Europe won’t admit the mini-BOTs are coming

A mini-BOT is a small denomination (mini) Bill of Treasury (BOT) that can be issued by, in this case, the Italian government to act as a domestic currency for settling government debts, paying taxes, etc.

It would be a parallel currency, which could circulate freely domestically at a discount to the euro, which would work as a medium of exchange to reflect the reality of the Italian economy better than the euro does.

The euro’s value is dominated by Germany’s economy. And, in short, by being so the euro overvalues Italy’s labour pool and undervalues Germany’s. Gresham’s Law states under-valued money is hoarded and over-valued spent. In Italy the euro is hoarded. In Germany it is spent.

This is why Germany runs such a massive trade surplus against the other members of the euro-zone.

Italy (and Greece, Portugal, Spain and others) needs a currency that can circulate to properly support domestic trade.

By mispricing Italian labour via the euro it keeps the goods produced in Italy uncompetitive on the world market. Italy’s central bank can only issue euro-denominated debt which trades at rates far lower than it should, enhancing Germany’s position.

The Italian economy, like Greece’s, is also strangled by the cost of servicing its national debt denominated in euros.

This keeps the demand for money within the economy high for debt servicing purposes and its circulation low.

Low circulation equals low trade and a sluggish economy. The EU’s budget rules favour paying off creditors first and tending to the Italian economy second.

The ‘austerity’ imposed on euro-zone members, because of this mispricing of both the debt and the euro itself, becomes doubly harsh when the euro rises, sucking the life out of the debtor nation.

As the currency rises, the value of the debt rises versus the labour it is a claim against also rises.

Luigi Di Maio’s Five Star Movement has lost ground to the Lega

Then the country’s creditors need a bailout, which they get. The debt gets ‘restructured’ to put the debtor on an even-longer dated hamster wheel of repayment and some of it gets paid off in the form of national assets now trading at a fraction of their real value.

The mini-BOT seeks to reverse this process by allowing the Italian treasury to issue them as interest-bearing small bills which can be used to purchase goods and services in the Italian market but which will also be redeemable to pay for government services and taxes.

Doing this bypasses the euro completely and these will trade at a discount to the euro, thereby setting a proper exchange rate for Italy’s economy relative to Europe’s as a whole and increasing money velocity.

This is what Salvini and Di Maio are in favour of and what they will likely introduce soon.

It is imperative that Europe understands what this means for the European Union. It is an existential threat to the current Germany-dominated political order.

Critics will say that the main purpose of the euro was to do exactly what it has done since its introduction: create a structural advantage for German industry through which Germany’s political class can dominate the EU itself.

It was specifically designed to roll up the wealth of the continent in this way, bankrupt countries less competitive than Germany and keep them that way trapped within this single currency regime.

The current structure of the euro is even more monstrous than that of the individual currencies themselves. But, the Mini-BOT is a stop-gap measure on the road back to monetary and fiscal sanity. Not perfect, but the right first step.

Italy’s sovereignty-focused government, an outgrowth of the desperation of the Italian people, understands this dynamic at a deep level.

It is why Salvini and Di Maio have attacked Brussels on the issue of the budget rules, tax cuts and infrastructure spending while soft-pedalling to the Italian people their radical agenda, which is to force a reorganisation of power in Brussels or, failing that, take Italy out of the euro completely.

Analysts have been arguing for over two years now since Matteo Salvini came onto the scene as a major player in Italian politics that his best path for success is to always and consistently put Brussels into the position of the bad guy.

Breach a budget rule here, detain some human traffickers there.

Each time the EU responds in the most predictable way, Salvini gains popularity and his arguments against Brussels’ unwillingness to listen gain credence.

And what scares Brussels the most is not what they say do – an increase in Italy’s debt, unsustainable spending, etc. Italy is nearly unsalvageable under a euro-only currency regime. No, what EU leadership fears the most is that this parallel domestic currency system of the mini-BOT actually works.

From what analysts understand, through anecdotal evidence, Salvini and Di Maio are going to move quickly on the mini-BOT, not just as a threat but as a real thing.

And their problems now lie with the technocrats who hold the positions to block their plans – President Sergio Mattarella, Prime Minister Giuseppe Conte and Finance Minister Giovanni Tria.

They will try to take down the Italian government before the mini-BOT becomes more than a discussion in parliament. Conte already threatened to resign over this issue, but hasn’t yet done so.

Conte bluffed Salvini and lost.

Because with Di Maio in charge of Five Star and the poll numbers where they are, the three technocrats could all easily be removed if they try to take down the government.

Salvini and Di Maio have to move quickly to get the Mini-BOT in place. Europe’s finances are unravelling quickly.

The ECB is looking at lowering rates again once Mario Draghi exits the stage.

Deutsche Bank is looking to spin off a small portion of its bad assets while Germany’s economy continues cratering and a hard Brexit is looking more and more likely.

None of these things are euro positive and none of them help the EU in its fight to keep Italy in the fold.

Italy will need the mini-BOT once this huge move into sovereign debt is over. It is rapidly becoming the most over-crowded trade in history with nearly $12 trillion in debt now carrying a negative return.

For now, Draghi and the rest of the would-be oligarchs in Brussels are in denial about what Salvini and Di Maio are planning.

They won’t be once the power struggle for Italy’s government takes centre stage in September when the budget is proposed, Brussels tries to impose fines and Salvini starts selling mini-BOTs.

One shouldn’t have to wonder how the markets are going to respond to that.