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Post by oliver on Oct 11, 2017 14:03:12 GMT
The argument is that banks are like LETS and that 'money' is a product of banking. Central banks, central bank money and monetary policy are add-ons. What do you mean by add-ons? That they aren't necessary? Well, consider the analogy of a firm. If the monetary system is like Chrysler, then I would consider a LETS-like system to be the equivalent of the vehicles that are manufactured, including logistics, distribution, supply chains etc.. Everything a central bank does is more analogous to management of Chrysler. Would Chrysler exist without its management? Probably not. Are there many firms that have no management as such? No. An equivalent to LETS might be the Mondragon Corporation. In any case, I would not begin describing Chrysler from management downwards. I'd start with vehicles. Edit: I think Antti is arguing more in terms of an underlying operating system. LETS is like LINUX, or something like that. I'm just saying that banking is the bast place to be looking for signs of the underlying operating system. |
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Post by oliver on Oct 12, 2017 5:34:36 GMT
JP, Theoretically there's no clear limit to the government's ability to finance itself through the LETS (as, for instance, MMT likes to point out). Yet, I'm sure we can find a role for government bonds. I'll start with one (historical) reason: Before electronic communications systems, many LETS credits existed in portable paper form, as bearer instruments (see this post of mine for more detailed description). This made it hard to pay interest on them, and so they didn't serve well as 'stores of value' in inflationary environments. So we could view government bonds as a way to offer better stores of value to the public. I'd like you to help me with finding more reasons. How do you see the role of government bonds in the real world? Why do they exist? Why don't we just remove the prohibition of 'monetary financing' and let the government overdraw its account at the central bank, and thus remove an artificial need for government bonds? With government bonds, we are talking about another recordkeeper. But we find the same LETS logic behind these records. And if the LETS operator is holding government bonds, then we can view the sum of these bonds -- netted against the Treasury's account, TGA, or PGA as in my example above -- as an overdrawn account. The overdraft limit will vary according to the maturity schedule of the bonds. ( Here I explain how I convert "loans"/bonds into overdrafts.) I always thought bond finance was intended, or at least defended, as a means of keeping checks and balances on government spending. In the sense that no agent must be allowed to issue credit upon himself and at leat the central bank, if not the entire banking system can be considered somewhat under government control, a separate 'market' force is introduced to assess credit worthiness. Whether that actually works or not, is an entirely separate question, of course. |
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Post by Antti Jokinen on Oct 12, 2017 7:24:01 GMT
I have to say you pretty much lost me there, Oliver  (I refer to your earlier comments, not the latest!) It might be too early for analogies. I don't know. I'm after the underlying logic of the system. So it might be comparable to an operating system. The central bank has a central role in the system, as the strongest of all banks. In my view all banks together are operating the LETS system, so it's not like each bank running their own LETS. While we speak of LETS, I'm not willing to forget the gift economy analogy either. Our system makes the implicit recordkeeping of a gift economy explicit. Instead of a decentralized mental ledger we have a more centralized (although multiple banks means we don't have a clear picture of net positions) physical ledger. |
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Post by Antti Jokinen on Oct 12, 2017 11:20:51 GMT
I always thought bond finance was intended, or at least defended, as a means of keeping checks and balances on government spending. In the sense that no agent must be allowed to issue credit upon himself and at leat the central bank, if not the entire banking system can be considered somewhat under government control, a separate 'market' force is introduced to assess credit worthiness. Whether that actually works or not, is an entirely separate question, of course. Makes sense. On "issuing credit upon himself" I might not agree, though -- although I can see why you say so. If we consider an ideal democratic government which acts on behalf of the people, then I wouldn't say it is issuing credit upon itself if it runs an overdraft at the CB. The democratic process acts as a check on its behavior, and there cannot be any higher authority which should stop the people incurring public liabilities. The people are issuing credit upon themselves. The LETS belongs to the people, and acting together they can do whatever they want with it. Of course, governments are never ideal in this sense. It is interesting to consider how the banking system has evolved when we have moved from mistrust in governments to more and more trust in governments, isn't it? If you look at how central banks got started, you see that the first ones operated in countries with relatively high trust in government, didn't they? Sweden, the Netherlands and the UK. |
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Post by JP (admin) on Oct 12, 2017 14:52:30 GMT
I'd like you to help me with finding more reasons. How do you see the role of government bonds in the real world? Why do they exist? Why don't we just remove the prohibition of 'monetary financing' and let the government overdraw its account at the central bank, and thus remove an artificial need for government bonds? There have been a number of historical instances when governments directly created paper money. Sometimes these schemes work, sometimes not. I think episodes like John Law's experiment, the French assignat inflation, and the US greenback episode have instilled in people the idea that governments should stay at arm's length from the business of creating paper money. So to finance spending, the only option governments have generally had are taxes and bond issuance. I don't really disagree with this division. Public bond auctions seem to me to be a more transparent financing route than spending money directly into the economy. |
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Post by Antti Jokinen on Oct 12, 2017 16:28:27 GMT
I don't really disagree with this division. Public bond auctions seem to me to be a more transparent financing route than spending money directly into the economy. It seems you are offering, just like Oliver, the "checks and balances" explanation. Makes sense, and, as you say, there are good historical reasons for this. But isn't it a bit strange that it is OK for individuals and firms, but not for the government, to "spend money directly into the economy"[*]? When Oliver bought his home, he didn't need to find someone with money to buy his mortgage. Likewise, the one buying the government bond might overdraw his bank account when buying, so that any subsequent government spending would actually increase the amount of money in the economy (compared to the amount of money before the bond issuance). Of course, here I'm talking about checking account balances. Historically, as in all the instances you mentioned, we would have been talking about (physical) non-interest-bearing currency, whether Treasury notes or central bank notes. Do we have any examples of hyperinflation in an economy where most transactions would have been made using (interest-bearing) checking accounts instead of cash? How would a hyperinflation look like in an economy like today's Sweden (if all went wrong) or a future cashless economy? [*] This language is incompatible with the LETS view, but we don't need to let that bother us now. |
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Post by JP (admin) on Oct 13, 2017 16:06:25 GMT
But isn't it a bit strange that it is OK for individuals and firms, but not for the government, to "spend money directly into the economy"[*]? When Oliver bought his home, he didn't need to find someone with money to buy his mortgage. Likewise, the one buying the government bond might overdraw his bank account when buying, so that any subsequent government spending would actually increase the amount of money in the economy (compared to the amount of money before the bond issuance). Of course, here I'm talking about checking account balances. Historically, as in all the instances you mentioned, we would have been talking about (physical) non-interest-bearing currency, whether Treasury notes or central bank notes. Antti, I'm not really following you. A government cannot go to the central bank and ask to be financed with new money, just like Oliver can't get the central bank to underwrite his mortgage. This is probably a good thing, since it forces both to go to more market-oriented and transparent sources. Do we have any examples of hyperinflation in an economy where most transactions would have been made using (interest-bearing) checking accounts instead of cash? How would a hyperinflation look like in an economy like today's Sweden (if all went wrong) or a future cashless economy? Well-managed central banks don't suffer from hyperinflations. It is also the case that well-managed central banks tend to operate in developed nations where cash usage is relatively low or on decline. So we don't have many examples of hyperinflations in economies where most transactions are made using chequing accounts. But in general, I don't think hyperinflation in a cashless-Sweden would look any different than in Sweden that used plenty of cash. |
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Post by oliver on Oct 13, 2017 19:26:56 GMT
@jp:
But I can go to a bank and sell it my IOU directly and receive bank credit in return. Government has to float its IOU on the market.
So you do not consider bank credit to be (new) money. Why not? And how is new bank credit less inflationary than new central bank money?
@antti:
I think government is also different due to its sheer size. (compared to other agents) So maybe that's a valid reason to apply extra precautionary measures.
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Post by JP (admin) on Oct 14, 2017 1:27:54 GMT
@jp: But I can go to a bank and sell it my IOU directly and receive bank credit in return. Government has to float its IOU on the market. So you do not consider bank credit to be (new) money. Why not? And how is new bank credit less inflationary than new central bank money? Like yourself, a government can go to a private bank and sell its IOU, receiving a bank credit in return. Whether it goes this route or floats bonds doesn't make a big difference, the key is that it has received the market's seal of approval. It went through a rigorous process to get funded. If it goes through the central bank, the odds are higher that this rigor will be lacking. Bank credit is new money, but its not inflationary. Unwanted money refluxes back to the issuer. |
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Post by oliver on Oct 14, 2017 9:59:19 GMT
@jp: But I can go to a bank and sell it my IOU directly and receive bank credit in return. Government has to float its IOU on the market. So you do not consider bank credit to be (new) money. Why not? And how is new bank credit less inflationary than new central bank money? Like yourself, a government can go to a private bank and sell its IOU, receiving a bank credit in return. Whether it goes this route or floats bonds doesn't make a big difference, the key is that it has received the market's seal of approval. It went through a rigorous process to get funded. If it goes through the central bank, the odds are higher that this rigor will be lacking. Bank credit is new money, but its not inflationary. Unwanted money refluxes back to the issuer. So central banks hav credit lines with banks? Do they count toward public debt? I didn't know that. As for your second point, I think I'll have to strongly disagree there. There is nothing fundamentally different between bank money and central bank money. The two institutions may differ in their legal status and respective charters, but both monies are essentially book money / records that follow the same rules of accounting. The law of reflux either applies to both or neither, I'd say. |
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Post by oliver on Oct 14, 2017 10:31:20 GMT
Someone smart once wrote:
Here is a list of some of the many channels through which bank notes might reflux to the issuing bank:
1. The silver channel: Unwanted notes are returned to the bank for 1 oz. of silver. Alternatively, the bank sells its silver for its own notes, which are retired.
2. The bond channel: The bank sells its bonds in exchange for its notes, which are retired.
3. The loan channel: The bank's borrowers repay loans with the bank's own notes.
4. The real estate channel: The bank sells its real estate holdings for its own notes.
5. The rental channel: The bank owns rental properties, and tenants pay their rent in the bank's notes.
6. The furniture channel: The bank sells its used furniture for its own notes.
Nr. 2 (no pun intended) is a defining feature of any type of credit / book money. If one weren't allowed to pay back debt, no one would ever take on debt in the first place. And if one finds oneself with too many credits, one can always buy assets, including foreign currency. The bank need not supply any of those itself , that's what the market is for, except to perhaps enhance the public's perception of its trustworthiness.
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Post by JP (admin) on Oct 14, 2017 16:25:42 GMT
Sounds like you've been reading your Mike Sproul.
Do we really want to get into the differences between bank money and central bank money here? Seems like that's an entirely different debate worthy its own thread.
In a TOM world where people own entries that represents underlying barter transactions, the concept of money demand and reflux are irrelevant, anyways. There is no medium of exchange, just bookkeeping. Nothing actually moves between accounts. So there is no monetary instrument that can be in excess demand, and therefore nothing to reflux. That's why you and Antti had so many troubles fitting your TOM description to the actual system in which open market operations set the overnight rate... because to explain the effectiveness of OMOs you need some sort of demand for settlement balances, and a limited supply of those balances, which allows a central bank precise control over the overnight rate.
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Post by oliver on Oct 14, 2017 18:40:55 GMT
Sounds like you've been reading your Mike Sproul. Do we really want to get into the differences between bank money and central bank money here? Seems like that's an entirely different debate worthy its own thread. In a TOM world where people own entries that represents underlying barter transactions, the concept of money demand and reflux are irrelevant, anyways. There is no medium of exchange, just bookkeeping. Nothing actually moves between accounts. So there is no monetary instrument that can be in excess demand, and therefore nothing to reflux. That's why you and Antti had so many troubles fitting your TOM description to the actual system in which open market operations set the overnight rate... because to explain the effectiveness of OMOs you need some sort of demand for settlement balances, and a limited supply of those balances, which allows a central bank precise control over the overnight rate. Sorry, I thought I'd quoted you, not Mike Soroul. Darned mobile phones... Do we really want to get into the differences between central bank abd bank money? Only to the extent that you're taking me there by claimining there is one :-). In a world where all banking is entries of underlying, delayed barter transactions, and assuming more than one bank and free transaction between them, there can, even must, also be entries that measure the indebtedness between banks. These are kept with me, the central bank. And I, the central bank can demand from you, banks, that you pay me for the privilege of being allowed to borrow from each other. It is still record keeping. |
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Post by Antti Jokinen on Oct 14, 2017 18:58:34 GMT
Antti, I'm not really following you. A government cannot go to the central bank and ask to be financed with new money, just like Oliver can't get the central bank to underwrite his mortgage. This is probably a good thing, since it forces both to go to more market-oriented and transparent sources. OK, I see your point. But I'm not sure if a government would ever have trouble finding some commercial bank that it could force to grant the public credit, under any circumstances. So I wouldn't call it more market-oriented approach necessarily, should the government do so. Anyway, what I meant was that there is an increase in total "money supply" when Oliver spends, but not when the government spends (assuming bond issuance). Well, what I meant was that it might be more difficult to get a hyperinflation going if checking accounts get compensated for inflation. To a large extent they do, so there's not nearly as strong hot potato effect as in the case of cash? People don't need to hurry to buy stuff. |
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Post by Antti Jokinen on Oct 14, 2017 19:47:15 GMT
In a TOM world where people own entries that represents underlying barter transactions, the concept of money demand and reflux are irrelevant, anyways. There is no medium of exchange, just bookkeeping. Nothing actually moves between accounts. So there is no monetary instrument that can be in excess demand, and therefore nothing to reflux. That's why you and Antti had so many troubles fitting your TOM description to the actual system in which open market operations set the overnight rate... because to explain the effectiveness of OMOs you need some sort of demand for settlement balances, and a limited supply of those balances, which allows a central bank precise control over the overnight rate. JP, the trouble came mainly from there being only One Bank, and no "bank of banks", in my narrative so far. We'll get back to OMO when we have introduced multiple banks. About "demand for settlement balances". If we still stay in the One Bank world, and assume the OB suddenly makes it prohibitively expensive to run any new/larger debit balances, then we could say that the "settlement balances" you are talking about are the credit balances on certain people's accounts. One could say that they are in limited supply. This would not change the purpose of -- or underlying logic behind; or, as Schumpeter would most likely have said, the essence of -- those records, as explained from the TOM perspective, but it might change the way people view and talk about the credit balances. Let's say I had a $100 credit balance and Oliver had a zero balance. Oliver wanted to buy a $50 dinner. He could do it by overdrawing his account, but it would cost him 20 % in interest, while inflation run at 2 % (compare this to a commercial bank getting stigmatized if it asks for credit from the central bank). In this situation I could agree to credit Oliver's account and debit mine, for $50, on the condition that Oliver credits my account for $52 in one year's time. Oliver and I might call this a "loan of credit balances", but the OB wouldn't know that I didn't buy anything from Oliver when I asked it to credit his account for $50. From the OB's perspective, we are still recording trades of goods. Alternatively, Oliver and I could call this a "forward sale", as if Oliver actually did sell me something with a delivery date in one year's time. When the date arrives, I sell the something back to Oliver at $52, with the goods (which might have served as collateral, or not) staying in Oliver's possession throughout the process. Are you following me? |
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(I refer to your earlier comments, not the latest!) It might be too early for analogies. I don't know. I'm after the underlying logic of the system. So it might be comparable to an operating system.