This post is about something I don't understand.
Let's start out simple. There are two parallel imaginary worlds: the green world and the red world.
In the green world people use positively-valued green money as the medium of exchange. If I buy something I give the seller my green money in exchange. Green money flows in the opposite direction from all other goods and financial assets. I am not allowed to take green money from someone without their consent. Only the issuer of green money is allowed to create green money. The borrower of green money undertakes an obligation to give green money to the lender at some future date.
In the red world people use negatively-valued red money as the medium of exchange. If I buy something the seller gives me his red money in exchange. Red money flows in the same direction as goods and financial assets. I am not allowed to give red money to someone without their consent. Only the issuer of red money is allowed to destroy red money. The lender of red money undertakes an obligation to accept red money from the borrower at some future date.
There is a symmetry between the red and green worlds; one is the negative mirror-image of the other. But there is also one asymmetry: the red world has a fundamental problem. Each individual can increase his utility by buying more goods and selling less goods, thereby accumulating an infinitely large stock of red money. The bank that issues the red money needs to put some limit on each customer's holdings of red money, to ensure this does not happen. This is not a problem in the green world, because having zero stock of green money sets a natural limit that stops an individual buying, and the individual is fully aware of that limit.
The real world is a red/green world. It has both green money and red money. A positive balance in a chequing account is green money. A negative balance in a chequing account is red money. If I sell my car to Andy, who gives me a cheque for $1,000, the bank reduces my overdraft by $1,000 and increases Andy's overdraft by $1,000. The bank has transferred $1,000 of red money from me to Andy. IIRC my father nearly always used red money. He nearly always ran an overdraft, paying it off once a year when he sold the harvest, to keep the bank manager happy.
In a red/green world, we can define the stock of "gross money" as the absolute sum of red money plus green money, and we can define the stock of "net money" as green money minus red money.
The Bank of Canada.
Canadian commercial banks have chequing accounts at the Bank of Canada. It's a red/green system. If I bank at BMO, and Andy banks at TD, and I sell my car to Andy who pays by cheque, BMO now has a positive balance of $1,000 at the Bank of Canada, and TD now has a negative balance of $1,000 at the Bank of Canada.
But the Bank of Canada sets a 50 basis point spread between the interest it charges TD on red money and the interest it pays BMO on green money. So BMO and TD can both gain if BMO lends TD $1,000 to eliminate both balances, at a rate of interest that splits the spread between the Bank of Canada's two rates of interest. Which is what Canadian commercial banks normally do. So the gross money stock is small, and normally the same as the equally small net money stock, by the end of each day.
- If the Bank of Canada acted differently, and set the same rate of interest on both red and green money, so the spread is zero, then there would be no incentive for BMO and TD to trade in the overnight market. If BMO's customers always sold more to TD customers than vice versa, BMO's chequing account at the Bank of Canada would become more and more positive, and TD's chequing account at the Bank of Canada would get more and more negative. The gross money stock would rise without limit, though the net money stock would not change.
- Or if TD were a risky bank, and if that risk were bigger than a 50 basis point compensation would warrant, there would be no rate of interest at which BMO would lend to TD that TD would accept. Again it is possible for BMO's account at the Bank of Canada to become increasingly positive, and TD's account increasingly negative.
A red/green world faces the same fundamental problem as the red world. A commercial bank will put a limit on each customer's overdraft. Similarly, the Bank of Canada must, at least implicitly, place a limit on commercial banks' overdrafts.
The European Central Bank.
Eurozone national banks have chequing accounts at the European Central Bank. It's a red/green system. They call it TARGET2. But unlike the Bank of Canada's red/green system, there doesn't seem to be any functioning equivalent to the overnight market that eliminates negative balances every evening. The ECB can hold the net money stock fixed, but the gross money stock can rise without limit. Here is the recent data (pdf).
I think you can see where this is going. I don't understand how it is supposed to work.
Worthwhile Canadian Initiative 
JKH,
By counterfactual, do you mean the system which existed previously?
Even in that case the flows where central banks borrow from each other are accommodating because they act based on what’s happening to autonomous flows.
So if France is seeing lot of outflows to Germany, its central bank will first sell existing foreign reserves and if it’s below some level, it will borrow from Germany.
True, accommodated position doesn’t mean net international investment position. One can in theory think of a positive net international investment position but yet a TARGET2 liability for the central bank. But accommodated is residual finance basically.
JKH: Thanks for the link! Very good post, as always. I don’t find much in it to disagree with, and I did search carefully. I might question two expressions, though (these are related to our earlier discussion):
“The key idea here is that banks compete for deposits that currently exist in the system”
Across the banking system, new deposits are created all of the time. Individual banks don’t know if they’ve “received” a deposit that previously existed or not. (Here I used your language. I’m actually saying — as I’ve understood Quantum Economics is saying, too — that deposits are born/deposits die with every credit/debit entry made on the account. A bank doesn’t receive deposits, it creates them when it credits a checking account. It doesn’t know if the payment order came from Nick’s dad who has an overdraft in the “sending bank” or from someone who had a deposit there.)
So, “banks compete for deposits”, fine. “Banks compete for deposits that currently exist”, not as fine.
“This overall liquidity churn feeds economic activity of all sorts, where households, businesses, and governments are making payments to each other for various goods and services and other types of transactions, and are making choices about the portfolio structure of their liquid assets.”
Why ‘feeds’? Why not, for instance, ‘reflects’? I see the “liquidity churn” more as “accommodation” 🙂 Meir Kohn has written a related remark (The Finance Constraint Theory of Money: A Progress Report, 1988; p. 12):
“For the liquidity preference theory, the holding of money is primary – the object of an active decision by agents of how much of their wealth to hold in this form. If agents wish to hold more or less than they actually possess, expenditure will fall or rise in response (the “real balance effect”). For the finance constraint theory, on the other hand, it is expenditure that is primary: the holding of money is a secondary consequence of decisions about sales and purchases. … Money received in exchange for sales, rather than being “demanded” as a portfolio investment, is passively “accepted” pending future disposal.”
JKH: I think your on-topic discussion with Ramanan and Nick unfortunately takes too much of your attention away from our (less on-topic) discussion… You managed to miss my point completely here:
“I agree with the concept that “loans create deposits” from both an operational and accounting perspective”
We discussed that and “deposits fund loans” a couple of days ago. We are in full agreement.
Where we seem to disagree is this:
“I have no problem with the idea that a positive green money balance (stock) can be transferred from a starting balance of 0, to result in a negative balance. It is clear that a positive balance ends up at the destination account. So it must be taken from the origin account.”
I countered that with two questions:
“Does this mean that if the destination account happens to be overdrawn, then you don’t see a positive balance being transferred?”
“I assume you don’t see a positive balance being transferred from the borrower’s loan account to his checking account in the traditional “loans create deposits” case? Or do you?”
Further recap:
You say that a positive balance is transferred from the buyer to the seller. Nick says that a negative balance might be transferred from the seller to the buyer.
I say that no balance is transferred. One account balance is “marked up” (ie. a credit entry is made on the account), another account balance is “marked down”.
I’m not going to prove here that it is wrong from you to think like you do. I only want to hear whether you find something wrong, logically, with the way I see this? I think you might, because you earlier said that one of the two ways, yours or Nick’s, may be “the way it actually happens”. Here:
“thinking about something in two different ways may include the way that it actually happens, and the way that it actually doesn’t happen but hypothetically could happen with some appropriate modification”
I’m actually saying — as I’ve understood Quantum Economics is saying, too — that deposits are born/deposits die with every credit/debit entry made on the account.
That’s how I’ve understood them, yes.
Here’s an extreme, hypothetical, counterfactual example of how things might look if the Eurozone operated in quite a different way:
Suppose the Bundesbank has a TARGET2 surplus of 600 billion Euros.
It then decides, for some reason, it wants to “manage down” that position.
So it buys $ 590 billion Euros worth of bonds from residents of Spain, Italy, and Greece.
Its TARGET2 position will drop to a $ 10 billion Euro surplus.
The balance of payments situation really hasn’t changed.
But the mix of “official” flows has.
There has been a new $ 590 billion Euro autonomous flow, leaving a new residual “accommodating” position of $ 10 billion Euros. Both are “official”.
So in general, the accommodating characteristic is a function of the net clearing after autonomous flows, rather than of the balance of payments per se. It just so happens that the Eurosystem was not designed to encourage such autonomous official flows.
That autonomous action example is more akin to what a commercial bank might do in the regular course to adjust its reserve position – but with domestic autonomous flows rather than international.
This isn’t supposed to happen in the Eurosystem under normal circumstances – because the financial effect would be shared among all members according to their capital keys. Thus, there is no individual NCB inventive the way there as for commercial banks. That was my point in the first comment in this thread.
Oliver: Nice to see you took your “in-house contrarian” hat off for a second 😉
You said: “Adding another type of paper that ‘flows’ in the other direction does not resolve that particular dissonance. I found it did make me think about the differences between the way accounts are marked up and the way they are marked down, though.”
I fully agree with you (also on the differences, I’m sure). The reason why I’ve embraced Nick’s “red money transfers” is because it provides justification for my “no transfers” view. If we can argue about whether green or red money is transferred, then it looks likely that in reality no money is transferred.
Likewise, one can keep on arguing about the physical qualities of luminiferous aether, or then one can conclude that luminiferous aether doesn’t exist. From Wikipedia:
“As the nature of light was explored, especially in the 19th century, the physical qualities required of the aether became increasingly contradictory. By the late 1800s, the existence of the aether was being questioned, although there was no physical theory to replace it.”
The case of “money transfers” is different, though: I already have a theory which works very well without those.
JKH: “It just so happens that the Eurosystem was not designed to encourage such autonomous official flows.
That autonomous action example is more akin to what a commercial bank might do in the regular course to adjust its reserve position – but with domestic autonomous flows rather than international.”
Yep. And the Bank of Canada’s system was designed to encourage those “autonomous” flows between commercial banks; specifically, by having a 50bp spread between the interest rate on negative vs positive balances.
Nick,
OK, but that’s only a very small part of the story.
There is a galaxy of autonomous flows generated by bank asset-liability management that has as one of it’s objectives the optimization of the reserve position (to financial advantage) as a residual outcome of all of that balance sheet management activity. And all of it has a potential impact on the reserve position.
As I said earlier, there is far more going on in terms of financial management incentive than interbank lending and the bid offer spread on interbank lending.
In other words, that interbank bid offer spread is consistent with the story, but the story itself is a much bigger one than that piece alone.
JKH:
Your example above was great. That’s why I hate to be nitpicking again, but I cannot help myself because this is something that is repeated all the time (I think Ramanan used similar wording) — and because nitpicking is one of the few things I’m good at:
“So it buys $ 590 billion Euros worth of bonds from residents of Spain, Italy, and Greece.”
Because of the “free movement of capital” principle, we cannot talk about “residents” in this sense. I wonder if there are many Greek residents who would sell bonds for millions of euros and give their local bank account as the destination account for the payment. (With the latter sentence I don’t mean to criticize your example. And I’m sure that with residents you meant people who use a local bank.)
I think it is easier for us all to think in terms of residents here. Just like it’s often easier to think that countries, not their residents, trade with each other, when talking about international trade. I understand we need to simplify things, but we need to remind ourselves from time to time that we do simplify things.
JKH,
The TARGET2 system and rules were made to keep in mind the system which existed before – for residual finance. In the earlier system, it was not the case that autonomous flows would exactly balance to equal the current account balance. So central banks had facilities to lend each other but just that when large flows happened, they didn’t feel confident enough and hence the system was created to remove this.
So it has everything to do with BOP.
In your example, of Bundesbank trying to reduce its position from Spain, Italy and Greece .. the new TARGET2 balance will again be accommodative because by definition it’s something which depends on other items.
It’s fine if the net international investment position hasn’t changed … just that I am defining the TARGET2 balances as accommodative. Both can be simultaneously true.
In fact banks’ borrowing cross-border is also defined by me as accommodative. It depends on other items in the financial account of balance of payments.
Nick,
In fact, going right back to the text of your post, and with our recent exchange here, I’m not even sure that bid-offer spread is important at all.
What is important to commercial bank liquidity management is that banks have all sorts of market outlets to disburse short term surplus reserve positions by buying “money market” instruments such as bills, commercial paper, bankers’ acceptances, short term bonds, etc. (I know – not your favorite terminology, but used universally in the real institutional world – separate issue.)
That’s actually how it’s done – an attempt in effect to “push” reserve positions out to other banks as a result of this autonomous liquidity management action.
Direct interbank lending is only small part of that.
And it’s quite easy to visualize effective commercial bank liquidity management without direct interbank lending.
In fact I know from experience that direct interbank lending was a very small part of the process (but it was quite useful on occasion in cases of large reserve distribution disruption.)
Hence, without thinking about this a whole lot at the beginning of the discussion, I’m now thinking that the issue of that bid-offer spread is pretty minor in context, and not even necessary. (Although it is consistent with the general workings of the system when compared to the passive nature of TARGET2 responses.) The active management of a commercial bank reserve position involves a much wider spectrum of channels for autonomous activities.
Ramanan said: “In your example, of Bundesbank trying to reduce its position from Spain, Italy and Greece .. the new TARGET2 balance will again be accommodative because by definition it’s something which depends on other items.”
Your “… Bundesbank trying…” caught my attention. You might agree with me if I say that it is hard for Bundesbank to buy bonds specifically from sellers who “bank” with banks domiciled in those specific countries? (Is this possible even OTC?) I guess in normal circumstances BB would choose which bonds to buy, without knowing if the purchase even affects its TARGET2 balance?
Ramanan,
“So it has everything to do with BOP.”
Agreed.
I acknowledged that’s true in the particular case of TARGET2 – because of its architecture and operating rules.
My point is that at an abstract level (if you agree that the same concept of accommodation applies to commercial bank reserve balances with (N)CBs), balance of payments is not the defining characteristic of what accommodation means in that general sense. It is a feature of TARGET2 – not the defining characteristic of accommodation interpreted at a the general level that includes context for both commercial bank clearings and NCB clearings.
“the new TARGET2 balance will again be accommodative because by definition it’s something which depends on other items”
exactly
that’s my point
the reduction of the balance in the example means that it doesn’t depend on the balance of payments in the generic sense
Antti
late in responding to several of your points
will be back
JKH: “So in general, the accommodating characteristic is a function of the net clearing after autonomous flows, rather than of the balance of payments per se. It just so happens that the Eurosystem was not designed to encourage such autonomous official flows.”
Not only ‘not designed to’, but effectively encouraged to create boundaries for NCB’s holdings of financial assets which aren’t relating to the common monetary policy. Isn’t that what ANFA is for (the Agreement on Net Financial Assets)?
Click to access en_anfa_agreement_19nov2014_f_sign.pdf
JKH: No worries at all. Get back to me when you have time to set yourself into our discussion. (I often find it hard to engage in multiple discussions if I only have, say, one hour of spare time. Tonight I think I have time to finally answer Roger, Oliver and Johan in my own blog…)
JKH,
“the reduction of the balance in the example means that it doesn’t depend on the balance of payments in the generic sense”
But the relation between central banks is between residents and non-residents. So the reduction in the balance affects the financial account of the BOP.
Nick @ 7:47
I take that to be a reply to my question further above. Thanks, I think I understand and don’t have anything intelligent to add. I’m still thinking…
Antti,
“Does this mean that if the destination account happens to be overdrawn, then you don’t see a positive balance being transferred?”
I interpret the transfer as a positive balance that gets deducted from the starting balance of the origin account – whatever the starting balance of that account is. For example, I have no problem with the transfer of a positive balance of $ 5 from a starting overdraft position of $ 5 and therefore a final overdraft position of $ 10. Similarly, the transferred positive balance gets added to the destination account – whatever the starting balance of that account is. For example, I have no problem with the transfer of a positive balance of $ 5 to a destination account with a starting overdraft position of $ 10 and a final overdraft position of $ 5.
“I assume you don’t see a positive balance being transferred from the borrower’s loan account to his checking account in the traditional “loans create deposits” case? Or do you?”
I don’t particularly like the language in that context, but I have no huge objection to it.
“I say that no balance is transferred. One account balance is “marked up” (i.e. a credit entry is made on the account), another account balance is “marked down”.”
I interpret a transfer as what is done as the result of a payment instruction. The marking up and the marking down is the result of executing that instruction. A result comes about as the effect of a cause – in this case the payment instruction. So I think its fine to describe that as a transfer of funds, with the marking being the outcome of the execution of the payment instruction. Real world language often describes a payment instruction and a consequent transfer of funds as such. In the context of Nick’s various worlds, the payment instruction can be classified implicitly or explicitly as a payment in green or red money, depending on the world.
Ramanan,
……
“The reduction of the balance in the example means that it doesn’t depend on the balance of payments in the generic sense”
But the relation between central banks is between residents and non-residents. So the reduction in the balance affects the financial account of the BOP.
……
I’m not up to speed on this capital account/financial account distinction. It may be well in play now as the accepted way of looking at things, but I’ve just never seen the value in worrying about it.
I think everything I’ve said holds, but treating the balance of payments as consisting of a current account and a capital account and some piece of the capital flow being an official flow.
If you can elaborate on how you see it by splitting out the capital account and the financial account as distinct, I’d certainly appreciate it. May be too complicated to explain that all here.
I’m just lazy I guess. I still think in terms of an integrated, single capital account, without the financial account terminology.
Antti
I guess I’m also saying that just because we don’t see the transfer of a physical dollar bill from one account to another, that doesn’t mean we can’t use the language of transfer in a reasonable way, particularly given the direction that is specified in an actual electronic payment instruction.
… and remember that Nick has been pretty explicit and consistent (I think) in noting the direction of a payment in red money as opposed to the direction of a payment in green money
JKH: I don’t think we are getting forward now. You’re discussing an implicit model: whether it makes sense or not to think and talk in certain way. This “thinking and talking” is always based on some kind of model, implicit or explicit. A “payment instruction”, an instruction to “transfer funds”, is part of that “thinking and talking”; it’s model-specific language. Like here:
“I interpret a transfer as what is done as the result of a payment instruction. The marking up and the marking down is the result of executing that instruction. A result comes about as the effect of a cause – in this case the payment instruction.”
I’m trying to argue on a different level — across our implicit models, if you like.
For instance, I say that your “payment instruction” might very well include the words “Transfer a positive balance from Account X to Account Y” — and that could even be official language used in this kind of payment instructions — BUT that doesn’t make the alleged transfer something that happens outside the model you and other are using to make sense of the phenomena.
If we take the entries to be the phenomena under study, we can see that those same entries would be made if I instructed the bank to “Debit Account X and credit Account Y” — or, altenatively, if Nick gave the following instruction to a bank accountant who reads his blog: “Transfer a negative balance, ie. red money, from Account Y to Account X”.
The “transfer” is nothing but a word, or a concept, commonly used in this connection, without any deeper meaning other than that it reveals something about the implicit model the person uttering the word uses to make sense of those entries.
I have to repeat my question:
“I only want to hear whether you find something wrong, logically, with the way I see this? I think you might, because you earlier said that one of the two ways, yours or Nick’s, may be ‘the way it actually happens’.”
I’m saying the way it actually happens is the way I describe it.
Recognizing that the entries, not a transfer, is the phenomena is of course only the first step. What I say would have little meaning if I proceeded to articulate a model/theory in which it makes sense to talk about a “transfer of funds” when one describes that phenomena. But within the framework (isn’t this the word one uses when one isn’t sure if one should say ‘model’ or ‘theory’?) I’m building/presenting in my blog, it doesn’t make sense to talk about a “transfer of funds” in connection to these entries. (Above I have already linked to my third post and even quoted from it, so I won’t do it again here.)
JKH said: “… and remember that Nick has been pretty explicit and consistent (I think) in noting the direction of a payment in red money as opposed to the direction of a payment in green money”
I’m not arguing Nick’s case. As I wrote to Oliver above:
“The reason why I’ve embraced Nick’s ‘red money transfers’ is because it provides justification for my ‘no transfers’ view. If we can argue about whether green or red money is transferred, then it looks likely that in reality no money is transferred.
Likewise, one can keep on arguing about the physical qualities of luminiferous aether, or then one can conclude that luminiferous aether doesn’t exist.”
I’m not arguing against seeing bits of paper being transferred. I’m arguing against the idea that in reality something, be it “positive balances” or “funds”, is being transferred. I guess I’m really arguing for my freedom to be right when I say that in reality nothing is transferred 🙂
JKH,
The financial account is just what earlier used to be called the capital account.
The new terminology has a capital account which doesn’t include things such as investment flows. It’s added to just make it consistent with the SNA. So it has exchange of non-produced nonfinancial assets and capital transfers.
One can simply use the old terminology (nothing achieved in the current discussion by using new terminology).
What I am saying is that TARGET2 provides residual finance for a nation and it’s in the books of the central bank.
JKH,
I prefer that way of looking at it because I see things as “nation first”, although I am completely opposed to nationalism.
“One can simply use the old terminology (nothing achieved in the current discussion by using new terminology).
What I am saying is that TARGET2 provides residual finance for a nation and it’s in the books of the central bank.”
And I haven’t disagreed with that in the actual case of Eurozone operations and TARGET2 operations.
So:
a) I believe you’ve agreed that a TARGET2 surplus analogizes to a commercial bank reserve surplus and that both have the quality of an accommodating flow
b) Suppose the actual TARGET2 surplus in this real world is 600 billion
c) Leaving everything else unchanged, suppose instead that 600 billion is composed of 590 billion in bonds and a 10 billion TARGET2 surplus
Then:
1. What is the accommodating flow in the second TARGET2 case
2. What is the official balance of payments for Germany in the second case
3. What is the residual finance for Germany in the second case
4. What is the general definition of an accommodating flow that applies to both the second case and to a commercial bank surplus
“For instance, I say that your “payment instruction” might very well include the words “Transfer a positive balance from Account X to Account Y” — and that could even be official language used in this kind of payment instructions — BUT that doesn’t make the alleged transfer something that happens outside the model you and other are using to make sense of the phenomena.”
Antti, I believe I understand what you are saying
Its just that it contradicts what is actually written on a cheque – “pay to the order of”
That’s not a model
I’m not imagining that
And it’s only consistent with an instrument to pay in what is intrinsically green money
Because if it were something that is intrinsically red money, it would read something along the lines of “Pay to my account … etc.
If you ignore what is actually on that cheque, and the instruction is written in terms of debits and credits, then I would agree fully with you
I know you are not arguing Nick’s case
Although Nick’s case is consistent with the existence of an instruction like “pay to the order of”
It’s just that I don’t think he has made a point yet of describing the corresponding payment instruction in the red money case – but he HAS acknowledged direction of payment
In short, I think Nick is describing something closer to the real world than what you are arguing
Because his model for red money is consistent with the identification of payment direction
Yours isn’t, because you implicitly argue that the words “pay to the order of” on a real world cheque have no meaning, are irrelevant, or are written in disappearing ink, or are only imagined by the person writing the check, or in fact don’t exist at all
Obviously any green money transaction can be equated to a red money transaction in the opposite direction, and one way of doing that is to pretend that the instruction is simply debit/credit, as you are saying I think
And obviously we can create a world in which the words “pay to” do not exist and the entire system of instruction is set up with reference to direction of payment and only with reference to debits and credits, without direction – I think that is the world you are suggesting
But that’s not the case
That’s not what is written on the cheque
You are pretending such cheques don’t exist, or that we are all delusional in thinking those words have meaning
I think that second part is what you are arguing
Is that what you are arguing – that the words “pay to” have no meaning?
“Because if it were something that is intrinsically red money, it would read something along the lines of “Pay to my account … etc.”
JKH
Aren’t you mixing your colours?
If it is a red money cheque and payment is in red money, would it not actually say: “pay to the account of the payee”? – normal cheque.
If it is a red money cheque and payment was in green money, it would say: “pay to the account of payer” – which is somewhat of an oxymoron.
In fact for completeness and clarity you would have to say respectively:
“pay to the red money account of the payee” and
“pay to the green money account of payer”.
Henry,
Attempting to fend off colour blindness:
“Pay to the order of” instructs a payment of green money (dare I say real world money) from my account to the account of the seller – i.e. payment of an asset balance.
“Pay to my account” instructs a payment of red money from the account of the seller to my account – i.e. payment of a liability balance.
I don’t think the language is oxymoronic (although it is quite understandable that the sanity of those attempting to use the language might well be questioned at this point in the discussion).
From the perspective of a household “user of money”, and picking up from Nick’s initial notion of borrowing red money, that idea translates to borrowing and lending of red money liabilities (as opposed to green money assets). The counterpart in goods and services transactions would be payment/receipt of red money liabilities. In making a purchase, I may instruct the payment of a red money liability to my account.
It’s the stock item or balance – green or red money – that is being paid and received in either case.
And of course, according to Nick, we would not want to be giving away our red money in the first place, seeking to build up a mountain of red money prior to earth departure.
Could it be that red money could sell at a premium to green money because of this?
I pray that Antti doesn’t have a heart attack after my last comment.
Again, it should be clarified:
Red money should be at a premium in green money terms and a discount in red money terms.
“Could it be that red money could sell at a premium to green money because of this?”
Red and green should be fully exchangeable/arbitrage-able 1:(1)
But the quantity and distribution of red must be governed by a credit risk limit structure.
Red and green are exchangeable, but credit risk limit aren’t.
“I pray that Antti doesn’t have a heart attack after my last comment.”
Forget about Antti.
I’m going out back to slit my wrists with a course bladed jigsaw.
🙂
“Red and green are exchangeable, but credit risk limit aren’t.”
For sure. Other than it being pointed out, no-one has come up with a creditable system of limits and managing them so I am hangin’ on to as much of my red money as I can and with Christmas coming I won’t be handing out red money presents.
If you want to give a great Christmas gift, consider receiving red money transfers from your relatives
Its the gift that keeps on taking
🙂
I would say, on the face of it, “pay to the account of payer” is oxymoronic.
However, “pay to the green money account of payer” would not be because the settlement conditions are fully specified.
it’s pay to the red money account of the receiver
the receiver is the one instructing the red money payment
“Its the gift that keeps on taking”
LOL! Very clever.
Henry: “Could it be that red money could sell at a premium to green money because of this?”
Q. Why is one $20 notes worth two $10 notes?
A. Because the central bank will always swap one $20 for two $10’s, or vice versa, if you ask.
Q. Why is one red note worth minus one green note?
A. Because the CB will always create (or destroy) one red note plus one green note, if you ask.
Same answer (with a minus sign).
“it’s pay to the red money account of the receiver
the receiver is the one instructing the red money payment”
Not really. If you write a green money cheque it is your cheque specifying how it will be settled, i.e. pay to the payee. However, because we have a monochromatic money system we don’t have to specify colour, it is understood.
In a bichromatic money system it is still the payer writing a red money cheque and presumable he gets to specify the settlement condition – unless of course some mutually agreeable arrangement is made between payer and payee.
Perhaps we should have four sets of cheque books. A green money cheque book which specifies settlement in green money (pay the payee), a green money cheque book which specifies settlement in red money (pay the payer), a red money cheque book which specifies settlement in red money (pay the payee) and a red money cheque book which specifies settlement in green money (pay the payer).
“Its the gift that keeps on taking”
A bichromatic money system could change the Christmas culture. Instead of deciding who to give a gift to you would decide who would give a gift to you.
that jigsaw is beckoning
🙂
“Same answer (with a minus sign).”
If that’s the case, I won’t be handing in my red money to the CB unless of course I am compelled to.
“Perhaps we should have four sets of cheque books. ”
Imagine poor ol’ granma thinking about Christmas.
First, she will have to decide whether she will want to give her favourite grandson, Henry, a green money gift or a red money gift.
Then she will have to decide how the gift should be settled.
Once she decides she will have to open her handbag and pull out four cheque books and decide which one she should use.
What are the chances that she will, in her advancing age, fill out the appropriate check book.
Life in a green/red money world should be interesting.