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Post by JP (admin) on Sept 29, 2017 14:11:03 GMT
Working through this a bit more, I think Antti may be right. Both debtors and creditors try to sell goods in response to an increase in the interest rate. Debtors because they want less exposure to pricy debt, creditors because they want more exposure to high-yielding loans. As Oliver points out, not everyone can do this simultaneously, some will fail. What corrects the imbalance is a decline in the price of goods (i.e. deflation, or an increase in the purchasing power of balances). Once the price of goods falls far enough people will get lured back into buying goods, the excess demand for balances thus being choked off.
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Post by Antti Jokinen on Sept 29, 2017 15:14:24 GMT
Exactly, JP.
Oliver, is it OK for you if we assume a simple LETS model without other financial assets than LETS credits? To keep this as simple as possible.
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Post by oliver on Sept 29, 2017 19:24:12 GMT
OK, so it's 1:0 for standard economics, leaving only the debate whether it's prices that adjust or quantities produced. But the high church of Oliver concedes defeat, in theory at least.
Sure Antti, lead the discussion wherever you like. Maybe you can give us a teaser.
Edit: If I'm a typical saver, i.e. someone who lives off the interest, and someone offers me higher interest rate on my savings, I think I'd be quite content. I might even consume more than before. The opposite effect, i.e. higher saving rates with low interest rates is quite apparent at the moment. See also Japan for the last 30 years. But anyway, back to the original discussion.
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Post by Antti Jokinen on Sept 30, 2017 10:20:33 GMT
Oliver, I think you're right in that this isn't that simple. Both prices and quantities produced are affected. And to me it's clear that changes in price level will affect "demand on balances" (language I try to avoid), and not only the other way around; why buy today if we're in the midst of deflation, unless the interest rate matches the rate of deflation, i.e. is negative. It's the real interest rate which matters the most, and that creates a feedback loop between nominal rate-setting and the price level.
Now that I already sound like an advocate of neoclassical economics, perhaps we could further assume that there are no defaults.
In our LETS-like system, in the absence of defaults, shouldn't the nominal interest rate track the rate of inflation? Shouldn't the starting point be that if you give 10 apples, then you receive 10 apples later? The 'zero lower bound' is something that interferes with this goal, so the ability to set the rate negative in a cashless society would be welcome. If the nominal rate on credit balances did track the inflation rate close enough, then there wouldn't be speculative "demand on balances" (which in my world probably translates to speculative postponing of purchases; the opposite would be speculative purchases "on credit", I think). The monetary authority, by setting the nominal interest rate, can affect the size of this speculative component. It can either try to minimize it, or then it can increase it, both ways. The latter is what JP means when he talks about "harnessing the hot potato effect", right?
I have much more time to write early next week, but I just wanted, partly by thinking out loud, to give you some food for thought.
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Post by JP (admin) on Oct 1, 2017 14:24:36 GMT
We've gone through interest on balances. Maybe at some point you can discuss the next major monetary policy tool, open market operations. I'm not sure how they'd work in a LETS world.
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Post by Antti Jokinen on Oct 1, 2017 15:40:42 GMT
JP, sure, let's move forward. But before that, one comment on this one from you:
As I hinted in my previous comment, it is hard to lure people back into buying goods if the real interest rate is highly positive. "Far enough" might be too far, as Keynes pointed out (partly echoing Irving Fisher?). This doesn't mean that the actual price level at any point in time doesn't play any role in luring people back into buying goods, but it means that both the observed and the expected rate of change in the price level also play important roles in people's calculations.
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Post by Antti Jokinen on Oct 1, 2017 16:47:58 GMT
Let's move to OMO. We can imagine our LETS operator opening a discount window (comparable to, say, 19th century Bank of England). Oliver has sold goods priced at $10 to JP who is planning to sell the goods forward in one month's time. For some reason they didn't use LETS in this trade. Instead, Oliver accepted a $10 IOU from JP in the form of a bill of exchange (any bystanders not familiar with this or the concept of discounting, have a look at here). Depending on what was agreed, this debt is expected to be extinguished either by JP delivering goods priced at $10 to Oliver (not typical) or by JP instructing a $10 credit entry on Oliver's LETS account after 30 days have passed (typical). Either way, we can assume that JP gets rid of his debt by selling goods, just like he would get rid of a debit balance on his LETS account. Either way, Oliver ultimately has a claim on goods worth $10. We have a bilateral debt relationship, which is by definition not recorded in the LETS ledger which deals with multilateral debt relationships. To keep things simple, let's assume 0 % interest / 0 % discount. What happens next is that Oliver, trusting that JP will honor the bill of exchange on the due date, endorses the bill of exchange and walks with it to the LETS discount window where he presents the bill for discounting (at 0 %). The LETS operator accepts the bill and makes a $10 credit entry on Oliver's account and a $10 debit entry on JP's account (for simplicity's sake, let's assume JP has an account with zero balance). To give JP a reason for using the bill of exchange instead of LETS in the first place, we could assume the LETS operator doesn't trust JP -- a kind of outside member -- and accepts the resulting $10 debit balance only because Oliver has endorsed the bill (that is, he has promised to instruct a $10 credit entry on JP's LETS account in 30 days if no one else does). That's it. A bilateral debt was made into a multilateral debt. The recordkeeper was changed. JP still has to sell goods worth $10 to get rid of his debt. Oliver still has a claim on goods worth $10. The biggest difference between this example and a more typical OMO is that in the latter Oliver wouldn't have endorsed the bill and so would not continue to bear default risk. What makes this monetary policy in your view, JP? Or can this be called monetary policy only if it is done on a larger scale and it includes longer-term bilateral debt instruments?
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Post by JP (admin) on Oct 2, 2017 19:05:09 GMT
Ok, I understand your bill of exchange example.
What if the central bank is conducting open market operations by buying gold bars from Oliver? How would this work?
"What makes this monetary policy in your view, JP? Or can this be called monetary policy only if it is done on a larger scale and it includes longer-term bilateral debt instruments?"
In conventional monetary economics, open market operations alter the supply of settlement balances in the wholesale payments system, one of the many macroeconomic effects being to drive the overnight rate either higher or lower. I am just trying to understand if open market ops would do the same in a LETS-based system.
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Post by oliver on Oct 2, 2017 19:40:10 GMT
Ok, I understand your bill of exchange example. What if the central bank is conducting open market operations by buying gold bars from Oliver? How would this work? "What makes this monetary policy in your view, JP? Or can this be called monetary policy only if it is done on a larger scale and it includes longer-term bilateral debt instruments?" In conventional monetary economics, open market operations alter the supply of settlement balances in the wholesale payments system, one of the many macroeconomic effects being to drive the overnight rate either higher or lower. I am just trying to understand if open market ops would do the same in a LETS-based system. There aren't any settlement balances in a LETS only world (or any other 'one bank' world) because there is no other bank or entity which to settle with. That policy lever is non-existent. Unless there is another country with its own, different LETS system, and settlement between the two is say in gold. Then buying and selling gold might be considered monetary / exchange rate policy of sorts? That's a guess. In any case, the whole point of building a LETS or 'one bank' model is to try and explain the functioning of a monetary system without having to reference any 'outside money'.
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Post by oliver on Oct 3, 2017 7:19:12 GMT
A conventional setup includes a central bank and a number of commercial banks. By altering the supply of settlement balances between the commercial banks, the central bank can, as you say, alter the conditions under which comercial banks operate. It is, among other things, an indirect way of influencing lending rates. It also incentivises banks to not become too indebted to one another.
The latter problem doesn't exist if there is only one bank. The former can be achieved by directly setting an interest rate.
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Post by oliver on Oct 3, 2017 7:48:20 GMT
Oliver, I think you're right in that this isn't that simple. Both prices and quantities produced are affected. And to me it's clear that changes in price level will affect "demand on balances" (language I try to avoid), and not only the other way around; why buy today if we're in the midst of deflation, unless the interest rate matches the rate of deflation, i.e. is negative. It's the real interest rate which matters the most, and that creates a feedback loop between nominal rate-setting and the price level. Now that I already sound like an advocate of neoclassical economics, perhaps we could further assume that there are no defaults. In our LETS-like system, in the absence of defaults, shouldn't the nominal interest rate track the rate of inflation? Shouldn't the starting point be that if you give 10 apples, then you receive 10 apples later? The 'zero lower bound' is something that interferes with this goal, so the ability to set the rate negative in a cashless society would be welcome. If the nominal rate on credit balances did track the inflation rate close enough, then there wouldn't be speculative "demand on balances" (which in my world probably translates to speculative postponing of purchases; the opposite would be speculative purchases "on credit", I think). The monetary authority, by setting the nominal interest rate, can affect the size of this speculative component. It can either try to minimize it, or then it can increase it, both ways. The latter is what JP means when he talks about "harnessing the hot potato effect", right? I have much more time to write early next week, but I just wanted, partly by thinking out loud, to give you some food for thought. That sounds logical. I'm not sure I'm much of a fan of a real interest rate though. As an idividual, I can track nominal interest rate and my income and the prices of many goods, some of which become cheaper, others more expensive. But an average of all goods, assets and services I do or could buy? Inflation or deflation would have to be pretty obvious. And I don't postpone buying potatoes, shoes, education, tennis lessons or the like just because I know that they might cost 2% less next year. People just buy shit when they need or want it. And in countries with high inflation rates, those who have money to spare for things other than bare necessities buy foreign currencies...
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Post by Antti Jokinen on Oct 3, 2017 11:28:38 GMT
JP said: I think we discussed this already earlier, although we didn't relate it to OMO. In short: Oliver sells gold priced at $100 and gets credited for it. The buyer is the One Bank (OB), so its own account ("Gold holdings" or similar) gets debited. In the case of a real world central bank we are used to call the gold an asset of the CB, but in LETS world the debit balance on the Gold account is a OB liability (all debit balances are records of liabilities). It can get rid of this liability by selling the gold back to the "market" (as usual, you get rid of a liability by selling goods). Why would the OB buy and sell gold? Due to some historical reasons, it could be targeting the price of gold, perhaps in order to provide some kind of anchor for the price level (measured in the abstract UoA) more generally. I don't know. edit: Note how the OB doesn't pay for the gold by creating money. All it does is that it credits the account of the seller and debits the account of the buyer, like in any other LETS transaction. It could be that Oliver's account has a debit balance, so that no "balances" are created; only a debit balance is reduced. (I think Quantum Economics describes these two entries as some kind of "money emission" and argues that money only exists in an instant, when the entries are made -- I go further and say that money doesn't exist at all. Already Schumpeter was discussing this, and he concluded that we cannot really say that certain "money" or "balance" is transferred. I can find the quote later if you're interested.) Here's a Quantum Econ quote: A somewhat complicated way to describe the same phenomena I'm describing from the LETS perspective.
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Post by oliver on Oct 3, 2017 14:45:53 GMT
Antti, in a one bank world, there is a UoA that is axtraneous to the bank while the bank has the function of recording transactions of third parties or, in the case of OMO, its own transactions with third parties (operating expenses?).
As soon as you add another layer with a separate CB and a number of banks, you also need more than one record keeper.
Banks keep records of our transactions and when they act on behalf of their owners.
But records between banks need an independent record keeper, aka the central bank, if they are to be recorded on a 'public ledger'.
No?
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Post by Antti Jokinen on Oct 3, 2017 17:05:32 GMT
Oliver said:
You're right in that "settlement balances" as such don't exist in our LETS system. But if we take my discounting example, and assume non-zero rates, then the OB can to some extent influence what you call 'lending rates' (this is the rate on the bill of exchange) through its discounting policy. Right?
Oliver said:
Me neither. But in a LETS country with a high inflation rate, people would have no problem with holding credit balances if the interest rate matched the inflation rate (unless the foreign currency appreciated at a higher rate than the inflation rate).
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Post by Antti Jokinen on Oct 3, 2017 17:30:07 GMT
Antti, in a one bank world, there is a UoA that is axtraneous to the bank while the bank has the function of recording transactions of third parties or, in the case of OMO, its own transactions with third parties (operating expenses?). Well, I guess we shouldn't call the transacting parties 'third parties', should we? They are just the two parties to a goods transaction which is recorded by the OB. If the OB buys gold, then it itself is a party to a goods transaction (I wouldn't call this 'operating expenses', although I'm not sure what you meant by it). I think I know what you mean, but I wouldn't call the bank's (goods) trading on its own account "acting on behalf of their owners". If we take owners to be a group of holders of certain types of credit balances, then everything the bank does does affect this group, but it also affects, potentially at least, other credit-holders. And as everything the bank does affects the shareholders, then we could as well conclude -- following your wording -- that it acts on behalf of its owners also when it extends credit (that is, allows someone to run a debit balance). In general, the (management of a) bank or any other company acts on behalf of someone else. Always. It might be that your definition of 'public ledger' already implies a central bank, but otherwise I don't see that we necessarily need an independent recordkeeper. Nostro accounts would do. But it seems that it helps to have a separate clearing house, a role which the central bank usually assumes. I think the best way to discuss multiple banks is to first introduce a second bank. And I think it's best to wait before we do it
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