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Post by Roger Sparks on Sept 11, 2018 22:04:03 GMT
Hi Oliver,
I remain a latecomer here and my understanding of "pink" money is near zero. That said, the concept may be similar to having a second market for red money. Let's see.
My first example of government borrowing green money to spend seems to me to be a good place to start. I think of government borrowing as coming from two possible sources: Government may borrow from the private sector (pink borrowing?) or the CB (red borrowing?). Both sources give government green money to spend. I don't think that government debt paper can be assumed by others. I think of government as borrowing from the 'money market' in a very general way.
Government paper, whether red or pink, would be traded in a money market for money of a different color but never for physical assets (not denying that work-a-rounds are possible).
Turning to the second example of a car traded with red paper to a new owner, I think I did describe an assumable loan here. However, I think that in this example, the size of the assumable loan bears little resemblance to the size of the green money spent to build the vehicle.
The ambiguity of government borrowing drove my introduction of two (at least) markets for red paper.
If we stay with the car example, we might engage the concept of multiple markets that multiply green or red papers. My thinking is simple. Some entity with access to green money authorized original construction of the car. Unless the money was given to the manufacturer, there will be a red paper trail following that car until the original green money is returned. I can see the possibility that green money can be turned over several times in one year building several cars. At the same time, red money may be issued for each car with complete repayment not expected for several years. We would get a rapid divergence between quantities of red and green money supplies in this case, the divergence being measured in terms of profit or interest or net worth or other.
Do our two concepts (multiple markets vs several colors of money) correspond even a little?
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Post by oliver on Sept 12, 2018 6:51:59 GMT
Hi Oliver, I remain a latecomer here and my understanding of "pink" money is near zero. That said, the concept may be similar to having a second market for red money. Let's see. My first example of government borrowing green money to spend seems to me to be a good place to start. I think of government borrowing as coming from two possible sources: Government may borrow from the private sector (pink borrowing?) or the CB (red borrowing?). Both sources give government green money to spend. I don't think that government debt paper can be assumed by others. I think of government as borrowing from the 'money market' in a very general way. Government paper, whether red or pink, would be traded in a money market for money of a different color but never for physical assets (not denying that work-a-rounds are possible). Turning to the second example of a car traded with red paper to a new owner, I think I did describe an assumable loan here. However, I think that in this example, the size of the assumable loan bears little resemblance to the size of the green money spent to build the vehicle. The ambiguity of government borrowing drove my introduction of two (at least) markets for red paper. If we stay with the car example, we might engage the concept of multiple markets that multiply green or red papers. My thinking is simple. Some entity with access to green money authorized original construction of the car. Unless the money was given to the manufacturer, there will be a red paper trail following that car until the original green money is returned. I can see the possibility that green money can be turned over several times in one year building several cars. At the same time, red money may be issued for each car with complete repayment not expected for several years. We would get a rapid divergence between quantities of red and green money supplies in this case, the divergence being measured in terms of profit or interest or net worth or other. Do our two concepts (multiple markets vs several colors of money) correspond even a little? Red and green money are alway created simultaneously by a bank. There is never a divergence of red and green money. I introduced pink money as a subdivision of red money. You can forget it for the moment. What you call secondary markets for debt involves the issuance of turquoise / orange papers by non-bank entities. If I borrow green money from you to buy a car, I give you my turquoise IOU which I printed myself and keep an orange reminder of my debt to you. So you receive my turquoise paper (asset) and give me the green paper. I receive the green paper which I immediately hand on to the seller of the car. The seller of the car is left with the green paper while I am left with the car and my orange debt. The alternative story involves the car seller giving me the car for red money (bank debt). In that case, I receive the car and red money, end of story. In neither case did the amount of red or green money in the economy change. The concept of changing amounts of money is a consequence of taking out or repaying new bank loans, not of non-bank borrowing. Red and green always change in tandem. When government (a non-bank entity) borrows, it issues its own IOU (turquoise asset) to the public and is debited an orange paper (government debt) in exchange for green money which it then spends. In a next step, the (central) bank can buy the turquoise paper from the public and issue a green paper in exchange (the OMO story above).
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Post by Antti Jokinen on Sept 12, 2018 7:06:02 GMT
Oliver said: "I do hope that you agree with me that assets = liabilities before just as much as after the OMO."
Of course. Records just change their form, while non-sync -- total debt, and thus credits, in society -- remains the same. In OMO, when "buying" (I prefer other language) securities, the CB records in its ledger a pre-existing deb(i)t and a credit. This debit and credit were previously recorded in the bearer instrument (IOU/bond): the holder had a credit and the debit belonged to the one with his name and signature on the note.
Now comes the part where we should agree, but where I see some confusion. The CB separates the credit from the debit, both of which the IOU served as a record of earlier. The CB records the previous holder's credit in green money form (credit entry on the account 'Currency in circulation'). It is left with a paper, the IOU, which is an acknowledgement of debt only (not turquoise but orange or pink; the CB just took the credit out of it!). The CB writes down in its ledger, based on this acknowledgement which it retains as evidence, that person A owes so much. The only thing that differentiates this record from physical red money is that it is centrally recorded, not a decentralised bearer instrument.
I think it's hard to see this if one sees money being owed. Conversely, it is easy to see this if one thinks there are various ways to keep records of goods and services being owed to 'others' (~the society) and by 'others'. You talked about us accepting green bits as assets, even if we can't enforce the claim. Is it better to have an enforceable claim *on* those same green bits? Of course not.
By holding an IOU, you engage in recordkeeping. The issuer owes goods to others, as far as you as a recordkeeper are concerned. The same is true for a bank as a recordkeeper. Both of you demand evidence from the debtor that he has delivered goods to others. Once he arrives with green money, you can assume he has delivered those goods. You "write" his debt off (non-sync diminishes). Unlike the bank, you, as a natural person, are owed goods by others. For a while the record of this credit, or claim, was the IOU you held. Once you receive green money, the credit is in a safer form again. Again you bear only real credit risk (not getting as much in real quantity as you gave up), not both real and nominal credit risk (not getting as much in nominal quantity, measured in UoA, as you gave up) as you did when you held the private record.
Is there something you find especially hard to understand here?
Yes, what Kay says applies to all firms equally. There are people and machines who work, but the firm itself is imaginary (Harari talked about this in his 'Sapiens'). It's no wonder we often think of the records, the balance sheet, as the firm itself. It is.
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Post by oliver on Sept 12, 2018 7:46:36 GMT
Oliver said: "I do hope that you agree with me that assets = liabilities before just as much as after the OMO." Of course. Records just change their form, while non-sync -- total debt, and thus credits, in society -- remains the same. In OMO, when "buying" (I prefer other language) securities, the CB records in its ledger a pre-existing deb(i)t and a credit. This debit and credit were previously recorded in the bearer instrument (IOU/bond): the holder had a credit and the debit belonged to the one with his name and signature on the note. Good. Also asset = liabilities even if non-sync does change, right? Tick. So, the main change is for the receiver of green money in exchange for previously holding the bearer instrument. The debt part remains the same, except that it is now centrally recorded. I can live with that being red or pink instead of orange. It is just that if the IOU is sold again by the bank, I find it cleaner to assume that it is still around somewhere. Accounting wise one can think it away, but in light of its potential future life back in private hands, one should somehow find a place for it on a balance sheet, I find. Well, I have a feeling jurists would see it that way. I have a legally enforceable claim to something that itself is not an enforceable claim. Schizophrenic to a degree, but true. No, all IOUs and money things are different types of record keeping. And all can be traced back to a good given up and none received in return. I like the distinction between real and nominal credit risk. Just to be a pain though, I suppose the distinction begs the question of what makes one kind of record the unit of account and the other merely a reference thereof. Why aren't certain types of very safe securities or maybe something like ETFs the unit of account?
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Post by Roger Sparks on Sept 12, 2018 18:52:55 GMT
Hi Oliver, I remain a latecomer here and my understanding of "pink" money is near zero. That said, the concept may be similar to having a second market for red money. Let's see. My first example of government borrowing green money to spend seems to me to be a good place to start. I think of government borrowing as coming from two possible sources: Government may borrow from the private sector (pink borrowing?) or the CB (red borrowing?). Both sources give government green money to spend. I don't think that government debt paper can be assumed by others. I think of government as borrowing from the 'money market' in a very general way. Government paper, whether red or pink, would be traded in a money market for money of a different color but never for physical assets (not denying that work-a-rounds are possible). Turning to the second example of a car traded with red paper to a new owner, I think I did describe an assumable loan here. However, I think that in this example, the size of the assumable loan bears little resemblance to the size of the green money spent to build the vehicle. The ambiguity of government borrowing drove my introduction of two (at least) markets for red paper. If we stay with the car example, we might engage the concept of multiple markets that multiply green or red papers. My thinking is simple. Some entity with access to green money authorized original construction of the car. Unless the money was given to the manufacturer, there will be a red paper trail following that car until the original green money is returned. I can see the possibility that green money can be turned over several times in one year building several cars. At the same time, red money may be issued for each car with complete repayment not expected for several years. We would get a rapid divergence between quantities of red and green money supplies in this case, the divergence being measured in terms of profit or interest or net worth or other. Do our two concepts (multiple markets vs several colors of money) correspond even a little? Red and green money are alway created simultaneously by a bank. There is never a divergence of red and green money. I introduced pink money as a subdivision of red money. You can forget it for the moment. What you call secondary markets for debt involves the issuance of turquoise / orange papers by non-bank entities. If I borrow green money from you to buy a car, I give you my turquoise IOU which I printed myself and keep an orange reminder of my debt to you. So you receive my turquoise paper (asset) and give me the green paper. I receive the green paper which I immediately hand on to the seller of the car. The seller of the car is left with the green paper while I am left with the car and my orange debt. The alternative story involves the car seller giving me the car for red money (bank debt). In that case, I receive the car and red money, end of story. In neither case did the amount of red or green money in the economy change. The concept of changing amounts of money is a consequence of taking out or repaying new bank loans, not of non-bank borrowing. Red and green always change in tandem. When government (a non-bank entity) borrows, it issues its own IOU (turquoise asset) to the public and is debited an orange paper (government debt) in exchange for green money which it then spends. In a next step, the (central) bank can buy the turquoise paper from the public and issue a green paper in exchange (the OMO story above). Thanks for the detailed examples. I can see that my simple example of a car with debt remaining then sold to a new owner for no green at all, just an agreement for the new owner to assume both car and red paper, is too simple. I needed to specify whether the loan paper was bank (red paper) or non-bank (turquoise paper). Dropping down to the government borrowing example, the government issues its own IOU (turquoise paper) to the public. In a next step, the CB buys the IOU from the public, issuing green paper. I guess the CB would assume ownership and responsibility for the IOU (turquoise asset) just like the car secondary purchaser would do if the loan was sourced non-bank. Or do we have an incongruity here? Maybe instead, in this case the turquoise paper would disappear to be replaced by red paper at the instant of green money creation. Because the CB is a bank, I think this second alternative is correct. NMW, thanks for the detailed explanation.
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Post by Antti Jokinen on Sept 13, 2018 5:20:22 GMT
Oliver said: "Also asset = liabilities even if non-sync does change, right?" Yes. I see I wasn't clear about it. Oliver said: "It is just that if the IOU is sold again by the bank, I find it cleaner to assume that it is still around somewhere. Accounting wise one can think it away, but in light of its potential future life back in private hands, one should somehow find a place for it on a balance sheet, I find." I understand. As I said, the bank retains the IOU note as evidence. In the same way, the bank holds in its archive (not balance sheet) a signed loan contract -- an acknowledgement of debt -- for every mortgage it has granted, while it records the debt on an account (the balance of which will appear on the LHS of its B/S). The bank can later pass on the acknowledgement of debt to an investor (or a special purpose vehicle...). Oliver said: "Why aren't certain types of very safe securities or maybe something like ETFs the unit of account?" Have you forgotten my first blog post? Arthur Kitson and all that? An abstract dollar is the unit of account. Green money is not the unit of account, but it's hard to see the distinction because it (nearly) always "trades at par". Still, it's just nominally the most stable form of a credit, and like all credits it is denominated in an abstract UoA. When it comes to jurists, I can see how they always prefer an enforceable claim. They get paid for enforcing it.
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Post by oliver on Sept 13, 2018 6:33:33 GMT
Maybe instead, in this case the turquoise paper would disappear to be replaced by red paper at the instant of green money creation. Because the CB is a bank, I think this second alternative is correct. That was Antti's argmuent. And yes, the CB is also a bank. It makes sense, particulary taking into account his last post above. Importantly, the contract is not renegotiated but accepted 1:1 by the bank.
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Post by oliver on Sept 13, 2018 6:43:01 GMT
Oliver said: "Why aren't certain types of very safe securities or maybe something like ETFs the unit of account?" Have you forgotten my first blog post? Arthur Kitson and all that? An abstract dollar is the unit of account. Green money is not the unit of account, but it's hard to see the distinction because it (nearly) always "trades at par". Still, it's just nominally the most stable form of a credit, and like all credits it is denominated in an abstract UoA. When it comes to jurists, I can see how they always prefer an enforceable claim. They get paid for enforcing it. No, I haven't forgotten your first blog. The way I phrased it was maybe a bit sloppy. Is there a mechanism by which a divergence between the abstract UoA and the nominal demoniation on a $ can be made visible by ist users? What happens during a bout of inflation? Does the UoA itself become unhingend or is it money that is losing touch with the UoA?
Enforcing doesn't mean one always gets what one wants. In fact, that is often impossible. It just means you can go to court and argue your case backed by the force of the law. In the case of say inflation, you can whine and start a blog or dream of the gold standard, but that's about it.
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Post by oliver on Sept 13, 2018 7:35:05 GMT
In any case, thanks for the discussion. I think maybe it's time for a recap before we leave this slightly silly, colourful land.
I started it out as a way to discuss different measures of the money supply as well as an argument against the claim by Nick Rowe that OMOs add assets without adding liabilities to the private, non-bank sector. Hence, his claim that OMOs are a way by which to create (or destroy) a third measure of money, namely the NET money stock. Basically, it was a big, slightly convoluted exercise in expressing accounting with paper bits. The other two measures of the money stock were the total of all credit / debit limits for all non-bank entities (that's what I would call the gross money stock) as well as the position of all credits / debits actually drawn and netted against one another (what I would call the net money stock or one possible measure of non-synchronisation).
The main focus was on deconstructing OMOs in such a way as to 'prove' that assets are always equal to liabilities, no matter which way you look at it. In my humble opinion, we've succeeded at that and in consequence, Nick Rowe's measure of NET money does not actually exist. I doubt Nick Rowe's equally humble opinion has be swayed by our arguments :-).
Banks can set credit / debit limits for us non-bank mortals. We can max them out or not or we can bypass them by creating our own, private, bilateral agreements of non-synchronisation. Banks can then intervene and officialise these private agreements by buying them in exchange for their own 'papers'. This frees the holders of the assets of being bound to a particular debtor. But the debtor is still there, non-synchronisation remains unchanged, assets still equal liabilities and the new found freedom comes at a price. The difference in yield accrues to others who are willing to assume the residual risk.
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Post by Roger Sparks on Sept 13, 2018 15:34:20 GMT
In any case, thanks for the discussion. I think maybe it's time for a recap before we leave this slightly silly, colourful land.
I started it out as a way to discuss different measures of the money supply as well as an argument against the claim by Nick Rowe that OMOs add assets without adding liabilities to the private, non-bank sector. Hence, his claim that OMOs are a way by which to create (or destroy) a third measure of money, namely the NET money stock. Basically, it was a big, slightly convoluted exercise in expressing accounting with paper bits. The other two measures of the money stock were the total of all credit / debit limits for all non-bank entities (that's what I would call the gross money stock) as well as the position of all credits / debits actually drawn and netted against one another (what I would call the net money stock or one possible measure of non-synchronisation).
The main focus was on deconstructing OMOs in such a way as to 'prove' that assets are always equal to liabilities, no matter which way you look at it. In my humble opinion, we've succeeded at that and in consequence, Nick Rowe's measure of NET money does not actually exist. I doubt Nick Rowe's equally humble opinion has be swayed by our arguments :-).
Banks can set credit / debit limits for us non-bank mortals. We can max them out or not or we can bypass them by creating our own, private, bilateral agreements of non-synchronisation. Banks can then intervene and officialise these private agreements by buying them in exchange for their own 'papers'. This frees the holders of the assets of being bound to a particular debtor. But the debtor is still there, non-synchronisation remains unchanged, assets still equal liabilities and the new found freedom comes at a price. The difference in yield accrues to others who are willing to assume the residual risk.
Thanks for initiating the discussion and letting me join, albeit a late join. For sure, assets are equal to liabilities when we are speaking about IOUs. One person owns the instrument (his asset) which obligates a second person (his liability). Green money is still ambiguous (in my opinion). Green money is not tied to any one entity who has an obligation to the green money holder. At best, green money is tied to the nation who created it, who pledged only to accept it in payment of debts.
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Post by Antti Jokinen on Sept 14, 2018 6:06:11 GMT
Oliver said: "Is there a mechanism by which a divergence between the abstract UoA and the nominal demoniation on a $ can be made visible by ist users? What happens during a bout of inflation? Does the UoA itself become unhingend or is it money that is losing touch with the UoA?"
Good questions.
During inflation, the UoA itself becomes unhinged.
(I'm partly thinking aloud now.) We define the UoA every day as we set prices. The UoA itself is no benchmark. The prices others set are benchmarks for me when I set a price on my goods or services.
Had the UoA, an abstract dollar, diverged from a 1-dollar bill, we would have by now probably realized they are two different things. Conversely, it's hard to get divergence when all of us believe they are the same thing. Although I must admit we would probably not see divergence even if we saw they are not the same. There has to be some preferred option, a certain type of credit, when it comes to recording a trade, and goods are priced with that option in mind. Only in non-barter is the absolute -- as opposed to relative -- price important, so the UoA serves first and foremost non-barter exchange.
How does this sound?
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Post by oliver on Sept 14, 2018 8:30:57 GMT
Thanks for initiating the discussion and letting me join, albeit a late join. For sure, assets are equal to liabilities when we are speaking about IOUs. One person owns the instrument (his asset) which obligates a second person (his liability). Green money is still ambiguous (in my opinion). Green money is not tied to any one entity who has an obligation to the green money holder. At best, green money is tied to the nation who created it, who pledged only to accept it in payment of debts. The fact that green money cannot be traced to a particular debtor, and conversely, that debtors / red money holders have no one they specifically owe money to, is not contradicted by the (universal) fact that for every $ of green credit there is a corresponding $ of red money debit. Those are two entirely separate matters.
That was one of the main points of my discussion. I have yet to see evidence to the contrary.
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Post by Roger Sparks on Sept 14, 2018 15:33:46 GMT
Green money is still ambiguous (in my opinion). Green money is not tied to any one entity who has an obligation to the green money holder. At best, green money is tied to the nation who created it, who pledged only to accept it in payment of debts. The fact that green money cannot be traced to a particular debtor, and conversely, that debtors / red money holders have no one they specifically owe money to, is not contradicted by the (universal) fact that for every $ of green credit there is a corresponding $ of red money debit. Those are two entirely separate matters.
That was one of the main points of my discussion. I have yet to see evidence to the contrary.
They are indeed two separate matters. This may be more important than I first recognized. Perhaps we should also observe that while " for every $ of green credit there is a corresponding $ of red money debit" is correct, it is only correct because we have limited the observation to the relationship between green money and banks. Non-bank lenders also deliver green money as we notice when government borrows from the public. This would have an effect on money supply measurement. Now I am thinking out-loud here, but the combined green money supply should equal the total debt obligations held by the CB and private banks. Because government borrows from the public as well as from banks, government debt could not be used as a measure of green money supply. Right? Still thinking out-loud, this limitation on green money (it must come from banks) puts quite a choke point into the non-bank lending scheme. Borrowers from non-bank sources are looking (when they repay) for the same green money that is already sought by borrowers from bank sources. In other words, two groups of borrowers are chasing the same green money to use for repayment. Continuing to think out-loud, if ALL debt was going to be paid off using green money, the non-bank debt would need to be paid first. If non-bank were to be paid second (after bank debt was paid) there would be no green money to pay with. The justification for QE is more understandable when we have that sequential relationship in mind. Does that make sense?
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Post by oliver on Sept 15, 2018 9:51:54 GMT
There has to be some preferred option, a certain type of credit, when it comes to recording a trade, and goods are priced with that option in mind. How does this sound? I like the sound of that. There is no other way to express the UofA than through a credit instrument. So it is that instrument which is closest to the idea of the UoA (or numeraire, as you say) that is chosen as the 'medium' of exchange / preferred credit instrument. I think the distinction to other causal explanations is in this case not some other, outside piece of evidence but rather the idea that it is users themselves who collectively determine the real value of the credit instrument at hand, as opposed to the issuing / recording institution. Going back to your initial post on your own blog, the real numeraire good (salt in your example) is actually only necessary as an initial real point of reference. It's an origins story, not a constant anchor of some sort.
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Post by oliver on Sept 15, 2018 9:58:27 GMT
The fact that green money cannot be traced to a particular debtor, and conversely, that debtors / red money holders have no one they specifically owe money to, is not contradicted by the (universal) fact that for every $ of green credit there is a corresponding $ of red money debit. Those are two entirely separate matters.
That was one of the main points of my discussion. I have yet to see evidence to the contrary.
They are indeed two separate matters. This may be more important than I first recognized. Perhaps we should also observe that while " for every $ of green credit there is a corresponding $ of red money debit" is correct, it is only correct because we have limited the observation to the relationship between green money and banks. Non-bank lenders also deliver green money as we notice when government borrows from the public. This would have an effect on money supply measurement. Now I am thinking out-loud here, but the combined green money supply should equal the total debt obligations held by the CB and private banks. Because government borrows from the public as well as from banks, government debt could not be used as a measure of green money supply. Right? Still thinking out-loud, this limitation on green money (it must come from banks) puts quite a choke point into the non-bank lending scheme. Borrowers from non-bank sources are looking (when they repay) for the same green money that is already sought by borrowers from bank sources. In other words, two groups of borrowers are chasing the same green money to use for repayment. Continuing to think out-loud, if ALL debt was going to be paid off using green money, the non-bank debt would need to be paid first. If non-bank were to be paid second (after bank debt was paid) there would be no green money to pay with. The justification for QE is more understandable when we have that sequential relationship in mind. Does that make sense? Yes, that makes sense. So, if anything, private lending creates an overhang of red over green money that can only be alleviated through OMOs as they provide the means of repayment. The crux of the story is that the stock measure of green money says nothing about whether it will land in the hands of those who mean to repay debt. The money needs to end up in the hands of those who owe, not those who are owed to.
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