Post by Antti Jokinen on Aug 28, 2017 18:17:27 GMT
Here's some background in the form of my comment on JP's blog:
If I understood correctly, JP does see sense in this TOM description of money (let's stay in a one bank world for now, to keep things simple; money = credit balances on either checking accounts or the "notes in circulation" account, in The Bank's ledger -- together "credits"). What bothers JP in this kind of world is that for him there is nothing to anchor the price level (it is indeterminate). For him the anchor comes in the form of an obligation, or liability, of the Bank to buy back credits should inflation become excessive (~above any target level). And because the Bank could be said to be obliged to buy back credits in this kind of situation, then it makes sense, according to JP, to say that the credits are IOUs of the Bank.
In one of the comments, JP says of his "IOU argument":
To me banknotes, or fiat money, are far from ponzi assets, so I'm not sure if we disagree at all. Anyway, here's my answer to JP regarding the "anchor":
As you see, I do agree that the Bank has some kind of responsibility to try to maintain a stable price level. But that doesn't lead me to describe credits in its ledger as its IOUs, as if the Bank owed a $100 note-holder something worth $100.
Do you, JP, mean that if inflation gets out of control, the Bank will start to sell Treasuries, or gold, in exchange for its credits? I can see how that would give us a reason to call the credits its IOUs; it is as if it was redeeming them with Treasuries and gold. Why I don't like it as a description of the system is because, at least theoretically, this kind of "redemptions" never need to happen -- while the system would work perfectly fine as it is described by the "TOM perspective" (I can describe it in more detail, or from another angle, later -- unless all is clear).
'IOU' is a word I avoid, because both I and U are in singular, while the monetary system seems to be a record-keeping system for an economy where individuals hold claims against, or have obligations towards, everyone else. Thus, a bank note is a TOM (they owe me) and a mortgage is an IOT (I owe them).
If a bank is not the one who owes or is owed to, and I argue it isn’t, then it makes sense to see its balance sheet as a mirror image of what we are used to: on the LHS there are liabilities (mortgages, bonds, etc; the IOTs) and on the RHS there are claims/assets (TOMs).
How does one get rid of a mortgage? One gives, i.e. sells, goods of a certain nominal value to others. How does one redeem a claim against everyone else? One receives, i.e. buys, goods from them.
By adopting this perspective (it might require some brain torture…), we get rid of endless arguments about central bank liabilities.
If a bank is not the one who owes or is owed to, and I argue it isn’t, then it makes sense to see its balance sheet as a mirror image of what we are used to: on the LHS there are liabilities (mortgages, bonds, etc; the IOTs) and on the RHS there are claims/assets (TOMs).
How does one get rid of a mortgage? One gives, i.e. sells, goods of a certain nominal value to others. How does one redeem a claim against everyone else? One receives, i.e. buys, goods from them.
By adopting this perspective (it might require some brain torture…), we get rid of endless arguments about central bank liabilities.
If I understood correctly, JP does see sense in this TOM description of money (let's stay in a one bank world for now, to keep things simple; money = credit balances on either checking accounts or the "notes in circulation" account, in The Bank's ledger -- together "credits"). What bothers JP in this kind of world is that for him there is nothing to anchor the price level (it is indeterminate). For him the anchor comes in the form of an obligation, or liability, of the Bank to buy back credits should inflation become excessive (~above any target level). And because the Bank could be said to be obliged to buy back credits in this kind of situation, then it makes sense, according to JP, to say that the credits are IOUs of the Bank.
In one of the comments, JP says of his "IOU argument":
The main target I have in mind when I make these arguments is economist who claim that banknotes are ponzi assets, mere "oblongs" of paper.
To me banknotes, or fiat money, are far from ponzi assets, so I'm not sure if we disagree at all. Anyway, here's my answer to JP regarding the "anchor":
JP, are you talking about some mathematical models now? Because in the real world, there's an anchor, and it's yesterday's prices. (Even in an inflationary environment it's an anchor, even if it's moving gradually; as if dragged on the bottom of the sea.)
Central banks have a role in price level stabilization, I would never deny that. But it's symmetrical: they fight deflation too, and that is not because they owe debtors something (as in debtors holding CB IOUs). So why would they fight inflation because they owe $100 to a note-holder?
No. They fight deflation and inflation because they believe it's best for the economy. Because they owe it to us all, as they are in a position to affect macro outcomes. We individuals can't really affect the price level, and that's why it cannot swing from one day to another -- even if it's us who usually set the prices. We do it based on yesterday's prices, sometimes adding a little to them to keep up with a longer trend. These trends have such an inertia that even the central bank is often unable to affect prices, unless it does something very drastic.
I think the TOM perspective does a good job in explaining reality. As Oliver suggests, the problem might be that this perspective doesn't fit well with other theories. I don't know. Do you think there's a real world anchor which other theories do capture?
Central banks have a role in price level stabilization, I would never deny that. But it's symmetrical: they fight deflation too, and that is not because they owe debtors something (as in debtors holding CB IOUs). So why would they fight inflation because they owe $100 to a note-holder?
No. They fight deflation and inflation because they believe it's best for the economy. Because they owe it to us all, as they are in a position to affect macro outcomes. We individuals can't really affect the price level, and that's why it cannot swing from one day to another -- even if it's us who usually set the prices. We do it based on yesterday's prices, sometimes adding a little to them to keep up with a longer trend. These trends have such an inertia that even the central bank is often unable to affect prices, unless it does something very drastic.
I think the TOM perspective does a good job in explaining reality. As Oliver suggests, the problem might be that this perspective doesn't fit well with other theories. I don't know. Do you think there's a real world anchor which other theories do capture?
As you see, I do agree that the Bank has some kind of responsibility to try to maintain a stable price level. But that doesn't lead me to describe credits in its ledger as its IOUs, as if the Bank owed a $100 note-holder something worth $100.
Do you, JP, mean that if inflation gets out of control, the Bank will start to sell Treasuries, or gold, in exchange for its credits? I can see how that would give us a reason to call the credits its IOUs; it is as if it was redeeming them with Treasuries and gold. Why I don't like it as a description of the system is because, at least theoretically, this kind of "redemptions" never need to happen -- while the system would work perfectly fine as it is described by the "TOM perspective" (I can describe it in more detail, or from another angle, later -- unless all is clear).