This discussion has given us new tools and perspectives for dissecting money and the money supply. I will try to summarized it as best I can but I need to add another assumption to make the entire
discussion stick together logically.
For our added assumption, we will assume that fiat money is issued by banks, not government. The (fiat) role of government is to allow banks to function as creators of fiat currency. It is possible for
government to assume the role of banks but this blurs parts of the sequential puzzle needed to understand modern fiat money.
Once we assume that banks create fiat money, we have the assumed condition that there is no (fiat) money until the first fiat is created. It follows that any future non-bank lending of (fiat) money must
await the creation of first fiat money. Should we ever expect a complete withdrawal of fiat money, the sequence must reverse. The existence of a sequence introduces the need for a differentiation between
debt originators. In this discussion, colors of money were assign to accomplish this differentiation.
Now I am new to this discussion. I don't know the order or originators of the color system but remember Nick Rowe introducing the green money, red money scheme a few years back. Oliver introduced
additional colors in this thread but I don't know that the idea is original with him. The extra colors seem a very good innovation in my way of thinking.
Money in each of several forms is assigned a color.
- Green----money loaned by a bank or a non-bank entity--corresponds to money we use in daily life.
- Red----paper money in the form of a obligation TO A BANK to repay green money to the holder. This form of money is a liability for the obligated and an asset to the holder.
- Turquoise---- paper money in the form of a obligation TO A NON_BANK to repay green money to the holder. This form of money is a liability for the obligated and an asset to the holder.
- Orange---- money in the form of a reminder to the borrower that he owes green money to either a bank or non-bank. This money is not negotiable but is maintained on the books of obligees.
Next, I will try using this colorful money combination on two examples. Both examples are everyday events in modern fiat funded economies. Green money in some quantity already exists as these examples begin.
In the first example, a car has been purchased with a loan from a private entity (non-bank). Green money was loaned creating a turquoise paper obligation. Green money was then used to buy a car. After
a suitable period, the car owner decides to sell the car but the value of the car exactly equals the amount of green money obligation. With the permission of the turquoise paper holder, our buyer sells the
car for no green money whatsoever to a second buyer who assumes the remaining turquoise paper obligation. An orange paper trail is transferred from the first buyer to second buyer. Should the second
buyer fail to continue timely payments, the holder of the turquoise paper has the right to seize the car but no right to green money recovery except from the second buyer individually.
The second example will utilize both red and turquoise obligations. Notice the path(s) of green money. The example begins with government borrowing money from the public (non-bank) just as the car
buyer did. Government would exchange turquoise paper for green money and make an orange paper record of the obligation. Government then spends the green money according to the needs of
government. In the next step, the Central Bank decides to buy the turquoise paper from the non-bank owner. This transaction entails the CB giving green money to the public non-bank in exchange for the
turquoise paper obligation of government. Government keeps it's orange record of obligation but changes the destination of future obligated payments.
Notice that second example concludes with the CB (a bank) owning turquoise paper. Does the paper obligation now turn red? Also notice that the non-bank traded away green money but gets green
money back. Government was originally obligated to repay the public but concludes with an obligation to the central bank. At conclusion, if we assume that government controls banks, government seems
to have an obligation to repay itself.
I write this from the perspective of a newcomer to the discussion, without consulting with Antti and Oliver. I hope the summary is coherent and fair. I welcome corrections or additional perspective.