Wednesday, December 14, 2016
Nick Rowe Is Getting into Trouble
The title of this post is all too premature. But my "cunning plan" to reform Nick Rowe's thinking involves applying some pressure on him. After all, some of his ideas appear to me as lumps of coal on their way to become diamonds.
In the center of this debate is Nick's red money. For Nick, a negative ("red") balance on a checking account – what is also known as an overdraft – is a medium of exchange. For Nick, a medium of exchange is 'money'. Hence, red, or negative, money.
Many might ask: How is a negative balance a medium of exchange? Nick's answer goes something like this:
Andy has a negative $100 balance on his checking account. (We could say he's in possession of 100 negative dollars.) Betty has a zero balance on her checking account, and she is allowed by her bank to "overdraw" her account.
Andy sells apples worth $100 to Betty. Betty instructs the bank to debit her account and credit Andy's account.
As her account balance is zero, Betty is in no position to transfer any "medium of exchange" to Andy. Further, Andy's account balance will be zero after the bank has made the entries. This means that Andy is not going to receive any "medium of exchange".
After the entries are made, Betty's account balance will be negative $100. Thus, it seems plausible to think that Andy transferred 100 negative dollars to Betty. Those negative, or red, dollars are media of exchange.
This is no doubt unconventional thinking (that's why I like it).
Many will protest, and have protested, by arguing that Betty transferred 100 positive dollars to Andy. But that is to adopt a purely arithmetical view on money. Yes, one can deduct 100 from zero. But one cannot pull a rabbit, or hundred rabbits, out of an empty hat (right?).
For Nick, a medium of exchange – that is, money – has to be, if not a commodity like it is for Clower, then some kind of item, a "thing". Otherwise it won't fit into the model, explicit or implicit, of a "monetary exchange economy" Nick is using. That's why Nick must reject the arithmetical view on money.
This puts Nick seemingly at odds with accounting. Accounting is, in this sense, arithmetics. Make a debit entry on an account with a zero balance and you get a debit (negative) balance. No problem. It's no wonder that many people think Nick rejects accounting. But some people think he is doing the opposite. I believe I'm mostly in the latter camp, although I see some truth in the former view as well.
We must keep in mind where Nick is coming from. It is because Nick takes into account the accounting that he has moved away from the "Clower world" or "Monetarist world" where money is a commodity – an asset to its holder but a liability to no one – by coming up with red money, which Nick says is a "liability to its holder but an asset to no one".
This is how an accountant might view this: The monetarists have been traditionally saying that money is a credit without a debit, but Nick is saying that there are also debits without credits which should be called 'money'. Nick is saying that there are not only credits but debits, too. That, to me, is a sign that Nick is actually embracing accounting. (Who knows if Nick, working for Deloitte, will be auditing the Bank of Canada in a few years' time?)
Conclusion: Nick cannot fully embrace accounting because that would require an arithmetic view on money. Nick is half-embracing accounting by trying to describe what happens in the accounting realm in the language of the physical realm.
And you know what? I think Nick has raised an important point, although he might not know it himself. If we can choose whether we want to see, in our minds, positive or negative money being transferred between accounts, then it sounds plausible to argue that in reality no money is transferred between accounts. That's what I've been arguing for long. What makes this an important issue to me is that this "non-transfer" is an integral part of my interpretation of our monetary system. Within the framework I have established (see my posts: Part 1, Part 2, Part 3 and Part 4) it doesn't make sense to talk about something being transferred between checking accounts.
If something really was transferred between the accounts, then I wouldn't be describing the real monetary system.
 See, for instance, Nick's posts here, here and here.
 Schumpeter has expressed similar thoughts (in posthumously published "Treatise on Money"):
“… in a pure account-settling system the concept of money supply would correspond to nothing at all.” (p. 244) “… in a pure account-settling system there is no analogue for the velocity of the circulation of money… Because in the account-settling system a deposit element disappears with each act of payment and a new item, just as large, is created, it makes no sense to speak of ‘the same’ deposit element just ‘changing hands’.” (p. 247)
There is also a whole branch of economics (related to the Post-Keynesian school?), called Quantum Economics, which seems to agree with the "non-transfer" view I have adopted.