Posted on 01/17/2016 12:19:49 AM PST by SunkenCiv
Greece today (and Cyprus before it) offers a case study of how capital controls bifurcate a currency and distort business incentives... Once euro deposits are imprisoned within a national banking system, the currency essentially splits in two: Bank euros (BE) and paper, or free, euros (FE). Suddenly, an informal exchange rate between the two currencies emerges.
Consider a Greek depositor keen to convert a large sum of BE into FE (say, to pay for medical expenses abroad, or to repay a company debt to a non-Greek entity). Assuming such depositors find FE holders willing to purchase their BE, a substantial BE-FE exchange rate emerges, varying with the size of the transaction, BE holders' relative impatience, and the expected duration of capital controls.
On August 18, 2015, a few weeks after pulling the plug from Greece's banks (thus making capital controls inevitable), the European Central Bank and its Greek branch, the Bank of Greece, actually formalised a dual-currency currency regime. A government decree stated that "Transfer of the early, partial, or total prepayment of a loan in a credit institution is prohibited, excluding repayment by cash or remittance from abroad."
The eurozone authorities thus permitted Greek banks to deny their customers the right to repay loans or mortgages in BE, thereby boosting the effective BE-FE exchange rate. And, by continuing to allow payments of tax arrears to be made in BE, while prescribing FE as a separate, harder currency uniquely able to extinguish commercial bank debt, Europe's authorities acknowledged that Greece now has two euros.
The real effects of the dual-currency regime on Greece's economy and society can be gleaned only from the pernicious interaction between the capital controls and the "reforms" (essentially tax hikes, pension reductions, and other contractionary measures) imposed on the country by the eurozone authorities.
(Excerpt) Read more at irishexaminer.com ...
Greece debt crisis: Athens narrowly passes 2016 austerity budget
http://www.freerepublic.com/focus/news/3369199/posts
Greek Lawmakers Clear Way for $2.3 Billion in Bailout Funds
http://www.freerepublic.com/focus/news/3350426/posts
Greek PM Tsipras holds warm talks with Turkey’s left-wing opposition
http://www.freerepublic.com/focus/news/3363546/posts
IMF resists a return to still-struggling Greece
http://citizen.co.za/afp_feed_article/imf-resists-a-return-to-still-struggling-greece/
URBAN FARMER: Don’t give up on Greece
http://www.woonsocketcall.com/online_features/lawn_and_garden/urban-farmer-don-t-give-up-on-greece/article_68d07056-bcca-11e5-b0ea-d3bca83be6d9.html
How Alexis Tsipras Has Overplayed His Hand
http://www.socialeurope.eu/2016/01/how-alexis-tsipras-has-overplayed-his-hand/
Alexis Tsipras: Leader who risked Greece’s euro future
http://www.bbc.com/news/world-europe-33243579
i am a bit dense on this.
could this happen in the usa? (do i actually have to worry about it?)
Let me say to begin, I love your tag line.
Subject change.
The dollar might have numerous levels of currency or value.
There is what goes on at the FED. Ones and zeroes being sent all over the world for mostly nefarious purposes. There is a generality for you.
The Central bank, who benefits greatly from the FED activity, but is involved in dealings with other banks to provide needed services for a price unobtainable by the general public.
Paper dollars held by the people and sent to Washington DC for tax purposes. Those dollars which were once real dollars though fiat paper, are then run through the ringer, and come out generally as borrowed money and given after that process to the states to use for strings attached purposes.
Cash transactions with businesses
Credit transactions with business which have a cost attached.
Gold and silver dollars and junk silver in limited supply and generally high value because of the precious metal within.
There is probably much more to be said, but bottom line there are many levels of currency transactions. What is a dollar worth to a drug lord sitting on multi-millions of cash, and no place to put it because of banking regulation. His product may be worth more than the money he receives in payment.
There is a very old aphorism, “bad money drives out good”. People will hoard good money, eg gold, silver, Swiss Francs etc while trying to pay debts buy goods with distressed money.
Varoufakis is always “interesting”, but take him with more than just a grain of salt!
Thanks, and quite so — didn’t he resign from the current gov’t over the concessions?
Indeed he did. I disagree with Varoufakis, as does the overwhelming majority of my family, but he is a rare bird among Greek politicians, a man of principle...just no our principles!
One of the most interesting things about the Greek debt crisis is that it reveals the existence of a left that actually understands economics and is willing to argue in public on the basis of sound economic analyses. The left in the US and Western Europe are either economically illiterate or are charlatans who do understand economics but take public positions based on what they know to be lies about economic matters simply to curry favor with voters and expand the power of the state.
Not too sure about that -- I think he's driven by vaulting ambition, and makes a public display first of appearing to work with the powerful, then following that with a public display of his resignation. Have cake, eat too. He worked for an earlier gubmint, it sez here, from a different part of the Greek political spectrum.
Tsipras has been a pleasant surprise -- and nimble, making a big fight of it, then conceding defeat, but for the most part leaving the 'blame' on the shoulders of outside political figures.
There is a pending disaster that will be this split currency mess times ten in the amount of chaos it causes.
Sweden going to have just a virtual currency.
Having a “cashless society” has been a fantasy of the left for a hundred years. However, it flies in the face of several “iron rules” of economics. Such as the very definition of currency, and Gresham’s Law.
Currency is an exchange of goods or services using tokens instead of the thing in itself. But it only works if there is agreement as to the value of the goods and services, as well as the value of the tokens.
Other than that, currency has conditions: that it must be based in something that exists in abundance, and that people want, and yet takes enough effort to obtain so that it retains its value in relation to goods and services, and it cannot be perishable.
So when Sweden officially goes “cashless”, at first there will be a flight to Euros and other currencies, like Dollars. So the Swedish government will move to prevent the use of these currencies. So then, more and more exchanges will be goods and services swaps, until specie (gold and silver) begin to be used again.
Because these will be the currencies the people want, they will be saved and increase in value, while the Swedish virtual currency inflates and loses value. Everyone will want to spend up their virtual money and hoard “real” money.
In turn, this also means that the Swedish government will lose more and more tax base, as everyone will pay taxes in the increasingly more worthless virtual currency. And nobody will want to sell the government anything that is paid for with virtual money.
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