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Post by Antti Jokinen on Jun 4, 2018 19:38:22 GMT
Oliver, regarding your earlier accounting example.
It is of course hard to see how a commercial bank could continue operating with the same unit of account and continue accepting cash once a central bank has ceased to exist. From a practical point of view, it doesn't make sense. The central bank holds the banking system together, and if it disappears like it did in Somalia, there's no way the commercial banks would continue operating the way you suggest. But I see what you mean, and theoretically speaking it seems to make sense.
A quick and dirty translation to TOM language:
1.
customer 1 (C1): + good 1, liability to give/sell goods to the (general) public
customer 2 (C2): asset = claim on goods from the public, - good 1
bank: records of the liability of C1 and the claim of C2
2. C2 wants his claim to be recorded in the CB ledger instead of the commercial bank ledger:
customer 1: + good 1, liability
customer 2: claim on goods, - good 1
bank: record of the liability of C1 , a balancing credit in the name of the CB
central bank: a balancing debit in the name of the bank, record of the claim of C2 (note)
What happens in step 3 is quite unfathomable. How could the central bookkeeper of the economy just disappear, leaving behind a mess when it comes to its ledger, without the commercial bank also collapsing. The disappearance of the CB could only be caused by a breakdown of the society.
Note that the 'balancing' debits and credits I talk about above are there to allow the use of multiple bookkeepers (or LETS operators, as JP might want to view them). The strongest reason to use multiple bookkeepers is probably to allow the ones best placed to rate the creditworthiness of certain debtors to do it, and to make sure they have at least some skin in the game.
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Post by Antti Jokinen on Jun 4, 2018 19:49:21 GMT
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. How many people need to have formed such expectations for the Swiss dinar not to have been a bubble?
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Post by oliver on Jun 5, 2018 19:07:02 GMT
Oliver, regarding your earlier accounting example. It is of course hard to see how a commercial bank could continue operating with the same unit of account and continue accepting cash once a central bank has ceased to exist. From a practical point of view, it doesn't make sense. The central bank holds the banking system together, and if it disappears like it did in Somalia, there's no way the commercial banks would continue operating the way you suggest. But I see what you mean, and theoretically speaking it seems to make sense. (...) What happens in step 3 is quite unfathomable. How could the central bookkeeper of the economy just disappear, leaving behind a mess when it comes to its ledger, without the commercial bank also collapsing. The disappearance of the CB could only be caused by a breakdown of the society. Note that the 'balancing' debits and credits I talk about above are there to allow the use of multiple bookkeepers (or LETS operators, as JP might want to view them). The strongest reason to use multiple bookkeepers is probably to allow the ones best placed to rate the creditworthiness of certain debtors to do it, and to make sure they have at least some skin in the game. You may well be right that my little accounting example is more theory than real world. I looked up the Swiss dinar on Wikipedia. It says (my highlights): I take that to mean that the Kurdish government accepted Swiss Dinar bills in payment and probably for extinguishing tax liabilities, even if it had no means of printing more bills. I'd say this is the chartalist equivalent to the story I've been trying to get across. I suspect there was some sort of banking system within both Kurdistan and the rest of Iraq but probably only one central bank in Baghdad that worked with Saddam dinars. So Iraqi Kurdistan de facto a government, some sort of monetary system (I'm guessing it had banks, Kurdistan is not Somalia...) but no central bank. The important bit in the highlighted section is the reflux mechanism that was guaranteed by the fact that government accepted Swiss dinars. And that is the back bone of any monetary system, I'd say. T he reflux principle says that when agents dispose of money balances that they do not wish to hold, these excess money balances can be extinguished by the reimbursement of previously accumulated debt. The same goes for the opposite, of course. Agents, including government, can expand and contract their credit-debit relations within the economy through actions of their own and must not rely on an omniscient central monetary authority to track their collective demands and supply credits (what about debits, I wonder?) accordingly.
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Post by Antti Jokinen on Jun 6, 2018 10:25:14 GMT
Oliver said: How does this compare to American colonial currency? Badly, I think. Kurdish government doesn't destroy the Swiss dinars it receives. That's because it is 'outside money' for it, and that's the opposite of 'chartal money'. It treats the Swiss dinars like it would treat Fed notes -- they are something it can pass on later when it makes purchases. I think the acceptance of Swiss dinars by the Kurdish government mainly followed the acceptance of Swiss dinars by the (mainly Kurdish) people and businesses it dealt with. Of course one could argue that it also encouraged the wider acceptance, and one would probably be right. It takes two to tango, as you said. But I argue that the Swiss dinars stayed in circulation when they were in the coffers of the Kurdish government, and that makes this not a chartalist story. If this is so, then we cannot talk about reflux here, can we?
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Post by oliver on Jun 6, 2018 12:41:47 GMT
Oliver said: How does this compare to American colonial currency? Badly, I think. Kurdish government doesn't destroy the Swiss dinars it receives. That's because it is 'outside money' for it, and that's the opposite of 'chartal money'. It treats the Swiss dinars like it would treat Fed notes -- they are something it can pass on later when it makes purchases. I think the acceptance of Swiss dinars by the Kurdish government mainly followed the acceptance of Swiss dinars by the (mainly Kurdish) people and businesses it dealt with. Of course one could argue that it also encouraged the wider acceptance, and one would probably be right. It takes two to tango, as you said. But I argue that the Swiss dinars stayed in circulation when they were in the coffers of the Kurdish government, and that makes this not a chartalist story. If this is so, then we cannot talk about reflux here, can we? Right, which is why one shouldn’t conflate government and banks as e.g. MMTers like to do. Government is an agent. Banks are banks, even if they belong to government. The acceptance of paper money by governmentwould have helped its acceptance as medium of exchange by the public, but for it to disappear off the books, it would have had to be used to pay down government debt. So yes, reflux is dependent on a bank. What I can’t imagine is any kind of half way sophisticated economy in which paper money circulates but is somehow not accepted by banks for debt repayment or not exchangeable for other types of the same denomination that do reflux.
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Post by oliver on Jun 7, 2018 7:51:27 GMT
Or let me put it this way:
To the extent that there was no type of finance whatsoever other than the bills in circulation, and that includes informal LETS type arrangement or anything similar that involves credit-debit relations in the UoA, my 'theory' tells me that stability in value of the Swiss dinar currency would have been hard to attain.
That could of course be due to the fact that my 'theory' is bunk or that I'm missing something (foreign reserves through oil sales? Although I believe that revenue went mostly to Baghdad). But in the absence of a central bank that is actively involved in changing the 'money stock' of Swiss dinars, conventional theory falls flat, too.
The only safe place is complete theory agnosticism. But that doesn't help us find new places to look for answers beyond guessing about psychology.
Edit: And I don't think that contradicts your (Antti) assertion that people will generally choose the most reliable UoA that is available to them. I'm guessing JP agrees. In Somalia, that would be USD payments via mobile phone (for those who have one) and in Iraqi Kurdistan that would have been the Swiss dinar. I don't think one needs to draw a causational arrow from the authorities to the users (or in any other direction, for that matter). Better = more stable money drives out less stable money, unless the authorities manage to prohibit it.
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Post by JP (admin) on Jun 9, 2018 2:31:36 GMT
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. How many people need to have formed such expectations for the Swiss dinar not to have been a bubble? When it comes to an asset like an ETF, you only need a few large actors to keep it on target. So I suppose you needed some, but not everyone, to have formed those sorts of expectations about the Swiss dinar.
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Post by JP (admin) on Jun 9, 2018 2:47:02 GMT
Oliver said: How does this compare to American colonial currency? Badly, I think. Kurdish government doesn't destroy the Swiss dinars it receives. That's because it is 'outside money' for it, and that's the opposite of 'chartal money'. It treats the Swiss dinars like it would treat Fed notes -- they are something it can pass on later when it makes purchases. I think the acceptance of Swiss dinars by the Kurdish government mainly followed the acceptance of Swiss dinars by the (mainly Kurdish) people and businesses it dealt with. Of course one could argue that it also encouraged the wider acceptance, and one would probably be right. It takes two to tango, as you said. But I argue that the Swiss dinars stayed in circulation when they were in the coffers of the Kurdish government, and that makes this not a chartalist story. If this is so, then we cannot talk about reflux here, can we? Right, which is why one shouldn’t conflate government and banks as e.g. MMTers like to do. Government is an agent. Banks are banks, even if they belong to government. The acceptance of paper money by governmentwould have helped its acceptance as medium of exchange by the public, but for it to disappear off the books, it would have had to be used to pay down government debt. So yes, reflux is dependent on a bank. What I can’t imagine is any kind of half way sophisticated economy in which paper money circulates but is somehow not accepted by banks for debt repayment or not exchangeable for other types of the same denomination that do reflux. I think I agree with Antti here. Even if the Kurdish government accepted Swiss dinars, it probably didn't destroy them. So it wasn't like the classic colonial currency that chartalists like to talk about. As quickly as the notes refluxed to the government, they were effluxed outwards by spending. (Can't believe I used those two words in one sentence). A destruction mechanism for Swiss dinars only re-appeared when the US coalition set up the new Central Bank of Iraq and had it adopt the orphaned Swiss dinar notes. By the way, it's difficult to get good information about the Swiss dinar phenomenon. No one has done a full study of them, which is too bad. We're just relying on a few anecdotes here and there.
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Post by oliver on Jun 9, 2018 11:02:42 GMT
Right, which is why one shouldn’t conflate government and banks as e.g. MMTers like to do. Government is an agent. Banks are banks, even if they belong to government. The acceptance of paper money by governmentwould have helped its acceptance as medium of exchange by the public, but for it to disappear off the books, it would have had to be used to pay down government debt. So yes, reflux is dependent on a bank. What I can’t imagine is any kind of half way sophisticated economy in which paper money circulates but is somehow not accepted by banks for debt repayment or not exchangeable for other types of the same denomination that do reflux. I think I agree with Antti here. Even if the Kurdish government accepted Swiss dinars, it probably didn't destroy them. So it wasn't like the classic colonial currency that chartalists like to talk about. As quickly as the notes refluxed to the government, they were effluxed outwards by spending. (Can't believe I used those two words in one sentence). A destruction mechanism for Swiss dinars only re-appeared when the US coalition set up the new Central Bank of Iraq and had it adopt the orphaned Swiss dinar notes. By the way, it's difficult to get good information about the Swiss dinar phenomenon. No one has done a full study of them, which is too bad. We're just relying on a few anecdotes here and there. The two of you are probably right. I over-interpreted the Wiki page. And my interpretation would necessitate a central bank, which contradicts what I've been saying all along... But I do think some sort of reflux mechanism is the place to look for answers.
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Post by Antti Jokinen on Jun 10, 2018 19:50:25 GMT
Oliver, do you mean that there could have been some reflux mechanism at work in case of the Swiss dinar? I don't see any (JP talks about reflux and efflux, but that's not true, because the dinars stayed in circulation all of the time; the Fed notes I have in my safety box are 'in circulation'). But neither do I see stable value (say, vs. USD), so that solves it, doesn't it?
You quoted Marc Lavoie (from the paper you linked to earlier):
I've long suspected that there's something wrong with these "unwanted money balances", so perhaps it's time to dive deeper.
What bothers me is how do these unwanted money balances show up at the aggregate level, or more likely, is there such a thing at the aggregate level. People who talk about them must talk about the aggregate level, because they are usually discussing the quantity of money and the price level. Right?
Where can we find the dollar bill that no one wants? For every person wanting to get rid of money, as if he had too much of it, there are at least ten people who want to sell him goods or investment assets. They want his money, and often they also get it. Was there ever more money "chasing" goods and assets than the aggregate sum on all price tags on goods and assets for sale? I guess they say that's how we get inflation, but I'm not convinced.
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Post by oliver on Jun 11, 2018 7:36:30 GMT
Oliver, do you mean that there could have been some reflux mechanism at work in case of the Swiss dinar? I don't see any (JP talks about reflux and efflux, but that's not true, because the dinars stayed in circulation all of the time; the Fed notes I have in my safety box are 'in circulation'). But neither do I see stable value (say, vs. USD), so that solves it, doesn't it? Hmm, I'm not sure stable value should be primarily defined in relation to other currencies. The price level wrt goods within the economy itself is the better measure.
Yes, I think you're right that this all boils down to QTM which I myself have derided on numerous occasions. And I agree that people will not have a problem with 'too much money'. You may be on to something.
Thinking it through, I can imagine that (too much) debt is the limiting factor. If your estimation of what the future holds changes for the worse, you will be inclined to sell some of your assets to pay down debt. It would be disconcerting if that weren't possible. To the extent that this takes place on an individual level, the ability to sell assets and pay down debt should have a stabilising effect on the market as a whole. If a decline in optimism happens on the aggregate level though, one ends up with frenzied sell-offs or attempts thereof that lead to asset prices spiralling downwards. I suppose that's where a cb comes in handy...
In theory, if debtors pay down debt in aggregate, banks should be inclined to find new debtors to make up for lost revenue. But a: those customers might be hard to find and b: banks themselves might well share the pessimism of the non-bank market participants. So one has to ask oneself whether shrinking balance sheets are good or bad (they obviously reflect a desire), whether falling or rising asset prices are a problem (or only large swings in one direction or the other?) and whether say banks should be paid to stay in business or not. I think that latter point is the discussion JP had with George Selgin on this blog post of his. The discussion, especially George Selgin's argument, was a bit beyond me, I admit. Also, the link between asset prices and other prices needs clarification. But I'll leave that to a trained economist.
In all, I think the Lavoie quote can be changed in the following way: The reflux principle says that money balances can be used to extingish previously accumulated debt. In a functioning market environment, aggregate levels of debt / money balances can thus be considered equal to desired levels of debt / money balances. In extention, a cb's main objective cannot be to bring demand for money / debt in line with supple of money / debt, as both are equal.
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Post by oliver on Jun 20, 2018 10:22:44 GMT
Just found this highly entertaining gem of crypto dingbattery: Why Bitcoin Isn't FiatI think it supports my initial rant.
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Post by Antti Jokinen on Jun 24, 2018 18:50:08 GMT
JP said:
Perhaps. But I think this is more complicated than that. I find it hard to put it in words, but I'll try.
Most people think all monies are bubbles. We all know Bitcoin is a bubble. Price level measured in Bitcoins has deflated a lot during the last couple of years. This is, I assume, mainly because the quantity of Bitcoins is strictly limited. People have bought that story, and think Bitcoin is a better currency than USD, and thus its price vs. USD has increased.
The quantity of Swiss dinars became strictly limited. Did it hold its value mainly because of that? I find this plausible.
Or did the Swiss dinar hold its value because some people (a) understood, unlike even most economists, that money is not a bubble, and (b) expected Swiss dinars to regain their status as currency (as they later did)? I find this implausible.
What I'm saying is that the question about Swiss dinar having been a bubble at some point in time or not is probably not related to its actual value during that period. It's more a philosophical question. It could even be that Swiss dinars were later acknowledged because they held their value thanks to people focusing on their limited quantity, thinking all monies are bubbles and the more limited the quantity, the better. Getting back to your answer, if this is not about the actual value as it is in case of ETFs, then, for all that it matters, your "some" could as well be just one person. Do you see what I mean?
For all we know, the people who can to some extent affect the price level in terms of USD might all think USD is a bubble. Yes, even central bankers might think it's a bubble, and try to affect the price level by targeting the quantity of M1/M2 or interest rates. This kind of price level targeting is probably more in line with bubble understanding of money than with non-bubble understanding of money (especially so with targeting the quantity), or at best neutral towards it.
Does this mean that we could as well have "debt-free money"? I don't think so. The monetary system has evolved, and evolves, through trial and error, so no one alive needs to understand how it works for it to work. Remove the debt, and we might soon find out it was there for a reason.
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Post by Antti Jokinen on Jun 24, 2018 19:33:40 GMT
Just found this highly entertaining gem of crypto dingbattery: Why Bitcoin Isn't FiatI think it supports my initial rant. Yes. I don't think you and I disagree. To these guys, 'fiat' means that one can decide to create more of it. In a sense this is true of USD, but not of Bitcoin. But if we look at how Bitcoin got started, then it sounds more like the fiat money of fables. Someone decided to create a certain quantity of useless digital objects and suggest we use those as money. True, he/she/they didn't force people to use them, but then again, were people initially forced to use colonial currencies, pounds or shekels? Or did people / their representatives choose to use them? This is how the guy behind your link sees 'fiat money': Mentioning "pretty pieces of paper" always reveals that the speaker has no idea how the monetary system really works. The material, if there is any, has nothing to do with the value of a credit/IOU. What is valuable are the records in the accounting system, because they are about debts and credits, and are linked to real goods and services. Governments can misuse the accounting system, and the way they misuse it is always by incurring more public debt than is sustainable -- any money created is just a by-product of this kind of misuse. It's not an ability to create money that is dangerous, but an ability to incur public debt without there being any creditor who could stop this. Yet this ability must always exist in a modern democratic society, I suppose, and it is the debtors, the public, who should set the limits. By the way, today this is even more true of private debtors. They should themselves say no to incurring more debt. Once all the (potential) creditors say no, the debtor has already incurred way too much debt.
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Post by Roger Sparks on Jun 27, 2018 16:27:26 GMT
I agree with Antti in thinking that all money has value, even if a very small value.
Perhaps the next question we should think about is "How is value established?"
This question, when applied to fiat money or Bitcoin, seems to gravitate towards philosophical (or maybe 'bubble') explanations. A good case can be made that 'group think' has a role in establishing a value for money.
Perhaps my philosophical method of establishing a value for money is too simple. Simple or not, the best test of a philosophy is the fit it makes with observed facts.
Here are two simple rules included in my philosophy of money:
1. Every trade-of-money-for-something-else is a barter event.
2. The value-of-money is a group-think-average based on the observation of many barter events.
Maybe we can apply these two rules to the creation of money. Let's assume that government decides to create fiat money by way of accounting book entries. Government issues a promise to repay the money it would like to borrow. With promise in hand, the government approaches a bank asking for a loan. Knowing that government can repay any loan made, a bank makes the loan.
Now accounting takes over. The bank makes an accounting entry increasing the amount of funds in a government owned deposit record. Government can next purchase resources. Sequentially, sellers will increase their own records of deposited funds.
This example leaves many other questions unanswered.
1. Did the bank lending money REALLY have preexisting money to lend?
2. Did government borrow a small amount of money or a large amount? Presumably, a small borrowing would not affect the VALUE-of-money but a large borrowing could have an effect.
3. I won't try to list all other questions.
Unfortunately, the two rules offered lead us to the conclusion that value is not a fixed constant. This lack of fixed value may become a source of financial disaster when the time to repay-debt-by-selling-resources arrives. It would not be possible for EVERYONE to be selling resources and maintain the value of money constant against assets, both at the same time.
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