floating option could take either of two routes. You could offer to redeem IOUs in a few years with a fixed amount of euros, in which case the IOUs would float until redemption. Or you could (maybe) create a new currency with no redemption, in which case it would float forever.
People would care whether the government treated IOUs as junior or senior in the first. But would they care in the case of the second?
JP: thanks.
I was a bit cryptic about the junior/senior bit. Assume the Drachma floats. Suppose the Greek government has some tax revenue coming in. It could use that tax revenue either: to pay interest on Euro bonds; or else reduce (prevent rising) the total stock of Drachma balances. If it does the first, then I would say Euro bonds are senior, and there would be a higher money supply growth rate for the Drachma, and higher inflation.
I think the plan B makes some sense as long as the banking system is closed. When the banking system is closed (even for domestic transactions), there will be demand for this medium of exchange. It should probably be backed somehow because whenever the banks reopen, demand for this medium of exchange will probably collapse. The anticipaton of this could otherwise severely impair the function of this alternative medium of exchange.
I think in order to make it work you could credit every account with a certain amount which is supposed to be payed back later. Doing this, the state would assume credit risk to its own population. The payment system would at least initially be flawed because people in need of big amounts of money for transactions would struggle to get them quickly because no loans are available and the funds would have to be acquire from others over time.
Makroint: that makes sense to me.
BTW, I hear that the Bank of Mexico has something similar to Plan B already up and running. I haven’t looked into it.
Why didn’t they try it? >>
“Grexit is going to equip him [Schaeuble] with sufficient bargaining, sufficient terrorising power in order to impose upon the French that which Paris has been resisting. And what is that? A degree of transfer of budget making powers from Paris to Brussels.”
<<
The Plan B would have “worked” if: the Greece gov’t would have accepted the fiat-digital eDrachmas balances for tax collection at Euro par (100%), which allows those who pay to also be willing to accept from their own customers the same eDrachmas.
(I have previously suggested and still support Greece issuing 1 year, 0%, bearer bonds equal to their budget deficit plus some 10% of their outstanding debt. Bonds, NOT money, no firm must accept them as payment, altho it is allowed. Greece would pay 50% of its pensions, salaries, and other internal cost suppliers with bearer bonds, as long as it has bonds. Makroint would agree with this, I think.)
A parallel / script / digital/ bearer bond currency that goes along with real limits on its creation can be successful. The real world problem is when there is no limit to the amount of new currency the gov’t can print & use, so it fails to reduce spending.
The other hand issue is whether the new currency helps spark economic growth, which is needed for any success (as well as to reduce the safety net demands for more spending).
Extraordinary interview with Varoufakis:
http://mobil.stern.de/politik/ausland/yanis-varoufakis—they-bury-the-values-of-democracy–6364696.html
Why is China so reluctant to devalue? Could someone please provide a more thorough explanation than this?
“This relief is blocked – for now – because it would risk other nasty side-effects. Chinese companies have $1.2 trillion of US denominated debt. A yuan devaluation would anger Washington and risk a beggar-thy-neighbour currency war across Asia, with lethal deflationary effects.”
– Ambrose Evans-Pritchard
http://www.telegraph.co.uk/finance/economics/11756858/Capital-exodus-from-China-reaches-800bn-as-crisis-deepens.html