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Post by oliver on May 25, 2018 12:55:38 GMT
'Granting credit' is about the debit side (credit means 'trust' in this sense). If a bank grants you an overdraft account / credit line, it allows you to have a debit balance on your account. I assume 'supplying credit' means the same.
You're right, I was sloppy.
I agree with the rest, too.
As for language. Since we're occupying JP's blog space, and I at least am trying to have an (imaginary?) conversation with him, I'm trying to put things into language I amagine most people, including JP, can relate to. Not sure I'm very fluent at that language nor very convincing in my effort. Plus, there's always a translation problem as you rightly point out.
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Post by JP (admin) on May 25, 2018 14:14:17 GMT
Hoping to chime in soon. I have a bunch of deadlines I have to meet first.
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Post by JP (admin) on May 27, 2018 14:58:49 GMT
Is central bank money a part of a credit-debt relationship? To me it is obvious that it is. We only need to imagine a situation where all debt in the economy is repaid, and for a minute or two there's no debt (new debts will emerge through trade shortly, but for a moment we're in a weird situation with no debt). Central bank money would have disappeared, with the debt, which is IMO clear evidence of it not being a bubble. (Depending on how we define debt, there could be some central bank money in existence, fully backed by gold and other tangible assets on the CB balance sheet.) Money being a bubble means it would still exist when all debt has been momentarily repaid. How does this sound? That makes sense to me. Money-as-bubble means that the instrument still exists when all debt has been repaid (or if debtors have gone bankrupt and their debts are worth zero). The case of the Somali shilling is a good example, since the Somali Central Bank ceased to exist, yet shillings continued to have value. Your conversation about coins being 80% IOU, 20% gold content, and whether they are the property of the government, just some thoughts. For most of history, people brought their gold to the mint, the sovereign stamped it, and gave them their gold back in a different form. The stamp was only an attestation to the fineness and weight of the coin. The coin wasn't the sovereign's property at all, and the sovereign didn't care if it was melted down. It is now illegal to melt down coins, but that's because the whole process changed in the 1800s when the mints were closed to the public and token coinage was created. The coins have become the property of the sovereign.
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Post by oliver on May 28, 2018 9:27:26 GMT
Is central bank money a part of a credit-debt relationship? To me it is obvious that it is. We only need to imagine a situation where all debt in the economy is repaid, and for a minute or two there's no debt (new debts will emerge through trade shortly, but for a moment we're in a weird situation with no debt). Central bank money would have disappeared, with the debt, which is IMO clear evidence of it not being a bubble. (Depending on how we define debt, there could be some central bank money in existence, fully backed by gold and other tangible assets on the CB balance sheet.) Money being a bubble means it would still exist when all debt has been momentarily repaid. How does this sound? That makes sense to me. Money-as-bubble means that the instrument still exists when all debt has been repaid (or if debtors have gone bankrupt and their debts are worth zero). The case of the Somali shilling is a good example, since the Somali Central Bank ceased to exist, yet shillings continued to have value. Your conversation about coins being 80% IOU, 20% gold content, and whether they are the property of the government, just some thoughts. For most of history, people brought their gold to the mint, the sovereign stamped it, and gave them their gold back in a different form. The stamp was only an attestation to the fineness and weight of the coin. The coin wasn't the sovereign's property at all, and the sovereign didn't care if it was melted down. It is now illegal to melt down coins, but that's because the whole process changed in the 1800s when the mints were closed to the public and token coinage was created. The coins have become the property of the sovereign. Great, there seems to be much agreement! As for the orphaned Somali shilling: are you saying that it must have been a bubble because there was no central bank (or government)? Your old post seems to suggest just that: One famous answer to the riddle of fiat money is that governments use force to ensure that fiat money is valued. But this can't be the case in Somalia: it hasn't had a government since 1991, yet shillings continue to be accepted.
A second answer is that once money is valued—say because it a central bank has been pegged to an existing store of value like gold—then once the central bank disappears and the anchor is lost, those orphaned notes will continue to have value by dint of pure inertia and custom. This theory certainly seems to fit Somalia's experience.
The last theory is that when a central bank is destroyed, the money it issues will quickly become worthless... unless citizens expect a future central bank to emerge and reclaim the orphaned currency as its own. If so, it makes sense to keep using the currency since it isn't actually orphaned—it's on the way to being adopted.
All of the above three suggest that the debtor is no longer there and thus any positive value must be due to a bubble, whether it's rational or irrational. Following our discussions on your board and hoping Antti agrees, may I suggest a fourth option? The debt represented by the bills in circulation are not debts of the central bank. They are merely debts that were once recorded by the central bank. So, just because the central bank happens to disappear, or even if the government collapses, the counter party to the debts represented by the bills left in circulation, have not necessarily disappeared. The representative of the public is gone, so there is no one to file complaints to or vote out of office, but the public as such is still there. Also, the second tier of record keeping, commercial banks, has not necessarily disappeared (in the case of Somalia, I don't know). But if so, there is still a functioning agent around on whose books the initial debts will have been recorded, even if the creditors decided cash out at some point. As long as they accept cash to pay down debt, the relationship between debtors and creditors from which, so I posit, value flows, is in tact.
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Post by JP (admin) on May 29, 2018 19:05:27 GMT
As for the orphaned Somali shilling: are you saying that it must have been a bubble because there was no central bank (or government)? Yes, that's right. All of the above three suggest that the debtor is no longer there and thus any positive value must be due to a bubble, whether it's rational or irrational. Following our discussions on your board and hoping Antti agrees, may I suggest a fourth option? The debt represented by the bills in circulation are not debts of the central bank. They are merely debts that were once recorded by the central bank. So, just because the central bank happens to disappear, or even if the government collapses, the counter party to the debts represented by the bills left in circulation, have not necessarily disappeared. The representative of the public is gone, so there is no one to file complaints to or vote out of office, but the public as such is still there. Also, the second tier of record keeping, commercial banks, has not necessarily disappeared (in the case of Somalia, I don't know). But if so, there is still a functioning agent around on whose books the initial debts will have been recorded, even if the creditors decided cash out at some point. As long as they accept cash to pay down debt, the relationship between debtors and creditors from which, so I posit, value flows, is in tact. Many people don't even take Somali shillings. As I understand it , shillings have become a currency for only the urban poor and rural people. So if shilling notes are records of the public's debt to the holder, they aren't very good debts since many people won't even take them anymore. Somali commercial banks pretty much disappeared too during the war, so there is no "functioning agent around on whose books the initial debts will have been recorded". In term of digital money, all that Somali has are mobile money operators, but these are all based on US dollars.
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Post by oliver on May 30, 2018 6:01:46 GMT
Many people don't even take Somali shillings. As I understand it , shillings have become a currency for only the urban poor and rural people. So if shilling notes are records of the public's debt to the holder, they aren't very good debts since many people won't even take them anymore. Somali commercial banks pretty much disappeared too during the war, so there is no "functioning agent around on whose books the initial debts will have been recorded". In term of digital money, all that Somali has are mobile money operators, but these are all based on US dollars. I see. I suppose, lacking any kind of banking system (maybe tabs at the local market?), my theory isn't really applicable here. Although if it is debts, or some distant memory thereof, that support the remaining value of the shilling, its very low and declining value is congruent with the fact that those debts are 'not very good'. In any case, whether it's debts or just 'inertia', as you put it, the shilling still seem to be preferable to barter for those who have no access to phones / USD services. That would be my takeaway. Is that a conundrum? I also stand by my statement that, in theory at least, money can have positive and stable value without a central bank that actively implements any 'standard'. But I guess I'll have to find a different example to convince you with.
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Post by Antti Jokinen on May 30, 2018 18:23:38 GMT
JP, You're right about there having been both gold coins that trade at their bullion value (commodity) and gold coins that traded above their bullion value, at their face value (tokens). The former never appeared on the RHS of any central bank / treasury balance sheet, I assume. This might be a good place to mention a short discussion I had with Nick Rowe on where on his "slippery slope" do we move from 'commodity money' to a record-keeping system (or 'credit money'). Nick never got back to me on my reply to him, but I guess you who are more familiar with my thinking might be able to follow me? Here's an excerpt (please read the whole thing, though):
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Post by Antti Jokinen on May 30, 2018 19:56:40 GMT
Regarding the Somali shilling, and Oliver's fourth option.I see what you mean, Oliver. I think you're on to something relevant here. We don't yet know what will happen with Somali shillings should the country become more stable again, but, thanks to JP, we have other examples. The odd case of the Swiss dinar came to my mind. A long habit, combined with trust in a limited supply, might of course explain part of the value of these currencies which I like to call 'stray credits' (a credit without a debit). Look no further than Bitcoin and you see that people value something they think is, or might become, money, even if it should logically be worth zero. And if even economists actually think that money is a bubble, then the value of a stray credit doesn't fall to zero, no matter how much the ones who understand accounting protest. Now to what you said: In the case of Swiss dinars, the Coalition did later recognize them as legitimate credits that should be matched with deb(i)ts. The stray credit found its partner. From the TOM point-of-view, this is quite easy to explain. I think you did a good job explaining it above, but I'll offer my intepretation. The ones who had given up goods, and thus got Swiss dinars which prior to "Saddam manoeuvres" acted as records of its holder having given up goods without getting anything in return (yet), were due to get goods later from other members of the public. That was the public's understanding, an unwritten rule. Saddam and his officers, arguably as representatives of the public, didn't obviously fully share this understanding (they shared it partly, as they partly allowed them to be exchanged prior to denouncing them). But the Coalition, which later took on the role of the representative of the public, made this public understanding explicit again by matching the remaining Swiss dinars against public debt (which I assume to have been on the LHS of the central bank balance sheet). I don't see commercial banks playing the role you suggest, though. If they decide to accept these stray credits, they do it on the same premises as any individual does. The commercial banks will also be dependent on the central bank, or treasury, later accepting these as legitimate credits to be matched with debits. "The relationship between debtors and creditors" you talk about could indeed be seen as being intact, but that requires that there's some kind of understanding among the public that once they get their "representative" changed, they will again respect the public debt that is the "other side of the coin" behind what seem to be stray credits. JP: The Swiss dinars weren't a bubble between May 10, 1993 and July 7, 2003, were they? Looking forward to discussing your answer to this question. This is not straightforward.
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Post by oliver on Jun 1, 2018 14:14:23 GMT
Regarding the Somali shilling, and Oliver's fourth option.I see what you mean, Oliver. I think you're on to something relevant here. We don't yet know what will happen with Somali shillings should the country become more stable again, but, thanks to JP, we have other examples. The odd case of the Swiss dinar came to my mind. Ah yes, the Swiss Dinar. That is probably what I had in mind all along, but somehow confused with the Somali shilling.
Anyway, here's a little accounting story (not in TOM language!) I just made up to explain where I'm coming from.
Starting from scratch:
1. loan creates deposit:
customer 1: + good 1, liability = loan from bank
customer 2: asset = credit by bank, - good 1
bank: asset = loan, liability = deposit
2. customer 2 cashes out:
customer 1: + good 1, liability = loan from bank
customer 2: asset = cash, - good 1
bank: asset = loan to customer 1, liability = loan from cb*
central bank: asset = loan to bank*, liability = cash in circulation
3. central bank goes AWOL:
customer 1: asset = good 1, liability = loan from bank
customer 2: weird stray asset = cash, - good 1
bank: liability: asset = loan to customer 1, liability = weird stray loan from former cb (or whatever the accountant says it should say. Hole in balance sheet?)
4. customer 1 pays down loan to bank by selling new good to customer 2:
customer 1: + good 1, - good 2, assets / liabilities = 0
customer 2: - good 1, + good 2, assets / liabilities = 0
bank: assets / liabilities = 0
For step 4 to take place, customer 2 needs the assurance that his bank will accept cash in repayment of the loan. An intermediate step might be, that banks accept old cash in exchange for electronic (or new paper) credits, thus officially 'repairing' their balance sheets without shrinking them, while at the same time assuring that the the old cash bills trade at par with their own credits. Theoretically, they could remain in circulation, no matter what they have writtenon them.
Customer 1 in the example above could also be government, in which case the 'loan from bank' part becomes a bit mor complicated. But I say it is de facto the same.
*I'm assuming that banks have an overdraft facility with the cb to cover for deposit flight, as opposed to a reserve account with the cb as in an asset-based system. This was standard practice e.g. in France before the euro. As with a private entity that borrows from a bank, as opposed to government, an overdraft system is more straight forward than an asset based one accounting-wise (I find).
In all, I would posit that, in a modern banking system with a central bank and various commercial banks, cash is actually a secondary phenomenon. One could say that if loans create deposits, then it is deposits that create cash. And although it is always the public that is liable for producing / selling the goods that are inhernt in the loans made, it is confusing if one conflates money as a public liability and public debt created when government borrows. I think one needs a balance sheet construct with 2 customers and one bank to make sense of things.
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Post by Antti Jokinen on Jun 1, 2018 14:57:17 GMT
Oliver, a quick question: What does the bank do with the cash it receives in step 4?
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Post by oliver on Jun 1, 2018 15:32:30 GMT
Oliver, a quick question: What does the bank do with the cash it receives in step 4? That depends on what the bank intends to do with it afterwards. If it only serves the purpose of repairing the balance sheet, I suppose it would hand the bills to the department that is responsible for entering such things into the books (I don't know how banks are organised). Afterwards, the money would / could be destroyed. If it intends on reusing it for future withdrawals, that is it intends to appropriate the high quality paper for its own use, it would put it in a safe place until such an event takes place. But until that happens, its face value would not appear on its books. Only the value of the paper, minus storage costs.
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Post by oliver on Jun 2, 2018 7:20:44 GMT
Of course, you can turn the whole story around and start with an OMO. That would place the cb at the centre of things.
The money then circulates and at some time ends up on deposit in a bank from where it is lent out. A classic money multiplier story.
I find it logically inconsistent for the following reason:
The assets that a cb buys in an OMO are not of the type: John owes Bill three cows. They are of the type: John's corporations owes the bearer x$. But, since we're starting from scratch, which is a necessary logical hurdle in building a consistent story, those $ don't actually exist yet. It's circular. I think one has to start at the interface of goods on the one hand and an abstract unit of account on the other. That is not a cb's domain.
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Post by JP (admin) on Jun 3, 2018 4:46:09 GMT
JP: The Swiss dinars weren't a bubble between May 10, 1993 and July 7, 2003, were they? Looking forward to discussing your answer to this question. This is not straightforward. I guess it's hard to say. How early in the 1993 - 2003 period did people holding Swiss dinars start to form expectations that a future central bank would re-adopt the currency? If this expectation was present from the very beginning, then it might be that Swiss dinars were never in a bubble.
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Post by Roger Sparks on Jun 3, 2018 15:27:47 GMT
Does it help to theoretically assume that money must exist in unlimited quantities in the vault of the central bank? How much is EXACTLY in existence is forever unknown. The important quantity to observe is how much money has been issued into public ownership.
If the reader can accept that basic framework, then I think that money can be logically treated as if it were a gift certificate.
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Post by oliver on Jun 3, 2018 17:08:42 GMT
I'm becoming quite partial to the idea that if people expect (or desperately hope) things will normalise, they can hold up their end of the bargain and keep a currency afloat, even if pieces of the system we otherwise take for granted go (temporarily) missing. I'm not sure I would call it a bubble.
Thinking it through though, if beliefs were the only thing needed to keep a currency afloat, any talk of what it is that central banks or any other players do to manage the currency become superfluous. Not even wooing people into believing that the cb has super powers would make a difference if it doesn't exist. Just believing in a cb does not make a cb.
Also, it doesn't quite square with your (JP's) contention that it takes a cb to run things. Nor does it really square with what I've said until now, for that matter. But I think both approaches can be reconciled with the above if one distinguishes between the financial system one one side and the currency using public on the other. And recognises that it takes both to tango.
While the currency user side is driven much by psychology, I'd say, hence the importance of beliefs, the dividing question IMO is on the currency issuer side. Is it the strict application of a logical mechanism (accounting) that keeps the whole thing running, as I think Antti and I are saying, or is it a set of (rule driven or otherwise defined) actions performed by a cb that does so?
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