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Post by JP (admin) on Sept 12, 2017 22:13:14 GMT
JP, what do you mean by 'define'? Whether this is important or not hinges on that, I think. I'm aiming at a logical, internally consistent description of 'monetary phenomena' which doesn't include money as MoE (something the seller receives). That is, I'm trying to make money disappear, without making anything real disappear. (Currency I cannot make disappear, but it can be "modelled away", as it represents a credit balance in the ledger. Neither can I make the image of money as MoE in people's heads disappear, but that is as expected.) What I have taken you to mean by 'define' is that 'a dollar' is a $1 LETS credit balance. But if we price goods in dollars before any LETS is in place, then a dollar must be something else. Why would 'a dollar' become something else overnight when LETS is introduced? I'm arguing that 'a dollar' remains as it is. The LETS is not about defining 'dollar' anew. It is about tracking where each individual stands in relation to his overall budget balance as he trades. As I said earlier, it might look like LETS balances define the UoA, if all, or nearly all, trade takes place through the LETS. Ok, here's what I mean by "define." The unit of account, say the dollar, is just a sign or a symbol, just like "f" represents "foot". The foot unit has a fixed definition, say it equals JP's foot length, or Antti's foot length, or the average male adult foot length. The definition can even change over time. Likewise, the $ measuring unit is defined by something else, either custom or government edict setting the definition. Conventional thinking among monetary economists is that in modern systems, the unit of account is defined by the currently circulating medium of exchange, say a coin or a banknote. But we know that it needn't be the medium of exchange that defines the unit, since we can have abstract units of account like the UF or medieval ghost money. Correct me if I'm wrong, but you are going a step further and saying the unit of account has no definition whatsoever. I'll leave you with that definition and see if it colours the remainder of your response.
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Post by JP (admin) on Sept 13, 2017 3:26:44 GMT
Creditors' accounts are left untouched but the purchasing power of their remaining credits falls accordingly (one time change in price level).
I agree with your points 1, 2, and 3. The one issue I have with the above bit. Yes, the purchasing power of their remaining credits falls accordingly. But given Antti's assumption that the unit of account is not defined as LETS balances, then the price level stays constant. Instead, the value of credits falls to a discount relative to their face value. After all, if the unit of account is not defined as LETS balances, then the value of the unit of account, and thus the price level, is determined outside of the system. It's like in medieval monetary systems, where the unit of account is a ghost coin. No matter how much the current coin of the realm is debauched, the price level stays constant because the value of the unit of account is determined outside the system--by the gold content of an old coin that no longer exists.
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Post by Antti Jokinen on Sept 13, 2017 7:00:18 GMT
JP, you're right. The UoA has no definition, not in a strict sense at least.
A certain good has a certain dollar price which can vary from one minute to the next, although there's usually considerable stickyness in these prices. We could also say that the price of a consumption basket "defines" a dollar, but that is only to say that the goods included in the basket have a dollar price. Of course, an individual can quite easily form an opinion on the value of dollar when he compares the prices of goods to his salary (price of his labor). So we all have an idea of what the value of dollar -- that is, whether milk should be priced at $3 or $30 a gallon -- is at each instant. Yet, nothing defines 'dollar'.
I can see why you view this as comparable to ghost money. But there's a difference. We have only one UoA in this case. Prices of goods are expressed in dollars, and LETS is supposed to record the dollar prices of goods traded. So LETS balances are denominated in dollars. What you are saying is that when things go wrong there's some kind of split of the dollar into two units of account, say 'regular dollar' and 'LETS dollar', both abstract. Is this correct?
What I'm arguing is that there's no such a split. If someone prices eggs at $15 if LETS is used, then the price of those eggs is $15 in that particular transaction. Why would people try to maintain some kind of dual price system, if the other price ($10 in the case of eggs) had no practical meaning? For all practical purposes, the price of those eggs would be considered to be $15.
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Post by oliver on Sept 13, 2017 8:48:33 GMT
Creditors' accounts are left untouched but the purchasing power of their remaining credits falls accordingly (one time change in price level).
I agree with your points 1, 2, and 3. The one issue I have with the above bit. Yes, the purchasing power of their remaining credits falls accordingly. But given Antti's assumption that the unit of account is not defined as LETS balances, then the price level stays constant. Instead, the value of credits falls to a discount relative to their face value. After all, if the unit of account is not defined as LETS balances, then the value of the unit of account, and thus the price level, is determined outside of the system. It's like in medieval monetary systems, where the unit of account is a ghost coin. No matter how much the current coin of the realm is debauched, the price level stays constant because the value of the unit of account is determined outside the system--by the gold content of an old coin that no longer exists. I can see how you would arrive at that conclusion. I think the confusing part is that it isn't the bank that decides how to do the accounting. It is a collective decision by market participants and as such already reflects the actual market, or ghost if you like, values. There are no 2 values that can trade at a discount to one another. We, as a collective, decide how to do the accounting. And the results of our collective decision will show in the values we arrive at in our trades. LETS balances aren't things. They are mere reflections of our personal evaluations. These evaluations are influenced by our collective decisions about how to deal with losses / gains, though. Call it culture, if you like. There is actually a fourth possibility to do the accounting. It's a mixture of 2 & 3. The debts are officially communalised but are not taxed back. The outcome is identical to 3.
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Post by oliver on Sept 13, 2017 14:19:17 GMT
How would this one time change in price level take place on the ground, step by step? How much would people raise their asking prices? Why that amount and not something else? (Yes, I think it will be hard to answer these questions, but perhaps I'm wrong.) The short answer: supply and demand (production & consumption). The long answer: supply and demand + whether ceteris remains paribus or not. You agree that the departure of prospective net producers tears a hole into 'net supply'? You agree that, to the extent that the remaining 'net consumers', say old people, do not or cannot change their productive capacity but insist on upholding their consumption, something has to give? You agree that the reduction in 'net supply' takes effect from the time of departure, not at some arbitrary future date? That tells me that any measures to keep prices stable / reduce demand must be enacted immediately to have the intended effect. Always remaining in theory, of course. In reality, of course, changes in supply / demand will not be as clear cut as if all young people leave and leave only the old to fend for themselves. And any 'primary', theoretical effect on supply / demand might well be outweighed by other 'secondary', unintended side effects of the implemented or not-implemented measures. So, the real answer is of course, as always: it depends. And any actual answer is a matter of empirics more than theory, I'd say. On another note. You said you agree with the fiscal theory of the price level. If so, do you agree that there is an analogous 'policy lever' for private credit to raising and lowering taxes? Would that not consist of shortening and lengthening repayment schedules for credits (as opposed to fiddling with interest rates)?
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Post by Antti Jokinen on Sept 13, 2017 18:08:46 GMT
I agree. I think we can leave it there for now, and not go into specifics, so that the discussion doesn't become too fragmented. The same applies to the fiscal theory of price level, which I'm not a proponent of (I'm just sympathetic towards some main aspects of it). I hope this is OK with you? Partly related to what you said to JP, here are some comments regarding the "flight of the debtors" situation: Yes, it all depends on collective decisions (the government included). Let's assume there was only one bank in the US: the Fed. All debtors moved to Mars. Let's further assume, to limit the chaos, that the size of the Fed balance sheet was more modest than it would be in times like ours, when total debt is record high (I'm not talking about the actual Fed B/S, but the combined B/S of the US banking system). As far as I know, the collective has already established rules which say that the Fed would need to write off the debt of these debtors. This would make equity deeply negative (what is usually a credit balance would turn into a debit balance). This negative equity would on its own represent public debt, but we would probably plug it by crediting the equity account and debiting the Public account (which in my model world is an "overdraft TGA"; in the real world the government would probably issue new bonds, i.e. public debt, and sell them to the Fed). Taking the loss on the Public account ensures that we can take time with deciding which individuals should ultimately bear the loss. Instead of debiting the accounts of pensioners who depend on the credits they've earned, we can later debit, in the form of taxation, the accounts of those who are better placed to bear losses (progressive taxation). As I earlier said, we can make the future generations and immigrants share the losses too. These decisions are in line with the idea that those who are creditors at any point in time are not creditors to those who happen to be debitors. They are not supposed to bear the direct credit risk involved, other than as taxpayers.
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Post by Antti Jokinen on Sept 14, 2017 6:24:03 GMT
JP in his new blog post (a great one, as usual): RTGS dollars = LETS dollars? Even the sums, $10 and $15, happen to be the same as in our example here... Well, RTGS dollars offer a good comparison point. Two different units of account (US$ and RTGS$), and two different monetary systems where records are denominated in these units.
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Post by oliver on Sept 14, 2017 8:44:29 GMT
OK, so you can separate the fact that debtors have left the system from the question of whether this has an effect on the balance of supply and demand. My point would be though, that it is the empirical determination of the effects on supply and demand that should inform policy makers on how best to deal with the 'hole' in the balanc sheet. I see no sense in aiming for some arbitrary balance sheet outcome, whether slowly or quickly, if it is contradicted by the effective needs and wants of the remaining market partcipants. The ultimate goal is not a pretty, small balance sheet, it is happiness.
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Post by oliver on Sept 14, 2017 9:25:34 GMT
JP in his new blog post (a great one, as usual): RTGS dollars = LETS dollars? Even the sums, $10 and $15, happen to be the same as in our example here... Well, RTGS dollars offer a good comparison point. Two different units of account (US$ and RTGS$), and two different monetary systems where records are denominated in these units. I actually agree with the post. But I don't see a real parallel to our discussion here. The institutions behind the USD and RGTS are, roughly speaking, the US and Zimbabwean economies respectively. Although the first bluff to come across as a credible currency regime might have passed unnoticed, the bluff is now being called with the inevitable effect. They may both have USD written on them, but they most obviously are not the same thing.
In our example here, all possible permutations of money, whether LETS or coins etc. are representative of one and the same economy as well as its institutions. At least that's the way I have understood our discussion so far.
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Post by Antti Jokinen on Sept 14, 2017 11:17:09 GMT
OK, so you can separate the fact that debtors have left the system from the question of whether this has an effect on the balance of supply and demand. My point would be though, that it is the empirical determination of the effects on supply and demand that should inform policy makers on how best to deal with the 'hole' in the balanc sheet. I see no sense in aiming for some arbitrary balance sheet outcome, whether slowly or quickly, if it is contradicted by the effective needs and wants of the remaining market partcipants. The ultimate goal is not a pretty, small balance sheet, it is happiness. I see what you mean. But we have to remember that we are talking about a totally unrealistic scenario, and so I find it hard to look at it from an empirical viewpoint. If the debtors fled, perhaps they were slackers who never even intended to produce something? Instead of discussing what should be done, I wanted to explain what would be done if we follow the rules of the current US system and assume One Bank. I think you're right in that the production capacity would most likely be much reduced. And this would most likely affect prices (assuming debts are taken on the Public account), if we assume that the creditors would have relied in their consumption also on production by debtors. At the same time we have to remember that the debtors won't be now consuming, so less production is needed. I think you also mentioned that a lot depends on how large the debts/credits are in relation to the producing capacity of the economy, and if you did, you're absolutely right. The smaller the debts/credits, the less have the creditors counted on relying on production by others. But then again, if the debtors happened to have a central role in the production of goods... all creditors were retired people... Etc.
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Post by Antti Jokinen on Sept 14, 2017 11:54:26 GMT
I actually agree with the post. But I don't see a real parallel to our discussion here. The institutions behind the USD and RGTS are, roughly speaking, the US and Zimbabwean economies respectively. Although the first bluff to come across as a credible currency regime might have passed unnoticed, the bluff is now being called with the inevitable effect. They may both have USD written on them, but they most obviously are not the same thing.
In our example here, all possible permutations of money, whether LETS or coins etc. are representative of one and the same economy as well as its institutions. At least that's the way I have understood our discussion so far.
I, too, agree with the post. I also agree with you. RTGS dollar is not the "LETS dollar", and I assume JP knows it, too. What I found somewhat interesting is that in 2016 JP expected the US dollar to serve as a unit of account in Zimbabwe going forward (see my comment to his post), but now it seems that more and more prices are being denominated in RTGS dollars -- and inflation follows. If the US dollar couldn't survive as the main UoA in Zimbabwe, then what are the chances that in our LETS world the "other dollar" as opposed to "LETS dollar", as JP sees it, would survive as the main UoA? (I continue to argue that there's only one 'dollar' in our LETS world.)
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Post by oliver on Sept 14, 2017 12:34:05 GMT
I wanted to explain what would be done if we follow the rules of the current US system and assume One Bank. I see, I was thinking more in terms of an extraordinary, systemic shock.
That's why I spoke of 'net producers' and 'net consumers'. But you're right, that is not a given.
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Post by JP (admin) on Sept 14, 2017 13:45:18 GMT
I actually agree with the post. But I don't see a real parallel to our discussion here. The institutions behind the USD and RGTS are, roughly speaking, the US and Zimbabwean economies respectively. Although the first bluff to come across as a credible currency regime might have passed unnoticed, the bluff is now being called with the inevitable effect. They may both have USD written on them, but they most obviously are not the same thing.
In our example here, all possible permutations of money, whether LETS or coins etc. are representative of one and the same economy as well as its institutions. At least that's the way I have understood our discussion so far.
I, too, agree with the post. I also agree with you. RTGS dollar is not the "LETS dollar", and I assume JP knows it, too. What I found somewhat interesting is that in 2016 JP expected the US dollar to serve as a unit of account in Zimbabwe going forward (see my comment to his post), but now it seems that more and more prices are being denominated in RTGS dollars -- and inflation follows. If the US dollar couldn't survive as the main UoA in Zimbabwe, then what are the chances that in our LETS world the "other dollar" as opposed to "LETS dollar", as JP sees it, would survive as the main UoA? (I continue to argue that there's only one 'dollar' in our LETS world.) Yes, the Zimbabwe example has some carryover to how I understand your description of the One Bank/LETs system. If the US dollar was Zimbabwe's true unit of account, then prices of Zimbabwean stocks and goods would have stayed constant over the last year, the price level being determined outside Zimbabwe. RTGS dollars would have simply fallen to a discount to US$. But RTGS dollars have become the true unit of account (which surprised me, as you point out), so the price level is determined internally, by Zimbabwean supply and demand for RTGS dollars. If we take the Zimbabwe situation as a parable, the US$ unit of account is the skilo, the abstract unit of account you described earlier. Because it is not defined by any real thing in the Zimbabwean economy.* And RTGS dollars are like LETS credits, in that they do not define the unit of account (or at least I didn't think they would back in 2016). So whatever happens in the LETS should have no impact on the price level, just as I assumed back in 2016 that the combination of RTGS dollars and bond notes would have no impact on Zimbabwean inflation. *In a LETS/One Bank case, the value of the unit relies on memory and inertia, in the Zimbabwe case it is genuine U.S. banknotes that define the unit, but let's ignore that distinction)
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Post by Antti Jokinen on Sept 14, 2017 16:55:51 GMT
JP, I think I know what you mean. But you must admit that in Zimbabwe's case we are talking about two different monetary/banking systems using two different UoAs, while in LETS world we have one UoA, skilo or imaginary dollar, and one system with records denominated in that UoA. Right?
In Zimbabwe there are US$-denominated Fed notes in circulation. You can price your goods in US$ and demand Fed notes for them. In our LETS world there's no such alternative.
In Zimbabwe it became clear that the central bank records were not denominated in US$. Or did it? In LETS world the One Bank records will always be denominated in the one and only UoA.
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Post by Antti Jokinen on Sept 14, 2017 20:36:16 GMT
This is actually getting interesting.
Think of Free Banking era in the US, with private bank notes. Was there only one UoA, the US$, or were there as many UoAs as there were banks? A $5 note issued by a bank in Town A could buy, say, 50 eggs in Town A. The same note might buy only 40 eggs in Town B, even if the sticker price of the eggs was the same as in Town A. Vice versa for a $5 note issued by a bank in Town B.
If we agreed that during Free Banking there was only one UoA, the US$, would this imply that credit balances in the ledger of the central bank of Zimbabwe are denominated in US$, even if merchants in Harare would ask for their goods either a $5 Fed note or a $10 bond note?
Just a thought.
I'm starting to think that it doesn't matter that much if you think that there could be two UoAs, 'dollars' and 'LETS dollars', in our LETS world. Is it that different from imagining that a merchant in the US in 2017 would say that the price of a certain good is $9 in "year 2010 dollars" but would only accept $10 worth of Fed notes for the goods? Only the latter price would have any practical meaning.
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