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Post by JP (admin) on Sept 6, 2017 17:02:14 GMT
The One Bank really shouldn't be called a bank, then, since it isn't taking on any credit risk. It's just the administrator of the scheme. After all, if someone goes bankrupt, and they are in debt to the system, it isn't the One Bank that is out of pocket--it's every one of the system's members who suffers.
Are there credit limits? What prevents someone from continually drawing down on their credit lines? If someone hits their credit limit, how do the rest of us know to treat him/her as a pariah and not sell anything to them? If someone who is in debt to the system dies, and their estate is worth zero, then the system has lost IOUs--what makes it whole again?
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Post by Antti Jokinen on Sept 7, 2017 6:37:37 GMT
Good questions, JP.
How do you see the relationship between a company and its shareholders? Company = shareholders? I prefer to see the company as something else than its shareholders. When double-entry bookkeeping was introduced in Genoa some 800-900 years ago, it was because there was a need for a person trusted with taking care of common assets, not his own, to show that he has been taking good care of them and haven't, say, stolen anything. Or that's what I've understood. And to me a company is still the same today: the one who creates the financial statements (incl. balance sheet) -- and this can be seen as the company itself -- is someone who is responsible for taking care of someone else's assets.
To me, equity, too, is a credit balance. What if we introduce riskier, first-loss-absorbing, credit balances* to our One Bank system? Then someone is taking more credit risk than others and needs to be compensated for it. Perhaps by having a say in how the Bank grants overdraft limits, and perhaps by earning some interest on their credit balances.
* I think this approach is similar to Eugene Fama's “Banking in the theory of finance”. If I recall correctly. It could also be in Fischer Black's "Banking and Interest Rates in a World Without Money", which Fama builds on. (I don't have access to those right now, so I can't check.)
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Post by JP (admin) on Sept 7, 2017 15:33:22 GMT
I'm not sure I follow. Are all members of the system equity holders too? So if someone who is in debt to the system dies, and their estate is worth zero, there is a hit to everyone's equity?
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Post by Antti Jokinen on Sept 7, 2017 19:29:22 GMT
JP, I didn't mean that all members are equity-holders. Here's Fama (p. 42 in the article in mentioned above):
What I meant was that some members hold risky credit balances. Those could be on checking accounts, as in Fama's example, or they could be on some restricted accounts, just like equity (I prefer the latter).
All members could also bear the risk equally, so that their accounts -- regardless of balance, credit or debit -- would be debited with an equal amount when someone goes bankrupt. Would that make them equity-holders? I don't know, but I don't think it matters.
Someone is taking on credit risk, always. And it's never the bank, but always someone "residing" on the RHS of the balance sheet (or also LHS, in case of all members sharing the risk). So, you're wrong when you say that a bank is someone/-thing which takes on credit risk. Agree?
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Post by Antti Jokinen on Sept 7, 2017 20:16:25 GMT
JP, earlier you asked:
By now it's clear that there are credit limits. "Who sets the limit?" is an important question. Perhaps the banker is a person trusted by everyone, so that the members have delegated the limit-setting task to him. Or, in case of some risky credits / equity, the banker will take his instructions from the holders of these.
If someone hits their limit, the rest of us will find it out as he is unable to get our accounts credited when he's buying from us (I assume we have a "One Bank app" with real time account information on our cellphones, so that we don't hand over the goods before we see that our account has been credited -- the buyer instructs debit and credit entries by using the same app). (The buyer will save his face as he is always able to blame some technical glitch, thus avoiding pariah treatment.)
What makes the system whole when IOTs are lost through bankruptcy or death is double-entry bookkeeping. The account with the lost IOTs (i.e. debit balance) is credited and some other account must be debited. I already discussed this in my previous comment. It could be the accounts with risky credit balances / equity, or it could be the accounts of all members.
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Post by oliver on Sept 8, 2017 7:00:02 GMT
Yes, vice versa. And I very much doubt I will ever balance my budget...
I haven't come to a definite conclusion on he who owes what to whom. I suppose I have been thinking about it in terms of what happens when the one bank is wound down. Owing something is not the same as paying down. But I'll drop it because, as you say, it's not taking us anywhere.
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Post by oliver on Sept 8, 2017 7:27:31 GMT
I'm not bothered as much as you are by the attempt to call both things 'money' in the sense that obviously both types can fulfill the function of MOE. One could call them barter money and book money to distinguish them more clearly, for example.
What bothers me more, are the evolutionary tales that describe how one type apparently morphed into the other. Is there any evidence of such morphing? Could that evidence not just as well point to a fundamental systemic schism?
Once one accepts that the two types are different in kind and not in degree, does it really matter which appeared first? Could they not even have existed simultaneously? Does it matter? What does matter for analysis is that barter money is obviously statistically irrelevant nowadays.
And as for bitcoin it seems to me to be neither one nor the other. As you say, it attempts to emulate gold coins. But it quite obviously isn't gold. Which to me is further proof that the two systems do not mix. You either have a real asset, such as gold, that functions as private means of exchange or you have a book system, run by a bank, that follows the principle of debits = credits.
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Post by JP (admin) on Sept 8, 2017 15:43:22 GMT
JP, earlier you asked: By now it's clear that there are credit limits. "Who sets the limit?" is an important question. Perhaps the banker is a person trusted by everyone, so that the members have delegated the limit-setting task to him. Or, in case of some risky credits / equity, the banker will take his instructions from the holders of these. What makes the system whole when IOTs are lost through bankruptcy or death is double-entry bookkeeping. The account with the lost IOTs (i.e. debit balance) is credited and some other account must be debited. I already discussed this in my previous comment. It could be the accounts with risky credit balances / equity, or it could be the accounts of all members. And if the monetary union breaks up, say a large chunk of the debtors escape to Mars, then some creditor members could theoretically have their balances marked down to zero or even a negative amount in order to make the system whole? On a different note, what are the credits/debits denominated in? I think you said earlier that the unit of account was separated from the medium of exchange?
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Post by Antti Jokinen on Sept 8, 2017 18:10:28 GMT
Yes. (Though I don't think the system necessarily needs to break up as a consequence of this. It depends.) To make this more realistic, we could also assume that all credit losses get initially debited on an account called "Public account" or similar. * This would allow us to buy time, so that we can better see which members of the public are best positioned to bear the loss. The loss would be then privatized, over time, through taxation (that is, debit entries on private accounts, balanced by credit entries on the public account). But now I'm getting ahead of the story. The UoA is not separated from the MoE in the traditional sense, as in Chile with UF and peso (thanks for making me aware of the situation in Chile!). What I meant earlier is that we should be able to mentally distinguish between 'dollar' as UoA and a credit or a debit balance in the One Bank ledger which is denominated in this UoA. These balances are not 'dollars'. These balances are records of nominal quantities of goods owed or owed to; the quantity is measured, or expressed, in an abstract UoA called 'dollar' (or 'skilo' in my world; see again this post for how we arrive at this kind of UoA). I also wonder what could we call a 'medium of exchange' in the One Bank world (this is related to Oliver's latter comment above)? I think the whole system could fit that description. There isn't any object that passes from a buyer to a seller. The whole point of the system is to record exactly that fact -- the buyer gave nothing to the seller. Neither is there something that moves from the buyer's account to the seller's account (I've argued about this with many people and no one has yet been able to prove the contrary -- not even "JKH", if I remember correctly). * This is comparable to the current practice, or at least theory, of central banks where the government is a shareholder with more or less unlimited liability.
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Post by Antti Jokinen on Sept 8, 2017 18:41:03 GMT
See my comment to JP above. What is this "book money"? Yes, we should focus on explaining how the current system works. Focus on describing what exists, without being affected too much by what has existed but doesn't anymore. Once we understand how the current system works, this provides us with a "lense" to use when we look back in time. My best guess at the moment is that these systems have existed simultaneously and so one type didn't morph into the other. It seems quite obvious that trust plays a decisive role in all this. If there's no trust, the seller doesn't give up his goods only to receive nothing from the buyer (even if this fact is recorded by a third party), but demands something valuable, say gold. What I'm talking about is not really trust between two people, but between an individual and others, the society around him, represented by some public institution, be it a government or a bank. Of course, we should acknowledge that the history of gold is probably much more complicated than this. But that has nothing to do with our current monetary system, and very little to do with even a 'gold standard' system. We can explain these systems without knowing why gold originally became to be seen as something very valuable.
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Post by JP (admin) on Sept 9, 2017 5:19:05 GMT
The UoA is not separated from the MoE in the traditional sense, as in Chile with UF and peso (thanks for making me aware of the situation in Chile!). What I meant earlier is that we should be able to mentally distinguish between 'dollar' as UoA and a credit or a debit balance in the One Bank ledger which is denominated in this UoA. These balances are not 'dollars'. These balances are records of nominal quantities of goods owed or owed to; the quantity is measured, or expressed, in an abstract UoA called 'dollar' (or 'skilo' in my world; see again this post for how we arrive at this kind of UoA). So the skilo is defined in terms an agreed amount of salt, maybe 1 kg or 0.5 kg. What is the dollar defined in terms of? More specifically, if your One Bank is supposed to be a model of how the modern day U.S. monetary system works, and One Bank deposits are denominated in dollars, what serves as the 'salt' in our modern system? I also wonder what could we call a 'medium of exchange' in the One Bank world (this is related to Oliver's latter comment above)? I think the whole system could fit that description. There isn't any object that passes from a buyer to a seller. The whole point of the system is to record exactly that fact -- the buyer gave nothing to the seller. Neither is there something that moves from the buyer's account to the seller's account (I've argued about this with many people and no one has yet been able to prove the contrary -- not even "JKH", if I remember correctly). Well a buyer's account is debited and the seller's is credited, right? That's the medium of exchange. Just like in a LETS, promises to/from the system (i.e. all members) are being traded.
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Post by Antti Jokinen on Sept 9, 2017 14:18:45 GMT
No, but I see how you ended up thinking so. I should have been more careful. 'S-kilo' was 1 kg of salt. 'Skilo' is an abstract UoA, so that the price of a kilogram of salt might be 0.5 skilos today but 0.6 skilos tomorrow. There's no official price for salt -- just a market price. Fast forward 50 years, and very few even remember what 'skilo' used to mean. (Compare to the UK: a pound of what?) Crediting and debiting an account is part of bookkeeping. So bookkeeping is the MoE. The only thing a seller and a buyer trade is a good (incl. services). This trade is recorded in the ledger. If both parties had credit balances prior to the trade, then we might be able to think that a "promise from the system" was traded. But the buyer might as well have a zero or a debit balance prior to the trade of goods. What kind of promise is he then trading? He will incur a promise to the system, but he doesn't provide the seller with any kind of promise that would have been in his possession earlier. (Doesn't the word 'trade' suggest something is transferred from one person to another?) Do you see what I mean? I'm trying to draw a clear line between that which is being kept books of and the bookkeeping itself. Edit: I'll continue a bit. I buy an apple from you. You give it to me. There's no denying that an apple moved from you to me. Is there anything that moves the other direction? No, there isn't. Sure, we can describe the phenomena on the bookkeeping side as some kind of transfer from my account to your account. But nothing in reality is transferred. Thus, we are free to describe the phenomena in a way where there is no transfer, and when we do it we are, arguably, closer to the truth. So what happens on the bookkeeping side? My account is debited, to record the fact that I received an apple without giving anything in return. Your account is credited, to record the fact that you gave an apple without receiving anything in return. There can never be anything on my account that could be transferred to your account. It's nothing but arithmetic: amounts can be deducted from and added to the accounts. These credit entries and debit entries are not transfers -- they are records of transfers of goods. Say, a non-bank business makes a sale. Its accountant will credit the Sales account and debit the Cash account. We never say that something was transferred from Cash to Sales, or vice versa. So why should we say so if the accountant works for a bank? It might be that I'm just making a fuss over this. To put it simply: My aim is to show that money doesn't flow. I found the banking system much easier to understand when I stopped seeing money, or IOUs, being transferred between account(holder)s two to three years ago.
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Post by oliver on Sept 9, 2017 19:20:03 GMT
Well, accounting and arithmetics are things. And as such, it is perfectly legal and sane to call those things money, if they are used to facilitate the exchange of goods, whether simultaneously or deferred, between people in an orderly and comprehensible fashion. But I think we, or at least I, know what you mean.
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Post by JP (admin) on Sept 10, 2017 2:30:17 GMT
It might be that I'm just making a fuss over this. To put it simply: My aim is to show that money doesn't flow. I found the banking system much easier to understand when I stopped seeing money, or IOUs, being transferred between account(holder)s two to three years ago Well... I think you're making maybe a bit too much of a fuss over it. It's an interesting question (i.e. what is the medium of exchange), but I don't think we need to split hairs over it. No, but I see how you ended up thinking so. I should have been more careful. 'S-kilo' was 1 kg of salt. 'Skilo' is an abstract UoA, so that the price of a kilogram of salt might be 0.5 skilos today but 0.6 skilos tomorrow. There's no official price for salt -- just a market price. Fast forward 50 years, and very few even remember what 'skilo' used to mean. (Compare to the UK: a pound of what?) I don't really get this. Maybe you can start from the beginning. For instance, there are no actual physical or digital UF tokens but the UF still refers to some real underlying thing, the number of pesos required to buy a consumption basket. Or take medieval monetary systems, which used the LSD unit of account. There were no such thing as "pound coins" or "shilling coins" but the D, or penny unit, was almost always defined in terms of a real, actually circulating penny. In a few rare circumstances a long dead coin was used to define the D unit, but this only mean that D was defined in terms of a fixed amount of gold, more specifically the old coin's historical gold content. In the system you are describing, the unit of account should be defined in terms of something else. What is that thing?
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Post by Antti Jokinen on Sept 10, 2017 8:06:35 GMT
Yes, let's put the MoE question aside. If Oliver, and you, find it natural to think in terms of a "thing" being traded on the bookkeeping side, that's fine. (For me it took actually some brain torture to not see it like that.) We could perhaps say that it is defined in terms of a consumption basket, as it always refers to prices of goods. But there's no fixed anchor. Why do you price your wares at 10 skilos? Because your neighbor prices those same wares at SK10. And this can be a circular reference, so that he prices his wares at SK10 because you do. Or because Oliver priced them at SK10 yesterday. We are all, to a larger or smaller extent, price-takers (or, what is the same, we are limited in our ability to set any price we want). But the risk of high inflation always lurks in the background, in the real world too, because there is no fixed anchor. I think Hawtrey puts all this quite well (from my post): What is a $10 credit balance on the Fed's ledger defined in terms of?
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