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"ingenious, elegant" bond solution rejected by Noonan on contested grounds


feargach

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In the Guardian, economist David Graeber mentions a proposal by Warren Mosler and Philip Pilkington. The kernel of the idea is a tweak to the present system that would allow taxpayers to use national government bonds to settle their taxes with. This would work even if the bonds were defaulted upon.

The effect would be that, even in the case of a default by Portugal for example, there would still be a market for Portuguese bonds. Anyone who owes taxes in Portugal would be interested in buying those bonds.

Apparently, this was proposed to Noonan in Dáil Éireann but Noonan's advice was to shoot it down. Graeber strongly disputes the line of reasoning Noonan took.

David Graeber said:
When it was proposed in the Irish parliament in May 2012, finance minster Michael Noonan rejected the plan on completely arbitrary grounds (he claimed it would mean treating some bond-holders differently than others, and ignored those who quickly pointed out existing bonds could easily be given the same legal status, or else, swapped for tax-backed bonds). No one is quite sure what the real reason was, other than perhaps an instinctual bureaucratic fear of the unknown.
The enormity of this plan is huge. Even in the event of a total lack of interest in Frankfurt or City of London for the bonds, the government would be able to raise real money on the markets. The Troika could ejected and the locals placed back in charge of their finances.

Hospitals and schools could start hiring again to start to patch up the damage caused by the 2009-2013 austerity madness.

Here is the Mosler-Pilkington proposal: Levy Economics Institute | Publications

Here is David Graeber's column: There's no need for all this economic sadomasochism | David Graeber | Comment is free | The Guardian
 

Prester Jim

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A perpetual, if smallish, market for the bonds?
Sounds great to me but economics isn't my field yet.
Shocked but not surprised that Noonan dismissed it, as we all know we don't select the best people to be our leaders.
 

feargach

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I wouldn't blame Noonan. He doesn't have 58 hours in a day, so he can't inspect the minutiae of every proposal. He necessarily has to rely on a staff to brief him.
 

feargach

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A perpetual, if smallish, market for the bonds?
Similar to the way Japan works its debt system.

I really do suggest everyone read the proposal paper, it's very clearly written.
 

grassroots

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If a country defaulted and traded down to 50 in the euro and you had to pay a hundred euros in cash taxes, could you buy the bond at 50 with a nominal value of 100 and settle you full 100 euro bill. If yes, the revenue would be short 50 euros.
 

LDF

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It's a good idea but does it address the real problem? Ireland's problem isn't lack of access to cheap debt. Our problem is too much debt.
 

publicrealm

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If a country defaulted and traded down to 50 in the euro and you had to pay a hundred euros in cash taxes, could you buy the bond at 50 with a nominal value of 100 and settle you full 100 euro bill. If yes, the revenue would be short 50 euros.
No - it doesn't work that way. The Government wins - probably by confiscating all bonds over a certain amount.Or something.
 

Sync

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If an investor holds an Irish government bond, for example, worth 1,000 euros and the Irish government misses a payment of interest or principal,the investor can simply use the bond to make tax payments to the Irish government in the amount of 1,000 euros.
So...I remember reading a version of this yonks ago but using Ireland as an example, let's say I pay 100k tax a year. Now of that (roughly based on http://budget.gov.ie/budgets/2013/Documents/Expenditure Report 2013 Parts I - IV.pdf)

40k will go on Social Protection
28k will go on health
17k will go on education
15k will go on other stuff

I also save up and stick 100k into this bond scheme and it sits there for 5 years accruing interest. Then after 5 years the economy goes tits up and the govt needs my 100k. I say fine, they have it, buy a bond and I don't pay any tax that year.

The schools, hospitals, social welfare now face a shortfall in the amount of my tax money don't they?
 

seabhcan

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If a country defaulted and traded down to 50 in the euro and you had to pay a hundred euros in cash taxes, could you buy the bond at 50 with a nominal value of 100 and settle you full 100 euro bill. If yes, the revenue would be short 50 euros.
Revenue would be short 100 euro as I see it.

The bond is only allowed to be used to pay tax if the country defaults, right? So if Ireland defaults, Ireland says (initially at least) we're not paying you back that bond money you lent us.

But revenue still demands tax be paid. If it accepts a 100 euro bond (which has already been defaulted on) as payment, then Ireland has no gain from that transaction.
 

SPN

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Hospitals and schools could start hiring again to start to patch up the damage caused by the 2009-2013 austerity madness.
We have a deficit of >€10 Billion.

We are still spending as if we have a property/banking bubble going at full throttle.

Coming up with new ruses whereby the Sovereign can borrow even more money does not address the fundamental problem - spending is based on windfall taxes from a lending bubble. The real economy - the one based on selling goods and services cannot carry the bubble level spending.

The model proposed above is a good one. Another good one would be one where the State pays 10/14 of every bill in €, and 4/14 in these tax credits. PS workers, SW recipients, Etc., could sell the 4/14 tax credits on a secondary market for cash. That would also remove the necessity to borrow, and would create a stark picture in everybody's eyes of just how out of control spending is.

Hopefully we'll see something along those lines coming to the fore in the near future.

The alternative doesn't bear thinking about.
 

SPN

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Revenue would be short 100 euro as I see it.

The bond is only allowed to be used to pay tax if the country defaults, right? So if Ireland defaults, Ireland says (initially at least) we're not paying you back that bond money you lent us.

But revenue still demands tax be paid. If it accepts a 100 euro bond (which has already been defaulted on) as payment, then Ireland has no gain from that transaction.
It got the €100 to fund overspending in the first place.
 

SPN

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So...I remember reading a version of this yonks ago but using Ireland as an example, let's say I pay 100k tax a year. Now of that (roughly based on http://budget.gov.ie/budgets/2013/Documents/Expenditure Report 2013 Parts I - IV.pdf)

40k will go on Social Protection
28k will go on health
17k will go on education
15k will go on other stuff

I also save up and stick 100k into this bond scheme and it sits there for 5 years accruing interest. Then after 5 years the economy goes tits up and the govt needs my 100k. I say fine, they have it, buy a bond and I don't pay any tax that year.

The schools, hospitals, social welfare now face a shortfall in the amount of my tax money don't they?
They had the shortfall the year you bought the bond.

They need someone else to stump up a new €100 in the current year.

That's the problem with the ponzi scheme we have had running since 2008.
 

0507

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Hello all,

I'm one of the author's of this proposal (Pilkington -- I'm Irish...). Graeber is correct. Noonan rejected this last May on the advice, so far as I understand it, the National Treasury Management Agency (NTMA). The rejection can be found here:

debates.oireachtas. ie/dail/2012/05/17/00053.asp

The criticism was responded to but I never received a response to my response. So we are unclear as to why the Irish government has rejected this. I have also told people in opposition about the idea and they have not yet raised it -- despite the fact that they could probably use it as a leverage point to make a case against the present government.

I do not presently live in Ireland so I am unsure of the politics of all this. However, if anyone has any questions about the proposal or anything else please do raise them. Some people at a major financial newspaper are also interested in this idea. Please make sure to talk it up around the water-cooler. The proposal, at the very least, deserves to be debated.

Best,

P
 

tipp revolution

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Revenue would be short 100 euro as I see it.

The bond is only allowed to be used to pay tax if the country defaults, right? So if Ireland defaults, Ireland says (initially at least) we're not paying you back that bond money you lent us.

But revenue still demands tax be paid. If it accepts a 100 euro bond (which has already been defaulted on) as payment, then Ireland has no gain from that transaction.

Read the paper, the Tax bond would be guaranteed by International law

I think its a brilliant idea
 

Sync

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Read the paper, the Tax bond would be guaranteed by International law

I think its a brilliant idea
I've read the paper. How does it address my point about the shortfall for services?
 

tipp revolution

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I've read the paper. How does it address my point about the shortfall for services?
You talkin to me ? You talkin to me?
Sync - you and I don't agree ever, so I'm not engaging in an argumatch with you.
 

seabhcan

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Hello all,

I'm one of the author's of this proposal (Pilkington -- I'm Irish...). Graeber is correct. Noonan rejected this last May on the advice, so far as I understand it, the National Treasury Management Agency (NTMA). The rejection can be found here:

debates.oireachtas. ie/dail/2012/05/17/00053.asp

The criticism was responded to but I never received a response to my response. So we are unclear as to why the Irish government has rejected this. I have also told people in opposition about the idea and they have not yet raised it -- despite the fact that they could probably use it as a leverage point to make a case against the present government.

I do not presently live in Ireland so I am unsure of the politics of all this. However, if anyone has any questions about the proposal or anything else please do raise them. Some people at a major financial newspaper are also interested in this idea. Please make sure to talk it up around the water-cooler. The proposal, at the very least, deserves to be debated.

Best,

P
Welcome Philip.

You say that the tax bonds should be 'written under UK (international) law' to ensure they can't, themselves, be defaulted on. Why not just issue normal bonds on that basis?
 

0507

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Jul 11, 2006
Messages
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I've read the paper. How does it address my point about the shortfall for services?
Sync, the government does not need revenue if it can borrow without fearing that interest rates might spiral out of control. Just look at the recent stimulus program in Japan, for example.

Look, this isn't political. Maybe some people on here like austerity (really!?) and maybe others don't. The key point here is that Ireland gets to DECIDE on whether to implement it or not. No more pandering and pleading to outside politicians that are not democratically accountable to the Irish people. Then we can decide whether we want austerity or not. And there is no need for euro exit.

In fact, the Germans should love this. It means no more bailouts. And those bailouts have been a terrible headache for Merkel and her friends.
 
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