Friday, December 30, 2016

A New Monetary System From Scratch, Part 5: Credit Loss


In Part 4, we had three people and two trades.

Fast forward.

After an unknown amount of trades the central-banker, or record-keeper, produces an overview of accounts with negative (LHS) and positive (RHS) balances (all skilo-denominated):



OVERVIEW
Deb(i)ts/LiabilitiesCredits/Rights
Otto400200Kermit
Gary50150Betty
Carol100100Megan
John2550Andy
Seven50125Taylor
625625


We could start guessing who's been trading with whom, but it doesn't matter because no one participating in the trading is interested in bilateral balances. What matters is the multilateral, overall balance of each participant.

We can tell from the overview that Otto has been on a gift-accepting, or buying, binge. 

Bad news: the following day Otto gets hit by a school bus and dies. He leaves behind no assets. A credit loss of SK400 must be recognized. Who should incur it?

Otto's account will be credited with SK400, and that entry will bring the account balance to zero. Otto's negative balance is thus settled, and the account can be deleted from the system.

Some other account, or accounts, must be debited with SK400. That's the loss part. In normal course of business, Otto would have sold goods to someone for SK400, and this someone would have got his or her account debited with SK400 without incurring any loss  the debit would have been balanced by the goods received.

Just to give you an example: If Kermit would be made to incur the loss, not only would he have previously given up goods worth SK200 without receiving anything in return, but he would need to give up further goods worth SK200 without ever receiving anything in return for any of these goods. It's like he had given a pure (but forced) gift worth SK400 to Otto.

So, which account(s) should the central record-keeper debit? Who should incur the credit loss?

I'm asking you.

There's no wrong answer, but some answers might be better than others. Things you might want to consider: fairness and participants' expectations and assumptions regarding the rules of conduct, especially given the connection to a multilateral gift economy.

I have some ideas myself, but I don't want to miss a chance for a good discussion by randomly picking just one way to do this. People together, after listening to each others' arguments, make this kind of decisions all of the time. That's how the first ever monetary system must have been built, too. (We will never know for sure.)



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57 comments:

  1. Obviously, unintended contact with a school bus can be unhealthy. Anyone with a unfulfilled liability Otto (ought to) be more careful!

    Well, distribution of the liability? In our new monetary system, we have no mention (so far) about "collateral". I will therefore assume that Otto leaves no assets to be redistributed.

    In my lexicon, a liability is always a forward obligation. An obligation to whom? If no "whom" can be identified, then the obligation would be only visible to Otto. Nobody seems to be counting upon Otto; his unfortunate encounter with the school bus concerns only him.

    Otto's account could be reset to zero with a credit entry but why would that be necessary? Otto's record could be a simple footnote explaining the liability reduction (which was an obligation to no-one).

    Following Otto's footnote, liabilities and credits would not match. Would that be a problem? With an excess of credits, a small amount of effort on the part of liability holders could result in everyone having credits in their accounts. Everyone could feel good that they had done more than the minimum needed to have an average zero balance.

    Poor Otto would have made a positive contribution to the economy without being aware of what he was doing.

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  2. Roger, you are proposing something very similar to "helicopter money", aren't you? I don't think the times in our model economy are that desperate, yet :-)

    As I said, Otto left behind no assets. Had he done so, then the record-keeper could put (some of) Otto's estate up for auction -- based on a written law or an unwritten one; it would be a fair thing to do -- and settle Otto's negative balance that way, with no credit loss.

    But you raised an important point: The credit loss materializes only if the record-keeper recognizes it. In my question, I assumed it will be recognized. Why?

    Simple, superficial answer: I'm an accountant. I don't like a "dummy" negative balance, with no substance behind it.

    Slightly more nuanced answer: The mismatch between (genuine) liabilities and credits means that there are people walking around, knowing/feeling that they are entitled to receive an X amount of goods from "others" (the community), while the "others" in aggregate are not obliged to deliver an X amount of goods.

    Wouldn't the community be living a lie? Or is it "just accounting", with no need for real content? The community is, after all, a "going concern", which means that the judgment day might never arrive. Is that what you're saying?

    You are right in that the "whom" is no one particular. But the "whom" exists: it's the "others", the community. (In a bee colony the debtor would owe it, quite literally, to himself to give up goods, while in a human community it is only partly so.)

    You said: "Poor Otto would have made a positive contribution to the economy without being aware of what he was doing."

    Wouldn't he have made a similarly positive contribution had he successfully faked his death and fled to another (terrestrial) community? What's the difference? Should we encourage all "cheats" and "free-riders" on the same grounds?

    You gave a lot of food for thought, Roger! Thanks! (If you find time, it would be interesting to hear how you would recognize the credit loss, assuming we decided it's the right thing to do.)

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  3. I have been thinking quite a bit about the need to re-balance the record when we have a credit failure. As I wrote previously, one option is to consider that there is no loss because (under multilateral gifting theory) there is no single entity that can be identified as being "owed something".

    On the other hand, maybe we (speaking as theorist) consider that we MUST re-balance the accounts if there is an account failure. The account failure could be on either the credit or debt side of the ledger.

    One way to redistribute the accounts would be to reapportion the remaining account values among the remaining participants, proportional to original balances. Hence, if Otto failed with 400 skilos, the remaining 225 skilos would be redivided among the 5 remaining credit holders, proportional to how much each holder had when 625 skilos was apportioned.

    I don't think that is particularly fair but is perhaps the best we can do under these mandated circumstances.

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  4. Roger, I agree there is flexibility. And I think helicopter money advocates would like to use the flexibility in the way you suggest: increase credits while not increasing any genuine liabilities. (Is all government debt a genuine liability? It is assumed to be. HM is about explicitly stating that certain portion is not.)

    About the way you suggest we distribute the credit loss: Otto had a debt to the community. Shouldn't the community incur the loss more evenly? It is ultimately quite random who happens to hold credits in the centralized books at any particular moment in time. Say, Kermit saw Otto being hit by the bus, and rushed to buy goods, getting rid of his credits. That's probably not what we would want from this kind of system?

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  5. I haven't read through the above comments, so I may be repeating things. I think there are various ways of approaching this conundrum, some of which may entail making further, complicating assumptions about the legal nature of the bank or the individuals involved. In your 'pure' accountant + natural persons only world, the answer might be that the remaining individuals must share the loss by each accepting a debit of 100SK. Death is the limit for each person's liability and the community of living persons is the vessel that must accept the loss.
    There could be arrangements to keep the liability alive beyond Otto's death, say by inheritance.
    Alternatively, the accountant could inherit Otto's assets, if there are any, and sell them back to the community in order to cover the loss and then divide the rest as above. Or the accountant could accept partial (= limited) liability, that is up to a certain limit, himself. I think that's how private banking used to work?
    But maybe the accountant had been paid to start up an run his services by the community. Each individual had given up some real good, say a pen or maths classes, to get the accountant going, and had agreed to share losses (and profits) in proportion to that share. The 400SK would then be divided according to that key.
    How am I getting along?

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  6. ... Why not simply create a "communal account"; credit Otto's account, debit the communal account; then agree to institute, for example, a sales tax which by way of future transactions credits the communal account until "loss" is covered (or even beyond that)?

    Although, depending on the context, this would probably mean (implicitly) imbedding the inkling of a "means-of-payment" notion into the presented accounting logic.

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  7. Every economic theory builds on some basic observations and assumptions.

    The multilateral gifting theory begins with credits and debits entered into the ledger when a trade occurs. Here, the assumption underlying the term "debit" is that the receiver of a physical object in a trade gives nothing in return. The receiver is awarded a "debt" by the accountant who maintains the ledger. This assumption squares with observations taken from the real world.

    The hidden observations underlying the term "credit" are more difficult to ascertain. In the real world, assets do not simply "appear". In the real world, assets must be created, even if they are created by an individual. The ability to perform labor is an potential asset; the actual performance of labor for another entity is creation-of-an-asset.

    We can observe "labor" more carefully. The pricing of labor has a knowledge/skill component and a time component. It may even have a "control" component as might occur if the person contributing labor was working in a government controlled labor market such as medicine or law. In the multilateral-gift theory, labor-performed becomes an recordable asset/credit when gifted to another entity.

    We can use the just-presented observations for labor as the relational pattern leading to the ledger entries. Thus we can conclude that:

    1. Any pricing agreement would have been between the two trading entities.

    2. Any benefits accruing to the trade would have been only between the two trading entities.

    3. It is natural to assume that residual agreements (such as a forward looking promise-to-pay) would have been between the two trading entities. The multilateral-gifting theory counters this natural assumption with the assumption that any residual agreements are the property of the entire economy (without assignment to any single entity).

    We are asked (paraphrased) "What happens when the holder of a debit entry is lost to the economy?" How should the loss be distributed?

    We are asked how to distribute a loss that is unique to two trading partners. This seems to be a very unfair question. Why should the entire economy be asked to share in any loss that naturally would be shared only between the two trading partners? The notion seems very unfair to the broader economic society.

    Can we justify the thought that the economy-as-a-whole benefits from trade? Yes, we can assume that individual entity-trades always have a tax component that results in a broad economic gain. Using this tax assumption, we can foresee that a debt owed by an entity should result in future tax income, which could have value to the entire economic community.

    However, debt remains a future income, a future credit, a future tax. Any present value is a projection that may or may-not be realized. The failure of present-value (following the loss of one indebted entity) is not justification for penalizing the broader economy.

    (BTW, notice that any economy member with zero on the ledger would not share in any loss (when we follow multilateral gifting theory), no matter how may real assets may be owned off-ledger.)

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  8. Oliver: Who are the four remaining individuals? The ones with negative balances? Why should they incur the loss?

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  9. Johan: You are getting at my solution from my Finnish blog :) How exactly do you see means of payment sneaking in to the picture?

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  10. Roger: I don't see why we should bring in "value theory". We deal with exchange, and I find no problem with accepting whatever price two consenting parties have arrived at, without asking how they arrived at it.

    I'll get back to the rest of your comment tomorrow! I appreciate the time and thought you have put into this. Thanks!

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  11. Sorry, that should have read 9 remaining persons, not 4 or in my comment. Equal division among all remaining persons. In that case a debit of -400/9SK each,

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  12. I also like Johan's answer. But I feel it is at odds with what I understood to be your desire to not have the bank appear as an entity in its own (financial) right, as well as insisting on having accounts netted at all times. So in Jokinistan we wouldn't be allowed to keep a secret book of skeletons in the bank's vault. Rather we would be forced to face up to our losses and deal whith them as real men.

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  13. Well, since the offered accounting logic is primarily concerned with *recording* commodity exchanges among community members, there's no necessity to do anything with Otto's recording. It's just a record which after his death can remain there like a relic or a footprint in the snow—a trace of Otto having been there doing business.

    It's only under the directive that something must be done to Otto's account that brings about a new meaning to the accounting framework. It is, so to speak, consequently evolving into something more than mere recordings of real transactions. Once that step is taken, a dedicated "community account" is a logical manifestation of such dictum.

    There is, however, no need to alter any or anyone's pre-existing accounting records. They are already accounted for. But if we accept the extended role of the accounting framework, we might as well accept something to the effect of taxation on future transactions. Nothing else need to change but possibly the price so as to account for the tax (what used to sell for 100 might now sell for 110; of which 10 is symbolized as a credit to the community account). No one is getting hurt by that. Everyone knows it's just a symbolic function in terms of erasing Otto's accounting trail.

    But even so, there's a seed sown in terms of having accounting recordings created without fully signifying a mere commodity exchange but something more than that. It would be easy to imagine an extended context where mere accounting record manipulations/changes could be thought of as payments themselves. It's all about what meaning and consequent rules the community assigns to the functioning of the accounting framework.

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  14. Oliver: If there were more than nine people in total (some had zero balances not visible in the overview), then you would divide the loss among all 9+?

    If all members of the community had an account, then that wouldn't differ too much from Johan's suggestion. We could first debit a Communal Account (CA) (think of it as zero equity becoming negative equity) and then, say next month, impose a lump-sum tax on all members, to arrive at the same outcome as with your suggestion. Right?

    If we knew the sum to be debited on individual accounts later (having first debited the CA), then you're right -- it would translate to accounts not being netted at all times. So I think the main purpose of a CA should be to postpone the decision regarding which individual accounts should be debited and with which sum.

    What I don't understand is how you see the bank appearing as an entity in its own right if we create a CA? Do you refer to the decision process? What I, and probably Johan too, have in mind is a CA which belongs to the community (say, it is used by some governing body of the community) and not to the central bank(er). As with all entries, the central-banker would take instructions from others.

    It might be frustrating when I come up with these extra assumptions on the fly? :-) But like I said in the end of the post, this is at the same time about democratic decision-making. Trying to find fair solutions to problems that haven't always been anticipated. What I might not have been too clear about, but which you seem to have captured, is that the new monetary system is a common project. That would probably mean that even if all members had not yet opened accounts with the central bank, they would still be liable when the CA is later credited through (what looks like) taxation.

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  15. Again, I like Johan's comment. Why not just 'forget' Otto's debt for all practical purposes. A debt is personal in the sense that it signifies an individual's obligation towards someone else. That obligation thus deceases together with the person. What's then lacking, is the productive capacity to fill the outstanding claims with real goods and services which might, ultimately, lead to inflation. That's also a solution.
    By assuming taxation, you assume the existence of a communal body, nation or government. Firstly, all of the above are entities. And secondly, I don't think such an entity must necessarily encompass the electorate of a nation. I can easily think of a monetary system which is limited to some body of registered trading partners, e.g. the guilds of the Hanseatic League. The guilds agree to communalise residual losses, say due to the bankruptcy of a member.
    And, if we do focus on national monetary systems, I think it is best to think of a chain of liabilities, starting with commercial bank equity owners and ending, ultimately, with the tax payer. My point being that the intermediate steps matter in the real world. If, of course, you start out with one bank that belongs to the nation state, then you can legitimately abstract away from those steps and just assume direct democratic control. But I'd argue that that is a special case.

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  16. Johan said: "Nothing else need to change but possibly the price so as to account for the tax (what used to sell for 100 might now sell for 110; of which 10 is symbolized as a credit to the community account). No one is getting hurt by that. Everyone knows it's just a symbolic function in terms of erasing Otto's accounting trail."

    Is it really just symbolic?

    Say, prior to imposing the tax, Betty had sold 100 bananas at SK100. For some reason she wanted now to buy 100 bananas, at SK110 (SK10 as a tax). Wouldn't she be hurt?

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  17. Antti, I don't really see the hurt there. The numbers are slightly bigger, sure, but that's about it—like a slightly larger trail one leaves behind if one wears bigger shoes. It's not like Betty is departing with a larger sum of "money" in exchange for the bananas she received. I assume we're talking about trading the same quantity of goods regardless of the change in the price level.

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  18. Johan: Are you assuming individual overall net trade of zero market value (lifetime budget balance)?

    Betty sells 100 bananas @ SK100. Next, 10 % sales tax is imposed. Betty buys 100 bananas @ SK110. She's SK10 "behind".

    She sells 10 bananas @ SK11, of which SK10 is credited on her account and SK1.00 on CA. Betty is finally even, having given (sold) 110 bananas and having received (bought) only 100 bananas.

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  19. Oliver: I'll get to the "intermediate steps" once we have established a raison d'ĂȘtre for the central bank records. Records in other ledgers refer, in one way or another, to the central bank ledger, right?

    You said: "That obligation thus deceases together with the person."

    I agree. And that's why I want to get rid of the debit balance behind which there is no genuine obligation, or debt.

    If the central bank bought gold, and later the uninsured gold was stolen, should the CB credit (reduce) its gold stock? Or "just forget" it? After all -- to paraphrase Johan -- it's just a record which after the theft can remain there like a relic or a footprint in the snow —- a trace of central bank having done business.

    I can see how the day of recognizing the credit loss can be postponed, even indefinitely. Otto took SK400 worth more than he gave, and although this means that someone must ultimately give SK400 worth more than she takes, that someone doesn't need to be anyone alive today.

    But that's a very slippery slope, isn't it?

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  20. Regarding adjustments to the records in the absence of a direct link to an actual trade in goods:

    Otto's SK400 liability anticipated a sale worth SK400 by Otto. What is being recorded is liabilities and credits arising from trades -- not trades per se.

    Credit SK400 on Otto's account is a recognition that there will never be a sale by Otto. He won't settle his account. Debit SK400 on Communal Account is a recognition that someone else will make that sale. The "tax debits" on individual accounts later mean that the individuals in question must sell more goods than they buy in order to achieve an overall net trade of zero market value.

    So far coherent?

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  21. Roger said: "The multilateral gifting theory begins with credits and debits entered into the ledger when a trade occurs. Here, the assumption underlying the term "debit" is that the receiver of a physical object in a trade gives nothing in return. The receiver is awarded a "debt" by the accountant who maintains the ledger. This assumption squares with observations taken from the real world.

    The hidden observations underlying the term "credit" are more difficult to ascertain."

    Thanks for a good attempt at recap, Roger! :-)

    Why cannot 'credit' be a _symmetrical counterpart of 'debit' as you describe it? It's awarded when I give up goods without receiving anything in return.

    Yes, a credit balance is an asset to me. But it's still a record of me having not received anything in return for (certain portion of) goods that I have given. There's no paradox here: a personal IOU is an asset to its holder but at the same time it's a record which tells us that its holder hasn't yet received something which he is entitled to receive.

    A trade under this system -- as under any monetary system -- doesn't create any on-going bilateral relationship. It's a one-off. Andy takes Betty's bananas without giving anything in return, but this creates no obligation from Andy to Betty, nor a claim from Betty to Andy.

    Instead, we can view it like this: Andy took something from the community and must later give something back to the community. Betty gave something to the community and has the right later to take something back from the community.

    As Georg Simmel put it ("The Philosophy of Money", p. 176-177; the pages are from my notes, probably refer to some free online version):

    "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. The pivotal point in the interaction of the two parties recedes from the direct line of contact between them, and moves to the relationship which each of them, through his interest in money, has with the economic community that accepts the money"

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  22. Thanks Antti. Your theory has unique features, I am not sure that I understand completely.

    Antti said: "Why cannot 'credit' be a _symmetrical counterpart of 'debit' as you describe it?"

    Could we think about this statement for a minute?

    My suggestion is that the symmetrical counterpart of credit is "credit", not 'debit'. Following this line of thought, we have Betty (with bananas) and Tom (with tomatoes) deciding to make a trade in skilos. They decide to trade 75 skilos of bananas for 75 skilos of tomatoes. They report their trade to the accountant.

    Now do I have this right? The accountant, as he begins making ledger entries, could think "This is an offsetting trade. There is no need for any entry". The accountant could ALSO think "I will record both trades as separate events. It is no concern to me that they are offsetting events."

    I think that trade would be symmetrical, credit for credit.

    On the other hand, when credit is traded for 'debit', an unbalance begins to grow in the ledger. I would define this as an unsymmetrical trade.

    The lack of symmetry is first clearly visible when one trading party has an asset in hand, ready for trade. Betty and Tom both have assets before and after their trade. This remains true whether the accountant records the trade or not.

    Should either Betty or Tom trade with Andy, this asset rich position will be preserved within the accountant's ledger. Either Betty or Tom would receive a credit mark which is roughly equivalent to receiving a gift certificate. We could say that Betty or Tom gave a gift and received a gift certificate in return.

    On the other hand, Andy had nothing at the beginning. When he accepted either bananas or tomatoes, he was given a 'debit' mark by the accountant. Having no gift certificates, his next trade will begin from a debit position.

    You can see that I am arguing that credit is not symmetrical with debit. Yes, they are created at the same time and in equal amounts, but credit and debit are (in my opinion ) fundamentally different things.

    If they are different things, I repeat my contention that we should just forget Otto if his debit account fails. The asset that the gift certificate represents predated the debit generating transaction. There should be no reason to take gift certificates away from anyone upon the loss of a subsequent debit account.

    I guess we could question the role of the accountant in this scenario. I have the accountant issuing gift certificates which become representative of preexisting assets. The debtor is issued a mark in the ledger. Hmmmm. Maybe just another example of asymmetry.

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  23. I agree. And that's why I want to get rid of the debit balance behind which there is no genuine obligation, or debt.

    So ledger entries can exist independently of any legal right or obligation. Otherwise they would disappear automatically.

    this means that someone must ultimately give SK400 worth more than she takes

    One could draw that conclusion, but it's a purely normative statement. What would happen to Kermit's credits if he died? If one implemented a symmetry and posited that upon the death of an individual or firm the assets or liabilities were communalised (in whichever commune), then over time the communal account should balance at 0.

    Otto's SK400 liability anticipated a sale worth SK400 by Otto.

    In the first order the SK400 liability is a record of things received without reciprocation. In order to make a viable system out of such records, one that facilitates trade, we then superimpose a moral structure by assigning obligation to give and rights to receive to debits and credits respectively. There is no logical constraint that forces us to apply these morals, certainly not to the deceased. The only thing we should be interested in, is keeping the system alive. Since we seem to have an inherent dislike for unbounded processes, we have developed coercive means to dispel our fears.

    I also don't particularly like your use of the word tax in this context. Taxation is an instrument reserved for the sovereign and the counterpart to government spending. I think the aim should be to think of monetary system independently of the nation state.

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  24. Oliver said: "One could draw that conclusion, but it's a purely normative statement. What would happen to Kermit's credits if he died?"

    I don't see it as a normative statement. If Kermit died now, he would have given SK200 worth more than he took. That's half of the SK400 worth (market price) of goods I talked about.

    There's both moral "enforcement" and legal enforcement. I'm not talking about applying any morals on deceased people -- where did you get that from?

    "Government spending" includes transfers and the government, as a guarantor, taking on certain debt which has been defaulted upon.

    A town (community) council could very well have the right to impose taxes. Mine is no "state theory of money", but I find it necessary to involve some kind of government at one point -- if we are to describe reality.

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  25. Roger: I agree that credit and debit are different things. What I meant is what I said: "[Credit is] awarded when I give up goods without receiving anything in return". This description is symmetrical to your description of debit.

    When Betty and Tom exchange goods, if the accountant will record the goods exchange at all, he will record it as two separate trades. (I use the word 'exchange' when there is 'tit for tat', 'quid pro quo'.) Otherwise there is really nothing for him to record, because the purpose is to record liabilities, or debts, and credits arising from trade.

    Using your language, we are talking about two unsymmetrical trades -- seen together, they offset each other. With the first two entries, an unbalance (Nick's "non-synchronisation") grows in the ledger (assuming both Betty and Tom start from zero balance). The second pair of entries reduces unbalance, bringing both of their balances back to zero.

    Correct?

    You said: "There should be no reason to take gift certificates away from anyone upon the loss of a subsequent debit account."

    I've been discussing this with Johan and Oliver, too. You can say as you say, but it means that the credit loss remains unrecognized. Debiting a Communal Account would mean that no "gift certificates" (your language, not mine) are taken away, although the credit loss related to Otto's death is recognized by the community and Otto's private debt becomes public debt. After that, it's a (familiar) question of whether government debt should at one point be "paid back" (through surpluses) or not.

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  26. Antti, why should we consider that to be a real hurt—why is Betty hurt if she's got a debit balance of -10? Yes, she's "behind" and then "even"… perhaps even "affront" at some later stage, who knows. But do the balances have any economic impact in themselves? I assume Betty gets the bananas she wants and then sells the bananas someone else wants; i.e., the commodities produced and exchanged being the same regardless of the tax-induced prices.

    Individual overall net trade of zero || Well, I assume that to be a fairly abstract and theoretical notion. Otto just died leaving a -400 record. Betty could die as well, leaving 10 in the cold or warm without much impact on commodity quantities exchanged. Should Betty die of old age, it's quite probable that she's expected to go out with a negative balance (usually needing more in terms of real output than she could produce in the later stages of her life).

    As I previously alluded to: all depends on what meaning the members assign to the balances. So, we could have a narrative where she's indeed hurt in a practical sense. But then again, we could also have a story where such implementation only induces a symbolic strain on the traders. I focused on the latter alternative because, informationally, and considering the presented framework, that seemed to be closer by.

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  27. I don't see it as a normative statement. If Kermit died now, he would have given SK200 worth more than he took. That's half of the SK400 worth (market price) of goods I talked about.
    Yes, talking about what has happened is not normative. But the step from what has happened (unilateral gifting) to what should follow (reciprocity) is normative. We can choose the best way to deal with exceptional circumstances such as death.

    I'm not talking about applying any morals on deceased people -- where did you get that from?
    Sorry, that came out wrong. It's a question of how the legacy of the deceased gets transferred to us, the living. I agree with your last statement in your reply to Roger above.

    I find it necessary to involve some kind of government at one point

    You're very nordic, Antti :-). Personally, I would call it a monetary authority. It could be supra national, national, regional, communal but also represent some other collection of trading entities who share a common currency.

    I think the big lie that was sold to the citizens of the EZ was that they could have a common currency without some form of shared liability.

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  28. Johan: Are you arguing that a forced €100 debit on your account tomorrow by the tax authorities wouldn't hurt you in any real sense? It sounds like you are. If Otto could die with a SK400 "credit card debt", leaving no assets behind, then the same option is probably available to you and me, in real life.

    What's the difference?

    You are right in that this is about different narratives. But I don't see how the choice of a narrative alone would decide if Betty is hurt by a debit to her account or not. I don't see how the narrative, in this case, could affect real outcomes.

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  29. Oliver: Yes, it's very Nordic to assume a (mostly) benevolent government, a government that represents the people and acts in their interests :-) (Lennon's "Imagine" playing on background...)

    The whole monetary system is based on the norm of reciprocity (a "gift economy" is, too). Why would we record the liabilities and credits if reciprocity wasn't expected? Just for fun, or in order to be able to establish some kind of pecking order? (There are, admittedly, elements of the latter in all systems, also in a gift economy with no explicit record-keeping.)

    I have trouble understanding how your 'monetary authority' would deal with credit losses in the absence of a government which could bring in public debt on the LHS of B/S, in case the equity, or "capital", belonging to the same government was already wiped out. Could you give some examples?

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  30. Antti, I would consider it being a hurt. It's not self-evident that Betty is hurt as such. Is there a specific (given) schedule for Betty in regards to her having to reduce her debit balance; must she therefore abstains from purchasing something until her balance improves? That's why I'm asking about the specific *nature* of how Betty is getting hurt by the debit balance. I.e., how will that "hurt" *manifest* for Betty in real terms?

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  31. We have remaining "how to account for credit loss".

    I find myself attracted to Johan's "community account" solution.

    The community account is the sum of every account failure, whether liability or credit. Over time, this account should average near the zero level.

    By using the "community account" in each case of account failure, all surviving entity accounts remain unchanged and there is no need for multiparty account adjustments following every failure event.



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  32. Roger, I would say it's actually Antti's solution. At least that's what I think I've parsed together from prior discussions. I'm however not sure if the specific transaction tax -solution is how Antti would have operationalized it.

    I'm also unsure about whether the account balances would over time near the zero level. I simply don't know if that would happen or not. While it seems possible, it also appears to me to be an empirical question rather than a result of deductive reasoning.

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  33. Johan: I don’t think the specific schedule for reducing a negative balance is that relevant in this case. Aren't many banks happy if they have a(n otherwise) creditworthy credit card customer who runs indefinitely a negative balance? If I was that customer, I'd still mind an extra debit to my account (if for no other reason then at least due to reduced value of my estate).

    Empirically, "community accounts" tend to have deeply negative balances, over long periods :-)

    I mentioned sales tax as one option in my Finnish blog. This, too, is a general question: What types of taxes work the best? It's not an important question to me at this point.

    (Johan and I have discussed my theory already for some time now, for the most part of 2016 if I remember correctly. He has been of great help to me; without him my message would be even blurrier.)

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  34. I'm not questioning the norm. I'm merely pointing out that it is a norm :-). And as such, we can make exceptions to the norm if we deem them beneficial to the system.

    You lost me with the other part. I thought the whole point of the 'communal account' was that there was no need, speaking purely from an accounting perspective that is, for anything else to happen. And I understood the CA to be an account which the bank itself disposed of (?). The question as I understood it, was: must the moral obligation be passed on from the dead to the living?

    With the term monetary authority, I'm just looking for a more general term than government, because the latter has a very specific meaning in the context of the nation state. I'm looking for the general case, even if money is nowadays very much associated with the nation state. I gave an example with the gilds of the Hanseatic League. Not that I know which type of money they actually used. But it seems feasible that such a network of trading partners might instate a monetary system of its own and choose a governing body which was granted authority over monetary matters by its members. And credit systems were in place before nation states, or indeed central banks, came about.

    As a matter of interest: Otto was expected to deliver SK400 worth of goods but died before he could do so. Now the government swoops in and debits the remaining accounts by imposing a SK400 tax. Does that incentivise the economy to produce SK400 goods more than it otherwise would have? That seems diametrically opposed to any other economic theory that I'm aware of.

    And as another matter of interest: how is debt treated in the nordic countries? Is it inherited? over here all assets and liabilities are passed on to the next of kin as a default setting. But the receiver has the option to choose whether he/she wishes to accept the inheritance. So there is an asymmetry. And there is also no inheritance tax for direct relatives. That probably sounds completely bonkers for a northerner like yourself, as indeed it is. But the system hasn't imploded yet...

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  35. Oliver: I think this is an interesting discussion, something I didn't expect. You don't leave any stones unturned.

    About the CA... It was supposed to be an account for recording public debts and credits (I assume the existence of some governing body, be it town council or federal government; both can tax, in real life). I have hard time figuring out how the CA could belong to the bank itself. It sounds like you are again combining the point of view of the company and the PoV of the owner/shareholder, the latter being the 'monetary authority' alone or together with the bank?

    I don't know if this is about passing on the moral obligation. I don't think so. It's more a question of system logic and what works best in practice. We could have more 'rights to take' (credits) than 'obligations to give' (total debits minus any "dummy debits"), and it could work OK until it didn't. I assume you agree that there must be a limit to these dummy debits? It doesn't sound good if we have a lot of people feeling they are entitled to receive goods from others while few would have an obligation to give goods?

    From accounting PoV, it sounds like fraud if we are to have items recorded at positive value on the LHS, if there in reality is no value behind these items.

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  36. Also, the moral obligation ceases to be just a moral obligation once some kind of enforcement is involved? This system has enforcement part, too.

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  37. Oliver said: "Now the government swoops in and debits the remaining accounts by imposing a SK400 tax. Does that incentivise the economy to produce SK400 goods more than it otherwise would have?"

    A good question.

    I don't think it does. If it did, then it would have to be because the "taxpayers" in aggregate would somehow have a negative (personal) balance as a result of the tax? After Otto's death, the aggregate balance was positive SK400. It is this imbalance which is removed by the tax. I guess it doesn't affect incentives to produce goods.

    Sounds right?

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  38. I said: "After Otto's death, the aggregate balance was positive SK400. It is this imbalance which is removed by the tax."

    To be precise, the imbalance is removed already when the CA is created and debited, assuming that it is a record of genuine public liability (which can only be redeemed by someone giving up goods for the benefit of another person). The imbalance remains if the CA is just some "dummy debit" which is assumed to be no record of a genuine liability.

    Perhaps I've left something important unsaid? It would explain why Johan, who is familiar with my thinking, is able to follow my thought while you're not.

    Otto's death was probably not the best way to introduce "public spending" and taxation. Another way to think of this would be a public investment, say building a road. The builder's account would be credited and the CA would be debited. Taxing everyone, the builder included, would then lead to the following outcome: Everyone has contributed, either directly (the builder who won't get goods in return for the full value of his labor) or indirectly (others who likewise will give more than they receive), to the common good.

    An example: Think of 10 people in total, road costs SK500. All start with zero balance. Builder builds road. Builder's account credited with SK500, CA debited with the same sum. Then everyone taxed SK50: credit SK500 CA, debit SK50 x 10.

    Builder gives SK500 worth of labor, gets SK450 worth of goods from others (later). The other nine people give each SK50 worth of goods to the builder, totalling the SK450. When builder has got his goods from others, all account balances return to zero. The outcome: All contributed SK50 worth of goods (incl. labor) so that the road could be built. No money changed hands.

    How does that sound?

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  39. After all this babble, it might be useful to read this one from Mike Sproul (and also Nick's answer, the first comment to the post):

    https://realfreeradical.wordpress.com/2015/01/22/et-tu-nick-rowe/

    Mike is describing the same world as I. The difference is that I don't talk about the bookkeeping as if it was something more than bookkeeping. It ends up being something more than bookkeeping if we talk about there being a debt to the bookkeeper, a debt which can be paid by delivering "green money" to him. In Mike's words:

    "Then the young would trade the green money for goods from the old and the old would use the green money to repay their debt to the entity which issues red and green money and keeps track of who owes what (which is another way of saying that they hold the assets backing the red-money debts)."

    I'm not saying Mike is wrong. Mike is actually quite right. I'm just saying that the simplest, most elegant way (so far) to put all this is the way I put it. But it only reveals its simplicity and elegance once we manage to escape from the old ideas which ramify into every corner of our minds ;-)

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  40. It was supposed to be an account for recording public debts and credits

    I see. Personally, I see the public / government on par with any of the other individuals in your list. Sure, there could be an agreed upon public policy that said the public would borrow / spend whenever a private entity left a(n output) gap. We might call that fiscal policy.
    I was thinking more along the lines of a negative / positive equity account. Just substitute the name Otto (or anyone else who happened to die) with CA. Done. No transactions, no new debt, just a change of name out of respect for the dead. And maybe some membership fees to fill it up, should it become out of whack in a way that made living members worry. That's a kind of enforcement, too. No government needed. The risk if members do not comply is that the system fails and all credits and debits become worthless. Nobody wants that.

    I assume you agree that there must be a limit to these dummy debits?

    The limit is the trust in the system.

    From accounting PoV, it sounds like fraud if we are to have items recorded at positive value on the LHS, if there in reality is no value behind these items.

    Well, the value of Otto's SK400 debit is purely putative. It rests on the fact that we believe that his debt will incentivise him to produce goods for those with positive balances to consume in future. But he might never do that. Debt does not actually produce anything by itself, nor does a credit buy anything by itself. It is all based on trust (and experience).

    After Otto's death, the aggregate balance was positive SK400. It is this imbalance which is removed by the tax. I guess it doesn't affect incentives to produce goods.

    Sounds right?


    Well, to most economists I think it sounds completely wrong (which doesn't mean it is, of course :-)). Taxation reduces aggregate demand, all else equal. Reduced demand leads to reduced supply. Or only a fall in prices, for some (not me).

    Another way to think of this would be a public investment, say building a road.

    Agreed, but as opposed to just using public debt to fill a gap in the bank balance sheet, it would now be used to command a public resource, which might otherwise not have been built. I think there is a world, actually a universe, of difference between the two cases. The aim of the game should, in my honest opinion, be to optimally utilise existing productive capacity. Otto no longer has any productive capacity, no matter how hard the accountants try. Neither do Pan Am, Swissair, Sabena, Enron, Northern Rock etc.. R.I.P.

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  41. Maybe I've approached this from the wrong side. Otto's death has left a gap in potential output that will never be closed. On paper, there are now SK400 worth of claims that might never find goods because Otto won't produce them. To rectify that imbalance, one could consider confiscating the SK400 via a tax. Or one could leave things to chance and see what happens. The price level might rise, but then again it might not. Which is the better policy?

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  42. And will either of the two policies discourage other people or firms from dying without leaving debt behind in future? That sounds too much like Wolfgang SchÀuble to me...

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  43. Have I been treating the bank as a company instead of a communal project? I don't think I have. Just as you consider it feasible to think of the bank on a village, regional or national level, I can well imagine the 'communal' to take on another form. Of course, the use of the service then has to be limited to that circle of entities, too. Such non national money could not be public. Not everyone could open an account or accept such money in payment. Like CB reserves or SDRs, I suppose. But anyway, I've been babbling too much as it is. I'll move on to your next post.

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    1. Maybe those were bad examples as they both refer to lower order national currencies.

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  44. Oliver said: "I was thinking more along the lines of a negative / positive equity account. Just substitute the name Otto (or anyone else who happened to die) with CA. Done. No transactions, no new debt, just a change of name out of respect for the dead. And maybe some membership fees to fill it up, should it become out of whack in a way that made living members worry."

    I'm fine with you calling it equity account. Negative equity is a liability, just like an overdraft is.

    Whose liability is it then? All the members', the members being all the people using the system? Is 'membership fee' just another name for 'tax'?

    Government could impose all kinds of fees instead of taxes. In real life, in many countries there are actually fees that are deemed taxes, but for some reason are called 'fees'.

    I think it would be good if you managed to forget what you've thought a tax is :-) From the perspective I'm offering, this is about there being a liability which must be filled by someone giving up more goods than he receives. In this case, the liability is public; that is, belongs to all the members. By debiting certain members' accounts in form of a tax or a fee, we arrive at an outcome where these members actually need to, or are expected to, give up more goods than they receive. And that's how the tax leads to the fulfillment of the public liability. It's the members that take Otto's place; not some faceless governing body.

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  45. Yes, I agree with all that, at least to the extent that the liability must be fulfilled. I'm just fighting, apparently against windmills, to sever the unholy link between the nation state and 'the gifting economy'. The nation state is only one of many possible vessels in which community can be exercised. Taxes are very much linked with the nation state. So I demand that you drop the term :-).

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  46. I still don't fully agree with you, because any 'governing body' can naturally impose taxes; see, for instance, (town) 'council tax' in the UK, and talk about a possible EU-wide tax.

    But perhaps it's anyway smarter to talk about fees or charges. Are you fine with the latter? It might be the best option for me, because it sounds quite natural (I'm a non-native speaker, though) to talk about a charge against an account. Both 'tax' and 'fee' might sound more like something "paid with money".

    I think we agree, again. I don't need a nation state. I just need some 'governing body', which represents all the members/participants in the system. And I want that body to be separated from the bank/bookkeeper. The latter derives any powers it might have from the decisions of the former. The community decides, ultimately, how the banker should act in certain situations. (I'm not speaking against partial independence of the central bank, though.)

    I talk about a town in my posts, but as I've said, there has existed no 'medium of exchange' prior to the new monetary system (neither in the town or in the village). So we can ignore possible other currencies; there are none.

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  47. Now that I agreed to not talk about taxes, but charges... Could we, for now, forget any talk about (potential) output? I find it a distraction at this point. To draw any conclusions about effects on output involves all kinds of hidden assumptions (often 'ceteris paribus').

    For instance, does a tax, or a charge by a governing body, reduce aggregate demand? It depends. And that's why I want to leave it outside, for now.

    Oliver said: "The limit is the trust in the system."

    I want to make a more general point related to this. Trust is non-linear. Talking about trust and limits at the same time is problematic. I tend to think that any "dummy debit" would erode trust, but can we observe the erosion, or the degree of erosion? I don't think so. (In Finnish we talk about a "line drawn in water", which I think fits here.)

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  48. I'm fine with fees and charges. I'd be fine with taxes, too. But there are too many 'state theory of money' people in the internet for my comfort. I've been there and I've developed somewhat of an allergy...
    I agree that potential output etc. are where things become murky, and thus also somewhat interesting. I'll hold my horses for the moment, it's your blog :-).
    I had a similar thought about lack of trust not being detectable until it's too late. It's related to my point somewhere above that we humans tend to have a distaste for unbounded processes. Rationally speaking, I see no reason why negative equity shouldn't be allowed to go to infinity. But that doesn't seem to be the way our brains function, for better or for worse.
    I'm not sure about the dummy debit eroding trust, though, if it is dummy for a perfectly legitimate reason, say death of a natural person or, in the case of a corporation, non-fraudulent bankruptcy. We can design the system to minimise such occurrences, but we'll never eradicate them.

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  49. Oliver said: "I'm not sure about the dummy debit eroding trust, though, if it is dummy for a perfectly legitimate reason, say death of a natural person or, in the case of a corporation, non-fraudulent bankruptcy. We can design the system to minimise such occurrences, but we'll never eradicate them."

    I don't get this. We must be somehow speaking past each other.

    What would be an illegitimate reason? The person having faked his death and moved elsewhere, with the goods bought on credit (others' credit, trust, in that the person will give up goods later)? If so, then why would it matter, from the system logic point-of-view, whether the reason is legitimate or not?

    A liability can cease to exist either because it is fulfilled (Otto delivered goods) or because we agree that it doesn't need to be fulfilled (Otto defaulted, either due to death or due to unemployment, or whatever). To me, the records we are talking about are records of liabilities that do exist. If we want to keep some historical "track record", we do have it, in the form of all the entries that have been made (including the one which removes the record of a liability when the liability ceases to exist).

    I don't find this kind of defaults problematic. I'm not trying to eradicate them. I just want to update the records when a liability ceases to exist. This can be done only by crediting the account on which the liability exists (as a debit balance) and debiting some other account. The latter leads either to

    (a) decreased credits, or
    (b) increased liabilities.

    In my example, it would not be fair, for reasons I've explained, to directly decrease someone's credits (there's only private persons with credits), so we should either debit the accounts of all the members -- zero, credit or debit balance -- or then we can debit some kind of CA, or equity account (the balance of which is zero prior to the debit), as long as there are ultimately some natural persons behind the latter types of account, so that the liability is a genuine liability which can be fulfilled by 'charges', 'fees' or 'taxes'. (As I explained, a charge will ultimately lead to other people taking on Otto's liability and fulfilling it -- unless they default later, too.)

    I agree that it can be argued that a liability never needs to be fulfilled. What I don't understand is the logic behind the suggestion that it would somehow be logical to maintain records of liabilities (as if they still existed) that have ceased to exist?

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  50. An illegitimate reason would be e.g. fraudulent bankruptcy. Or any other act that could leave the impression that someone had been trying to get away with theft, as opposed to having acted in good faith.

    I agree that Otto's SK400 are not a liability in any real sense. But I'm wondering why such an item can't just be left to dwell, possibly in some collective nostalgic vessel, (a legacy asset, as seen by the bank?) on the LHS of the balance sheet. I'm not seeing the harm.

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  51. Oliver said: "But I'm wondering why such an item can't just be left to dwell, possibly in some collective nostalgic vessel, (a legacy asset, as seen by the bank?) on the LHS of the balance sheet. I'm not seeing the harm."

    I still don't see what good faith or not has to do with this. If someone fled to another side of the world, leaving a debt behind, would it then make sense to write it off -- because fraud was involved?

    I don't know. Perhaps you are posing a real challenge to my theory.

    Although there is no intention to clear all debts at some point (so that everyone is back to zero balance), I still think the system's logic demands that it should be a theoretical possibility. Intuitively, there is something wrong with the idea of having people with "rights to take" if there are no people with "obligations to give", even if there is no direct creditor-debtor relationship between these people.

    Is your challenge specific to my description of the system, or does it apply to central banks generally? That they could have some worthless items on the LHS of B/S and it would be OK? As I mentioned earlier in my response to Roger, we are talking about "helicopter money" here. Your "legacy asset" in that case would be a zero-interest, perpetual government bond (as suggested, for instance, by Adair Turner).

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  52. Oliver, if you find time, please see my comment to Roger under my new post.

    I'd appreciate your comments on it. The new post was originally the first part of a longer post. In the second part I will try to question Nick's separation of "red money" and "loans". In it I will also introduce physical credit notes which seem to work just like we thought 'money' (including "book money") works.

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  53. I'll have a look at it. I've already writtn a reply to the above. So here's that first:

    Perhaps you are posing a real challenge to my theory.

    I doubt it :-), especially considering I haven't really thought this through.


    Intuitively, there is something wrong with the idea of having people with "rights to take" if there are no people with "obligations to give",

    That's why I was arguing with incentives to produce (pardon me, if I go there again). To me, the logical counterpart to a 'right to take' is that there is something to take, aka current market supply, not the moral implication of a debt to 'please produce a bit more than you consume in the near future'. I'm arguing from a practical point of view. The moral imperative to produce is, of course important. But firstly, this imperative applies to all, not only those on the LHS of the balance sheet. And secondly, morals can only be applied to the living. One way of doing so, is by defining which kind of business conduct is considered right and which isn't. Using limited liability to enrich oneself, is morally wrong. Dying of natural causes isn't. Systemically speaking, I think there should be no incentive to avoid debt for fear of dying, if one sticks to the rules of good business conduct, i.e. acts in good faith. And if we see that the rules aren't working to our satisfaction, we should change them. Imposing a penalty on good behaviour, on the other hand - and a tax is a penalty - is a disincentive to doing business. We want individuals and businesses to take on risk, invest, have mad ideas, be overly optimistic about the future etc.. Dividing the world into a good half - those who have given more than they have taken - and a bad half - those who have taken more than they have given - is too moralistic, too static and too simple. And in such a grey world, I'm suggeting that there should be room for letting bygones be bygones.

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  54. Another way to state the above may be by using the example of Otto. You write:

    We can tell from the overview that Otto has been on a gift-accepting, or buying, binge.

    Maybe it was Otto who had the ingenious idea to invest in an electronic trade reporting system, called ETRS. For that, he needed to pay out 4 years worth of wages to some of his fellow citizens in advance. Sadly, he died before the investment yielded any profits. Why should the population be taxed to pay off that debt? Might it not even pay itself off? Of course, such a case is covered by your leaving it open whether debt should ever be repayed. Still, it puts the 'obligation to give' that is suposedly captured in the balance sheet in perspective.

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  55. Oliver: Sorry for not coming back earlier!

    Again I don't think we disagree on much :-)

    You said: "there should be room for letting bygones be bygones"

    I'm not against this. I'm all for debt forgiveness in certain situations. What I thought we were arguing about is whether a bank should leave a debt that has been defaulted upon untouched, so that it remains on the LHS of the B/S, or write it off (by necessarily debiting some other account, which would logically increase liabilities or decrease credits of someone else).

    I can see how the quote related to Otto sounds like I was making a moral statement. That was not my intention. Sorry. Again, if Otto had invested on something, and the investment turned sour, debt forgiveness might be the right thing to do. If the investment was profitable, and Otto died, then the community should be able to arrange a sale of Otto's share in the investment. That would mean that Otto didn't default on his liability.

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