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Post by Roger Sparks on Sept 16, 2018 23:24:13 GMT
They are indeed two separate matters. This may be more important than I first recognized. Perhaps we should also observe that while " for every $ of green credit there is a corresponding $ of red money debit" is correct, it is only correct because we have limited the observation to the relationship between green money and banks. Non-bank lenders also deliver green money as we notice when government borrows from the public. This would have an effect on money supply measurement. Now I am thinking out-loud here, but the combined green money supply should equal the total debt obligations held by the CB and private banks. Because government borrows from the public as well as from banks, government debt could not be used as a measure of green money supply. Right? Still thinking out-loud, this limitation on green money (it must come from banks) puts quite a choke point into the non-bank lending scheme. Borrowers from non-bank sources are looking (when they repay) for the same green money that is already sought by borrowers from bank sources. In other words, two groups of borrowers are chasing the same green money to use for repayment. Continuing to think out-loud, if ALL debt was going to be paid off using green money, the non-bank debt would need to be paid first. If non-bank were to be paid second (after bank debt was paid) there would be no green money to pay with. The justification for QE is more understandable when we have that sequential relationship in mind. Does that make sense? Yes, that makes sense. So, if anything, private lending creates an overhang of red over green money that can only be alleviated through OMOs as they provide the means of repayment. The crux of the story is that the stock measure of green money says nothing about whether it will land in the hands of those who mean to repay debt. The money needs to end up in the hands of those who owe, not those who are owed to. "Now I am thinking out-loud here, but the combined green money supply should equal the total debt obligations held by the CB and private banks. Because government borrows from the public as well as from banks, government debt could not be used as a measure of green money supply. Right? " Beginning in about 2008-9, the Fed seems to agree with this. Here is a chart comparing the sum of Fed and Commercial bank lending (WALCL and TOTLL) to M2. Before 2007-8, there was a greater divergence.
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Post by Antti Jokinen on Sept 17, 2018 6:07:58 GMT
Roger and Oliver,
This reminds me of the (often dramatic) revelation that banks don't create enough money for the interest *and* principal to be paid, and thus debt needs to grow. I know both of you know better, and you're not even talking about interest, but I think the idea of a fixed quantity of money leads us always astray.
Debtors don't need to get their hands on existing money, right? They just need someone to buy the goods or services they are selling. The buyer might overdraw his account or get the bank to convert another bank credit (CD, bank bond, even equity; the latter happens every time the bank pays dividends) into newly-created money.
It doesn't work too well even as a thought experiment where we imagine that all debt would be repaid, with no increase in debt allowed until existing debt was paid off (which I think was Roger's original assumption).
Let's say I was $10,000 in debt in the bank's books. The total amount of money in existence at that point was $8,000 (or $10K -- it doesn't really matter, as we'll see), and all of it was held by Oliver. Let's assume further that I happened to own gold worth $15,000 at market price. One might think Oliver is going to get a nice deal here, but he's not the only prospective buyer.
I could walk to the bank manager named Roger and suggest that instead of enriching Oliver, I'm happy to enrich the shareholders. Roger, always holding a special place in his mind for the shareholders, might suggest that my debt will be considered paid if I give the bank $11,000 worth of gold.
At this point I could tell both Roger and Oliver that the highest bidder will get to buy gold from me. Should Roger and Oliver instead try to collude against me, Roger and I would meet in court (Oliver is free to offer me a bad deal, but the bank is expected to follow much higher standards when it is in a position to exploit me).
What I'm saying is that there is a lot of flexibility here. Regardless of what Irving Fisher might have suggested, deflation is not caused by lack of money / diminishing quantity of money, but mainly by lack of willingness to buy stuff. (Inflation dynamics are partly different, but that's another story.)
This is not to say that I find this discussion useless. On the contrary!
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Post by oliver on Sept 17, 2018 7:16:34 GMT
Roger and Oliver, This reminds me of the (often dramatic) revelation that banks don't create enough money for the interest *and* principal to be paid, and thus debt needs to grow. I know both of you know better, and you're not even talking about interest, but I think the idea of a fixed quantity of money leads us always astray. Debtors don't need to get their hands on existing money, right? They just need someone to buy the goods or services they are selling. The buyer might overdraw his account or get the bank to convert another bank credit (CD, bank bond, even equity; the latter happens every time the bank pays dividends) into newly-created money. It doesn't work too well even as a thought experiment where we imagine that all debt would be repaid, with no increase in debt allowed until existing debt was paid off (which I think was Roger's original assumption). Let's say I was $10,000 in debt in the bank's books. The total amount of money in existence at that point was $8,000 (or $10K -- it doesn't really matter, as we'll see), and all of it was held by Oliver. Let's assume further that I happened to own gold worth $15,000 at market price. One might think Oliver is going to get a nice deal here, but he's not the only prospective buyer. I could walk to the bank manager named Roger and suggest that instead of enriching Oliver, I'm happy to enrich the shareholders. Roger, always holding a special place in his mind for the shareholders, might suggest that my debt will be considered paid if I give the bank $11,000 worth of gold. At this point I could tell both Roger and Oliver that the highest bidder will get to buy gold from me. Should Roger and Oliver instead try to collude against me, Roger and I would meet in court (Oliver is free to offer me a bad deal, but the bank is expected to follow much higher standards when it is in a position to exploit me). What I'm saying is that there is a lot of flexibility here. Regardless of what Irving Fisher might have suggested, deflation is not caused by lack of money / diminishing quantity of money, but mainly by lack of willingness to buy stuff. (Inflation dynamics are partly different, but that's another story.) This is not to say that I find this discussion useless. On the contrary! I said: The money needs to end up in the hands of those who owe, not those who are owed to.
That needs to be qalified: ... if the aim is that debt is paid off before new debt is taken on. I admit I hadn't considered bank shareholders paying with dividends.
It's all a bit theoretical. If anything, a diminishing quantity of money stocks could be considered a good sign since it means people are paying off debt. But then, creditors are also dissaving. Inventing 'NET' money by which creditors can keep on saving while debtors can simultaneously pay down debt comes in very handy. Sadly, it is a chimera.
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Post by oliver on Sept 17, 2018 7:47:20 GMT
"Now I am thinking out-loud here, but the combined green money supply should equal the total debt obligations held by the CB and private banks. Because government borrows from the public as well as from banks, government debt could not be used as a measure of green money supply. Right? You think out-loud a lot :-). I don't think federal governments are allowed to borrow directly from banks in most countries. And the largest 'producer' of green money are private borrowers except maybe in command type economies. So using government borrowing as a proxy for any money supply measure is wrong, imo. But then I'm not sure what you expect to read out of any measure, even if it is technically correct.
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Post by Roger Sparks on Sept 17, 2018 15:34:55 GMT
I apologize for diverting the discussion into the subject of debt repayment. The purpose of posting the chart was to use Fed data to show that deposits (represented by M2) closely follow the combined loans (WALCL and TOTLL) held by the Fed and commercial banks. I think this correlation supports Oliver's contention that green money corresponds to red money.
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Post by oliver on Sept 17, 2018 18:11:09 GMT
I apologize for diverting the discussion into the subject of debt repayment. The purpose of posting the chart was to use Fed data to show that deposits (represented by M2) closely follow the combined loans (WALCL and TOTLL) held by the Fed and commercial banks. I think this correlation supports Oliver's contention that green money corresponds to red money. No need to apologize! I was just pulling your leg. I see what you meant with your chart.
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Post by Antti Jokinen on Sept 18, 2018 7:14:35 GMT
Oliver said: "It's all a bit theoretical. If anything, a diminishing quantity of money stocksĀ could be considered a good sign since it means people are paying off debt. But then, creditors are also dissaving. Inventing 'NET' money by which creditors can keep on saving while debtors can simultaneously pay down debt comes in very handy. Sadly, it is a chimera." Chimera = Bitcoin? The latter is the 'bubble' -- a credit without a corresponding debit -- economists like Samuelson (in his overlapping generations model) talk about when they think they are describing actual money. Holding that kind of 'bubble good' doesn't make one a creditor, though. Let's think about saving. I want to build a house but I can't get all the needed materials at once. It will take me four years to get my hands on all the materials and build a house where I can live. Until then I will live in a hut. I have a need to save. I could save in the form of building materials, storing the stuff I little by little acquire. But that means storing costs, risk of theft and risk of ruining the materials (shelf life). I could also save in the form of an unfinished house, but it would be exposed to all kinds of weather for a long time, making this alternative not too desirable either. Both of these options would also add to the inventory of unused goods in the economy. It would be more efficient if the same materials were part of someone's finished house. It would be more efficient to save in the form of more or less useless goods. Bitcoin comes to mind. Gold is not that useful either, and is arguably a bubble, too. But in both cases I would face not only risk of theft and/or storing costs, but also large swings in value, which might mean that where I expected to have four walls in my house, I'd only have two. No. I want to be fairly sure I'll have a new home in four years' time. What about saving in the form of favours? I could help my friend, who is also building a house and is closer to finishing it. After we're finished, he'll help me with my house. And while we are building my house, five additional friends join in and help us with the roof. My friend owed me a favour (goods or services), and now I owe these five friends a favour each. This sounds more effective, and there's finally debt and credits involved, although not in a fully explicit form. The only problem is that there are people who can build a house faster and cheaper than me, but they are not my friends. The best system would track favours received from, and done to, anyone, even total strangers who might be best qualified to produce what we need. We have that system and it's called the monetary system. It allows me to do favours to Sam and Bob and get Ben and Jenny to build a house for me, as if in return for my favours to Sam and Bob. Or I could get Ben and Jenny to build a house for me even by just promising to provide others with favours later. That promise is then recorded, and for some reason we call that record a loan from the bank. So, yes, there's a need to save. And doing it so that someone else gets indebted seems to be the most effective way to arrange things.
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Post by Antti Jokinen on Sept 18, 2018 13:24:55 GMT
So, yes, there's a need to save. And doing it so that someone else gets indebted seems to be the most effective way to arrange things. I'll continue from this a bit. As I explained above, by stockpiling stuff we could all save, at aggregate level, without someone getting indebted. That's 'saving' as usually understood by Keynes and other economists: producing something without consuming that something. Then there's individual saving in the form of "favours accumulated" -- that is, credits. This saving is balanced by an equal amount of debt incurred by those who've received more goods and services from others than they have provided to others. In aggregate, credits and debt must sum up to zero (we keep records of them in the form of bookkeeping, where credit = debit, so this is kind of obvious). That doesn't mean we can ignore these credits and debts, but that's perhaps another story. What is interesting is cause-and-effect in the case of debt and credits (more precisely: 'incurring debt' and 'saving'). Some people say that the government, for instance, needs to be in debt because/if the private sector wants to 'net save'. But does the private sector as a whole want to save? Or does the private sector end up 'net saving' because the government decides to get into debt? And more generally, do we need someone who actively wants to save in order to incur (private) debt ourselves? Oliver and Roger, I'd like to hear your thoughts on this.
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Post by oliver on Sept 18, 2018 15:00:22 GMT
Oliver said: "It's all a bit theoretical. If anything, a diminishing quantity of money stocks could be considered a good sign since it means people are paying off debt. But then, creditors are also dissaving. Inventing 'NET' money by which creditors can keep on saving while debtors can simultaneously pay down debt comes in very handy. Sadly, it is a chimera." Chimera = Bitcoin? The latter is the 'bubble' -- a credit without a corresponding debit -- economists like Samuelson (in his overlapping generations model) talk about when they think they are describing actual money. Holding that kind of 'bubble good' doesn't make one a creditor, though. Let's think about saving. I want to build a house but I can't get all the needed materials at once. It will take me four years to get my hands on all the materials and build a house where I can live. Until then I will live in a hut. I have a need to save. I could save in the form of building materials, storing the stuff I little by little acquire. But that means storing costs, risk of theft and risk of ruining the materials (shelf life). I could also save in the form of an unfinished house, but it would be exposed to all kinds of weather for a long time, making this alternative not too desirable either. Both of these options would also add to the inventory of unused goods in the economy. It would be more efficient if the same materials were part of someone's finished house. It would be more efficient to save in the form of more or less useless goods. Bitcoin comes to mind. Gold is not that useful either, and is arguably a bubble, too. But in both cases I would face not only risk of theft and/or storing costs, but also large swings in value, which might mean that where I expected to have four walls in my house, I'd only have two. No. I want to be fairly sure I'll have a new home in four years' time. What about saving in the form of favours? I could help my friend, who is also building a house and is closer to finishing it. After we're finished, he'll help me with my house. And while we are building my house, five additional friends join in and help us with the roof. My friend owed me a favour (goods or services), and now I owe these five friends a favour each. This sounds more effective, and there's finally debt and credits involved, although not in a fully explicit form. The only problem is that there are people who can build a house faster and cheaper than me, but they are not my friends. The best system would track favours received from, and done to, anyone, even total strangers who might be best qualified to produce what we need. We have that system and it's called the monetary system. It allows me to do favours to Sam and Bob and get Ben and Jenny to build a house for me, as if in return for my favours to Sam and Bob. Or I could get Ben and Jenny to build a house for me even by just promising to provide others with favours later. That promise is then recorded, and for some reason we call that record a loan from the bank. So, yes, there's a need to save. And doing it so that someone else gets indebted seems to be the most effective way to arrange things. A credit without a correspondong debit is not a credit.
From Investopedia:
Credit is a contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date with consideration, generally with interest. Credit also refers to an accounting entry that either decreases assets or increases liabilities and equity on the company's balance sheet. Additionally, on the company's income statement, a debit reduces net income, while a credit increases net income.
Slightly confused as concerns the terms credit and debit, but the gist is clear, I find.
In general, the arrangement works if the amount of people entering obligations by taking on more debt / buying goods is equalled by an equal amount of people willing to reciprocate. So, for example, if the number of people who wish to pay down debt / sell goods / save credits or merely service their debt in the case of interest payments is not matched by people who wish to buy goods / give up credits, then there is an problem for (net) debtors in that they cannot sell the goods they need in order to meet their financial obligations. Importantly, that goes for bank credit as well as for any other type of credit! So, in a way it is inconsistent to consider one side of the deal an obligation and the other side 'merely' a (non enforcable) right as they both depend on each other. Also, measures that consider only one side of the story but run counter to the other are unlikely to work in the intended way.
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Post by Roger Sparks on Sept 18, 2018 16:44:36 GMT
So, yes, there's a need to save. And doing it so that someone else gets indebted seems to be the most effective way to arrange things. I'll continue from this a bit. As I explained above, by stockpiling stuff we could all save, at aggregate level, without someone getting indebted. That's 'saving' as usually understood by Keynes and other economists: producing something without consuming that something. Hmmm. I am struggling to correlate 'saving' with stockpiling, yet the concepts are related. For example, the stockpile that we find for sale in stores is actually someone's 'savings'. That observation links to your example of saving for house construction. By purchasing a board each day over the course of years, you 'save' and build your supply base for house construction. You seem to be acquiring ownership of someone else's savings.
Then there's individual saving in the form of "favours accumulated" -- that is, credits. This saving is balanced by an equal amount of debt incurred by those who've received more goods and services from others than they have provided to others. In aggregate, credits and debt must sum up to zero (we keep records of them in the form of bookkeeping, where credit = debit, so this is kind of obvious). That doesn't mean we can ignore these credits and debts, but that's perhaps another story. Hmmm. I think here we can use the house building example again. You work for a lumber company. Instead of taking money for your work, you take a 'credit' to be paid in boards, saved until some time in the future. You earn a daily credit on the books or maybe a paper chit. The lumber company records a debit on it's books, knowing that they have promised you boards related to days worked.
What is interesting is cause-and-effect in the case of debt and credits (more precisely: 'incurring debt' and 'saving'). Some people say that the government, for instance, needs to be in debt because/if the private sector wants to 'net save'. But does the private sector as a whole want to save? Or does the private sector end up 'net saving' because the government decides to get into debt? And more generally, do we need someone who actively wants to save in order to incur (private) debt ourselves? Oliver and Roger, I'd like to hear your thoughts on this. Hmmm. In my way of thinking, 'the public' is represented by you collecting chits and 'government' is represented by the lumber company.
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Post by Antti Jokinen on Sept 19, 2018 6:12:42 GMT
Oliver, you're basically saying that for every buyer there must be a seller and vice versa? I agree. I would keep the acts of buying and selling mentally separated from the buyer's and seller's account balance. A debtor doesn't need to find *a buyer with green money* in order to reduce his debt. He just needs to find *a buyer* to whom to 'pass his red money' along the goods he sells. And now we come to what I was after in my previous comment: New debts arise in the course of buying and selling, not in the course of borrowing and lending. (The neoclassical explanation gets this wrong in its coconut stories.) To get indebted, I don't need to find a lender or even someone who is willing to save. What I need to find is a seller of goods, and I also need to get the banker's acceptance that I get into debt -- not towards him, not towards the seller, but towards the society. That acceptance is for most of us easy to get, because bankers often measure their success mainly by how many debtors they have said yes to. And not only that, but more and more often the seller and the banker have teamed up, one wanting to sell me goods and the other wanting me to get indebted! Now you might say: But someone -- initially the seller -- needs to hold the (newly-created) credits, and that someone we must call 'a saver'. The seller might of course proceed to buy stuff right away, so he's not really a saver, but what about the guy who sold the stuff to him? We don't know. But by some measures even 80 % of Americans live paycheck to paycheck (see here). There are a lot of credits in the hands or accounts of these people at any point in time (Keynes's 'transaction demand'), yet I find it hard to call any of them 'a saver'. Of course there are a lot of actual savers, too, but I wanted to show that the link between debtors and savers is not that strong. A saver is not the same as a creditor. As I've shown, one can be a saver without being a creditor and a creditor (one who is holding credits) without being a saver. I also find it hard to see some common will among debtors to reduce their debts. Right now the opposite seems more true, although it probably changes when the next recession hits. Yet choices remain individual choices.
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Post by oliver on Sept 19, 2018 8:48:27 GMT
Oliver, you're basically saying that for every buyer there must be a seller and vice versa? I agree. (...) Of course there are a lot of actual savers, too, but I wanted to show that the link between debtors and savers is not that strong. A saver is not the same as a creditor. As I've shown, one can be a saver without being a creditor and a creditor (one who is holding credits) without being a saver. I also find it hard to see some common will among debtors to reduce their debts. Right now the opposite seems more true, although it probably changes when the next recession hits. Yet choices remain individual choices. Yes, for actual transactions there will always be a seller and a buyer. And depending on their relative positions before the transaction, that may increase overall non-synchronisation or decrease it. We don't know. The definition of savers of accumulated favours is pretty clear. I'm not questioning the motivation. Also, I'm not positing a behavioural link between debtors and creditors, merely a numerical one. But in some cases that numerical link can cause tensions, most notably in recessions. The idea that debtors as a whole want to reduce their debts is a recession case. It is a question of 'what if', not a general observation. I didn't come up with this, Roger Sparks did, I think. Let's take the worker who lives from paycheck to paycheck. Let's say she rents her home, so is not in debt but has other obligations such as her rent, school fees, taxes etc. (and maybe some pension scheme). And then there is worker b who has the same obligations but a mortgage instead of rent. Now, if worker b decides she wants to pay down her mortgage because she finds it oppressive, then that would require someone buying more goods from her or her buying less goods from someone else. The prior requires someone willing to change their position vs. before whereas the latter might mean someone is not able to sell the goods she intended. Neither is necessarily a problem as long as it doesn't become a mass phenomenon. And yes, collectively paying down debt is just one possible action that could 'cause' a recession. We could all collectively decide to no longer consume, for example. Again, I didn't come up with the example, I'm just going along with it...
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Post by JP (admin) on Sept 19, 2018 14:38:42 GMT
Hey guys, sorry for not jumping in earlier, been busy. I hate to do this to you, but is there a short tldr; version (i.e. 1 maybe 2 paragraphs) that can help me get caught up. If not, don't worry about it! I'll remain a spectator, don't want to derail anything.
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Post by Roger Sparks on Sept 19, 2018 17:16:31 GMT
I'll continue from this a bit. As I explained above, by stockpiling stuff we could all save, at aggregate level, without someone getting indebted. That's 'saving' as usually understood by Keynes and other economists: producing something without consuming that something. (..........)I am thinking of the link between 'saving' and 'stockpiles' again. Thanks to Antti for making this link between verbs and nouns. I like to think of extremes (uncommonly reached) to find inspiration for uncovering underlying theory. The extreme I am momentarily considering is Venezuela. They seem to have lots of money but few goods. In addition, they seem to have a severe stratification between those with money and those without money. Do they have a lack of stockpiles that represent the savings of others? The suggested theory would be that the public wants to have money but very few would want to keep money in the form of savings or stockpiles (they are interchangeable). The political/economic question leading to a cure would be 'how to reverse that mass psychology'. My first thought is that this (hyperinflation) is the near opposite from a recession, but that thought is an observation, not a suggested solution. The common element between recession and hyperinflation seems to be the mass attitude toward savings/stockpiles.
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Post by Roger Sparks on Sept 19, 2018 18:07:56 GMT
Hey guys, sorry for not jumping in earlier, been busy. I hate to do this to you, but is there a short tldr; version (i.e. 1 maybe 2 paragraphs) that can help me get caught up. If not, don't worry about it! I'll remain a spectator, don't want to derail anything. Hi JP (admin). Welcome! I am a late-comer myself, but I will give you my version of where the discussion is. Antti and Oliver will probably each have a different 'take'. Oliver successfully convinced me that green money is linked to bank debt (red money). (In my mind, that creates an important distinction for the role of public lending by non-bank entities (purple debt). This distinction has not been discussed here in depth.) Antti made a casual link between saving and stockpiles of goods that I have expanded. That said, Oliver and Antti have not yet picked up on this tack.
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