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.[1] 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.[2] 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.






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[1] See, for instance, Nick's posts here, here and here.

[2] 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.


119 comments:

  1. "liability to its holder but an asset to no one".

    Isn't it only a liability if it has to be settled?

    Nick says everybody's aim in life would be die a red money billionaire.

    Henry

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  2. Henry:

    I think that was more of a problem in connection to "red paper money". Nick tried to get around that by assuming that people would voluntarily settle their liabilities because they believed that bad things will happen to them in the afterlife if they don't.

    But I think Nick has more or less abandoned the idea of "red cash" in his thinking. And even if he hasn't, we should. It doesn't make sense.

    That leaves us with a real-life overdraft. Is it expected to be settled? Yes, it is. The bank can take care of enforcement.

    Still, people actually can die as red money (overdraft) billionaires. The bank doesn't necessarily care much, as long as there is collateral. The estate of the late "red billionaire" will be liable to settle the account.

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    Replies
    1. "That leaves us with a real-life overdraft. "

      Antti,

      A real life overdraft must be settled with green money. So I have difficulty with it being called red money.

      If the holders of red money liabilities are compelled to settle them then there should be, one would think, the reciprocal and symmetric right to have the CB settle its green money liabilities - that is, it redeems, presumably in gold, green money.

      The notion of red money is an interesting pedagogical and theoretical device but when taken too far can lead to all kinds of confusions and conundrums which I don't think are worth bothering about. The more interesting and useful discussions about Nick's NK model and the T2 system became subverted by endless circular discussions about red/green money considerations.

      I enjoy your contributions but my red/green money legs ran out of steam very quickly.

      Cheers,

      Henry

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  3. Oh, and welcome to my blog, Henry! The comments I've seen from you in Nick's blog have always been sensible, so I was happy to see you here.

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  4. I certainly like the way you express yourself!

    To no ones surprise, my perspective brings additional connections.

    Nick revealed a lot to me when he claimed that the borrower "issues" a bond; effectively claiming that a borrower is not "acknowledging" a bond document prepared by the bank. His claim fits perfectly with the idea of "issuing" red money. In his teaching universe, bond = red money = asset. (Remember, all of us need to explain why bonds are considered assets. This is Nick's explanation.)

    Of course, there are other explanations for the bond-asset phenomena.

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  5. Antti: consider 3 worlds:

    1. A world where red and green currency physically exist in people's pockets.

    2. A world where red and green currency physically exist in shoeboxes with our names on at the bank.

    3. A world where the shoeboxes burn, but it doesn't matter because the bank has records in a ledger.

    I can't tell the difference, except for the obvious practical difficulties of preventing people illicitly creating green paper and destroying red paper in world 1. They are theoretically equivalent.

    But in all 3 worlds I can define the "gross money stock" (absolute values of red+green notes), as a measure of cumulative non-synchronisation of payments and receipts. And velocity.

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  6. Henry: I understand your difficulties with the concept. But just think about what you say here: "A real life overdraft must be settled with green money." ... and compare that with the example I gave in the post.

    I think it takes imagination to see any of these things happening:

    1. Andy's overdraft is settled by green money he receives.
    2. Negative money is transferred from Andy's account to Betty's account.

    There is no green money in existence at any point during the transaction. When you say the overdraft is settled with green money, then you think purely arithmetically: -100+100=0. But one could argue that logically a medium of exchange must involve some kind of item (other than a number); that it cannot be only arithmetics.

    CB doesn't need to settle its green money "liabilities" because, unlike red money, those are "liabilities", not liabilities.

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  7. Roger said: "In his teaching universe, bond = red money = asset."

    Nick has said many times that a bond is not red money, because it needs to be settled with green money.

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  8. JKH: Thanks! There's a lot more to come (more trouble!), so stay tuned.

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  9. Nick: I hear what you say. Generally, I'm not as concerned with the logic behind your definitions than with the usefulness of your definitions. In many cases your thinking seems to be valid, but what you say could be said in a lot simpler way. (And often it is true that unless you can explain something in simple terms, your understanding of it is lacking.)

    Let's take 'velocity' as an example.

    That word and the concept -- 'velocity' needs a 'stock' -- makes sense in the imaginary Clower-like world where a commodity, green money, changes hands in every trade.

    But what is your 'velocity'? What does it tell us?

    You say: "I can define the "gross money stock" (absolute values of red+green notes), as a measure of cumulative non-synchronisation of payments and receipts"

    Remember what I said about 'velocity' needing a 'stock'. If your "stock" includes red money and is a measure of cumulative non-synchronisation of payments and receipts, then what is your 'velocity'? Why do you call it 'velocity', when a 'change' or 'delta' would sound more appropriate?

    Further, the use of the word 'velocity' sounds outright illogical in a case where cumulative non-synchronisation is initially zero and there is one trade which leads to non-synchronisation. How should one make sense of 'velocity' in that scenario? (I'm quite sure you can come up with a way to measure it, although you must use even more imagination than in the case of measuring velocity in the traditional quantity-theoretical sense. My point is: Does that number tell us something useful?)

    You don't run into similar lack of clarity if you use words like 'change' or 'delta'.

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  10. To visualise Nick's model, I think of a bunch of people sitting in a circle who can change seats every now and again. They each produce stuff and, at the count of 1 per bar, they pass their produce on to the person on the left. That's the perfectly synchronised economy. It's not barter because each trade is not bilateral, but each person receives goods of equal value to their income / output at every count so credits and debits always cancel out (gross money = 0).
    Add one lazy person who promises to pass on twice the goods on the next count then this person would receive a red bit of paper from his left hand neighbour, while passing on a green bit of paper. The green bits of paper can be traded in for goods from anyone in the circle. That's the unsynchronised economy. A higher velocity would mean passing on parcels at the count of, say 1 and 3 per bar, etc..
    This world can be reverse engineered to be compatible with what Antti calls the arithmetic treatment of money. Importantly though, and this is Antti's main point above, red = green at all times. It cannot be any other way. Even if people start issuing bits of paper among themselves and a central authority steps in and buys them, the equality still holds.
    So, instead of thinking of separate pieces of paper, it would be more accurate, if one insists on a physical analogy that is, to think of playing cards that are green on one side and red on the other. The cards can either be brought into play bilaterally, in which case they are IOUs (assets to the person looking at the green side, liabilities to the person looking at the red side), or they can be brought into play via a third agent, aka a bank. The red side always faces specific individuals, the green side faces the bank. The bank then issues its own playing cards called money, whereby the red side faces the bank and the green side faces other individuals. One can choose whether on wants to have red & green cards sitting next to each other (loan + checking account) or whether one wants the bank to net out reds and greens (checking account with overdraft facility). One can 'pass on' the green side of cards to other individuals (turn the card so that the green side faces someone else) in exchange for goods. One cannot do the same when one is facing the red side of a card. Such an exchange must first be accepted by the bank.

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  11. Nick: What I say above is related to my earlier comment here.

    Here's an extract:

    ------------------------------------------------------------

    Nick doesn't want to abandon the world where money moves between accounts/holders. [...]

    I can try to show Nick, in vain, that the bank-gnomes don't really move these bits of paper BETWEEN the shoeboxes; that they, more (though not wholly) realistically, have massive piles of Reds and Greens outside of the shoeboxes, as an inventory, and the only thing they do is they take Reds or Greens from those piles and add only one type/color to a shoebox when needed. If, as a consequence of a new trade, Andy's account balance should go from -$100 to +$100, then the bank-gnomes take 100 Reds from Andy's box and put them back into the "inventory pile" of Reds. Then they take 100 Greens from the inventory pile and put those in Andy's box. If Andy traded with Betty, then the gnomes do the necessary adjustments in Betty's box, too, but they NEVER move any bits of paper between two shoeboxes.

    Nick: How does this sound? My approach is observationally equivalent, isn't it?

    ----------------------------------------------------------

    My interpretation above is true to accounting. My interpretation is not useful, in the sense that one can say the same by forgetting the boxes and talking only about the accounting. Within my interpretation, it would make no sense at all to talk about 'velocity'.

    Your interpretation offers at least half a chance to define 'velocity'. That's your goal with it, right? You cannot live without velocity, it's an integral part of your model, and so you are willing to go to great lengths to be able to define it.

    I just think you go too far. Your 'velocity' is not a useful concept (if it ever was). It doesn't help us better understand the real world.

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  12. (continuing from above)
    The degree of unsynchronisation is the amount of green OR red faces counted in the non bank economy. This includes bilateral IOUs, I suppose.
    Taking this analogy one step further, and trying to incorprate the claim that money can be net worth, one must wade into the territory of psyhology. On paper (pardon the pun), green always equals red. All financial assets and liabilities net out to 0. Nevertheless, one can imagine different degrees and types of collective 'irrationality'. Looking at one's collection of red and green cards, it is possible, albeit irrational, to feel different about the two colours. Out of a collection of 100 reds and 100 greens, I might perceive the soothing effect of the greens to be stronger than the discomfort which the reds disseminate, or vice versa. In aggregate, this might lead to a faster growth of cards and thus to a higher degree of overall unsynchronisation (or vice versa in the latter case). From that point of view, it is also not at all evident that the 'forced' introduction of new bank cards (in exchange for bilateral playing cards), is likely to increase the velocity of exchange of real goods among non-bank individuals.

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  13. Oliver: I'm not familiar with the Swiss building standards, but your example passes at least my inspection! (Btw, although my wife is a pianist, I know nearly nothing about music. It took me a while to get your "count of 1 per bar".)

    You seem to venture to discuss even OMO/QE/"bill discounting" (which is interesting), but I think we should focus on the essentials first. Nick usually assumes no bilateral IOUs, so let's keep it like that?

    Before I get to your visualisation (I leave it to another comment, although I can barely wait!), I want to mention something that crossed my mind when reading your comment. Perhaps just a minor detail, but here we go:

    If the existence of money is a sign of non-synchronisation, why should we say (as Nick does here) that in a perfectly synchronised world the payments and receipts of money are that which is perfectly synchronised?

    As in your example, it is the trade in goods, buying and selling, which is perfectly synchronised (barter). There are no payments or receipts of money.

    Why this might not be a minor detail is because this suggests something that might be true in a broader context, too: Money has neither a physical nor an independent (conceptual) existence -- it exists only as "mirror image" of something which does exist independently.

    In the example, that something is trade in goods, which exists even if there is no money. If there is money, then the trade in goods cannot have been perfectly synchronised, and money exists as a measure of non-synchronisation in the trade of goods.

    If money is just a measure, a "mirror image" of something else, then it cannot flow. It cannot be transferred between accounts.

    You see what I mean?

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  14. Yes, I see what you mean and agree. I'm just trying to find a physical analogy with the same functional features. And as soon as you have a physical object, it is not false to imagine it changing hands. I see the accounting as being 'truer' in the sense that it is more parsimonious.

    Also, I'm not sure my second comment captures what Nick means when he (and others) talk about money's net worth. It may well be that the value in question is not measured in terms of green vs. red but rather in terms of MoE vs. non MoE. In that case I'd have to come up with a different story, probably involving interest (and QE).

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  15. I also agree that it is the exchange of real goods that is (un)synchronised, not the payment of 'money'. 'Money' captures the degree of synchronisation.
    I'm fairly certain though that the circular passing on of goods as in my example above does not qualify as barter for Nick. Barter consists strictly of bilateral trades that satisfy the double coincidence of wants each time.

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  16. Here's how you transfer a bank deposit the hard-core way (in R. S. Sayers [1938, 7-8]: Modern Banking):

    "The bank in its own books stands indebted to Mr. So-and-so to the amount given. That is the pure Bank Deposit. But sometimes Mr. So-and-so wants evidence of the debt in a different and more readily transferable form. In that event the bank enters the amount, not in favour of Mr. So-and-so specifically, but in favour of 'Bearer'. It then tears the page out and hands it to Mr. So-and-so, who becomes the first 'Bearer'. He, however, can readily pass it on, passing on in fact the claim against the bank, without the bank having to record the transaction in its books. When this is done the page which has been torn out of the bank's ledger is called a Bank Note. A Bank Note is therefore neither more nor less than visible evidence of a bank's debt, which can be passed round from hand to hand in settlement of all sorts of individual debts."

    The bearer could then, if he so wishes, deliver the claim to the bank and have his account credited to the same amount.

    In principle (highly theoretically thou), all this could be done via spoken agreement and good memory. Say, there's a glitch in the ledger technology and the ledgers go blank. The adjustments to the ledgers, when restored, simply being (retrospectively) adjusted to reflect what had previously taken place and communicated to the clerks – i.e., one having made over his claim against the bank to another.

    Now, take Mr. So-and-so's loan account, have the bank enter the amount as obligation of the 'Bearer' and then tear the page out… ;-)

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  17. By the way, I think Quantum Economics draws quite heavily on Schumpeter, as far as I can tell, so it makes sense to mention them both. The reason I've come to know a bit about them is through a similar series of online discussions with someone from Switzerland who as doing his PhD at Sergio Rossi's chair (University of Fribourg, Switzerland) at the time. You could ask him to be your PhD advisor, too :-).

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  18. Re: Einstein had the patent office, you have the government building department. I understand

    That would be incredibly flattering if it weren't so obviously blasphemous :-)

    And architectural studies are actually very interesting and good. It's a way of thinking, really. It forces you to apply influences from as far afield as philosophy, sociology, the arts, engineering and physics right down to logistics, management and marketing. In the end, all people see is a more or less beautiful pile of bricks, whereas actually it's a synthesis of human suffering frozen in time.

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  19. Oliver said: "I'm fairly certain though that the circular passing on of goods as in my example above does not qualify as barter for Nick."

    I don't think it matters whether Nick thinks it's strictly speaking barter or not. We can still make it fully synchronised and, from an individual's perspective, indistinguishable from barter. For instance like this:

    Each person takes the item he has produced in his left hand, holds it firmly, and extends the hand toward the person sitting on his left. Next, each person uses his right hand to grab the item which the person on his right is still holding tightly to (like in 4x100m relay).

    Each person studies (mainly visually) the item on their right, without letting go of the item in their left hand. If they agree to take the item on the right in exchange for the item in their left hand (barter), they will give a nod to a conductor standing in the middle of the circle. Once the conductor has received a nod from every person in the circle, he will use his whole body to make a dramatic gesture, and thanks to pre-agreed rules everyone knows that this is a sign that it is now safe to open their left palm and then pull their right hand towards their body, holding tight on the item in the hand.

    Simple? :-)

    In my next comment, I will explain what happens when this multilateral exchange is not as well synchronised. (A sneak preview: The conductor in the middle becomes a central-banker.)

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  20. Which is correct: Red money = Green money OR Red money /= Green money?

    Well, they seem to be equal because we use the same numerical value to define each.

    Well, they seem unequal because one is red and one is green.

    Now Nick likes to call them equal (truly equal!) and allows us to add the two together to find a "measure of cumulative non-synchronisation". This is OK but we must remember that we are counting OBJECTS in his example, not the sum of equals. (Like counting apples and oranges in a bucket.) Nick is thinking money is a physical object.

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  21. Oliver said: "So, instead of thinking of separate pieces of paper, it would be more accurate, if one insists on a physical analogy that is, to think of playing cards that are green on one side and red on the other. The cards can either be brought into play bilaterally, in which case they are IOUs (assets to the person looking at the green side, liabilities to the person looking at the red side), or they can be brought into play via a third agent, aka a bank. The red side always faces specific individuals, the green side faces the bank. The bank then issues its own playing cards called money, whereby the red side faces the bank and the green side faces other individuals."

    Here I don't agree with you. The cards the bank issues have only green faces or red faces. And that's why Nick's red and green bits of paper work better as an analogy here. (All this reminds me of Jamie's red and green money. You're following his terminology, not Nick's?)

    This is how the central-banker (really, a scribe or an accountant) in the middle of your circle would function:

    To keep this example simple -- and only because of that -- let's assume that prices of all goods are 1. You as a buyer either accept the price or then there's no trade.

    Our circle of people is formed around a (round) table. The central-banker puts an empty box on the table in front of each person. The person sitting by the box -- and no other person sitting around the table -- can see into the box through a glass lid. He cannot open the lid. Only the central-banker can.

    Trading starts.

    (Economists come up with nice trading/meeting structures in their papers. Pick your favorite. I don't want to spend time on that.)

    If someone accepts (buys) the item you offer for sale, then the central-banker will discreetly slip a green note in your box. He does it so fast that no other than your trading partner knows about it. The same goes for the red note he slips into the box of the buyer.

    Soon, people will have both green notes and red notes in their boxes. It might be harder for them to keep track of their net balance. Red net balance means they have a liability to sell items (in this way they get rid of the liability) and green net balance means they have the right to buy items without incurring a liability (but they lose that right).

    The central-banker offers the people alternative netting options:

    1. Real-time netting. The central-banker will always see that there are only green notes or red notes in a box. Not both.

    2. Deferred netting. The central-banker will at pre-agreed times remove an identical amount of both green and red notes from a box. This might, or might not, still leave both red and green notes in the box.

    You probably get the idea?


    Now, how to make this compatible with Nick's view? Why on earth should we start talking about how the central-banker is transferring bits of paper between the boxes? If he anyway needs to use bits of paper which are not initially in the boxes, then why not continue assuming he doesn't transfer anything between the boxes?

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  22. I said: "...remove an identical amount of both green and red notes from a box"

    This, of course, applies also to the real-time netting option. (An assumption I left implicit in a hurry.) Instead of putting a red note in a box with one or more green notes, the central-banker removes a green note from the box, automatically, "real-time".

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  23. Bmuuk:

    Did you recognize your name in code? The code used was a simple one-character shift to the right on an English alphabet scale.

    Accounting uses a rather strange cryptography shift but one that makes lots of sense. Accounting permits adding apples and oranges to give an answer of zero.

    Mathematics has a strict rule against adding unlike objects. Hence, you are not allowed to add apples and oranges. Yet, in accounting, we do it all the time when we add debts and assets. The code rules are different between math and accounting (both are cryptography). In accounting, debt is allowed to cancel assets.

    Now if accounting is cryptography, what are we representing in accounting code? Is it pure credit? Is it a signature on a piece of paper existing over a time period that we define as "credit"? Is it worthless pieces of paper that have been traded for a signature on paper?

    You know my answer: So long as money is digital, any physical code can be used as an accurate translation.

    Do I sound a little bit testy? :-(

    I don't really understand why voiding any possible link between physical money and accounting is important to you. I especially do not understand why when there are extremely strong arguments otherwise.

    I guess that is what makes this discussion so interesting and challenging. :-)

    (I wrote this after noticing your comment to Nick. )

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  24. Here I don't agree with you. The cards the bank issues have only green faces or red faces. And that's why Nick's red and green bits of paper work better as an analogy here. (All this reminds me of Jamie's red and green money. You're following his terminology, not Nick's?)

    I think this is definitely the part where we disagree - until now. Yes, I'm following Jamie's 'quadruple / sextuple' etc. book keeping. I still cannot understand why you're trying to make banks and money 'disappear'.

    And having thought about your comment above a bit, I may even have to back track a bit on some previous comments of mine and insist that banks do not 'only' keep score of trades between non-bank entities, they also add their own service into the mix, without which bilateral IOUs and bank money would be indistinguishable. In German, we have the lovely term 'verwursten' - to make sausage out of. I think of banks as making homogenous financial sausages out of idiosyncratic IOUs. And that is why they must appear as entities in their own right, that can be depicted in balance sheets (and an income statements).

    You say banks owe us nothing and thus the green cards they issue (the ones with the little 'b' on them) have no red reverse. You then go on to say that they issue red cards, presumably meaning cards that have only a red face which faces non bank entities? To the extent that I haven't misunderstood you, I say that cannot be! All economic entities (including banks) can only bring cards into play if the red side faces them and the trading partner accepts the green face. And it is the acceptance part that makes banks a bit more special than all other entities.

    Take the following example: You do agree that services are also 'goods', right? Apples, bananas and haircuts - same category. You also agree that banks can extend loans to businesses, say by giving an advance on wages? That is the classical Circuitist setup that Quantum economists also use.
    (continued below)

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  25. (continued from above)
    Now suppose a couple of hard working accountants and people with degrees in finance come together and want to start a business of their own. They have a bit of collateral but no liquid assets so they ask their bank for an advance for one year's worth of wages. They then apply for a bank license which is granted and by the end of the period they are an up and running bank.

    So far this story is functionally identical to alternative business start ups, say Antti's new hair salon or Nick's new banana plantation, right? But what I hear you saying, is that as soon as the banking license is granted, these fine young fellows who started the bank turn into fairies and fall off the face of the earth ;-).

    I, on the other hand am saying that they are a business like any other, except that their business is the business of enabling other people's business. That is what they are liable for and, to the extent that they are good at what they do, that is why their liabilties are accepted by others as assets. Their service must be such that they obtain and maintain the good will of their customers so that the bits of paper they issue remain accepted in general 'gifting' practices of the non bank public while their creditors keep up the other end of the bargain by closing the circle of reflux, thus maintaining demand for new credit cycles to be opened (pardon the flow language). As opposed to non bank entities who promise to return other goods or services, banks promise to make new promises. Banks promise to issue new promises with the same properties as their previous promises. They are keepers of the Skilo by means of an ancient trade.

    What I think you're doing, is completely outsourcing the economy to the non bank public. That seems to be a very popular theme in many economic theories. No hierarchies whatsoever, only a bunch of individuals. I, on the other hand, don't think we could all just hire our private scribes and start a decentralised, stable, monetary economy. As per my example in the comments of your previous post, I believe banks are active managers of the economy and must be thought of as such.

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  26. correction: that should read their debtors, not their creditors.

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  27. Roger: I recognize the link between physical money and accounting. I stress the fact that physical money can be viewed as a "portable bearer credit balance", and this allows us to think and talk only about the accounting, not about physical objects.

    About apples and oranges... In a way I agree with you. Deb(i)ts and credits are inherently different, but this difference is not something that should keep us from using the arithmetical approach in the accounting itself. The difference I'm talking about is about what they mean to their holder. If you have a $100,000 liability, you might not get rid of it overnight. If you have a $100,000 credit, you are able to get rid of it overnight. This difference has also macroeconomic consequences. We shouldn't "net to zero" debts and credits. (Oliver: Take notice of what I say, as it is related to your comment.)

    To your comment in the other thread which you linked to.

    Could it be that you are saying that 'money', a certain credit balance, is not that different from the credit balances in the auto manufacturer's accounting? That the difference between them is only a difference in degree?

    If the supplier can trust the manufacturer, then those credits serve as a "placeholder". That's what you mean?

    If so, I agree with you. And as I said, your "placeholder" could then be translated as "store of value". Remember that it is not only 'money' that is said to serve as a store of value. Monetary theorists actually stress the fact that this function doesn't differentiate money from other assets. That's why they focus on the MoE function (as Nick does).

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  28. Oliver said: "I still cannot understand why you're trying to make banks and money 'disappear'." and "they must appear as entities in their own right, that can be depicted in balance sheets (and an income statements)"

    You have misunderstood me. Either you're again impatient or then I'm not able to communicate effectively. Almost certainly both.

    I don't want to make banks disappear. I don't even want to make the credit balances, which most of us call 'money', disappear. The only 'money' I want to make disappear is the money flowing between accounts (or between countries, even). I want to make the 'money stock' as a concept disappear, too. It's useless if we want to understand how the system works.

    You jumped back into the real world (because you know that I'm talking about it when I talk about your example?). That just complicates things too much. We should now argue in terms of your simple model as a hypothetical model of the real world.

    Were you only talking about commercial banks when you talked about the red face of the card facing banks? What about the central bank? In the example I gave, should the central-banker "see red"? This is an age-old question. It's in the center of many big disagreements.

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  29. Oliver said: "I believe banks are active managers of the economy and must be thought of as such."

    I fully agree. (Now we only need to explain, in detail, what it means to be "an active manager of the economy".)

    I suggest that you always assume that I agree with you. If I say something that seems to be in contrast with how you think, then try to interpret it differently. If you don't manage to intepret it differently, then ask me what I mean by it. OK? :-)

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  30. Oliver:

    In the example with the central-banker in the middle of circle, I only touched the accounting part of the story. I didn't mean to say anything about other duties of the central-banker, like making sure that people don't incur liabilities they cannot get rid of later by selling goods. I didn't touch the subject of credit losses, either. We get to all that later.

    Again I have the feeling that there is a small risk here that you mistake the company for its shareholders. Those are two different things. The central-banker will not directly bear any credit losses.

    "Limited liability" is an important concept here. Commercial banks are nowadays limited liability companies. But most of them are "too big to fail", so even though the shareholders have a limited liability, this doesn't mean that the other parties on the RHS of the bank balance sheet are next in line. Often the government is. (This is true for any TBTF companies, not just banks. But in value terms, unlike in the case of non-banks, a massive share of all credit balances in the banking system are secure, because the alternative is considered almost unthinkable.)

    Central banks are not that different from commercial banks in this respect. Or are they?

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  31. Oliver: As I read your comment, I applied my mechanical CB filter. Your comment came through the filter unscathed.

    Only at the last sentence, where you write "....... I believe banks are active managers of the economy and must be thought of as such." did I think I might add some perspective.

    I agree that the banks are active managers of an economy. (They give out National Gift Certificates.) I want to add that I think borrowers are also active managers of the economy. Borrowers, by agreeing to return the borrowed gift certificates, must manage their affairs prospectively so that their promise might be fulfilled.

    How does this (borrower responsibility) fit into Antti's need to void money? Hmmm. Borrowers must manage prospectively which means that a period of time will have active management activity. Doesn't money (as NGCs) carry this sense of management but, at the same time, also introduce an element of ongoing expectation (modeled by NGCs floating around the economy, awaiting destruction by being returned to the original issuer).

    In this last paragraph, I am suggesting that money plays a vital role (as a physical asset) in reminding the economy that the original commitment (to return the money) has not been fulfilled. Hence, a yearly record of increasing money supply indicates that borrowers are not honoring their promise of returning money to the source.

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  32. Were you only talking about commercial banks when you talked about the red face of the card facing banks? What about the central bank?

    I always start with one commercial bank. I don't see the need to call it a central bank (bank of banks) unless there is more than one commercial bank. But ultimately, I think the same principles apply to both types. Except that the CB is a branch of government, at least nowadays. Historically and theoretically though, I think commercial banks are the more interesting entities. They are the nexus between finance and the real economy.

    In the example I gave, should the central-banker "see red"? This is an age-old question. It's in the center of many big disagreements.

    I believe he should see red & green. He sees red where you and I see green and he sees green where you and I see red. In my card game I see the cards standing upright on the table with one side facing the customer and one the banker. To me that's just the (tauto)logical conclusion of double entry book keeping. I'm NOT saying that banks have mirror image ledgers in which every entry on behalf of customers is copied with an opposite sign! But each debit or credit entry has the opposite meaning when viewed from the perspective of the bank as an economic entity. That's all I'm saying. Hence my excursion into the real world.

    I suggest that you always assume that I agree with you. If I say something that seems to be in contrast with how you think, then try to interpret it differently. If you don't manage to intepret it differently, then ask me what I mean by it. OK? :-)

    OK!!! I find myself very much in agreement with most everything you say. It's all the more frustrating when I get to places where it seems like I don't. That leads my to cast my way of seeing things at you in hope of eliciting a clarifying reaction. I think that's a blog phenomenon as much as anything else. I'm convinced that blogs turn people into contrarians :-) and I'm sure that a 1:1 discussion would be quite different. Are you aware of Goodwin's Law?

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  33. Roger, I think I agree with that. Each agent is an active part of the economy. My point was merely that banks are agents, too, not that they are the only agents. I share Antti's view that money is ultimately an accounting phenomenon and that where it takes on a physical shape this must be considered secondary to its actual accounting nature.

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  34. Johan: Nice metaphor! :-)

    Coincidentally, I'm going to write a post on this one (the next or the one after it):

    "The adjustments to the ledgers, when restored, simply being (retrospectively) adjusted to reflect what had previously taken place and communicated to the clerks"

    This is, of course, how currency works. It serves to de-centralize the accounting.

    And here, again, it is clear how credits and debits are inherently different, and how the latter cannot be a "bearer instrument". It might be that you hold currency, but in some bank's books you have a liability. This setting can only work against you, not in your favor. You will be "held liable" by someone. Present the currency, the credit, at the bank and your liability can be written off (because you didn't have a net liability; the bank just didn't know this).

    Your liability shouldn't be your private information, in the way your credits (currency) can be.

    When we add many banks in our model, then it's not that different from currency vs. ledger. You can have credits in one ledger and deb(i)ts in another bank's ledger, and the former could as well be currency when the latter bank is concerned. When private banks could still issue their own bank notes, this was even clearer.

    The whole banking system should be seen as the record-keeper.

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  35. Antti: Thanks for overlooking the testy flavor of my comment. By doing so, you have advanced the discussion. THANKS!

    I so much agreed with Oliver, that the words came easily. Of course, I basically agree with you also. The difference (between us) is your repeated need to eliminate the physical connection to money. Money as a place-holder may be a unifying concept.

    We certainly agree that money has a role as a store-of-value. Store-of-value inherently carries a sense of time. By describing money as a place-holder, my intent was to enhance the sense-of-time nature of stored value. Does that make sense?

    Money as a-physical-object also enhances the sense of money acting over time.

    The notion of time in the monetary realm takes me to Oliver's comment and my reply. In fact, this whole thread (including your many posts and Nick's post) is taking me in the direction of increased awareness of the role of the borrower as a time manager. That is, the role of the borrower as a manager of money and resources during the period described by the borrowing agreement.

    The borrowing agreement does not contemplate the borrower simply rolling over the debt. The agreement does not preclude rolling-over, it simply requires debt repayment.

    (Rolling-over-debt is a mechanism that allows the borrower to live in a fashion not possible should the borrowed money not be available. Rolling-over-debt lets an individual to live "high on the hog" and lets entities form enduring patterns of economic servitude.)

    In my comment to Oliver, I elaborated on the role of money as physical reminder that a loan remains unpaid. Could you look at that comment to see if we can find unifying concepts? Thanks. :-)

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  36. Roger said: "How does this (borrower responsibility) fit into Antti's need to void money?"

    Now we are dealing with the central issue, Roger. Good. Here's the difference (and, again, it is clearest in the case of an overdraft):

    No buyer borrows NGCs from the bank. The bank creates NGCs on the seller's account, IF the account balance is not negative prior to the trade. If it is negative, there are no NGCs created.

    Your NGC metaphor runs into exactly the same problems as any metaphor involving some physical (inl. electronic) objects that are transferred. These problems can be avoided if we separate the situation of the buyer from the situation of the seller. We look at both account balances separately, not in connection to each other.

    I think your NGC metaphor is a nice way to look at 'money'. For the holder, money is not that different from a gift certificate. But what you are talking about is still 'money', even if you call it a NGC. So the NGC metaphor doesn't manage to solve any of the scientific/theoretical problems related to money.

    I still believe that the best way to solve those problems is to "get rid of money" (that is, interpret the system in a way where there is no place for the concept of medium of exchange, or 'money'). All the other options must have been already exhausted during the past 100-200 years.

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  37. Oliver: I agree with you that if there is only one bank, we can as well view it as a commercial bank. But then, like in the case of a central bank, most of the non-equity credit balances in its books have to be nominally "safe". As I said:

    "Commercial banks are nowadays limited liability companies. But most of them are "too big to fail", so even though the shareholders have a limited liability, this doesn't mean that the other parties on the RHS of the bank balance sheet are next in line. Often the government is."


    You said: "But each debit or credit entry has the opposite meaning when viewed from the perspective of the bank as an economic entity."

    In what sense? What is the bank liable to provide to its alleged creditor? That something has to be "worth" the balance in question, so I'm not expecting an answer such as "The bank is liable to maintain a payments system", or similar.

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  38. I think we are now looking at the role of the bank.

    Does it make a difference if the bank creates deposits (Bank prepares for customers, creates money AND loan documents) IS CONTRASTED with the bank loans deposits (bank has money on hand, buys the borrowers loan document)?

    Both choices have money as a physical object; the difference is original source.

    Antti suggests a third alternative. Money (as an accounting entry) can be created by two exchanging entities. There are no prior bounds (prior to the trade).

    Is this the general outline?

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  39. Following up on my previous comment , we can look at the three choices of bank involvement using a control filter. What degree of control of the monetary process is exercised by the bank?

    1. Bank creates money and document: If we include collateral requirements, the bank has very strong control.

    2. Bank lends existing money and borrower offers a loan document: Collateral requires not so strong, borrower has more control. Debt roll-over becomes possible. Bank control is weak.

    3. Bank is reduced to role of accountant: Both lender and borrower have ability to create money by coming to agreement. Control has been fragmented into a simple exchange between any two entities.

    Now I think of Venezuela. Has government control become so strong that their banking system has evolved into a condition some place between control position 2 and 3?

    The goal of this comment is not to consider Venezuela. The goal is to consider the interaction of money and credit through a control filter.

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  40. Antti: This is not a role of the bank comment. It is a simple logic comment about overdrafts.

    Concerning overdrafts, you write:

    No buyer borrows NGCs from the bank. The bank creates NGCs on the seller's account, IF the account balance is not negative prior to the trade. If it is negative, there are no NGCs created.

    I sometimes consider accounting using the inefficient dollar by dollar entry method (takes a LOT of entries). By subtracting dollar by dollar, an overdraft will reduce a positive account slowly until it becomes negative. Why then would we ever have NGCs created????

    Instead, would the bank just honor the check using existing NGCs (following condition 2 from the previous comment?

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  41. Antti: "The whole banking system should be seen as the record-keeper."

    Sure, but it's also more than that.

    Antti: "What is the bank liable to provide to its alleged creditor? That something has to be "worth" the balance in question, so I'm not expecting an answer such as 'The bank is liable to maintain a payments system', or similar."

    I think that's exactly what you should expect thou. Obviously, one can utilize the standard legal definition and say it's liable to tender currency (or to the satisfaction of a right to receive it). But we can go further than that, which brings us explicitly to the paymaster/payment-system realm. "Money" and the payment system are inextricably interrelated in that neither makes sense without the other – i.e., they can't be viewed independently of each other. In this view (particularly in Joseph Sommer 1998), a bank liability is a license to sue and collect judgement for a predeterminate sum of monetary value (the value of the deposit). So even if the PURPOSE of the payment system is to discharge money-denominated obligations among end-users, it FUNCTIONS by way of extinction and novation of bank liabilities… to which the banks themselves exercise discretion over incurring such liabilities towards end-users (as gate-keepers), thus indirectly affecting the end-users abilities to pay and make economic transactions.

    For the whole argument of this strand, see Joseph H. Sommer (1998): "Where is a Bank Account?"

    http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=3008&context=mlr

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  42. Johan put it more eloquently than I ever could. I would add, although it's probably in Johan's reply somewhere (I'm just too dim to understand it), that banks are liable to guarantee the original 'barter' value, that is the purchasing power, of their assets by maintaining their credibility. The economics of commercial banking may not guarantee the success of that endeavour for the whole system which is where the CB, and ultimately the state as guarantor of last resort, come in. Basically banks must never leave any doubt as to whether they can keep their 'ponzi scheme' going which is how they manage to transpose the value of their otherwise worthless assets it into the future.

    But I guess the answer lies in one's definition of money. Which is why, by claiming that a bank's balance sheet is 'empty' - shows no assets or liabilities - I feel you're saying that neither banks nor money exist. To the extent that that is so, and I know the solution is probably on the last page of your thesis, I say we are in temporary disagreement.

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  43. Maybe I have to turn the question around ans ask you: what is it about those 'mere records' that enables me to acquire goods and services by presenting proof of their existence in my name in the books of a bank? Why doesn't the salesman kick me out of the store?

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  44. Johan and Oliver: I don't think we really disagree on much.

    Let's stay now in the One Bank world, because it anyway always comes back to that (the buck stops at the central bank).

    This is not true then, not in any meaningful way: "it's liable to tender currency". Currency is a credit balance in CB ledger.

    Then we have this: "it FUNCTIONS by way of extinction and novation of bank liabilities"

    First I have to let out some frustration: Johan, why so much legal language?! :-)

    I'll expect one of you to explain what exactly is meant by that sentence. It seems to me that the "bank liabilities" is just a name which is used for the credit balances. If you want to call them bank liabilities, then you have to explain what the bank is liable to provide to the holder of the credit balance. And no, it cannot be "payment services" or anything like that, because that kind of liability would not be 10 times larger towards A than B, if A has a 10 times larger credit balance than B.

    Does that bank liability, in your eyes, have its nominal value clearly defined? If I, a non-bank, have a $100 liability in the (one and only) bank's books, then I get rid of it by selling goods worth $100. There is clear link between the nominal value of the liability and the nominal value of the goods I have to sell to get rid of it. I have to give away goods worth $100. What does the bank give away?

    Oliver said: "by claiming that a bank's balance sheet is 'empty' - shows no assets or liabilities - I feel you're saying that neither banks nor money exist"

    I'm not saying the balance sheet is empty. I'm just renaming the sides, so that

    LHS lists liabilities (non-bank, and bank to the extent there are real assets), and

    RHS lists assets, or credits (all non-bank).


    Oliver asked: "what is it about those 'mere records' that enables me to acquire goods and services by presenting proof of their existence in my name in the books of a bank?"

    This is now very important: Why would the seller care whether there are any credits in the bank's books in your name or not? All he cares about is that his own account will be credited. If that happens, then you get the goods. This is enough for him because that entry records the fact that he has given up goods of certain nominal value without receiving anything in return.

    That entry will either reduce his liabilities to give up goods or increase his right to acquire goods without incurring a liability while doing so.

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  45. I don't know if it is of any help, but I want to remind you both that I've been in (a world which looked very much like) your world earlier, but you've probably never been in a world which looks like mine.

    I used to have no problem with talking about "bank liabilities". Not until I had to conclude that if I wanted to understand how the system really works, and how debt works at macro level, then the only (or so I think) way to make real sense of the system was to stop talking about "bank liabilities".

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  46. Roger said: "Bank is reduced to role of accountant: Both lender and borrower have ability to create money by coming to agreement."

    Here you make the typical mistake of underestimating the power accountants wield! :-) The accountant can stop all trade by refusing to make entries. For instance, he will refuse to debit your account if that would lead to a negative balance -- unless he trusts you. The fact that the accountant doesn't have nominally valued liabilities doesn't mean that he hasn't got responsibilities.

    Have I said somewhere something that is incompatible with what I say above?

    The bank doesn't create money. The accountant makes a credit entry, and you interpret this as "creating money".

    The bank and the customer together create and sign a credit ("loan") contract/document. It doesn't have anything directly to do with the entries. The documentation behind the entries should be viewed separately. It's a legal consideration. The bank might have a debit, a liability, recorded in your name, but if you haven't signed a credit contract where you agreed to incur that liability, then the bank is in trouble.

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  47. After criticizing Johan for using legal language, I have to thank him, big time, for introducing legal scholarship!

    An economist can talk about money in a vague manner. A lawyer cannot. That's why the latter is much better at pointing out all the problems related to money!

    Sommer's article, which Johan linked to, starts like this:
    -------------------------------------------------------------
    The commentary of the last fifteen years has sought to answer the question, "Where is money?" before tackling the prior question, "What is money?" The first question is intractable without answering the second, and there has been very little recent scholarship on the legal nature of money."
    ----------------------------------------------------------

    :-)

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  48. Antti: Yes, the accountant certainly can wield considerable power if he is willing to use it. My brother is an accountant. I remember his remarking he was not sure that he was going to keep his job after a run-in with his boss over a perception issue that would appear on the shareholder report. I think he won but probably carried away some scars.

    One facet of money we have not dealt with is the valuation. Why is the yen roughly 100 times the value of the dollar? Why is the present USA first class postage stamp now roughly 15 times more expensive than in the 1940's? I really can't answer those questions using physical money. Could we answer them better using zero based accounting? Maybe, but I don't yet see the path.

    This effort to develop a new money theory is really difficult but it is something we are both trying to do. It should be no surprise that we are not developing in identical paths. It is heartening that we have many similar constructs.

    In the last couple of days, something(s) has(have) brought together more forcefully the nexus of bank control, borrower acknowledgement, and monetary stability. I think I will focus on this nexus during the weekend as I spend less time on the computer. It will give me something to do while not otherwise occupied. Of course I will consider zero based accounts as an option.

    BTW, my bank statement (received every month) just reports credits and debits. Thinking physical, I see each as a "flow". Then I convert their report to my system and expect agreement. Doesn't always happen easily. :-)

    I think it is about 10PM where you are. Have a nice weekend. :-)

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  49. Antti, will come back later on the rest.

    Why legal terms? Because the payment system is inherently a legal construct. It is also (directly) justified empirically. In this case, you need to look at the finger pointing at the moon, not only the moon.

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  50. Some highlights from Sommer's article (which, interpreted in the right -- that is, right as I define it -- way, can be taken to support my view):

    "money is what payment systems do." (p. 6)

    "Money is (carefully regulated) talk" (p. 7) [AJ note: "Money talks" --> "Talk talks"?]

    "Bank money exists when we say it exists, and it exists where we say it exists." (p. 7) [AJ note: So when I say, as I do, that money doesn't exist, then it doesn't exist? Case closed! I won.]


    Note that Sommer is talking about (commercial) "bank money", and that's why he can find comfort in the fact that a commercial bank is -- how should I say this -- liable to make it possible for a credit-holder in its ledger (say, a "depositor") to become a credit-holder in another bank's (incl. central bank) ledger.

    When we have only one bank, or we are talking about the central bank, then we have no such comfort. A credit in that bank's books is not "a license to sue and collect". (Btw, I use 'ledger' and 'books' interchangeably.)

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  51. Sommer's I.B.2 seems to be most relevant for us. Here he, for instance, provides a quote from Georg Simmel's "The Philosophy of Money" (I have used exactly the same quote in my private theory papers...). But I don't see that Sommer interprets Simmel as one might interpret him after having adopted the view I have adopted. Simmel says:

    "When barter is replaced by money transactions a third factor is introduced between the two parties: the community as a whole, which provides a real value corresponding to money.... This is the core of truth in the theory that money is only a claim upon society."

    I'm not going to leave much room for different interpretations of my theory, so stay tuned! ;-) Good night, and good weekend!

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  52. Yup, Antti, I knew you would like the article (Simmel and all). ;-)

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  53. I'll try to find time to read the paper. I've said somewhere before that I see money / banking in a legal context. Money is what the banking system does. As corporations, they are legally liable to do whatever it is they do with legally enforceable due diligence.

    The fact that the accountant doesn't have nominally valued liabilities doesn't mean that he hasn't got responsibilities.
    For a corporate person: responsibility = obligation = liability.

    I'm sure Nordic law has something similar to Swiss / German law:

    https://en.wikipedia.org/wiki/Swiss_Code_of_Obligations

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  54. I liked it. Mainly because, like I said, it highlights many of the problems related to money. Having said that, I don't think it solves any of those problems (perhaps some legal problems, but I'm not interested in those). The language used is somewhat different, but many of the problems are very familiar to a monetary theorist.

    See what he says on page 20:

    "Money--as a social phenomenon--works best when the validity of the underlying rules is beyond question, the transparency near-perfect, the infinite regress ignored. It is tempting to quip: Money is a miracle, its operations a mystery, and we had better not question too closely its authority. Or another quip: Money is like the cartoon characters who run over a cliff--they never fall until they look down."

    Money remains an enigma. Someone might be satisfied and say: "I understand everything there is to understand about money, because I understand it is a miracle." Another might say: "I understand what money is, because I understand that it is a social convention." That's not enough for me.

    Conventions, rules and law play an important role in our monetary system. But a law regarding money can be only as good, or precise, as is the best understanding of money. A lawyer doesn't know better what money is than an economist does (that's why Sommer talks about Simmel, Knapp, Keynes, etc; all philosophers, some economists as well).

    Law can tell us many important things. But it doesn't tell us what money is.

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  55. Oliver said: "For a corporate person: responsibility = obligation = liability."

    You're being my in-house contrarian again! :-D

    With my choice of words, I just wanted to highlight the difference between a

    nominally valued liability, and

    a more abstract responsibility, or liability, which you don't find on the balance sheet report. It's not like the bank has a liability to maintain a payments system, or "purchasing power of money", and that liability happens to match the nominal value of, say, positive balances on checking accounts in its ledger -- or is it?

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  56. I would also question the focus on 'law', strictly speaking. More generally, commonly recognized rules, or "unwritten laws", conventions, are often enough.

    "My word is my bond" testifies for this. By that is meant that you will never need to sue me. I will always admit my liability. You can trust me.

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  57. Oliver: It seems you're trying to find some refuge in this legal "mambo jambo"? Uniting with Johan, possibly against me? :-)

    I believe I have asked you some questions above which deserve better answers than this:

    "Money is what the banking system does. As corporations, they are legally liable to do whatever it is they do with legally enforceable due diligence."

    Remember Jamie's "intelligent schoolchild" philosophy? I like it.

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    Replies
    1. OK, money is financial sausage :-). Homogenised, standardised collages of other people's IOUs valued at (and thereby defining) 1 Skilo or multiples thereof.

      Delete
  58. I would like to build on my answer to Oliver (Dec 16, 12:20PM). I said:

    --------------------------------------------------------------
    Why would the seller care whether there are any credits in the bank's books in your name or not? All he cares about is that his own account will be credited. If that happens, then you get the goods. This is enough for him because that entry records the fact that he has given up goods of certain nominal value without receiving anything in return.

    That entry will either reduce his liabilities to give up goods or increase his right to acquire goods without incurring a liability while doing so.
    ------------------------------------------------------------

    We have an entry. (That could be called the primary phenomenon, or perhaps even the only phenomenon.)

    We have a balance. But a balance is just the sum of cumulative entries. Balances are not 'made' or 'transferred', they are calculated. (I could try to argue that it is not a phenomenon, but this is not important; I might not be smart enough to tell the difference.)

    Above I state clearly what is being recorded when the entry is made. My interpretation is independent of the initial or ensuing balance on the account. This allows us to talk about entries without any reference to balances. And I think that's nice, and it sounds right, because it is the entries that "cause" balances.

    It's all arithmetics.

    I'm not a mathematician, but I dare to argue that the alternative way of thinking is not all arithmetics. Let's look at two pairs of equations:

    10 + 60 + 30 = 100 ---- (1)
    40 - 100 = -60 -------- (2)

    and

    10 + 60 + 30 - 60 = 40 ------ (3)
    40 - 100 + 60 = 0 ----------- (4)


    Would it be sensible for a mathematician to say that 60 was transferred from equation 1 to equation 2, and so we ended up with equations 3 and 4?

    I believe it would make more sense for him to say that +60 was subtracted from, or -60 added to, equation 1 to arrive at equation 3. And that -60 was subtracted from, or +60 added to, equation 2 to arrive at equation 4.

    What do you think?

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  59. Sorry, replied directly to your 4:23 AM above.

    To your (Dec 16, 12:20 AM)
    I'm not saying the balance sheet is empty. I'm just renaming the sides, so that

    LHS lists liabilities (non-bank, and bank to the extent there are real assets), and

    RHS lists assets, or credits (all non-bank).


    Hmm, I'd say accounting is just convention. And for any other firm, say a law firm or hairdresser, their own balance sheets would be mirrored so that the equity that is an asset to the owners shows up on the liability side for the corporation. In that sense I'm actual partial to Nick Rowe when he says that money is akin to an equity share in the bank.

    This is now very important: Why would the seller care whether there are any credits in the bank's books in your name or not? All he cares about is that his own account will be credited. If that happens, then you get the goods. This is enough for him because that entry records the fact that he has given up goods of certain nominal value without receiving anything in return.

    That entry will either reduce his liabilities to give up goods or increase his right to acquire goods without incurring a liability while doing so.


    Yes, but why? Why does he trust the bank to pull off such a thing but not me or the butcher? And why is it that that by doing so his right to acquire goods increases? Why is that 'right' not just ignored by everyone? You are aware that 'right' is a legal term?

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  60. To your 6:03:
    I have no problem at all with your contention that nothing is transferred between accounts, that everything is just arithmetics / counting 'real world' phenomena.

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  61. I Still haven't read the paper. No time...

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  62. Antti: Regarding comment Dec. 17 at 6:03 AM:

    I also am not a mathematician. I just spent about an hour trying to prepare a sensible comment without complete success. I'll take a different tact.

    Let me give you an example of two object sets but the same scale: Imagine a meter stick divided into centimeters. This meter stick is unusual in that it has zero at the center with the scale reading zero to 50 on each side. One side is painted green and the other side red.

    Now if we had only one object set, why would we ever use the colors as part of the distance identification?

    Now if we had two object sets, there may be an important identification that we want to carry into a math equation. For example, two points lay on property (land) owned by different people. What is the distance between the two points measured by distance within each owners borders? The answer: two-owner-distance = X on red scale) + Y on Green scale = X + Y

    That is what this non-mathematician has to contribute. :-

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  63. Now we see that if Nick defines money supply as green plus red, he is giving a sloppy (misleading) definition of money supply. We would more accurately say

    two-owner-money-supply = green money plus red money.

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  64. Oliver, the article is not the "money-bible" and one only really needs to read the first 25-30 pages or so. I just think it's quite a good legal take on the issue. The issue regarding location stems from a legal case from the late 1980s [Libyan Arab Bank v. Bankers Trust Co]—the Libyan bank having Eurodollar deposits in a London-branch NY bank and the Reagan administration trying to freeze Libyan assets in the US. All sorts of legal wrangling took place in order to define deposits and where they were, and how they could (or not) be transferred/released. The US actually lost the case that time.

    Antti, the law may not tell us what money is, it just gives a particular perspective to the issue and the context. We can have many other perspectives too. However, we do know that we treat particular bank liabilities as money, and as such, the "money-phenomenon" is intertwined with payment systems and how they work—hence the whole description of the payment system functioning as 'trade in licenses to sue'. And contrary to your opinion, those licenses do not disappear even if we consider only one bank or the banker's bank (the central bank).

    The "transfer problem" is not contingent on in situ debit-credit entries not being transferable as such. Rights and obligations, claims and liabilities, are considered transferable all the time however… through, for example, novation. Bringing those principles into a paymaster/payment system realm don't really change the underlying logic all that much. What has changed is the technology by which these communications are transmitted. Herein a case might be made for looking at the moon rather than at the finger pointing at the moon? But it's also just another perspective with another emphasis.

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  65. Johan said: "However, we do know that we treat particular bank liabilities as money"

    Yes, but as you've seen, the problem to me is really about what are those (central, or One) "bank liabilities" that we treat as money. In what way are they liabilities to the bank, if they are at all (that is, perhaps they are "liabilities" because of a naming convention).

    Johan said: "Rights and obligations, claims and liabilities, are considered transferable all the time however"

    You are right. And this shows how my point is perhaps more subtle than what I've made it sound like.

    That said, there is a material difference between the right (one could probably substitute 'right' for 'money') I'm talking about and a right that is transferred (or a 'license' that can be traded).

    Benjamin Geva, whom you referred to in Nick's blog earlier, was of the opinion that we cannot generally talk about transfer of bank liabilities, or licenses, (I think he used another term, though), because the payor (in case of an overdraft) doesn't necessarily have one, even if the payee ends up with one. (Something that is transferred or traded must first be manufactured, or at least exist. But in this case, the alleged trade creates that which is allegedly traded. Again: the trade/transfer metaphor is not generally valid.)

    We see that the transfer/trade (of bank liabilities, or licenses) metaphor refers to a special case: the account which is debited has a non-negative balance after the entry is made and the account which is credited has a non-negative balance prior to the entry. (And even then Schumpeter's argument in my footnote is valid.)

    My interpretation is generally valid.

    But I think I have taken us partly to the wrong track, because what I should be doing is to show that my way of thinking about this is valid; not that your way is invalid. I shouldn't care if both of them were valid.

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  66. Oliver said: "OK, money is financial sausage :-). Homogenised, standardised collages of other people's IOUs valued at (and thereby defining) 1 Skilo or multiples thereof."

    The intelligent schoolchild remains perplexed.

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  67. Oliver said: "Homogenised, standardised collages of other people's IOUs"

    I've said to you earlier, that this sounds like the way I thought about this earlier. I used to talk about "indirect IOUs of debtors" (by debtors I meant those with liabilities in the bank's books).

    That concept works OK. But it runs into at least two problems:

    1. The material of which that sausage or collage is made changes all the time, without the owner being able to notice it.

    2. The "other people" can default on their IOUs and still the value of the sausage remains the same. If there are so much defaults that the value of the sausage is threatened (equity is "swiped out"), then the government protects the sausage by replacing lost material (private debt) with new material (public debt).

    This got me to conclude that the credit balances (rights or claims) are connected (by the system's logic) to the debit balances (liabilities or debts), but that we cannot say that the rights or claims are someone else's liabilities or debts.

    Does this make any sense to you?

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  68. Yes, I suppose it does. I apologise for the lack of time I have to think through my replies. Nor do I really have a good definition to offer.

    The definition of novation might be helpful, although not necessarily to the intelligent schoolchild.

    novation (...) is the act of either:

    replacing an obligation to perform with another obligation; or
    adding an obligation to perform; or
    replacing a party to an agreement with a new party.


    The new party being, in this case, the bank. But I do share your view that money is ultimately a societal project. The bank is only an intermediary - the butcher of promises.

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  69. Our comments seem to have crossed. I was replying to your previous comment.

    To your latest:
    I don't want to stretch the sausage analogy, but I suppose one can water down the quality of the sausage for quite a bit before sutlers catch on. And since it is filled with nothing but trust in the promises made, the quality cannot really be measured objectively - until the day it isn't there any more.

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    Replies
    1. before customers catch on. autocorrect...

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  70. Oliver said: "the equity that is an asset to the owners shows up on the liability side for the corporation"

    Yes. And equity is a credit balance, which makes it similar to 'money'. I agree. (I don't like "Assets = Liabilities + Equity". To me it's "Assets = Liabilities".)

    But as you saw, in case of banks, I turn this around. Liabilities = Assets. (Again, best to think of this in terms of central/one bank.)

    I'll explain the logic.

    Remember Betty and Andy.

    Betty gave up (sold) bananas. Her account was credited. This lead to a credit balance. The credit balance ended up on the RHS of CB balance sheet. It is a record of Betty's rights/claims/credits.

    Andy received (bought) bananas. His account was debited. This lead to a debit balance. The debit balance ended up on the LHS of CB balance sheet. It is a record of Andy's liability/debt.

    Next, Betty meets the central-banker. The central-banker is looking for a very expensive abacus, not for his private use, but to be used in the central bank. Betty happens to have that kind of abacus.

    Betty gives up (sells) the abacus. Her account is credited. This increases the credit balance. The credit balance is still reported on the RHS of CB balance sheet. It is a record of Betty's rights/claims/credits.

    The central bank receives (buys) the abacus. It's equipment account is debited. The account has a debit balance. It's reported on the LHS of balance sheet. It is a record of central bank's liability.

    Before you protest my unconventional choice of words (isn't it an asset, not a liability, to the central bank?), I'll try to defend it.

    Why do I call the equipment account debit balance a liability of the central bank (the entity)?

    I call it such because the logic behind my theory seems to demand that I call it such. Is this a problem in my theory? Isn't this illogical?

    Not necessarily.

    Before I proceed with my defence (in the evening, hopefully), I'd like you, if you have time, or anyone else reading this, to take my place and try to justify my calling the equipment a liability to the entity :-)

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  71. Antti wrote: "Yes, but as you've seen, the problem to me is really about what are those (central, or One) "bank liabilities" that we treat as money. In what way are they liabilities to the bank, if they are at all (that is, perhaps they are "liabilities" because of a naming convention)."

    To irradiate the "money-character" in them we need not go further than: They are liabilities to the bank in the precise way as the term implies, i.e., they give the deposit holder an ability/license/right to sue the bank for compensation (for a "predeterminate" sum). So here's an example: account holder A has a (positive) credit balance and intends to pay his debt to B by way of reducing his balance. Without other considerations, the (One) bank is bound to comply with such request and effect the payment. It is liable for a suit and compensation if it doesn't. Thus, A can force a legal resolution to the effect of extinguishing A's debt towards B through the paymaster. That's why they have such a generally accepted "money-character". The bank is not liable to comply if it means the payer will, as a consequence of such payment, go into overdraft, unless otherwise contracted. In other words, it requires a contractual extension for the bank to become liable in the overdraft case (i.e., for being liable to 'create' the opportunity for A to redeem his debt to B).

    So, it's a matter of perspective whichever scenario is treated as general or special. Empirically, I would suspect the overdraft case is special. From a philosophical point of view, in the sense of mapping out the possibilities of carrying out such payment without breaking the overall transaction logic imbued in the payment system, I would tend to agree with Antti in that the overdraft could be considered general—the overdraft does not exclude the possibility of payments in terms of increasing-reducing debit balances towards the paymaster. Legally, however, from the paymaster's perspective: there seems to be a world apart between being liable to grant a loan through payment vs. liable to extinguish/novate a liability through payment.

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  72. I'll give it a try. You're saying that the banking system as a whole cannot be considered to be an incorporated entity with limited liability because in the end there is no one left who could be held liable other than the owners, aka the people. So if we were to put assets / liabilities on the same side as on our private balance sheets, we would be double counting, whereas if we mirror it as with LL corporations we would. e fooling ourselves into thinking there was anyone or anything other than ourselves that could give value to our money.

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  73. Johan said: "they give the deposit holder an ability/license/right to sue the bank for compensation (for a "predeterminate" sum)"

    I think it's best to clear this now. Is the "predeterminate sum" the credit balance ("bank liability") in question? What Sommer talked about sounded like bankruptcy proceedings. He said that the court can order the bank to sell assets, etc. He seemed to say that in no other situation does it make sense for the bank not to comply.

    I also read Sommer as saying that this doesn't apply to a central bank. Which is true.

    I don't like words like "paymaster". It doesn't refer to a bank in conventional use. Using it just adds to the ambiguity, and there's already enough of that.

    What adds to the pain in this discussion is that I don't even like to use the word 'payment' in this context. I believe it's possible to discuss the phenomena, which really consists of the entries made, without using the word 'payment'. The concept is in many people's minds linked to a 'transfer' (I don't know about your mind).

    Is some kind of incommensurability (of our languages) causing problems in this discussion? I think so. I still don't see your explanation of the liability valid. A liability to comply with a request to make entries is not a $100 liability -- assuming credit balance covers the entry -- in case of a request for a $100 debit entry. It is some kind of general liability, and if the bank doesn't for some reason comply, the customer can sue the bank for damages or for breaking the contract, or whatever lawyers call it (not for $100).

    The explanation might be good enough for lawyers, but it has clearly not been good enough for economists.

    With "my interpretation" I didn't mean overdraft. I meant that it is generally valid to describe the entries made as entries made, instead of describing the entries made as a transfer or trade of 'bank liabilities' or 'licenses to sue'. Oliver seems to agree with this. Don't you, Johan?

    I probably sound tired. I am. And when I'm tired, I don't like to go through legal jargon. Intellingent schoolchild language is OK. If I say that a non-bank has a $100 liability, then it usually means that the non-bank actually has to, at some point, give up something worth $100. At that point its balance sheet "shrinks". Clearly, the "liability" of the One Bank is not of the same nature.

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  74. I said: "If I say that a non-bank has a $100 liability, then it usually means that the non-bank actually has to, at some point, give up something worth $100. At that point its balance sheet "shrinks"."

    This was stupid. I meant to say "private person" instead of "non-bank", and talk about balance sheet only figuratively (I have reservations when it comes to "household balance sheets".)

    Banks and non-bank companies have a lot in common. Many of my points about banks apply to non-bank companies as well.

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  75. If I have a $100 liability, it might mean, for instance, that I have promised to deliver cash to someone, or get his account credited with $100. When I explain in this way what my liability is about, I talk about the liability from my perspective.

    It would sound weird to me to explain that I have a $100 liability which is a license to sue me. Sure, it can be seen as as such. But it sounds much clearer to explain, for instance, that I have agreed to give up $100 cash at one point, or at request. That's a debt. Does the bank have a debt? Or does it only have a "$100 liability to comply"? The latter sounds weird to me.

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  76. Antti, no, it's the payment obligation. That's the "predeterminate sum" which is in question. So no, the CB is not exempt from such liability. Sommers p. 9, incl. fn. 21: "But it is only these payment liabilities—commnunicative and predeterminate—that are special." So, the damages are precisely known beforehand, and no bankruptcy proceeding are required as (ibid. p. 8): "These predeterminate liabilities represent a license to execute a judgment against the bank's general assets, perhaps triggered by some formal requirement such as dishonor and protest."

    True, it makes no sense for the bank not to comply if it may comply… which is exactly why the general "money-character" of these liabilities comes about. (In a multiple commercial bank world: those who do not comply find themselves soon out of business.)

    Antti wrote: "With "my interpretation" I didn't mean overdraft. I meant that it is generally valid to describe the entries made as entries made, instead of describing the entries made as a transfer or trade of 'bank liabilities' or 'licenses to sue'. Oliver seems to agree with this. Don't you, Johan?"

    I'm not sure since that seems circular "entries made as entries made"? Those entries are not devoid of legal meaning. The accountant/bank is certainly not free to make any entries he or she would like to (I don't assume you even intended that). In fact, it's fairly regulated as to what the bank may or may not enter onto ledgers. When it comes to pre-existing credit balances of a customer, it's even stricter because of the predeterminate obligation to execute a payment when demanded (less so if it involves an overdraft which usually taps into the bank's right to discretion). But sure, entries representing an executed payment booked to the effect of a loan to the payer and a reduced overdraft to the payee is not a transaction in bank liabilities other than in terms of a required netting effect. I.e., what can legally make a debit balance of a payee to be reduced if not a credit entry signifying bank liability to the same account? One could make a case for the bank being liable to reduce the debit balance of the payee (and for a predeterminate amount).

    I agree with you in that the liability in this respect for the One bank is not of the same nature as a private person's monetary liability (unless, theoretically, the private person has infinite roll-over). Although, there's still a liability there in the legal sense for the One bank.

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  77. Johan: Thanks for the good tone in your message (especially after my frustrated one)! I'm a lot less frustrated now :-)

    With "entries made" I referred to my interpretation of the meaning of those entries, the one about recording goods given up and goods received. That is an intepretation which is independent of the balance, so it applies both to overdrafts and cases where there are only positive balances. And this I contrasted with any interpretation which is not independent of the balance. Which takes us to what you said above:

    "what can legally make a debit balance of a payee to be reduced if not a credit entry signifying bank liability to the same account"

    Do you really mean that the credit entry signifies a bank liability? The way I understand this is that a credit balance is said to be, or signify, a bank liability.

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  78. Overall, I think the ambiguity remains.

    "payment obligation"

    "One could make a case for the bank being liable to reduce the debit balance of the payee"

    I don't see how this wouldn't apply to an "accountant-bank". It's liable to make certain entries.

    You have pushed me (and us all, I guess) to think hard, and that's good. But I think we should try to use more simple examples, because otherwise we are discussing on too an abstract level, like I feel we are now.

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  79. I wrote above:

    ---------------------------------------------------------------
    Why do I call the equipment account debit balance a liability of the central bank (the entity)?

    I call it such because the logic behind my theory seems to demand that I call it such. Is this a problem in my theory? Isn't this illogical?

    Not necessarily.
    ---------------------------------------------------------------

    Thanks for trying to defend me, Oliver! ;-) I have to say I didn't make it easy for you, as I didn't give any hint where I'm going. But it seems it's not the place you had in mind.

    I shouldn't have stressed that this is about banks. This is about companies in general. I have to keep this short now, but I'll get back to this in more detail some other day (I have to do some research on this; now I'm just relying on bits and pieces from my memory). But here's a start:

    There is ambiguity involved when we talk about companies. What is a company? Who owns it? Etc. And I think this ambiguity makes it possible for us to choose between alternative perspectives when we talk about, for instance, the balance sheet.

    (I think there's a lot of research I could use to back many of arguments here. But unfortunately I don't have it at hand now. As I said: bits and pieces.)

    Company is a 'juridical person'. That suggests a perspective where the company acts, where the company gains or profits, where the company loses.

    But does it?

    For instance, profit or loss shows right away as a gain or a loss of shareholders. And we talk about 'agent-principal problems', because there are people who act on behalf of the company, and are liable (let's not start...) to its shareholders or other stakeholders.

    I want to go the history of accounting, especially to look at how balance sheets came to be used as reports. But I don't have time for it now.

    If I try to put this simply now, in my own words, without further thinking, this is how it sounds:

    People get together and found a company. Each of them puts assets "into" the company. Legally, the ownership of the assets is shifted to the juridical person. The shareholders just get a record of their putting their assets into common use by the company, for the common good of the shareholders. We could say that they still indirectly, through the company, own the assets. And the company, which is an entity separate from its shareholders, is a kind of "guardian" of those assets. Those assets are a liability for the company (which acts on behalf of its shareholders). Whatever way "it" (who? the agents?) uses those assets (ie. property, plant & equipment and financial assets), it leads to gain or loss for the shareholders -- not for the company itself (because the company, seen from this perspective, is no one -- another name for 'juridical person' is 'artificial person').

    I wrote this in a hurry, but I hope it gives some idea of how I approach this?

    I think in the history of accounting, in the Genoan examples, there is some hint of this "guardian" aspect, where the person liable to prepare and present accounts does it because he is not the one who owns those assets. If I give you my car, for you to use, the car could be seen as a liability to you. It's not your asset.

    As I said, I'm not presenting a definitive case here :-) And my purpose is not to argue that we should never talk about the "assets of the company". Again, I'm arguing for my right to view things differently, as long as I can somehow justify it.

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  80. As I said, there is ambiguity involved. That means that I can argue what I argue above without being obviously wrong. But even I can come up with many counter-arguments to my argument.

    In the end, what matters for me is that I can somehow justify saying that when the central bank takes the abacus in my example, and its account is debited, the central bank (not its owners, not its workers) acquires a liability. To see this, one needs to adopt a different perspective from the usual one where LHS is about assets and RHS is about liabilities. One, in a way, needs to recognize the company as no one, and focus on the someones :-)

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  81. Antti, Johan, Oliver: I am back at my home computer. You folks have been talkative!

    Let me comment on the asset-liability debate and make some perhaps-bridging comments.

    Let's begin, thinking that, from one aspect, both Betty and Andy have created assets on the CB balance sheet.

    Betty has had her bananas entered into the CB balance sheet for the first time. Andy has made a promise (maybe implied by social convention) to behave in a predictable way in the future. Both are positive contributions to human well being. From that aspect, both have created assets.

    This twist on accounting principals has no effect on the asset side. On the liability side, it requires thinking about liabilities as assets. This is not hard to do when we remember that all liabilities have ownership labels.

    So, Antti, I don't have quite so much problem with your zero based accounting when I think of the liability side as actually being a positive asset, segregated by ownership. Then, we can think of the accounting as physical entries or marks with meaning, the result should be the same.


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  82. Well, Antti, you could interpret the liability as a liability to reduce the debit balance. That's within the same logical treatment of "liability" as discussed above.

    But in a broader framework it could also make sense to interpret credit entries as signifying claims on the bank (bank's liabilities) and debit entries as the bank's claims on the account holder (account holder's liabilities)—the overall balance being the ongoing monetary obligation of the party in debit to the party in credit for that account in question. This is so, even if the "nature" of the ongoing obligation/liability might differ depending on who's in debit/credit.

    For example: This treatment is coherent in those circumstances where the customer has more than one account with the bank. So, one account might be in debit (overdraft) and another in credit. The bank might exercise a right to offset under some circumstances (say, overdraft past due and limit frozen), i.e., the bank may have the right to combine the accounts so as to express one current balance with the customer. Generally, the other account can't be a loan account but more to the point here: The bank can't offset if it is made known to the bank that a particular payment (credit transfer) is earmarked for a particular purpose. That can happen, for example, when the two-account holder (B), now under offset, is receiving a payment from A in order to buy a commodity from C which B then has agreed to deliver to A. Here we see that a credit entry may not be used to automatically reduce a debit balance without further consideration.

    I can't say I know the particulars about such cases. But in general, there seems to be room for interpreting credit entries as bank liabilities even though they may simply serve to arithmetically reduce a debit balance. In some cases, they don't, even if the bank would want to. It is as if, figuratively speaking, some credit entries have the "power to pass through" accounts. The treatment of considering all credit entries the same, regardless of balance, resolves the ambiguity.

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  83. Antti writes "In the end, what matters for me is that I can somehow justify saying that when the central bank takes the abacus in my example, and its account is debited, the central bank (not its owners, not its workers) acquires a liability. To see this, one needs to adopt a different perspective from the usual one where LHS is about assets and RHS is about liabilities. One, in a way, needs to recognize the company as no one, and focus on the someones :-)"

    This comment seems to smoothly fold into the concept that both sides of the balance sheet are assets. After the equipment acquisition, the CB controls the assets on the asset side of the balance sheet. The CB both controls and assigns ownership to the assets listed on the liability side of the balance sheet.

    With the abacus acquisition, the CB created assets in the sense that the assets have been recognized for the first time.

    Of course, the two sides should match in total value.

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  84. I think we could actually finalize our discussion here...

    Antti: wrote: "I don't see how this wouldn't apply to an 'accountant-bank'. It's liable to make certain entries."

    I think you are essentially correct. The term itself—"accountant-bank"—indicates a double-headed little devil in this discussion. Depending on circumstances, we may choose which head should be allowed to speak; the accountant (the record keeper) or the bank (the gate keeper).

    Some ambiguities appear to arise in situations where we must demand the devil to act as a record keeper and not as a gate keeper: for instance, in the setoff example with "earmarked" payments. On the other hand, the devil may use discretion itself: for instance, when a payment involves the creation of a debit balance for the payer (and for the payment to actually ensue to the satisfaction of the payee). Sometimes the gate keeper allows a recording to be made, sometimes it doesn't, potentially preventing the trade from occurring—or possibly forcing the trade to occur outside the realm of the devils ledgers.

    But in all cases, where there's existing credit balances in favor of the account holders, the obligation of the "accountant-bank" seems unambiguously tilted towards that of record keeping.

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  85. Antti, what you say did occur to me when writing my last comment, but I thought it too absurd to imagine you were taking on the whole concept of incorporation :-). I'm also not sure that fishing in the beginnings of double entry book keeping will get you anywhere as the concept of the corporate / legal body was introduced a couple of centuries afterwards, at the height of colonialism, I believe. So you're going to have to take on the whole of modern corporate law, too. Good luck!

    The only context within which I can imagine that abstracting away from the legal body is legitimate is, as per my comment above, when the idea of limited liability rests on a fallacy of composition. I have encountered, and am in favour of using, such an argument when faced with the supposed dichotomy of the (democratic) state and the people. Since, in theory, the actions of representative government reflect the will of the people (voters), the dichotomy of state vs. private can be ignored within the limits of a theoretical discussion. I'm not sure it works for the monetary system though, as a dissolution of such (wiping out all records) would still leave the world divided in to winners (former debtors) and losers (former creditors).

    This is a bit orthogonal to your discussion with Johan. Here I find the observation that banking is effectively a perpetuum mobile to be quite helpful. The liability inherent in every credit entry on a customer ledger can be said to be covered 100% in the context of a permanent flow of debits and credits, the potential fallout of which is (or should be) covered by the equity buffer. It is only in such a flow context that limited liability becomes a stable type of system design.

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  86. Oliver: We have arrived at a point where we talk past each other. (Remember: I most likely agree with you on all the important issues ;-))

    I'm not taking on the whole of modern corporate law. As I said, I'm not arguing against talking about "company's assets". On the occasions when we talk about the 'juridical person' it makes perfect sense. If I was against this, I would also be against the 'entity concept' in accounting. I'm not.

    I talked about seeing the company as 'no one', not as 'nothing'. I'm suggesting that, in this particular context, we see it as something else than someone; perhaps a 'conduit' is a good word. Only in tax havens have we companies which seem to exist independently of people -- even indirectly -- on the RHS of the B/S ;-)

    If I remember correctly, balance sheets came into being when there was a need to report to various stakeholders (initially mainly shareholders); that is, with joint-stock companies (or "proto versions" of those). Who was liable to create these reports? The 'agent' (even if a shareholder himself, he was acting as an agent of other shareholders). The shareholders wanted to know how their 'assets' or 'funds' are used by the agent (I'm quite sure that they didn't yet think of some abstract 'company' taking care of their assets/funds/wealth. As far as I know, the shareholders themselves were the company of persons who had got together to achieve a common goal.)

    And here's the link to Genoa. The agents who prepared the financial statements were "guardians" of other people's assets.

    I don't think I'm making a very strong case here. So I understand it if you don't "buy it".

    I'm going to move forward, but I'd like you to take this with you from this conversation:

    A bank is a 'juridical person'. One could describe it as a conduit for 'natural persons'. The bank itself doesn't appear on the RHS of its balance sheet.

    Adopting the viewpoint of natural persons, we can say that their assets (or assets of other juridical persons acting, ultimately, as conduits for natural persons) are to be found on the RHS of the bank B/S.

    Banks are special because most of the LHS of their B/S (conventionally seen as the assets of the bank) consists of someone's liabilities/debts. When we again adopt the non-bank perspective, we can talk about liabilities appearing on the LHS. But that leaves us with some tangible and intangible assets which are not financial assets (that is, someone else's liabilities). Those assets are legally owned by the bank, but then again, the bank is just a conduit. We could say those assets ultimately belong to someone else (not necessarily shareholders, but parties on the RHS in general). And because the assets ultimately belong to someone else than the bank, then we can think of them as a liability for the agent who has been trusted with them.

    My theory doesn't seem to hinge on this issue. But of course I'd like my explanation to be consistent. Perhaps you can give me the benefit of the doubt here? :-)

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  87. Johan and Oliver:

    I think we can finalize the discussion on 'bank liabilities'. I think our disagreements are mainly due to us adopting different perspectives. I have so far stressed mainly the bookkeeper role, without writing out some assumptions I rely on and which are related to the gatekeeper role. I should start writing out those.

    I think the unspoken assumptions led to Oliver saying this (far above):

    "Yes, but why? Why does he trust the bank to pull off such a thing but not me or the butcher? And why is it that that by doing so his right to acquire goods increases? Why is that 'right' not just ignored by everyone? You are aware that 'right' is a legal term?"

    We have customs and we have law. We have rules which govern this system. Perhaps what I've said so far can somehow be seen as inconsistent with what I say here?

    It has never been my intention to say that the bank doesn't have obligations to act in certain ways. What I've said is that the bank doesn't have a, say, $100 liability towards a holder of a credit balance. Yes, the bank might be liable to make a $100 entry. That's not what I'm talking about. What I'm talking about is a $100 liability, or debt, so that the bank would need to deliver 'money' or goods worth $100 to the credit balance holder.

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  88. I see I overshot by a wide margin. Sorry, I'm often forced to fly through comments in between tasks which sometimes comes at the expense of quality and nuance in my replies. I think I see what you mean, now. You may procede :-)

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  89. Regarding the last paragraph of your last comment. That is what capital requirements are for. For covering liabilities (1:1) in case assets go south at a greater pace than expected.

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  90. Antti: You write "The bank itself doesn't appear on the RHS of its balance sheet."

    I would argue that the entire RHS of it's balance sheet IS the bank itself.

    I would further argue that, to the extent that the bank has wholly self-owned assets under it's control, these assets would be listed on the RHS.

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  91. Thanks, Oliver!

    You said: "That is what capital requirements are for."

    Yes. At this point I only talk about checking account credit balances. Other types, like equity credit balances, come later. How familiar are you with Modigliani-Miller (the basic idea that "no matter how you slice the cake, it's still the same cake")?

    Fama puts it like this:

    "Or a bank may issue both riskfree and risky deposits against a given portfolio of assets, with any capital gains or losses in the portfolio absorbed by those holding the risky deposits. The latter scenario would look more familiar if we assumed instead that the risk in the portfolio is borne by stockholders. However, our risky deposits are common stock with the additional benefits provided by access to the bank’s transactions services." (Fama, Eugene. 1980. “Banking in the theory of finance”, p. 42.)

    Fama's paper builds on Black's ideas in this paper:

    Black, Fischer. 1970. “Banking and Interest Rates in a World Without Money: The Effects of Uncontrolled Banking”

    Again, I'm being unconventional when I don't start with equity :-) But proceeding in this order perhaps helps us better understand what "bank capital" is about.

    I don't actually see any need for a central bank to have "capital" (equity). Or I should put it like this: The capital -- with the government as a shareholder -- can be a residual, the value of which can alternate, being sometimes positive and sometimes negative. If it can go below zero (unlimited liability), the "protection" is there even if there's no "capital" in conventional sense. (These thoughts are not really that unconventional, I reckon.)

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  92. Yes, I've come across all of the above at various points. In fact, I've seen endless (mind-numbing) blog discussions over whether a CB can have or should be allowed to have negative equity. I can't say I have a strong opinion on the subject.

    And I'm not sure what such an 'unlimited liability' central bank means in the context of the various other corporate structures we currently have beneath the central bank (commercial banks + the rest of finance). And also how it would affect say a foreign exchange rate - assuming there is more than on currency in the world. Unlimited equity seems to imply unlimited moral hazard and unlimited possible dilution vs. something. But I'm just ad-libbing here.

    Btw., Nick Rowe links to a Brad deLong piece in his latest post that seems to use a lot of your gifting language.

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  93. Thanks, I'll read DeLong then!

    Aren't CBs de facto unlimited liability already? If equity is wiped out, Treasury must step in. Options are

    1. negative equity (Treasury liability in itself, comparable to an overdraft!)

    2. New bonds as a "capital injection" (comparable to a "loan"!)

    I don't think this has anything directly to do with moral hazard.

    What do you think?

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  94. DeLong: "eager to enter into reciprocal gift-exchange relationships—both one-offs mediated by cash alone and longer-run ones as well."

    How do you interpret this? Does he see the one mediated by cash as an exchange of gifts? Not as I see it, as a gift (goods) given; and cash as a record of this one-sided gift?

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  95. Several central banks are working perfectly well with negative equity (e.g., the Czech National Bank, at some point, with -5 percent of GDP | Also: Chile, Mexico, Israel…?).

    Peter Stella used to write about this. For example: https://www.imf.org/external/pubs/ft/wp/wp9783.pdf

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  96. Thanks, Johan! I knew it happens, but I wasn't aware of these specifics.

    Isn't it funny that the conversation turned to "gift economics" in Nick's blog without me, at least directly, leading it that way? :-)

    I couldn't help but advertise my theory and my blog. Let's see if something comes out of this.

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  97. eager to enter into reciprocal gift-exchange relationships—both one-offs mediated by cash alone and longer-run ones as well. I stumbled across that as well. I interpreted as distinguishing between consumption and investment. But I may be wrong.
    I don't think this has anything directly to do with moral hazard.
    You're probably right. Especially seeing the link in Johan's comment. I probably stepped into a quantity theory trap there.

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  98. Off topic musing:
    I remember Nick Rowe being a bit puzzled by the fact that LETS do not end up 'imploding' in the sense that everyone piles up as much debt as possible in a lifetime. Not that I have an answer. The (your) gifting economy presupposes that individuals seek to achieve balanced budget over a lifetime, possibly with the help commercial banks acting in their own self interest (?). This poses some interesting questions.

    Putting the 'one bank' world aside for a moment, I think the way in which we answer the question of what it is that limits our behaviour, is immensely important to our understanding of the financial system and any subsequent policy prescriptions. If we view the monetary world as it is, namely a creature of different hierarchical levels, beginning with commercial bank credit, followed by a national central bank, possibly a supra national central bank (ECB) and then international monetary flows - sorry quants - it makes a fundamental difference whether we consider individual behaviour at the lowest level to be the limiting factor, or whether we take a top down approach in which institutions limit / control the behaviour of their creditors / debtors. And if the latter, whether such limiting takes the form of quantitative limits (say strict overdraft limits), price controls (interest rates) or a more qualitative form (credit assessment). Also interesting is the question of whether top down rationing is thought to be governed by the economics of scarcity (Lionel Robbins: Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses) or whether there is some other force / sauce that governs the behaviour of institutions. A 'passive' central bank (or supra national central bank) that merely records the actions of its member banks can be made to 'fit in' to the world of the economics of scarcity if at least its member banks are considered classic private firms whose behaviour is governed by constraints of the free market. If you take a 'one bank' view of the world on the other hand, and then say that this one bank merely records the transactions of its creditors / debtors, you're making a completely different statement! The latter seems to be a reliable source of irritation for those trained in more established schools of thought.

    None of this is new in any way I guess, but I think it is at the heart of the dispute at hand and each school of thought seems to occupy a particular view within the above framework. Keynesian, New Keynesian, Monetarist and what not macro seem to be unified by their emphasis on top down explanations of one sort or another. Also, each school seems to be influenced strongly by the institution it was 'designed for'. If you're a central banker who has been given a goal and a set of tools to achieve it, theories that tell you that none of the tools you've been given will help you achieve your goal might not be very popular :-).

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  99. Oliver, I think there's been a problem with trying to weed out the significance of any third parties (as a category) from macroeconomic models, so that "assets" and "liabilities" may represent unproblematic general counter-categories to each other in whatever context they are presented.

    J. W. Mason and Arjun Jayadev (2015) in RoKE 3:3 are critical of the way it's been handled. From one of their concluding chapters [5.1 Debt as a monetary phenomenon]: "But, in fact, the financial relationships reflected on balance sheets and the real activities of production and consumption compose two separate systems, governed by two distinct sets of relationships. Explanations that reduce debt to the financial counterpart to some real phenomenon ignore the specifically financial factors governing the evolution of debt. The evolution of demand and production has to be explained in its own terms, and the evolution of debt and other financial commitments has to be explained in its terms. No simple story combining the two is likely to be useful or reliably consistent with the facts. [. . .] Balance sheets and real flows do interact, sometimes strongly. But conceptualizing the two systems independently is an essential first step towards understanding the points of articulation between them."

    Their article is a sober read in many ways.

    https://www.elgaronline.com/view/journals/roke/3-3/roke.2015.03.03.xml

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  100. Johan, I am thinking of an example where a significant factor is bypassed. How about Betty trades with Andy and each receives one mark?

    If we changed that story (thinking of 35 year loans), Andy would expect to extinguish his red mark over 35 years. That would be a description of lifetime debt, with some percentage statistically expected to fail due to death.

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    1. Sure, Roger: "leverage" (debt-to-income) is only as good a measure if you know the "deleveraging" schedule and other related variables. A change in household "leverage" according to broad national accounts categories does not necessary mean a change in borrowing behavior.

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  101. Thanks for the link, Johan. I'm afraid I haven't got access to the full article. Regarding the part you copied, I'm a bit confused by the following: the financial relationships reflected on balance sheets.... What is that supposed to mean? And why is debt supposedly a phenomenon that is captured on balance sheets while production and consumption aren't? Balance sheets do not really portray any relationships, as far as I can tell (Antti?). They're just a list of stuff acquired and debts incurred, presented in no particular, logical order and all of which must sum to 0 by definition. So things on the LHS and things on the RHS cannot be said to be in any 'relation' with one another. It is only in transactions that we can put real world phenomena in a debit / credit relation for an instance in time (or for a period, if you take a profit and loss account). And even then, no causal direction can easily be inferred. So, while I agree that decisions to produce, to invest, to consume and to take on debt may all be governed by their own 'laws', loose rules of thumb or lack thereof, I don't think that staring at balance sheets is going to help us find any of them. Balance sheets have no behavioural content, imho. But I may well have misunderstood what they're up to.

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  102. Oliver, I think you'll also find the whole article (including the context for that quote, specifically in relation to national account balances/relationships) here. :

    http://jwmason.org/wp-content/uploads/2015/05/Mason-and-Jayadev-The-post-1980-debt-disinflation-published-version.pdf

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  103. Thanks, Johan. I'm looking through it. Seems I was too quick to judge, as usual.

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  104. Oliver, a quick comment (I'm away from home during Christmas):

    If one doesn't give up goods as expected (defaults), then logic says someone else must give more than he receives. If the loss is recognized, then someone's account must be debited. Was this someone a creditor of the one who defaulted? Not really. He didn't stand to receive anything from the defaulter. But he stood to lose, bore the risk, and in this sense was a creditor.

    Do we know who the one who's account is debited is? Is it a bank shareholder? Not necessarily. Right? It's hard to point at a creditor if I name a debtor.

    But someone stands to lose. That someone wants to enforce budget discipline.

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  105. Oliver and Johan:

    Interesting discussion. I read the article, too. Mason and Jayadev (M&J) said that Keynes left room for (mis)interpretation in his GT; I cannot say that M&J themselves did much better in this respect. I think the subject matter -- not the writer(s) -- is to take most of the blame. Well, in the end the writer must be to blame, but not as a writer but as a thinker. The text can be only as good as is the writer's understanding of the subject, and I think we saw in the famous exchange between Krugman and Keen (just to name one instance out of hundreds available) that no writer's understanding on this subject is too clear. Didn't we?

    I don't like M&J's use of the word 'balance sheet' (Oliver, you sensed this?). I believe -- as I said, they left room for interpretation -- they, like many others, use the word when they refer to a certain way of thinking about, or seeing, the "financial side" of the economy (quote: ”Balance sheets and real flows do interact”). For instance JHK seems to be a ”balance sheet thinker”, who, by just looking at changes in balance sheets, sees 'flow of funds' where there are none ;-)

    What they seem to mean by 'balance sheet' is record-keeping, or accounting, in general. There are records of liabilities and there are records of credits, claims, rights, or whatever we decide to call them (I like the word 'credit', because it's something you earn by providing something valuable, and doesn't necessarily imply that there must be a certain debtor). These records exist independently of balance sheets. Especially when it comes to households (natural persons), I rather talk about these records than (imaginary) balance sheets.

    I'm not clear enough myself, either. Let me try to put this in a simpler way.

    Andy, as a household, has financial liabilities. He owns real assets, alongside some financial assets. He knows quite well the nominal value of his liabilities. What he is interested in is what is the nominal value of his (real and financial) assets. If he has an idea of this, he can calculate his 'net worth'. It might be positive or negative, but it most likely isn't zero. He is not interested in zero. If he was, he would create a balance sheet and show us that

    his assets minus his liabilities minus his 'net worth' = zero

    Households and family businesses did just fine for thousands of years without balance sheets to think in terms of.

    For companies, the zero has more relevance. This is because what some might call the company's 'net worth' is actually 'shareholders' equity', and shareholders are not the company. Both shareholders and (other) creditors want to see balance sheet reports. They are the ones being reported to.

    Who is reporting? The management (and, or including, the board). It reports to (among other stakeholders) the ones who have credit balances in the company's books. The management cannot escape zero; it's its destiny. It can only hope to show that the company (~management) has control of assets that are worth much more than any fixed claims in its books (liabilities, excl. equity), and if this is so, then the residual ”worth” belongs to the shareholders – not the management, and not the company, which is not the same as its shareholders.

    Think of it like this: On the LHS of B/S, there's the ”value”, whatever it consists of. On the RHS of B/S are the ones whom the ”value” belongs to. The one who reports – and he has an obligation to report, because he is responsible for taking care of ”value” belonging to someone else – is not anyone on the RHS. He, whether we think og 'him' being the management or the company as juridical person, ends up with zero – always. Not so in the case of a household.

    Does this make any sense?

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  106. Oliver said: "it makes a fundamental difference whether we consider individual behaviour at the lowest level to be the limiting factor, or whether we take a top down approach in which institutions limit / control the behaviour of their creditors / debtors. And if the latter, whether such limiting takes the form of quantitative limits (say strict overdraft limits), price controls (interest rates) or a more qualitative form (credit assessment)"

    Don't you think that both bottom-up and top-down are at play?

    One should use war metaphors sparingly, but we could compare this to the situation on the front line in a war (or any teamwork situation for that matter?). When the going gets really rough, would all of the soldiers flee if there wasn't someone who was authorized to shoot anyone caught fleeing?

    I don't think so. First, many of the soldiers wouldn't want to flee even if they got a chance. Second, when someone tried to flee, one of his peers might shoot him and very few would protest. (If this is true, there are probably very good reasons for assigning the authority, and the responsibility, to enforce a no-fleeing rule to someone with a capacity to make what might be the toughest call of all.)

    But I haven't even tried to say anything about this aspect yet. I guess I'm just misleading you when I stress the accountant role and leave the gatekeeper or enforcer role aside (Johan has criticized me, rightly, on this one before).

    My point is that the (one) bank (or banking system as a whole) records non-banks' credits and liabilities, without having itself some debtors or creditors. The enforcer role, which I have never meant to deny, doesn't make the bank itself a creditor or a debtor. Figuratively speaking, the enforcer role means that the bank can put a gun against the head of someone with a negative balance and try to force him to sell goods. When he does sell, he will get rid of the negative balance, without having delivered anything to the bank -- the bank was just an accountant with a gun in his hand.

    Is the gun really needed, even as a threat? In most cases not (although it must be there for the few cases when it is needed). I think DeLong wrote about people not wanting to be "cheats". For most of us, that is not part of a good life. I might be naive, but I believe that most -- if not all -- of us would feel very happy if we could give more than we receive, be in a position where we felt we can afford it, and could trust that others appreciate us because of it.

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  107. Don't you think that both bottom-up and top-down are at play?

    Hi Antti, and Happy New Year (nearly). I do think that both are at play, but I saw your model as ultimately positing a bottom up world while most conventional theories work with top down. Personally, I feel the greyer the better (except when it comes to the weather). I agree with the rest of your comment.

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  108. Happy New Year, Oliver!

    I'm all grey :-) To repeat myself: I believe you and I ultimately agree on nearly everything.

    Does it make any sense to you if I say that the rules on which the authority of the "top" is based arise (at least in an ideal world) from the "bottom"? In our model economy, the central-banker would be liable to all members of the community and would have been granted certain rights (for instance, regarding credit limits) so that he could defend the common interests.

    Using a broad definition of 'fiduciary', aren't we talking about some kind of fiduciary duty both here and when I explained my view on company vs. shareholders above? Here's from Wikipedia (more related to my discussions above than our central-banker):

    "The most common circumstance where a fiduciary duty will arise is between a trustee, whether real or juristic, and a beneficiary. The trustee to whom property is legally committed is the legal—i.e., common law—owner of all such property. The beneficiary, at law, has no legal title to the trust; however, the trustee is bound by equity to suppress their own interests and administer the property only for the benefit of the beneficiary."

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  109. I believe you and I ultimately agree on nearly everything.

    Within the realm of economics, I think there is some truth to that. And I'm very glad there is! The more I read and thought about this stuff, the more of a lonely place I found the internet to be...

    I have no trouble with banks being fiduciaries and having ultimately no physical assets or liabilities of their own, other than the fine capabilities of their employees and the priceless trust the public places in them. I'm still not sure where you're going with this line of argument, though.

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  110. You're not alone in not being sure where I'm going with this. Actually, it's me who is alone. There's a gap I haven't been able to fill, yet.

    What I've said so far, how do you see it? Do you see that I'm not saying anything new?

    People don't seem to be able to refute what I'm actually saying (understandably they try to think forward and they try to refute what they think I'm getting at). Neither do they point to someone -- one person -- who has worked out all these ideas before me and presented them as a coherent whole (there are many who have said similar things, though).

    The reaction among the few who have listened to me has been like yours: "So what?".

    It's a fair question, and I'd like to try to answer it. But first I have to understand where we stand, what kind of gaps there possibly are between how I see the whole and how you see it, trying to look at it from the perspective I'm suggesting.

    I think part of the problem is that I have looked at the real economy from the "bookkeeping perspective", with no MoE, for quite some time now. So long, that I don't remember how hard it was to translate everything to the language I now use. I looked at things like commercial banks, eurodollars, money market funds, repos, etc, and tried to describe all this phenomena using the new language (which itself evolved while I was doing this).

    When you say that you have no trouble with banks not having liabilities of their own (thus, money is not a bank IOU that can 'change hands'), does that mean you wouldn't have much trouble starting to describe all kinds of financial phenomena from that perspective?

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  111. Well, I try to think of financial instruments in terms of what they 'mean' within the 'real' economy - which real world phenomena they refer to. I'm doubtful about whether one can omit financial jargon entirely, though, because finance seems to exist in 'layers', the details (and meaning) of which would seem to get lost if one ventured to describe all of finance purely from a real economic perspective. Which is what you seem to be getting at (?). I can't say how new or unique your line of thought is because I'm not read well enough in the history of economics.

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    1. But maybe you have found a way to circumvent the problem I mention above. That's what I'm here to see.

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