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. 

Let’s watch.

Coda: If #2 works it’s inflationary for countries where the T-bill is expected to circulate.