From the WSJ (h/t Tyler):
The Portuguese government is considering a plan to pay public workers and pensioners one month of their salary in treasury bills rather than cash after a high court ruled out wage cuts…
One way to read this is that the Portuguese government has decided to print its own currency, a currency called “More Portuguese Treasury Bills.” Perhaps EU law or other pressures will prevent that from actually happening but let’s think through the possible consequences:
1. In a simple world this is just an extra debt, and the Portuguese will have to pay the debt back with higher taxes or lower government spending compared to the pre-Xeroxing plan. Short version: More debt=higher taxes later.
2. Paul Samuelson’s version of the overlapping generations model reminds us that if the Portuguese get lucky, the government debt could just turn into a totally rational, deceptionless Ponzi game: I take today’s T-bill because I know I’ll sell it to someone to who will sell it to someone else and so on forever. Samuelson showed how the “social contrivance of money” could lead to worthless pieces of paper passing from person to person endlessly. The T-bills could just turn into another form of money.
Alex discussed how Ronald Reagan may have played that Ponzi game in a nearly decade-old MR post. Maybe the Portuguese finance ministry read it already, at the very least they should read it now.
3. Note that the pensioners and public sector workers are the ones who will get paid in T-bills: Maybe this proposal is all just a bluff, but it’s a sign that the gerontocracy-bureaucracy complex is weakening. Good news for chained CPI
and the sequester.
4. If the Ponzi circulating debt plan didn’t work out after it was enacted then option #2 would begin turning into option #1, and debtholders would start to worry about default. But this is a matter of degree, and fortunately market prices should tell us about the probability of default.
So if the Portuguese put a lot of weight on the possibility of future default then the retirees and government clerks won’t be able to buy much with today’s T-bill scrip: A lack of confidence would push down the value of scrip. By contrast if the T-bill scrip is widely accepted at high prices that’s a sign the Portuguese are confident in their economic future. And I, for one, tend to put a lot of trust in local knowledge.
Coda: If #2 works it’s inflationary for countries where the T-bill is expected to circulate.
Apr 8 2013 at 4:24am
“The T-bills could just turn into another form of money.”
This is what I’d bet on. T-bills are already thought of as money-like. Since it’s Portugal maybe their price would fall for some period of time if Portugal got into some interest rate trouble, but even then these bills would eventually be worth their face value. That is not the worst thing in the world, especially if the government workers have enough savings (in Euros) to be able to weather a crisis.
I think of these T-bills as being basically already worth euros, and the only reason Portugal is issuing T-bills is because it can’t print euros. If you think that printing Euros would be inadvisable, then fine, it’s a bad move, but most economists, at least in the U.S., would say the ECB is already overly contractionary.
Apr 8 2013 at 9:20am
There are many experiences of paying salaries and other government expenditures with IOUs. You may remember that it has happened a few times in California. But let me tell you that based on what happened in Argentina during the fiscal crisis of 1962, it’s a great idea. I’m not going to bother you with the details of that experience but I suggest you to study Latin America’s economic history to know about great and terrible ideas to get out of fiscal and financial crises.
Nowhere T-bills are euros, dollars, pesos, or whatever currency is used. T-bills are not means of payments. Maybe some T-bills are worthless at the time they are issued because everyone agrees that the issuer is insolvent, but if this were the case, then those being forced to take them as payment for goods or services or past promises would be taxed now not later, and these T-bills would be confetti and per se they would not affect the currency.
Apr 8 2013 at 1:39pm
This may be the best way for Portugal to be able to devalue its currency against the Euro. Perhaps Greece, Cyprus, Spain and Ireland will follow suit. It is a good way to move resources into exportable and import substitutable goods and services production with minimum impact on aggregate demand.
Apr 13 2013 at 2:47pm
If this continued for a sufficiently long period of time, couldn’t this strategy fundamentally change the politics of public pension problems in Portugal?
As pensioners increasingly became creditors of Portugal, they should care increasingly about the creditworthiness of Portugal, if only for their own self-interested concern over the value of their treasuries. On the margin, that should make them more willing to accept reductions in pensions (or at least their growth), reductions in health care spending (which disproportionately affects the old), etc. This could end up being an accidentally brilliant strategy for reducing Portuguese commitments to retirees.
I will admit that there is an obvious counterfactual – the U.S. Social Security funds are nominally held as treasuries of a sort. But the difference is that the Social Security bonds aren’t tradeable individually, or even redeemable individually, by seniors. If they were, then presumably seniors would care a lot about the market for treasuries.
Comments are closed.