The Economist (Dec 31, 2011) gives a good fair account of neo-chartalism, and a momentous recognition of Warren Mosler’s long fight to have it accepted!
Like all new (and meaningful) views of the world, neo-chartalism develops from a number of forerunners, whose ideas are revamped under a new format.

Built on a clever use of accounting relationships, it explores the consequence of national states holding the power of using their own IOUs as means to acquire output from the private sector.

It is not a theory based on a set of assumptions. Rather, it can be effectively taught by removing assumptions from traditional monetary theory. It far more resembles the discovery that those round pieces sitting in the corner can be used as wheels!

Neo-chartalism is core to understanding how monetary economies operate—thus providing a powerful account of the cause and consequence of government deficits and surpluses, trade imbalances, private savings, changing prices, job losses or creation.

It does not provide an answer to the question of big vs. small government (this is not a monetary issue). Rather, it provides a compelling argument of how to achieve full employment and price stability—and this is precisely what the global economy needs today.

Read the article on The Economist

One claimed objective of the single currency area in Europe is (or should I say was?) to create a large single market for producers. But now the ECB is pressing national governments to gear their policies to enhance competitiveness so that they can “count on external demand” and increase their net exports! Mario Draghi, President of the ECB, and a key figure in the team now managing the European crisis, made this statement while responding to an Italian journalist, in the Q&A session of the ECB press conference of 8 December 2011.

Earlier, Draghi had described the ECB’s view of the 3-pillar recipe to end the euro crisis as follows:

First, European nations need budget policies geared to stability, growth, and competition (Note: he first said “stability, growth, and jobs”, but he immediately changed it into “stability, growth, and competition. And thus, jobs”).

Second, countries need common fiscal rules (the so-called “fiscal compact” of the euro zone approved this past week). The first two pillars are aimed at ending what Draghi calls a “confidence problem” with euro nations’ debt. So, again, for the ECB, it is all about “fiscal discipline”.

Third, the euro needs a “stabilization mechanism” led by the EFSF, with the ECB acting as its agent (and no involvement of the ECB’s balance sheet). In this respect, Draghi stressed that the ECB does not discuss its mandate: it simply complies with it.

Then, Alessandro Merli (from Il Sole24ore) asked Draghi if he wasn’t worried that budgets cuts in Europe would further intensify the recession.

Draghi’s answer was quite indicative of the conceptual framework of the ECB and of the economic scenario that the ECB expects will unfold as Europe continues with fiscal adjustments.

The ECB President admitted that budgets cuts and tax increases are contractionary—“in the short term” he added—but there are two ways to lessen their negative impact on growth:

One is the confidence-enhancing effect that will follow the new “fiscal compact”.

Now, does Draghi really believe that deficit and debt ratios will look any “better” after implementing the deficit cuts (which will, as he admits, deepen the recession in Europe)? And even assuming modest “improvements” of debt ratios, will this be enough to see markets suddenly rush for Italian and Spanish debt? Does he have a good explanation of why markets love debt issued by a non-euro country like the UK, whose deficit-gdp ratio is higher than Italy and Spain?

The other way of easing the impact of fiscal restrictions is, for Draghi, that “if you enhance the competitiveness, you can actually count on your external demand, on your net exports” (ECB press conference from 35′40” to 36′20”).

Does he really intend to make European growth depending on (or should I say at the mercy of) high levels of aggregate demand abroad? Does he not see that this means that Europeans will net export their standard of living by giving away goods and services in exchange for credits abroad? It is of course a matter of accounting logic that nations that net export will find it easier to keep their fiscal deficit lower, so perhaps Draghi is telling us that the myth of a balanced budget should rule all European policies, and Europe will do anything it takes to achieve “fiscal discipline”? Even if this means stagnation?

Or perhaps Draghi is a true genius, and he is subliminally trying to show us how absurd are the consequences of the current mandate of the ECB and of fiscal rules?

German central bankers (current and former) continue to voice their hostility to what the financial community now calls a Euro-style Quantitative Easing (aka big bazooka). This is the possibility that the ECB (directly, or through the EFSF) make an unlimited commitment to purchase euro bonds and remove the spreads.  Axel Weber, Juergen Stark, and Jens Weidmann have already voiced sharp criticism of the ongoing ECB’s sovereign bond purchase program (SMP, Securities Market Programme), saying it threatens the independence of the ECB.

Amid market rumors that the ECB will soon upgrade the SMP, Jens Weidmann (head of Germany’s Bundesbank) revisited the issue in a speech delivered last week in Berlin. This talk (by one of the boldest opponents of an ECB solution to the sovereign debt crisis) reveals how weak is the position of those who prefer to explore other paths: No real alternative is offered.

Weidmann first advocates what he calls a ‘macroprudential supervision column’. This would allegedly strengthen financial stability by giving the ECB the power to calibrate an additional buffer of bank capital and thus dampen credit expansion as needed. He then goes on to dispute the notion that monetary policy can be used to end the sovereign European debt crisis, and voiced the “staunch opposition of the Bundesbank” to any upgrade of the SMP.

What does Weidmann alternatively propose to save the euro? He calls for countries to “return to a sustainable path of public finance and to undertake the necessary structural reforms” coupled with “sufficient incentives for the member states” when austerity entails “painful and initially contentious adjustments”.
This result he says can be obtained in either of two ways:

One is a “fundamental change in the federal structure of the EU” and “a transfer of national responsibilities, particularly for borrowing and incurring debt, to the EU”.  The Unites States of Europe is a sure solution with a little problem: It demands political agreement of 27 sovereign countries. Is Weidmann aware of the cliff the euro is nearing each day?

The other is a “return to the founding principles of the system, but with an enhanced framework that really ensures sufficient incentives for sound public finances.”  Now, it is clear that (lacking political union) an enhanced set of incentives is needed, but Weidmann offers no explanation of how devising now a new form of discipline could turn things around to save the euro from the precipice.

So why does he oppose the big bazooka?

Here is my summary of Weidmann’s arguments in four bullets (with my comments):

Weidmann rightly acknowledges that in the euro area “the ultimate decision-making power has remained on the national level and the conditionality that was intended to rein in national policymakers has been increasingly relaxed”. This speaks for a mounting political problem, inevitable when a currency is without a state (see Goodhart 1998). It speaks not against the SMP. Rather, it says that the remaining question is how to dress the big bazooka up to make it politically suitable. And it says that more challenges, once the solvency issue is resolved, await the euro economy.

1. A full FICA suspension to end that highly regressive, punishing tax and restore sales, output, and jobs.

2.$150 billion in federal revenue sharing for the state goverments on a per capita basis to sustain essential services.

3. An $8/hr federally funded transition job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment.

4. See my universal health care proposals.

5. See my proposals for narrow banking, the Fed, the Treasury and the FDIC.

6. See my proposal’s to take away the financial sector’s ‘food supply’ by banning pension funds from buying equities, banning the Tsy from issuing anything longer than 3 month bills, and many others.

7. Universal Social Security at age 62 at a minimum level of support that makes us proud to be Americans.

8. Fill the Medicare ‘donut hole’ and other inequities.

9. Enact my housing proposals.

10. Don’t vote for anyone who wants to balance the federal budget!!!!

Two kinds of economic units are considered here, consistent with a longstanding taxonomy in economics: business firms and households. Households earn by selling productive services and spend on goods and services for their current consumption. Business firms convert acquired productive services and intermediate products into output for sale.

Net income is the difference between revenue (i.e., the proceeds received from sales, from selling labor services, from renting property, and from lending money) and current expenditure (i.e., the payments made for acquisitions of output consumed in the accounting period, for using labor services, for using property, and for borrowing money). Yet, depending on the type of economic entity being considered (households or business), different terms are used for revenue and expenses.

Income statements of business firms
Business firms’ net income is called profit. This is the difference between output sales (on the credit side) and operating expenses (on the debit side). The latter includes the expenses of output and productive services consumed in the period for running the business operation, typically labor, rental, and interest costs; the expenses for intermediate products used in the production of new output; and the expenses for maintaining and replacing capital goods (i.e., business plant and equipment). Operating expenses do not include expenditures for new capital goods whose lifespan is expected to extend beyond the accounting period. Figure 3 illustrates the key entries of a typical profit (or loss) statement for business.

Figure 3. Profit (or loss) statement for business

Income statements of households
Households’ net income is called saving. This is the difference between earned incomes from productive services (on the credit side) and consumption expenses (on the debit side). The latter include the expenses of output consumed during the period and do not include household expenses of assets whose lifespan extends beyond the period of reference, typically real estate. Figure 4 illustrates the key entries of a typical personal income statement for households.

Figure 4. Personal income statement for households

Consolidated sector income statements
A consolidated income statement combines the income statements of all units in a given sector in one single document. In such a statement, if the revenue of one unit in a given sector is the current expenditure of another unit in the same sector, they cancel out.
Because only two sectors are assumed to be operative, consolidated household incomes from productive services (IPS) must match consolidated business operating expenses (OE). Conversely, household consolidated consumption expenses (CE) only make one component of business output sales (OS)—that also include proceeds from capital goods sales. Because capital goods are sold by firms to other firms, and payments for capital goods are not accounted as operating expenses, business acquisition of capital goods does not cancel out.
Accounting thus provides the following identities:
(1) Profit = (OS−OE)
(2) Saving = (IPS-CE)
(3) IPS = OE
(4) OS = CE + Business acquisition of capital goods
And one obtains:
(5) Profit + Saving = (OS−OE) + (IPS-CE) = Business acquisition of capital goods
Letting “I” be business firms’ acquisition of capital goods:
(6) Profit + Saving = I
The value of acquired capital goods is the net income generated in this two-sector economy where some of the output is classified as “capital goods.”

Next module: Flow of funds accounts and the net financial position
Back to Table of Contents

Well, like all economists always do, let’s assume!

Let’s assume that Europeans have two goals:

1) Preventing sovereign debt defaults to avert a full-blown banking crisis; and

2) Saving the political project of the single currency that Europeans regard as a fundamental pillar of the integration process that started right after World War II.

Question: Should Europeans work towards reaching goal #2 in order to secure goal #1, or can they achieve goal #1 and then work towards goal #2?

If the euro area were already a political entity (like the United States) with a federal treasury and a central bank that acts as a market maker of treasury securities consistent with its policy rate, none of the sovereign debt problems would have occurred. Objecting that even the U.S. is not immune from a sovereign debt crisis is highly misleading: The U.S. “debt ceiling” crisis last summer was caused by a potential Congressional vote to deliberately suspend payments to private creditors of the U.S. government. By contrast, euro countries currently under pressure are very much willing to honor all their payments as they come due, but they are constrained by their status of regional entities (much like single states in the U.S.) and thus must face external funding constraints. In principle, Europeans could achieve goal #1 by first completing goal #2: Once Europeans have taken the full federation step, the sovereign debt crisis evaporates.

Because the euro area is not a political federation and is instead a union of countries that share the same currency but do not share the same treasury, the above question becomes crucial. Is a European federation, or at least some significant transfer of sovereignty from single states to a centralized EU body, a condition for achieving goal #1?

Let’s further assume that time for preventing a full-blown crisis is running out and that any sovereign transfer decisions must overcome political resistance in Europe and would take time. In that case, achieving goal #1 depends crucially on the possibility of doing it before Europe makes any progress towards goal #2. And it should be in the interest of Europeans to search and find solutions to #1 that do not require addressing #2 first.

Examples of proposals being discussed that include some form of political sovereignty transfer include those by Tabellini and Soros.

The only effective proposal around so far, to my knowledge, that directly aims at goal #1 (and does not require political reforms) is some combination of the ECB revenue-sharing solution and the ECB acquisition of Mosler bonds. This is not an easy political sell either, yet implementation of it before Europe finds itself on the brink of collapse would be a European boon!

Does this sound vaguely familiar?

Compare it to How to Fix the US Economy in Less Than 500 Words (posted by Warren Mosler on 8 February 2010)

let me get right to the point.

I have three bold new proposals to get back all the jobs we lost, and then some.
In fact, we need at least 20 million new jobs to restore our lost prosperity and put America back on top.

First let me state that the reason private sector jobs are lost is always the same.
Jobs are lost when business sales go down.
Economists give that fancy words- they call it a lack of aggregate demand.

But it’s very simple.
A restaurant doesn’t lay anyone off when it’s full of paying customers,
no matter how much the owner might hate the government,
the paper work, and the health regulations.

A department store doesn’t lay off workers when it’s full of paying customers,
And an engineering firm doesn’t lay anyone off when it has a backlog of orders.

Restaurants and other businesses lay people off when their customers stop buying, for any reason.
So the reason we lost 8 million jobs almost all at once back in 2008 wasn’t because all of a sudden
all those people decided they’d rather collect unemployment than work.
The reason all those jobs were lost was because sales collapsed.
Car sales, for example, collapsed from a rate of almost 17 million cars a year to just over 9 million cars a year.
That’s a serious collapse that cost millions of jobs.

Let me repeat, and it’s very simple, when sales go down, jobs are lost,
and when sales go up, jobs go up, as business hires to service all their new customers.

So my three proposals are specifically designed to get sales up to make sure business has a good paying job for anyone
willing and able to work.

That’s good for businesses and all the people who work for them.

And these proposals are bipartisan.
They are supported by Americans ranging from Tea Party supporters to the Progressive left, and everyone in between.

So listen up!

My first proposal if for a full payroll tax suspension.
That means no FICA taxes will be taken from both employees and employers.

These taxes are punishing, regressive taxes that no progressive short ever support.
And, of course, the Tea Party is against any tax.
So I expect full bipartisan support on this proposal.

Suspending these taxes adds hundreds of dollars a month to the incomes of people working for a living.
This is big money, not just a few pennies as in previous measures.

These are the people doing the real work.
Allowing them to take home more of their pay supports their good efforts.
Right now take home pay is barely enough to pay for food, rent, and gasoline, with not much left over.
When government stops taking FICA taxes out of their pockets,
they’ll be able to get back to more normal levels of spending.

And many will be able to better make their mortgage payments and their car payments,
which, by the way, is what the banks really want- people who can make their payments.
That’s the bottom up way to fix the banks, and not the top down bailouts we’ve done in the past.

And the payroll tax holiday is also for business,
which reduces costs for business,
which, through competition,
helps keep prices down for all of us, which means our dollars buy more than otherwise.

So a full payroll tax holiday means more take home pay for people working for a living,
and lower costs for business to help keep prices and inflation down,
so sales can go up and we can finally create those 20 million private sector jobs we desperately need.

My second proposal is for a one time $150 billion Federal revenue distribution to the 50 state governments
with no strings attached.
This will help the states to fill the financial hole created by the recession,
and stay afloat while the sales and jobs recovery spurred by the payroll tax holiday
restores their lost revenues.

Again, I expect bipartisan support.
The progressives will support this as it helps the states sustain essential services,
and the Tea Party believes money is better spent at the state level than the federal level.

My third proposal does not involve a lot of money,
but it’s critical for the kind of recovery that fits our common vision of America
My third proposal is for a federally funded $8/hr transition job
for anyone willing and able to work,
to help the transition from unemployment to private sector employment.
The problem is employers don’t like to hire the unemployed,
and especially the long term unemployed.
While at the same time,
with the payroll tax holiday and the revenue distribution to the states,
business is going to need to hire all the people it can get.
The federally funded transition job allows the unemployed to get a transition job,
and show that they are willing and able to go to work every day,
which makes them good candidates for graduation to private sector employment.

Again, I expect this proposal to also get solid bipartisan support.
Progressives have always known the value of full employment,
while the Tea Party believes people should be able to work for a living, rather than collect unemployment.

Let me add here that nothing in these proposals expands the role or scope of the federal government.
The payroll tax holiday is a cut of a regressive, punishing tax,
that takes the government’s hand out of the pockets of both workers and business.

The revenue distribution to the states has no strings attached.
The federal government does nothing more than write a check.

And the transition job is designed to move the unemployed, who are in fact already in the public sector,
to private sector jobs.

There is no question that these three proposals will bring drive the increase in sales we need to
usher in a new era of prosperity and full employment.

The remaining concern is the federal budget deficit.

Fortunately, with the bad news of the downgrade of US Treasury securities by Standard and Poors to AA+ from AAA,
a very important lesson was learned.

Interest rates actually came down. And substantially.

And with that the financial and economic heavy weights from the 4 corners of the globe
made a very important point.

The markets are telling us something we should have known all along.
The US is not Greece for a very important reason that has been overlooked.
That reason is, the US federal government is the issuer of its own currency, the US dollar.
While Greece is not the issuer of the euro.

In fact, Greece, and all the other euro nations, have put themselves in the position of the US states.
Like the US states, Greece and other euro nations are not the issuer of the currency that they spend.
So they can run out of money and go broke, and are dependent on being able to tax and borrow to be able to spend.

But the issuer of its own currency, like the US, Japan, and the UK,
can always pay their bills.
There is no such thing as the US running out of dollars.
The US is not dependent on taxes or borrowing to be able to make all of its dollar payments.
The US federal government can not go broke like Greece.

That was the important lesson of the S and P downgrade,
and everyone has seen it up close and personal and they all now agree.
And now they all know why, with the deficit at record high levels, interest rates remain at record low levels.

Does that mean we should spend without limit and not tax at all?
Absolutely not!
Too much spending and not enough taxing will surely drive up prices and inflation.

But it does mean that right now,
with unemployment sky high and an economy on the verge of another recession,
we can immediately enact my 3 proposals to bring us back to
a strong economy with good jobs for people who want them.

And some day, if somehow there are too many jobs and it’s causing an inflation problem,
we can then take the measures needed to cool things down.

But meanwhile, as they say, to get out of hole we need to stop digging,
and instead implement my 3 proposals.

So in conclusion, let me repeat these three, simple, direct, bipartisan proposals
for a speedy recovery:

A full payroll tax holiday for employees and employers
A one time revenue distribution to the states
And an $8/hr transition job for anyone willing and able to work to facilitate
the transition from unemployment to private sector employment as the economy recovers.

Thank you, God bless you, and may God bless the United States of America.