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Post by oliver on Aug 30, 2018 12:13:42 GMT
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Post by oliver on Aug 30, 2018 12:15:09 GMT
I promised to write something on red & green money, so I suppose I'd better deliver.
Quick recap: green money is (paper) money as we know it. The holder passes green bits of paper on to the willing seller in exchange for goods or services. Red money is the opposite. The seller passes it on the the willing buyer together with the goods.
Originally, I had my doubts about the analogy (sorry Nick, I'm pathologically sceptical), because I had a suspicion it was devised as a way to get around certain constraints I consider fundamental to any monetary system. One of those constraints is the golden rule that credits = debits. In a red and green world, this means red = green. The other is the fact that, to have an overhang of red over green money on one's account, in the real world one needs to get some kind of approval before hand.
But instead of just throwing the whole analogy over board, I thought I'd expand it to incorporate those constraints in a, hopefully, equally illustrative way. Not that others haven't had with similar thoughts long before me. But I don't think I've ever seen them spelled out.
Getting started: First, we need to get red and green bits of paper into circulation. The bank that issues them has only just been founded. It was furnished with a printing machine and some desks by its owners (say, the people) but has no other assets to sell. So it cannot get red bits of paper into circulation by selling anything. Instead, we need to find economic actors who are willing to trade goods and grant them access to the new paper system.
Debit limits: For this, each willling participant has her individual 'debit worthiness' assessed by the bank (there is a more complicated assessment procedure for government participants). Following that assessment, they are each endowed with a vessel containing a limited, but equal amount of red and green bits of paper. The size of the vessel indicates the maximum amount of red papers the holder may hold in excess of green papers at any one time. There is no limit to the total amount of papers each participant may hold through trade other than that differential constraint. If participants feel they deserve larger vessels, say for particular project, they can apply for them. Additional contraints may apply.
Money in circulation: The sum of all individual differentials is also called 'the money stock'. This corresponds with the sum of all overhang of all green over red papers for all net creditors, or all red over green papers for all net debtors. It signifies the extent to which economic participants have not been reciprocal in their exchange of goods to one another.
Netting: Instead of printing all papers necessary to fill the vessels in advance, the bank only delivers paper for trading purposes on demand. All red and green bits within a vessel that cancel out are removed and allocated to those with curernt trading needs. That saves a lot of paper and ink. Credit limits are sufficiently indicated by the size of the vessels.
Bilateral debts: Participants can engage in bilateral borrowing and lending of both green and red bits of paper. Such a deal will also involve printing red and green bits of paper, but on a private, home ink jet. The assessment of debit worthiness is carried out by the lender (receiver of red papers / giver of green papers) who then takes on the risk of that particular trade. The documents of these trades can be kept in the vessel in place of official paper bits, thus not changing the NET position of the vessel vs. before the trade. The bilateral documents cannot, however, be used to purchase goods directly. Or at least they are unlikely to be accepted due to the idiosyncratic risk inherent in them. The netting process does not work for these papers for the same reason. They can, however, be lent on themselves, thereby creating ever growing chains of new red & green private papers in reference to the first bilateral trade.
OMOs: The issuer can intervene in the market for bilateral agreements by assuming the risky papers (including the associated reward) in the name of the public in exchange for official papers that can then be used to trade with. What applies to green also applies to red (except that my head explodes thinking the red world through).
Right, that's probably enough for a start. So before I venture into, dunno interest rates, recessions or the significance of the money stock measure etc., I'll leave those reading (and still awake or recovered from laughing) to amend, expand, shred or otherwise react (or not) first.
P.S.: the same economy can be constructed without bits of paper, just with entries in pencil or digital entries in centrally held books. The main difference is that sellers cannot tell whether they are receiving green money or giving red money. Much like in the paper economy above, only the account holders (and the bank) know the net position of each account.
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Post by Antti Jokinen on Aug 31, 2018 6:49:51 GMT
Very good, Oliver!
Sounds pretty much like the TOM/LETS world (see another thread here) to me. In getting your head around red money, it helps to assume that everyone is 100 % honest, as you seem to have done. No one dumps red money without giving up goods simultaneously. In real life it would only work in a gift economy type of economy, where the number of participants is low and people have close ties to each other. Currency in circulation decentralises the credit side of the ledger (or RHS of the balance sheet), but to do the same to the deb(i)t side requires full trust -- or very expensive controls.
Your vessel approach reminds me of checkbooks. I like it. Already from the start we can see that it doesn't matter whether the buyer (of goods; I use the word in this meaning only) gives up green notes or the seller gives up red notes. These alternatives are observationally equivalent when we focus on the thing that matters: the net balance of each participant. This compares to the accounts-based, centralised system where the bookkeeper can freely choose whether he first debits one account and then credits another, or vice versa. (It is obvious that the bookkeeper in reality doesn't transfer anything between accounts.)
If we follow Keynes, then the money stock should be from the start the total amount of green notes, or red notes (which amounts to the same), in the participants' vessels. This is because Keynes saw that also unused overdraft facilities should be included in money aggregates, as they can be used in the same way as "existing" money when purchasing goods. This would make the money stock *not* a measure of 'non-synchronisation of payments and receipts of money' (Nick Rowe's language), or, as I prefer it, non-synchronisation of purchases and sales of goods and services. To measure this non-sync we would need to know the total sum of all *net* red note or green note holdings. Right?
Before looking at OMO, it's best to agree on how things look like on the issuer's balance sheet (B/S, in accountant language). I think it makes most sense to follow the tradition and show green notes as Currency in circulation on the RHS of the B/S. Red notes would then be Debt notes in circulation and they'd be recorded on the LHS of the B/S where participants' debt traditionally belongs.
During OMO, the issuer brings bilateral debt notes on its B/S or takes those off its B/S. When it acquires the debt notes, they cease to be bilateral notes and become part of the public recordkeeping system instead. Entry-wise, acquiring a bilateral debt note means a debit entry on the account 'Private debt notes held by the Bank' or similar (presented on the LHS). Credit entry will depend on the net vessel balance of the one who hands in the note. If it's negative, red, then, if we follow the netting principle, the Bank would take red notes from him and credit the account Debt notes in circulation (decreasing its balance). If positive, green, the Bank would hand him green notes from its vault and credit the account Currency in circulation (increasing its balance).
The entries will be the opposite when the Bank wants to reduce the amount of green notes in circulation and finds an agent who is willing to hold a bilateral debt note. In this case, interestingly enough, the Bank should demand green notes from the agent in exchange; otherwise it must increase the amount of red notes in circulation by handing over new ones to the agent, notes it takes from its... not vault, but rather the opposite.
It's important to notice that the bilateral debt notes should be considered green when in participants' vessels, increasing a net positive balance of their holder, but do not net against red (public) notes. But when the Bank acquires bilateral notes, they cease to be bilateral notes, and turn into red notes (or equivalent thereof). The Bank itself doesn't owe anyone, nor does any participant owe the Bank. The Bank is just a recordkeeper. (As you know, this is the essence of the theory I'm promoting.) I got this right, didn't I?
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Post by Nick Rowe on Aug 31, 2018 18:50:38 GMT
Sounds good Oliver.
"The other is the fact that, to have an overhang of red over green money on one's account, in the real world one needs to get some kind of approval before hand." Agreed. I mentioned that in a couple of my red/green posts.
What you call "the money stock" I've been calling "the gross money stock". (And "net money stock" is number of green notes minus number of red notes, which is zero in your example, but could be made positive if the central bank does an open market purchase of bonds, or negative if the central bank does an open market sale of bonds.
"Participants can engage in bilateral borrowing and lending of both green and red bits of paper. Such a deal will also involve printing red and green bits of paper, but on a private, home ink jet." But if privately printed notes are not generally trusted, they will not circulate as money (unlike notes printed by the bank). Similarly, I can write "IOU $1 signed Nick" on a bit of paper, and use it to borrow $1 Bank of Canada money from my friend who trusts me, but my IOU will not circulate as money. But if they are trusted widely, and do circulate as money, then I am a bank that creates money, not just a borrower of money.
Keep going! Good luck!
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Post by oliver on Sept 1, 2018 12:18:00 GMT
Very good, Oliver! Sounds pretty much like the TOM/LETS world (see another thread here) to me. In getting your head around red money, it helps to assume that everyone is 100 % honest, as you seem to have done. No one dumps red money without giving up goods simultaneously. In real life it would only work in a gift economy type of economy, where the number of participants is low and people have close ties to each other. Currency in circulation decentralises the credit side of the ledger (or RHS of the balance sheet), but to do the same to the deb(i)t side requires full trust -- or very expensive controls. Your vessel approach reminds me of checkbooks. I like it. Already from the start we can see that it doesn't matter whether the buyer (of goods; I use the word in this meaning only) gives up green notes or the seller gives up red notes. These alternatives are observationally equivalent when we focus on the thing that matters: the net balance of each participant. This compares to the accounts-based, centralised system where the bookkeeper can freely choose whether he first debits one account and then credits another, or vice versa. (It is obvious that the bookkeeper in reality doesn't transfer anything between accounts.) If we follow Keynes, then the money stock should be from the start the total amount of green notes, or red notes (which amounts to the same), in the participants' vessels. This is because Keynes saw that also unused overdraft facilities should be included in money aggregates, as they can be used in the same way as "existing" money when purchasing goods. This would make the money stock *not* a measure of 'non-synchronisation of payments and receipts of money' (Nick Rowe's language), or, as I prefer it, non-synchronisation of purchases and sales of goods and services. To measure this non-sync we would need to know the total sum of all *net* red note or green note holdings. Right? Before looking at OMO, it's best to agree on how things look like on the issuer's balance sheet (B/S, in accountant language). I think it makes most sense to follow the tradition and show green notes as Currency in circulation on the RHS of the B/S. Red notes would then be Debt notes in circulation and they'd be recorded on the LHS of the B/S where participants' debt traditionally belongs. During OMO, the issuer brings bilateral debt notes on its B/S or takes those off its B/S. When it acquires the debt notes, they cease to be bilateral notes and become part of the public recordkeeping system instead. Entry-wise, acquiring a bilateral debt note means a debit entry on the account 'Private debt notes held by the Bank' or similar (presented on the LHS). Credit entry will depend on the net vessel balance of the one who hands in the note. If it's negative, red, then, if we follow the netting principle, the Bank would take red notes from him and credit the account Debt notes in circulation (decreasing its balance). If positive, green, the Bank would hand him green notes from its vault and credit the account Currency in circulation (increasing its balance). The entries will be the opposite when the Bank wants to reduce the amount of green notes in circulation and finds an agent who is willing to hold a bilateral debt note. In this case, interestingly enough, the Bank should demand green notes from the agent in exchange; otherwise it must increase the amount of red notes in circulation by handing over new ones to the agent, notes it takes from its... not vault, but rather the opposite. It's important to notice that the bilateral debt notes should be considered green when in participants' vessels, increasing a net positive balance of their holder, but do not net against red (public) notes. But when the Bank acquires bilateral notes, they cease to be bilateral notes, and turn into red notes (or equivalent thereof). The Bank itself doesn't owe anyone, nor does any participant owe the Bank. The Bank is just a recordkeeper. (As you know, this is the essence of the theory I'm promoting.) I got this right, didn't I? Thanks, Antti I must have done something right, if you ask me whether I've got your theory right I assumed that accepting red money was a transparent and voluntary act, not a clandestine dumping of toxic waste. Within given debit limits, that seems like a reasonable assumption that doesn't require a close-knit community, no? I can always say no to the proposition. The different measures of money stock have different meanings. Much like the word saving. The most common measure is that of net balances or non-synchronisation, I'd say. Since the meaning of the stock measure differs greatly, so does the change in one stock or another, and the means of getting there. It is a fundamentally different proposition to propose an increase in credit limits than to propose an increase in non synchronisation. When someone proposes an increase in the money supply, are they really proposing an increase in non-synchronisation? How would they achieve that? And is than even a legitimate aim? Should one not aim for the opposite in general? You're right to put your finger on OMOs. That was the most fuzzy bit of my post. If I understand you correctly, the red and green bits of paper translate well into your thinking because the separation into two separate papers corresponds to the the fact that, with money, the link between creditors and debtors is severed. Money is a TOM (they owe me) without a specific counter party whereas the corresponding debt is an IOT (I owe them). Bilateral debts do have a specific counter party but, as you say, they are debits (red) to the issuer and credits (green) to the holder. To keep the paper analogy as symmetric as possible, I thought it would be legitimate to divide bilateral debts into two bits of paper as well. The difference between these and money is that there is a name written on them. The red parts can't be moved. The green parts therefore aren't commonly accepted. It is by underwriting the debt in the name of the public and issuing its own green and red notes in exchange that such bilateral debt can be turned into money. Have I got that right?
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Post by oliver on Sept 1, 2018 12:32:04 GMT
Sounds good Oliver. "The other is the fact that, to have an overhang of red over green money on one's account, in the real world one needs to get some kind of approval before hand." Agreed. I mentioned that in a couple of my red/green posts. What you call "the money stock" I've been calling "the gross money stock". (And "net money stock" is number of green notes minus number of red notes, which is zero in your example, but could be made positive if the central bank does an open market purchase of bonds, or negative if the central bank does an open market sale of bonds. "Participants can engage in bilateral borrowing and lending of both green and red bits of paper. Such a deal will also involve printing red and green bits of paper, but on a private, home ink jet." But if privately printed notes are not generally trusted, they will not circulate as money (unlike notes printed by the bank). Similarly, I can write "IOU $1 signed Nick" on a bit of paper, and use it to borrow $1 Bank of Canada money from my friend who trusts me, but my IOU will not circulate as money. But if they are trusted widely, and do circulate as money, then I am a bank that creates money, not just a borrower of money. Keep going! Good luck! Thanks, Nick. Very much appreciated! You may continue canoeing. I must have missed your mention of credit limits. Or I've simply forgotten. All the better, in any case. My contention is that the 'gross money stock' as you define it is always zero and must be so. That's why I brought up OMOs. I had a feeling that was your Trojan horse for upending accounting :-). Antti and I will work out a clean story to hopefully convince you of our version. The Keynesian gross money stock measure that Antti mentions is a much more useful measure, in my opinion. It describes a scope of action for individuals or the economy as a whole. Yes, but what is it that makes them widely trusted, apart from the fact that there isn't a counter party. Just blotting out the name ' John owes the holder' and replacing it with 'nobody owes the holder, signed Oliver' is a tempting proposition. But it would probably land me in jail rather than becoming widely accepted. Sure, there's bank licences and all. And any person can open a bank. But that doesn't answer the question about what it is that banks (or the central record keeper) do / does.
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Post by Antti Jokinen on Sept 3, 2018 6:08:58 GMT
I assumed that accepting red money was a transparent and voluntary act, not a clandestine dumping of toxic waste. Within given debit limits, that seems like a reasonable assumption that doesn't require a close-knit community, no? I can always say no to the proposition. The different measures of money stock have different meanings. Much like the word saving. The most common measure is that of net balances or non-synchronisation, I'd say. Since the meaning of the stock measure differs greatly, so does the change in one stock or another, and the means of getting there. It is a fundamentally different proposition to propose an increase in credit limits than to propose an increase in non synchronisation. When someone proposes an increase in the money supply, are they really proposing an increase in non-synchronisation? How would they achieve that? And is than even a legitimate aim? Should one not aim for the opposite in general? By dumping I meant dumping the red notes in, say, a river, to get rid of the only existing record of your debt. That possibility is, after all, what makes red paper money totally unrealistic. But unrealistic doesn't mean it's not useful as a thought experiment. Increasing money supply through OMO doesn't increase non-sync, at least not as you and I understand it, and at least not directly. There's no increase in debt/credits (that's what we mean by non-sync, don't we?). Privately recorded (in the form of an IOU) debits and credits just become publicly recorded. I see now what kind of symmetry you were after with your private red notes. But I think you end up mixing essential, societal recordkeeping of debts with the IOU issuer's private records of what he owes. By essential I mean that the imaginary red public note is the *only* record of its holder's debt to "others". But the strongest record of an IOU issuer's debt is the IOU itself, held by a creditor (which makes it a record of his credit,too). From the society's perspective your own private record of your debt (in real life often in an Excel spreadsheet) has no meaning. Do you see what I mean? As you say, it doesn't circulate.
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Post by Antti Jokinen on Sept 3, 2018 14:46:36 GMT
My contention is that the 'gross money stock' as you define it is always zero and must be so. That's why I brought up OMOs. I had a feeling that was your Trojan horse for upending accounting :-). Antti and I will work out a clean story to hopefully convince you of our version. This might be a Sisyphean task, Oliver :-) (I assume you talked about Nick's net money stock, not gross?) To convince Nick that, say, a mortgage is "red money" seems to be impossible. I've tried on many occasions to show him how a mortgage could exist in the form of an overdraft, with exactly the same characteristics as a traditional mortgage. That would make a mortgage "red money" for Nick, too, yet nothing meaningful had changed; just the way the debt is accounted for. To be fair, if Nick accepts any debit balance as red money, then we -- and him -- must accept any credit balance as green money. Do you agree? That sounds a lot like the age-old question about what should be included in money aggregates and what not. Seen broadly enough, even bonds (to their holders) and equity are money. And that's what we are basically saying? All credit balances are records of their holder's claim to goods and services. In case of equity, this is a residual claim on the assets of the company. All these claims differ as to their liquidity and credit risk, among other things. Nick can always say that to him green money is this and not that. What is harder for him to do is pointing to debts he considers red money in the real world. Perhaps those are some overdrafts where a bank can demand the client to close it without any need to explain its decision? I don't know. Any overdraft doesn't do, because as I explained above, we can structure any existing debt so that it can be recorded in the overdraft format, so that the client has only one current account with the bank. (That's not wholly unlike the world Fischer Black had in mind in his "Banking and interest rates in a world without money".)
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Post by oliver on Sept 4, 2018 6:22:20 GMT
By dumping I meant dumping the red notes in, say, a river, to get rid of the only existing record of your debt. That possibility is, after all, what makes red paper money totally unrealistic. But unrealistic doesn't mean it's not useful as a thought experiment. Increasing money supply through OMO doesn't increase non-sync, at least not as you and I understand it, and at least not directly. There's no increase in debt/credits (that's what we mean by non-sync, don't we?). Privately recorded (in the form of an IOU) debits and credits just become publicly recorded. I see now what kind of symmetry you were after with your private red notes. But I think you end up mixing essential, societal recordkeeping of debts with the IOU issuer's private records of what he owes. By essential I mean that the imaginary red public note is the *only* record of its holder's debt to "others". But the strongest record of an IOU issuer's debt is the IOU itself, held by a creditor (which makes it a record of his credit,too). From the society's perspective your own private record of your debt (in real life often in an Excel spreadsheet) has no meaning. Do you see what I mean? As you say, it doesn't circulate. Ah, yes. That kind of dumping had slipped my mind. How naive. Maybe I should rethink my new found faible for coloured paper. In private debt, there is obviously no technical need for a red bit, because the green bit has a name written on it. The creditor will find you and has proof of your debt. You're rigt that if there is no name on the green bits, then there needs to be a fool proof record of the other side. Either 100% honest people holding red bits, as you say, or, much more realistically, a centrally run ledger. We're going to have to define 'circulation' with respect to red bits, I think. More to follow.
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Post by oliver on Sept 4, 2018 8:57:57 GMT
My contention is that the 'gross money stock' as you define it is always zero and must be so. That's why I brought up OMOs. I had a feeling that was your Trojan horse for upending accounting :-). Antti and I will work out a clean story to hopefully convince you of our version. This might be a Sisyphean task, Oliver :-) (I assume you talked about Nick's net money stock, not gross?) To convince Nick that, say, a mortgage is "red money" seems to be impossible. I've tried on many occasions to show him how a mortgage could exist in the form of an overdraft, with exactly the same characteristics as a traditional mortgage. That would make a mortgage "red money" for Nick, too, yet nothing meaningful had changed; just the way the debt is accounted for. To be fair, if Nick accepts any debit balance as red money, then we -- and him -- must accept any credit balance as green money. Do you agree? That sounds a lot like the age-old question about what should be included in money aggregates and what not. Seen broadly enough, even bonds (to their holders) and equity are money. And that's what we are basically saying? All credit balances are records of their holder's claim to goods and services. In case of equity, this is a residual claim on the assets of the company. All these claims differ as to their liquidity and credit risk, among other things. Nick can always say that to him green money is this and not that. What is harder for him to do is pointing to debts he considers red money in the real world. Perhaps those are some overdrafts where a bank can demand the client to close it without any need to explain its decision? I don't know. Any overdraft doesn't do, because as I explained above, we can structure any existing debt so that it can be recorded in the overdraft format, so that the client has only one current account with the bank. (That's not wholly unlike the world Fischer Black had in mind in his "Banking and interest rates in a world without money".) Yes, net money stock, not gross. And yes, sisyphean. I go by the rule that one is not easily convinced by other people's arguments because that often requires dismantling all sorts of other beliefs that make up one's view of the world. Maybe we should use political tactics and scare him into believing instead? Something involving foreigners dumping their red money in the Saint Lawrence? The Chinese with their little red books? I wasn't aware that there were any particular constraints on what was an unrealitsic analogy to begin with. But I'm going to try to use that argument against him. If we only count that towards the red money stock which can be assumed by others, then taking out a loan that is not an overdraft (or not, say, an assumable mortgage), would be an act of me, Oliver, creating net money. I can't see Nick making that argument. The monetarist sleight of hand aims to makes us believe that everything the central bank does on its own books creates or destroys net money, whereas everything we mere mortals do nets out to zero. MMTers make a similar argument with regards to government deficit spending. Sure, Nick Rowe can claim that the credits in my checking account are not money either, and that only CB money is real money, but then why would he agree that my above example is an example of money creation, even if only gross money creation? Surely the stock of net money and the stock of gross money are fungible, no? I can easily make bank money into central bank money by going to the ATM. And vice versa. Furthermore, we have to see what net money creation is claimed to be. Taken at face value, it is a claim that net money creations is an act of creating assets that have no corresponding liability. That is quite obviously false. So the next best answer down the line is that the asset created is special (it is liquid / fungible / circulates) whereas the corresponding liability isn't? That then supposedly creates an asymmetry that allows green money to circulate and grease the wheels of commerce without a counteracting force of equally fungible liabilities. Apart from the fact that that admission actually constitutes a 180° turn from the first claim, it remains that any kind of debt, whether assumable or not, is an obligation to pay back money / give away goods. Even if it never is payed down and no matter the payment schedule or any other constraint, as you say. Also, I don't see that I'm saying that bonds and equity are money. Quite the contrary, actually. I find it perfectly consistent to say that the recording of a credit on a bank ledger, say in a checking account with no overdraft facility, can have different characteristics than the debt I incurred to get it. I would go so far as to say that red money, as in a debt that is transferable / assumable, is not required at all to build a consistent story. What one does need to do, however, is explain why bank money has characteristics that other types of IOUs don't. Personally, I feel that one can't do so without going into risk, interest rates etc., but that's for another day. First, I think I have to go back to my vessel example to exemplify how the red and green sides are alway equal in size, even if one assigns different meaning to different shades of green and red. To be continued....
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Post by oliver on Sept 4, 2018 14:23:29 GMT
So let's start with a recap of the above example, taking the netted view as a starting point.
1. overdrafts:
That means, that before trading starts, all vessels are empty and credit / debit limits are only implicit. When the first person uses her overdraft to pay for a good, her vessel gets filled with red paper whereas the producer of goods has his filled with an equal amount of green paper.
Once the buyer sells an equal amount of goods to someone else, she can do so by 'passing on her red papers' or 'accepting green papers'. In both casese, the effect is an immediate netting to zero. From her perspective the credit cycle is closed.
2. loans:
We can go thorugh the same procedure without an overdraft facility. The buyer apllies for a loan that has a strict repayment schedule and maybe other constraints. The green bits which the producer receives are the same as above. The red bits are slightly different, maybe they're pink. They both fit snugly in the vessels, as above. The buyer can sell goods but cannot have his account officially netted (i.e. the pink bits eliminated) until the loan becomes due. Depending on your taste, you can see green along side of pink as netting to zero. Or netting occurs when the loan is repayed. After that, though, the efect is identical to example 1.
3. private IOUs:
Instead of asking the bank for a loan or using an overdraft, the buyer prefers to source green bits with other non-bank entities. For this, she writes an IOU that consists of say a turquiose piece of paper with her name written on it and of say an orange one which she keeps to remind her of the money she owes / the goods she must sell. If she wishes her IOUs to be marketable, she can open a special account with the bank that keeps track of the orange and markets the turquoise side of this private contract. Again, as in example 2, she can save ordinary green bits along side her special orange debt which she can then use to repay the loan once it becomes due. When that happens, both the orange and the turquoise bits are torn up and her special account has a zero balance.
4. bank buys / sells private IOUs:
A bank, whether private or publicly owned, may use its own books to record the purchase of such private IOUs that are available on the open market. The turquoise paper is taken from the private vessel and placed in the bank's own vessel. The seller receives a green paper instead. The bank places a red paper in its own vessel as a reminder of the green bit it passed on. So the bank is now up one turquoise and one red bit, whereas the non-bank public is up one green and down one turquiose bit. The trade is neutralised / the credit cycle closed when the orange debt becomes due and the creditor gives the green bits to the bank. At that point, turquoise and orange are in the same, private vessel and cancel out, as do the green and red bits in the bank's vessel. The bank can also sell the turquoise bits before they become due in which case its own credit cycle is closed whereas the private credit cycle is as described in 3.
Conclusion:
At all times in the above examples red + pink = green and orange = turquoise if viewed over all vessels. Also, red + pink + orange = green + turqouise for all non-bank as well as all bank vessels. Furthermore, the purchase / sale of private IOUs by a bank changes the non-bank mix but not the total quantity of turquoise and green paper. It does not change the non-bank mix or quantity of red or pink or organge paper at all. You can construct it to see an overhang of green over red & pink if you don't count orange (net money in Nick Rowe's language). But someone is going to have to explain a meaningful difference between red, pink and organge papers to me. This is what Antti was bemoaning above. Debt is pretty much debt no matter which colour it is. It is a promise to pay money / to deliver goods. I find the only valid question wrt OMOs that remains is, whether green and turquoise papers have different economic effects if the are exchanged in voluntary trades with a bank.
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Post by Antti Jokinen on Sept 5, 2018 14:24:53 GMT
I'll try to understand where you're coming from. Let's see.
You said: "When the first person uses her overdraft to pay for a good, her vessel gets filled with red paper whereas the producer of goods has his filled with an equal amount of green paper."
I assume the notes come from a bank. And on its B/S, the bank has recorded on the LHS the amount of red notes in circulation and on the RHS the amount of green notes in circulation.
Next, the bank issues a bond worth 10 % of green notes in circulation. A single bond investor hands in 10 % of green notes in circulation and walks away with a bank bond. The bank burns the green notes it received. Red notes 100, green notes 90? (Instead of issuing a bond, the bank could as well have issued equity.)
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Post by oliver on Sept 5, 2018 18:01:28 GMT
I'll try to understand where you're coming from. Let's see. You said: "When the first person uses her overdraft to pay for a good, her vessel gets filled with red paper whereas the producer of goods has his filled with an equal amount of green paper." I assume the notes come from a bank. And on its B/S, the bank has recorded on the LHS the amount of red notes in circulation and on the RHS the amount of green notes in circulation. Next, the bank issues a bond worth 10 % of green notes in circulation. A single bond investor hands in 10 % of green notes in circulation and walks away with a bank bond. The bank burns the green notes it received. Red notes 100, green notes 90? (Instead of issuing a bond, the bank could as well have issued equity.) I didn't cover this case, but I think the right answer would be that, because it isn't acting on behalf of its customers, the green notes would not be burned but rather first moved to its own vessel and then presumably spent on something from the non bank sector it wanted to buy. The effect of such a trade would be 100 red and green notes in circulation plus the turquoise part of its bond. The bank would be up some good worth 10 as well as an orange bit also worth 10. If you think I've been or am being inconsistent, let me know. It's perfectly possible. I was just on a roll and thought I'd gotten the translation from paper to book entries right.
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Post by Antti Jokinen on Sept 6, 2018 5:14:46 GMT
I don't think you're being inconsistent. Rather, trying to be consistent, you're coming up with some red and green notes that don't seem to have any real purpose.
You said earlier: "The bank places a red paper in its own vessel as a reminder of the green bit it passed on."
Why would it need that reminder, why in the form of red paper and why suddenly in its own vessel? For all the previous green notes in circulation the bank didn't have a red note as a reminder. People have the red notes in their possession, as a record of their own debt, and now the bank holds a turquoise note which is a record of a person's debt. Debt equals credits (debit=credit). (The orange note in the IOU issuer's vessel is double counting. That's why I suggested that the turquoise note is actually turquoise/orange, both at the same time.)
Then you said that the bank doesn't burn the green notes it receives from the bond investor. Why can't it burn them and create new ones as it spends? That's what happens to 'account money' in real life in that kind of situation. Further, the bank's spending is not limited by the amount of money it receives from the investor (money from thin air, and all that).
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Post by Antti Jokinen on Sept 6, 2018 5:45:50 GMT
I know this is a difficult one, but try to think of the bond not as debt of the bank. It's no more debt for the bank than the green notes in circulation. (This is an alternative way to see the world, so I'm not going to prove that the bond is not debt for the bank. If we follow the conventional theory, it is.)
What we are used to consider repayment of the bond by the bank happens way too easily for it to be considered debt, anyway. The bank just prints some green notes and gives them to the bondholder. The green notes are not debt for the bank, right? (As Nick says, they are assets to their holder but no one's debt.)
Instead, this is what is going on:
The bank, when issuing the bond, offers the public a chance to convert their green paper credits to bond credits (which have their pros and cons to the holder when compared to green paper credits). Nothing happens on the debt side of the economy. Later, following an agreement, there will be conversion from bond credits to green paper credits. If the bank can be said to owe something, it is this *act* of conversion from bond to green paper credits (a click of a button in the modern world, without the bank giving up anything; it's just amending its records by making entries in its ledger). The bank doesn't owe money to the bondholder.
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