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Post by oliver on Sept 6, 2018 7:54:06 GMT
Well, I've divided what banks do into that which they do for two independent parties using their services and that which they do on behalf of their owners (also using their own type of services). In the first case, any accounting of green notes extant as red debt on the bank's books, although maybe technically correct, is, as you say, superfluous. In the second case, I would put it this way: firstly, it is easier to keep track of things if such a transaction is not mapped onto all other customers. A bank issuing debt or equity has no direct impact on the green or red notes in my account, although it adds a risk / burden which, as an astute customer I should be aware of (most people aren't, most of the time). Secondly, I found it logical in the sense that banks, too must follow their own rules. It's easier if one imagines banks having accounts / vessels at other banks. In a one bank world, that obviously doesn't work.
I can't quite follow your net view of things, though. No one issues a bond or equity to hold onto money. The money received is immediately 'passed on' / used to buy a good. So the net effect is an increase in non-sync. In the case of a bank issuing a bond, one can think of the money passing into the bank's realm where it is initially burnt. But that act is immediately followed by the creation of another green note which it passes on to the seller of the good. Why go to the trouble? In fact, the act of a bank issuing a bond is identical to a private person issuing a bond. And so is the accounting in terms of paper. It is just that the bank acts on behalf of a different group of people and that its actions have implications for everybody using its services. It is in the funny position of being both customer and service provider for its own transactions. I decided it is cleaner to record it from the perspective of the customer which includes keeping a customer account / vessel. That vessel can also be thought of as a number of vessels belonging directly to the bank's owners. Does it make a difference?
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Post by oliver on Sept 6, 2018 8:05:30 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. The group of bank owners, advised by its employees, decides to invest in new equipment for the bank. For that, it opens a bond vessel at its own bank through which it markets a turquoise paper to the bond investor. It receives an orange paper from the bank as a reminder of the sale. The green notes added to the vessel are then spent on the investment goods. Investor vessel: -100 green (+100 red), +100 turquoise Bank owner vessel: -100 orange, + investment goods Investment good seller: - investment goods, + green (-100 red) Net effect: 100 turquoise, 100 organge, 100 investment goods P.S. I explicitly constructed this whole story so that only red/pink net against green whereas only turqouise nets against orange. I did so to show that even if one makes such distinctions (especially between red & pink), one is never left with more papers on the reddish side than on the greenish side (credits = debits). Of course, if red, pink and orange net with green and turquoise, then one can greatly economise on paper and can ditch the petty distinctions between colour hues. But I explicitly did not go there to go along with Nick Rowe's story as far as I possibly could.
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Post by Antti Jokinen on Sept 6, 2018 13:14:36 GMT
Oliver said: "For that, it opens a bond vessel at its own bank through which it markets a turquoise paper to the bond investor. It receives an orange paper from the bank as a reminder of the sale. The green notes added to the vessel are then spent on the investment goods."
Why go through issuing a bond when it (the bank management, not owners) could just print green notes and give them to the seller of investment goods? The corresponding debt -- some shade of red, to follow your palette -- would be a debit balance on an equipment account (as in real life), or a piece of paper as a record of the same.
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Post by Antti Jokinen on Sept 6, 2018 13:28:04 GMT
So, the bank didn't need to issue a bond to buy investment goods. Why did it then issue a bond? A revered expert going only by the name JKH would probably be the right person to explain this. But I'll try. When issuing bonds the bank is managing the (maturity/rate) structure of the RHS of its B/S (traditionally called 'liabilities'). Does this sound familiar? Following messieurs Modigliani and Miller, I extend that to equity, too. I found a link: www.investopedia.com/terms/l/liability-management.asp
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Post by Antti Jokinen on Sept 6, 2018 13:43:36 GMT
When it comes to the shareholders (share=credit) as owners, I'm with John Kay: www.johnkay.com/1998/06/29/i-own-my-umbrella/or www.ft.com/content/7bd1b20a-879b-11e5-90de-f44762bf9896"English shareholders are definitely not owners. The Court of Appeal declared in 1948 that 'shareholders are not, in the eyes of the law, part owners of the company'. In 2003, the House of Lords reaffirmed that ruling, in unequivocal terms. [...] As Charles Handy has written, when we look at the modern corporation, 'the myth of ownership gets in the way'. Clear thinking about business would be easier if we stopped using the word."
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Post by oliver on Sept 6, 2018 14:53:59 GMT
Oliver said: "For that, it opens a bond vessel at its own bank through which it markets a turquoise paper to the bond investor. It receives an orange paper from the bank as a reminder of the sale. The green notes added to the vessel are then spent on the investment goods." Why go through issuing a bond when it (the bank management, not owners) could just print green notes and give them to the seller of investment goods? The corresponding debt -- some shade of red, to follow your palette -- would be a debit balance on an equipment account (as in real life), or a piece of paper as a record of the same. Well, you came up with the example :-) but I'll attempt an explanation all the same: All other entities are subject to debit limits that happen to be set and enforced by the bank (management). Floating a bond or equity is one way to asses such a limit for the bank. Another way would be to introduce a second bank, say the world bank? Otherwise, what would keep the one bank managers from just buying everything? Why bother managing maturities if every liquidity shortfall could be covered with new green bills? I don't think it is a technical question of 'can the one bank print green notes', more of a question of checks and balances. That is a somewhat circular concept by design, I admit. I control you, you control me. And it implicitly means we're both not 100% trustworthy which is a bit at odds with the idea of red money (but of course very true). While we're at it, why can't I just print green notes and give them to you? I promise I'll remember that I'm in debt to society, scout's honour... I'l grant you the point that ownership is a murky concept and that equity owners have no operative control over 'their' business nor can they lay any claim on the assets they supposedly own unless the company is being unwound. But somehow I feel that is unrelated to the issue above. Maybe I'm wrong.
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Post by Antti Jokinen on Sept 7, 2018 6:03:41 GMT
Yes, there are checks and balances. Quite literally so as double entry bookkeeping, as far as I remember correctly, came into being in Italy around 1100-1200 as a tool to ensure the honest conduct of a publicly chosen person who's duty was to look after public assets and use them wisely.
The accounts themselves, when published, limit the conduct of the management. That's the purpose of financial accounting: to give stakeholders a true and fair picture of what happens in the company. It's a solution to the principal-agent problem. You don't need bonds for that. But I agree that it is beneficial as a check to have some shareholders, and bondholders too, who stand in the line before more senior creditors when losses are distributed and thus have an incentive to keep an eye on the management.
Here's how I see equity, in any company:
It's a record that says its holder has given up something (goods or services) without getting anything in return. It's a credit. It's easiest to see it in a case where the shareholder's investment in the company was in form of goods or services directly. Like when the now famous guy painted Facebook's office in its early days and got shares in return. Facebook management just "printed" shares and used them as money. They might have printed a bond, but it's much easier to print shares, though usually more expensive in the long run -- as was in this case. The guy did some painting and got later, say, a mansion with no mortgage in return.
To get back to your example, I think it would be clearer to use tokens only where they have a real purpose, and rely on bookkeeping when tokens are not needed. The bank itself can rely on accounts. Any tokens issued by it will not show on those accounts when they are in the hands of the bank, and might thus be considered non-existing/burned. That's why I think red=green only when we consider red to be debit (LHS of B/S) and green to be credit (RHS of B/S), generally. The mix of different types of deb(i)ts is quite independent of the mix of credits on the B/S, so that any narrow definition of red and green won't give us red=green without the help of chance or imagination.
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Post by oliver on Sept 8, 2018 7:13:51 GMT
Yes, there are checks and balances. Quite literally so as double entry bookkeeping, as far as I remember correctly, came into being in Italy around 1100-1200 as a tool to ensure the honest conduct of a publicly chosen person who's duty was to look after public assets and use them wisely. The accounts themselves, when published, limit the conduct of the management. That's the purpose of financial accounting: to give stakeholders a true and fair picture of what happens in the company. It's a solution to the principal-agent problem. You don't need bonds for that. But I agree that it is beneficial as a check to have some shareholders, and bondholders too, who stand in the line before more senior creditors when losses are distributed and thus have an incentive to keep an eye on the management. Here's how I see equity, in any company: It's a record that says its holder has given up something (goods or services) without getting anything in return. It's a credit. It's easiest to see it in a case where the shareholder's investment in the company was in form of goods or services directly. Like when the now famous guy painted Facebook's office in its early days and got shares in return. Facebook management just "printed" shares and used them as money. They might have printed a bond, but it's much easier to print shares, though usually more expensive in the long run -- as was in this case. The guy did some painting and got later, say, a mansion with no mortgage in return. To get back to your example, I think it would be clearer to use tokens only where they have a real purpose, and rely on bookkeeping when tokens are not needed. The bank itself can rely on accounts. Any tokens issued by it will not show on those accounts when they are in the hands of the bank, and might thus be considered non-existing/burned. That's why I think red=green only when we consider red to be debit (LHS of B/S) and green to be credit (RHS of B/S), generally. The mix of different types of deb(i)ts is quite independent of the mix of credits on the B/S, so that any narrow definition of red and green won't give us red=green without the help of chance or imagination. In short, yes. Slightly longer, I can see how making transactions visible in form of double entries allows for control in the first place. I have no problem seeing equity as a credit. It doesn't make sense any other way. As in my coloured world, there is a close relationship between all greenish and all reddish things. In choosing my coloured chips, I explicitly did not want to mix different systems. I tried to do without bookkeeping altogether and made sure paper replaced double entries. I don't agree that it takes chance or wild imagination to arrive at red/pink = green in that context, since both are always created in pairs. So, assuming no after the fact conversion from one debit / credit type to another is possible for the moment, the arithmetic is pretty straight forward, I'd say. Edit: I've always thought of equity as a way to solve (re)evaluation 'problems'. A way to account for (macroeconomic) profits, for example. So, e.g. you start a credit cycle and close it again but are left with a positive residue of company value that can be accounted for in the equity department and be levered in the next credit cycle.
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Post by Antti Jokinen on Sept 10, 2018 5:22:16 GMT
Oliver said: " I don't agree that it takes chance or wild imagination to arrive at red/pink = green in that context, since both are always created in pairs."
Perhaps I misunderstood. Let's see.
The bank receives a private IOU, gives new green notes in return. Following double entry, the bank now has a pink IOU (debit) and... what? It gives away green notes. I say it should have photocopies of those green notes (credit), clearly marked "COPY", as a reminder of notes it has issued. I think you earlier said the bank will create a red note as a reminder? But a holder of a red note is in debt. The bank isn't.
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Post by Antti Jokinen on Sept 10, 2018 13:06:46 GMT
I don't fully agree on there being different systems in the case of ledger and tokens. Tokens decentralise recordkeeping. The ledger is centralised. The bank is a centralised recordkeeper, so I don't see any sense in the bank using tokens for its own records, which it could have on a ledger. It's unnecessary and confusing, even as a thought experiment. I see one system, which is partly centralised, partly decentralised.
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Post by oliver on Sept 10, 2018 19:04:07 GMT
Perhaps I misunderstood. Let's see. The bank receives a private IOU, gives new green notes in return. Following double entry, the bank now has a pink IOU (debit) and... what? It gives away green notes. I say it should have photocopies of those green notes (credit), clearly marked "COPY", as a reminder of notes it has issued. I think you earlier said the bank will create a red note as a reminder? But a holder of a red note is in debt. The bank isn't.
If I'm not confusing my colours, red is an overdraft, pink is a bank loan of some sort and orange is a private loan. On the asset side, green is what we would call money which includes notes, coins and bank deposits while turquoise is a private IOU.
The bank does not buy the orange paper - that remains in the hands of the private debtor - it buys the turquoise paper (IOU) and changes its colour to green. That either means the turquoise has no more meaning because it is now green (the simplified story) or one introduces an intermediate step which allows the turquoise paper to live on by introducing a new red paper that corresponds to the new green paper. But just doubling the asset side as Nick Rowe might be (mis?)understood as having said, seems false. That is not double entry, it is 1 1/2 entry.
Also, I can't see much of a difference between a bank loan and a private loan. In both cases I owe money and am due to repay according to some schedule. It does make a difference, however, whether my paper will buy me a coke at the grocer or whether I need a broker to intermediate first. So, if anything, a world with private IOUs circulating, can be considered short on liquidity and OMOs might be able to mitigate that shortage. But saying that OMOs create a NET asset, is false.
Edit: You say the bank does not owe anyone anything. That can only be true if it is not owed anything, either. So you need a neutralizing entry for the IOU it holds. In the colourful world, all debits are in the red spectrum whereas all credits are in the green spectrum. So making a photocopy of the turquoise IOU doesn't work, because it remains in the green spectrum. If you like, you may introduce another colour within the red spectrum for the entry that neutralizes the IOU. In any case, it is wrong to say that assets > liabilities.
In a further step one would have to explain the difference in market value of the IOU and the money asset and show where the residue goes.
I don't fully agree on there being different systems in the case of ledger and tokens. Tokens decentralise recordkeeping. The ledger is centralised. The bank is a centralised recordkeeper, so I don't see any sense in the bank using tokens for its own records, which it could have on a ledger. It's unnecessary and confusing, even as a thought experiment. I see one system, which is partly centralised, partly decentralised. With systems I was referring only to the physical appearance. Red money is already a stretch for the imagination, I just thought I'd take it even further and decentralise all entries by putting them on paper. I somehow thought it would be more straightforward to dive into a parallel world in which everything was different, as opposed to just some things.
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Post by Antti Jokinen on Sept 11, 2018 6:48:28 GMT
Oliver said: "The bank does not buy the orange paper - that remains in the hands of the private debtor - it buys the turquoise paper (IOU) and changes its colour to green. That either means the turquoise has no more meaning because it is now green (the simplified story) or one introduces an intermediate step which allows the turquoise paper to live on by introducing a new red paper that corresponds to the new green paper."
Remember:
Red paper = holder's debt, no one's asset. Green paper = holder's asset, no one's debt.
Orange paper = (private record of) holder's debt. Turquoise paper = holder's asset, issuer's (orange-paper-holder's) debt.
I think comparability breaks down already here. Don't you agree? As I said earlier, the private IOU is not of one colour, because it is a deb(i)t and a credit at the same time.
To follow double entry, when it receives what you call turquoise paper in real life, the bank will make a reddish entry--pink, I think--in the name of the debtor. From now on, it's a bank loan in all but name. (The bank will retain the IOU, because it serves as a loan contract.) The other entry will be green, as the bank gives newly printed green paper to the previous holder of the IOU. Do you follow me? There's no conversion from turquoise to green, other than from the perspective of the previous IOU holder.
Here comes the interesting part. The banker could now go to the issuer of the IOU and give him newly printed red paper with the same face value as the IOU, and hand over the IOU, too. The debtor is free to do whatever he wants with his turquoise and orange bits of paper. But he clearly hasn't paid his debt. The *debt record* just changes form, and is now an overdraft. No one holds the corresponding asset.
An interesting question arises: Was the IOU an asset to the bank when it held it? I cannot see it was, because it was willing to replace it with newly printed red paper just like that, without receiving any asset in return. It seems the IOU, while in the hands of the bank, was debt to its issuer but an asset to no one. And to me, that makes all the sense in the world.
Remember John Kay: no one owns the bank. Thus, what we call assets of the bank, are in reality assets of no one. Beautiful?
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Post by Roger Sparks on Sept 11, 2018 19:18:27 GMT
I am commenting at a point late in the discussion. Sorry about that.
As I follow the discussion, I find myself needing examples that are better described. So Oliver, I am adding (for my own use) some caveats to your original post in this thread.
The first caveat is that the red paper can trade in different markets, unlike green paper which has a universal market. Two examples resulting from this caveat:
1. The original creation of green money accompanied by red money trades on a long term money market. An example is government deficit spending wherein government pays in green money obtained by issuing red paper. The red paper trades in money markets of several varieties.
2. Red money also trades as paper following sales of physical property. An example is the sale of car with debt (red paper) remaining unpaid. The seller may agree to sell the car for nothing if only the buyer will assume the remaining debt owed on the vehicle. Here the red paper moves with the car.
I guess I am only adding one caveat to the green-red theory. Red money trades in more than one market
If we have more than one market for red money, we need to avoid using secondary markets as indicators of the amount of green money actually in circulation.
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Post by oliver on Sept 11, 2018 19:48:56 GMT
I see your point. The reason I didn't do it that way and rather introduced an intermediate step that one might call quadruple entry, is because I believe the original private debt contract still exists. It is not extinguished just because a bank buys the asset (turquoise). The bank certainly does not buy the liability (orange). So, rather than saying that orange is exchanged for pink, might it not be better to argue that there is no meaningful difference between orange and pink and red papers which is why they are interchangeable? That does not contradict the aspect you like hammering in, namely that the debt is to no one and the asset is of no one, I'd say. It just puts the focus on what happens with the asset. I say that by creating the new green asset, the bank can both keep the original contract intact (it hides the turquoise paper on its balance sheet and inoculates it with a corresponding debit) and create a situation in which the debtor and creditor are no longer connected through a mutual contract at the same time. Furthermore this gets us to the next question of what it is that distinguishes acts of monetisation, if I may call them that, from other ways of creating (or upholding) non-sync within an economy. What is it that allows a bank to pull off the trick that ends up in us accepting green bits as assets even though we have no way of enforcing our claim? And why can I use them at the grocer's but not my neighbour's IOU or my apple stock? In any case, even if we end up agreeing to disagree on this particular point, I do hope that you agree with me that assets = liabilities before just as much as after the OMO. OK, that's a rhetorical question. I hope. If I recall the article correctly, this applies not only to banks but to all firms equally. Anything that has a balance sheet, right? Because LHS = RHS, they always cancel out, leaving only the question of what (who) is behind one side and who behind the other. I think that's interesting point, but I don't think it means we shouldn't look at what happens within the firm.
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Post by oliver on Sept 11, 2018 20:13:48 GMT
I am commenting at a point late in the discussion. Sorry about that. As I follow the discussion, I find myself needing examples that are better described. So Oliver, I am adding (for my own use) some caveats to your original post in this thread. The first caveat is that the red paper can trade in different markets, unlike green paper which has a universal market. Two examples resulting from this caveat: 1. The original creation of green money accompanied by red money trades on a long term money market. An example is government deficit spending wherein government pays in green money obtained by issuing red paper. The red paper trades in money markets of several varieties. 2. Red money also trades as paper following sales of physical property. An example is the sale of car with debt (red paper) remaining unpaid. The seller may agree to sell the car for nothing if only the buyer will assume the remaining debt owed on the vehicle. Here the red paper moves with the car. I guess I am only adding one caveat to the green-red theory. Red money trades in more than one market If we have more than one market for red money, we need to avoid using secondary markets as indicators of the amount of green money actually in circulation. Hi Roger I'm afraid I don't quite follow. The fact that one can pass on debt, as in your car example, is one of the features of red money, which roughly corresponds to an overdraft or an assumable loan (my definition). Other types of bank loans may not be assumable (pink paper). I don't understand what you mean by trading in different markets. A non-bank loan creates a new paper (IOU in orange and turquoise). There aren't multiple markets that multiply green or red papers.
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