Take Bitcoin for example. It's a financial asset to whoever holds it. To whom is it a financial liability? I suppose you could say "it is a liability to the whole community of those who accept Bitcoin in exchange for goods". But that answer seems like a desperate attempt to salvage the assets=liabilities dogma. Nobody is obligated to accept Bitcoin.
Here's the right way to think about it. It's quite simple really. Very basic economics.
Suppose I sell you my car for $2,000. That would only happen if I value my car at less than $2,000, and you value my car at more than $2,000. So when I sell you my car, it must mean that the value of the car increases.
Only in a perfectly competitive market, where I and lots of others are selling lots of identical cars, and you and lots of others are buying lots of identical cars, and each buyer and seller takes price as given, does the value of the marginal car to the buyer equal the price, which equals the value of the marginal car to the seller, so the sale of that marginal car creates no net value.
Now suppose it's not a car that I sell you. Suppose I sell you a bit of paper on which I have written "I promise to pay the owner of this bit of paper $100 on 9 December 2017 signed Nick Rowe". The only way I would sell you that bit of paper and you would buy it is if the value of that asset to you is worth more than the value of that liability to me. So when I sell you that bit of paper, your asset > my liability.
Now suppose that my IOUs are more liquid than your IOUs. Because everyone recognises my signature and knows what my IOUs are worth, but I'm the only person who recognises your signature and knows what your IOUs are worth. A more liquid asset is more valuable than a less liquid asset, other things equal, to those who value liquidity. So there may be gains from trade if I sell you my IOU in exchange for your IOU. And if we do voluntarily swap IOUs, it must be that we create value by doing so, so that aggregating you and me, our combined financial assets > our combined financial liabilities.
See how easy it is? It's just like me selling you my car.
Now take the limiting case. Make the IOU that I sell you have a longer and longer maturity, approaching a perpetuity that pays an annual coupon. The greater the liquidity of that IOU, the lower the coupon I need offer to persuade you to buy it at a price of $100. If it's liquid enough, I don't need to offer you any coupon at all, and can stretch the redemption date out to infinity. It's an asset to you, but not a liability to me.
In fact, if it's liquid enough, and if you and the people you might sell it to value liquidity enough, I could even make the annual coupon negative. It's an asset to you, and an asset to me.
And in real terms, adjusting for inflation, paper currency is just like that. It pays the owner a negative real (inflation-adjusted) yield.
But, at the margin, money is only net wealth if the issuer has some sort of de facto or de jure monopoly power. Just like the sale of the marginal car creates no value in a perfectly competitive market. Which is what Pesek and Saving said back in the olden days. And it's all based on what the Austrians (and others) said, even earlier. Value is subjective.
Don't get muddled by accounting. It's just a way for me to keep track of how many cars I own. Just like a supermarket keeps a record of how many cans of beans it has on the shelf.
Update: Anwer Khan (deepwatrcreature) Tweeted: "it is net wealth due to the network effect. The surplus goes to those who establish the network, e.g. "exorbitant privilege". And I replied "Yes. Network Effect both creates Liquidity AND creates First Mover (incumbent) Advantage for de facto monopoly."
Worthwhile Canadian Initiative 
Market Fiscalist:
“they would pay interest to people holding their money, and/or offer cashback on purchases (like some credit companies do) in order to make their money competitive against their rivals ?”
Exactly.
Jussi: “It is interesting that you have shown that convertibility is still (kinda?) holds true but on the other hand you still (I assume) think that money doesn’t need to be that way.”
Yep. It doesn’t seem to need to be that way (though it might be safer to keep it that way, just in case I’m wrong, and we jump to the other equilibrium, like in that hilarious Onion sketch.
Money is like telephones. If everyone else throws theirs away, then mine becomes useless, and I throw mine away too. But we normally don’t see that second equilibrium for telephones. Force of habit, or inertia, and the stability of conventions, tend to make those self-fulflilling equilibria persist, once they get started.
Tel: you are off-topic. Any more blathering on about India etc. and I will delete your comments.
“I want you to take the “borrowing from future” with a grain of salt. No one has yet been able to explain in a precise way how it happens.”
Antti, I can probably help you with that one if you want.
JKH said (in response to Nick): “My final observation is that (in my view) you probably rank near the top of economic bloggers whose economic arguments are in fact bolstered by logical accounting facilitation – including unique representations like red and green money, etc. You may think you’re rejecting accounting, but in fact you rely on it – even if is constructed in your own unique way.”
I fully agree. I actually said the same when someone in another thread suggested that Nick is somehow ignoring, or doesn’t stay true to, accounting.
If this wasn’t so, I don’t think there would be people like you, Mike Sproul (who’s an advocate of RBD?) or me so eagerly discussing under red/green-related posts of Nick’s. What do you think?
I actually see that there is a chance for some kind of synthesis between “monetarism” and “accountism” (“credit theories of money”?) here. I happen to be very sympathetic towards Sproul’s RBD, and “credit theories of money” in general, but at the same time I can agree with Nick if he says that “money” itself is not debt, or a liability to someone.
The synthesis is probably something I see but which others don’t see, at least yet. And that’s because what I say above sounds contradictory to both “credit theorists” and monetarists 🙂 To me, money itself is not debt, but I could be called a “credit theorist”.
Can I summarise your point as follows: Money, as in that which is an asset to the holder (or possibly the inverse in a red money world), enables the economy to distribute existing goods in such a way as to maximise overall / macroeconomic value. It does so by providing liquidity. It can thus be said to have positive value even after the deduction of a possible ‘corresponding’ liability. A recession in that context can be seen as an excess demand to hold on to money, or lack of willingness to part with it. When each individual optimises their own utility in face of uncertainty by not parting with money / goods, total / macroeconomic value cannot reach its full potential.
TMF: It would be off-topic in this thread, but if you’d like to discuss it under any of my blog posts, you’re more than welcome!
I have to warn you that I think I’m on my way to explain how the “borrowing from future” happens. It’s just that trying to explain it to myself, step by step, took me to the fundamentals and made me question what we had taken as “axioms”: I had to adopt a wholly different view on the monetary system and money as part of it (I had to abandon money, as I’ve explained). Now, in order to come up with any kind of proof for “borrowing from future”, I have to work my way backwards, by starting from scratch.
I mentioned already Bill White. This means that I’m very sympathetic to Minsky’s ideas. I think, or at least I used to think, those explain quite well how the “borrowing from future” might happen. But now I’m not anymore 100 % sure how close to Minsky I am in my thinking, because I have adopted another starting point.
All this might sound like I have gone slightly mad, right? 🙂 When you get the idea that you see the world in a somewhat unique way, that you have an important theory of your own, then you end up questioning your mental health. Eventually. If you don’t, then you’re probably a megalomaniac? (And you write stuff like this, hoping that you’re not, indeed, a megalomaniac. But I’m doing fine 🙂 I seem to be thinking quite straight — albeit unconventionally, but that’s nothing new to me. Questioning my own mental health is mainly precautionary, “just in case”.)
Jussi and Nick: It was a pleasure to follow your discussion! Thanks.
Nick:
You said: “IOUs may or may not be tradeable, and may or may not be used as money, and may or may not be promises to pay money (they might be promises to pay wheat).”
I agree with this and your overall point about credit. I talked about “extending credit”, but I don’t put it like that in what unfortunately still is my “private language” (my “theory”).
You said: “Bill White is a very interesting thinker and speaker.”
Yes. I was lucky, or brave, or persistent, enough to get the opportunity to exchange a few words with him in Paris soon two years ago. He confirmed he is very, very concerned about the situation in global economy.
You said: “Sometimes the economic problem really is as simple as people aren’t spending money quickly enough.”
I don’t agree with you. But I think I understand how you see this, and I hope we get to discuss this in more detail later. A couple of words now:
I’d agree with you if you said that “If people spent more money in a certain situation, then we would have less problems.” But I don’t agree with you if you suggest — and I think you do — that we should try to get them spend more money, for instance, by threatening them with deeply negative real interest rates over time. To me, that’s not a solution.
My solution would involve the return of trust and more positive expectations about future (that’s not easy, but it targets the real causes). Not more positive expectations of inflation due to someone trying to force those expectations on people.
Antti: you’re sane.
Actually, let me rephrase that; you are no less sane than any of us monetary cranks.
Antti: “I’m a bit confused by the use of “net wealth” in this thread. Do you refer to some present value calculations with it? I took it to mean, in this context, that the money in question is an asset to its holder but a liability to no one…”
1. It could mean “liability to no one”, or just that the liability is less than the asset to the holder of money. But yes, basically.
2. If we do the economic accounting right, we should get the same answer from present value calculations. (My view is that all value of all assets (and liabilities) ultimately comes from the stream of present and expected future benefits (and costs, for liabilities).). Let me try a simple example:
A central bank in a stationary economy with a 0% inflation target has $100 currency paying 0% interest and $100 bonds earning 5% interest on the books. Assuming no administrative costs, it earns $5 per year profit forever, the present value of which is $100. We get the same $100 answer for net wealth if we assume that currency is not a liability. And we get the same answer for the economy as a whole (provided we say that the $100 on bonds are a liability to the taxpayer, though that is problematic, and may not be true in a growing economy).
I’ve just remembered an old post I did, which extends this to a growing economy: Accounting for central bank profits
Antti: By the way, are you familiar with Samuelson 1958 Exact Consumption Loan Model, where “money” is net wealth? If not, my old post gives you the gist of it.
JKH: Thanks! (But then you’ve been keeping me on my toes all these years.)
My view on accounting: stuff has to add up right. But there’s more than one way of adding stuff up right, and the best one to use depends on what our theory is.
Red money is weird, but I find it weirdly helpful.
Antti and Nick:
I certainly welcome the frank exchange of candor. I think it very fair and healthy.
You all have noticed that, like Antti, I write from my own evolving framework that does not fit exactly with other frameworks. Because I believe money to be mechanical in character, I keep looking for intersections with other frameworks with the hope that various frameworks can be joined or merged.
Yes, it will take some bending or redefining to make that happen.
Nick:
You presented a description of money creation that can be compared with my mechanical model. In the following comparison, I think you will see a shift in perspective.
You write ” A central bank……..has $100 currency …….and $100 bonds………”. Using a present value calculation, you conclude that the “net wealth” is $100.
Using my mechanical model, I would think the net wealth to be zero, thinking the currency exactly balanced the bond.
In place of net wealth, the mechanical model would use asset values. In your example, the central bank would have created assets worth $200 ($100 currency and $100 bonds). The bonds pay 5% interest. We could think of this as a rent on the valuable liquidity benefit provided by the availability of currency. (Currency can be used as an intermediate-physical-substitute for exchanges of other valuable property when the exchanges do not exactly coincide in time (barter coincides in time).
The mechanical model is taking a macro economic (from the outside, holistic) perspective of the central bank.
I am still looking for those framework intersections and offering some redefinition possibilities. 🙂
Antti, do you think “red money” is a “negative asset” like garbage?
Do you think real AD is unlimited?
Nick, can I talk to Antti about “borrowing from the future” here?
“A central bank in a stationary economy with a 0% inflation target has $100 currency paying 0% interest and $100 bonds earning 5% interest on the books. Assuming no administrative costs, it earns $5 per year profit forever, the present value of which is $100. We get the same $100 answer for net wealth if we assume that currency is not a liability. And we get the same answer for the economy as a whole (provided we say that the $100 on bonds are a liability to the taxpayer, though that is problematic, and may not be true in a growing economy).”
The difference between the central bank deposit rate and bond yield is normally (in a non-stationary stationary economy?) explained by other than liquidity/moneyness factors (time value, risk differences). I would also argue that bank deposits are as liquid as cash but their rate of return is (has been) often very different. Money certainly makes economy more efficient and creates some value but that cannot be measured using bond yields.
Roger: consider a central bank starting from scratch. It prints $100 currency, and uses it to buy $100 of bonds that already exist in the open market. Or, equivalently, people write new IOUs for $100, and sell them to the central bank for the $100 of newly-printed paper currency.
Jussi: central banks usually make most of their profit from issuing currency that pays 0% interest. It’s like an interest-free loan to the central bank, that it can use to buy bonds.
TMF: not here.
Nick: I will attempt to make a mechanical link (using a tweak in perspective) to show that we are both logically correct. The connection may be subtle; I hope it is not too hard to follow.
We begin with the mechanical central bank who creates assets of $200 ($100 currency, $100 bonds). Here, the bank creates both currency and bonds. Both currency and bonds are created “in-house”. There is no third party. The asset value ($200) is purely notional.
Now we create a mechanical link to a third party. Our link will be the sale of the currency to a third party. The third party will be asked to sign the bond created by the bank. The bond (can carry interest provisions) will be an agreement to return the new currency to the bank over some schedule. A signature by the third party completes the link and takes us to your description. The bank will have the bond asset; the third party will have the currency.
Using a macroeconomic perspective, after the transfer, the economy has $200 in new assets.
The CB has an asset (the bond) with a present value of $100.
The third party has a currency asset of $100. The third party is also bound by signature to return the currency (to the bank) on a schedule.
Not complicated but sequentially linked events have been mechanically linked here. We are also linking macro and micro economic frameworks. I think we would need three balance sheets to describe the three entities used in this mechanical framework.
Does it appear that we are both offering correct descriptions? We just aren’t both describing the identical thing. 🙂
Roger: talking about the central bank “creating” the bond, which someone else then signs, is extremely awkward. It is the person who signs the IOU who issues that bond, which the central bank buys for the $100 currency that the central bank issues.
It’s the same as a loan, except a bond is usually more easily traded to some third party.
“Jussi: central banks usually make most of their profit from issuing currency that pays 0% interest. It’s like an interest-free loan to the central bank, that it can use to buy bonds.”
I know, let me put it this way: that is pretty profitable, why that doesn’t attract competition? Think about for example money market fund shares etc.
Jussi, in Australia if you are caught trading Bitcoin they close all your bank accounts, cancel credit cards, etc.
There’s strong resistance to competition.
Nick said: “Roger: talking about the central bank “creating” the bond, which someone else then signs, is extremely awkward. It is the person who signs the IOU who issues that bond, which the central bank buys for the $100 currency that the central bank issues.”
That sounds right.
So is this the correct accounting just before the exchange happens?
Assets CB: $100 currency
Liabilities CB: $100 currency
Assets Bond Issuer: $100 bond
Liabilities Bond Issuer: $100 bond
That is called blowing up the balance sheets.
Next, asset swap happens. So is this the correct accounting just after the exchange happens?
Assets CB: $100 bond
Liabilities CB: $100 currency
Assets Bond Issuer: $100 currency
Liabilities Bond Issuer: $100 bond
Antti, is this what is meant by LETS?
LETS
TMF: This is how I see “red money” (I wrote this to Nick in another thread):
I give you an iPad as a birthday gift. You feel that you should return the gift, say by giving me an iPhone, when my birthday comes. You might be pissed at me for giving you such a valuable gift, but still you want to return the gift (perhaps because otherwise you’d feel inferior — to you gift-giving is a sign of power). You feel you owe me one and/or you think I think you owe me one.
I gave you an iPad and garbage.
If you (using Nick’s language) possess “red money”, then you are liable to sell, ie. give, goods without getting anything in return. All you get is your liability written off. You get rid of “red money” or “garbage”. I wouldn’t talk about “negative assets”, when we have the words ‘liability’ or ‘debt’.
Why would I mean something else by LETS? Come on.
I don’t think your accounting in the balance sheet example makes sense. The first step is unnecessary, if not outright wrong. Do you think a casino has the chips which remain in its possession recorded at face value on its balance sheet? No, it doesn’t. That wouldn’t make any sense.
Nick: Thanks! I think your rephrasing is more accurate. I see a continuum between sanity and insanity, and I’m comfortable if I can place myself somewhere in the grey zone.
Thanks for the links to old posts! Samuelson’s OLG(?) model is familiar to me, but a brush up never hurts. It has some merits, but I think the premise of a chain letter of which the generation that implements it profits enormously has nothing to do with money.
Regarding your central bank accounting examples. I’ve noticed that you always put a lot of focus on interest rates. I would personally prefer starting with a zero interest across-the-board assumption, and only later bring in interest rates. Those are not a law of nature, are they?
Say, you gave me a meal because I was starving, and I promised (I even wrote an IOU) to give you a meal next month, or next year. When the time came, I gave you the meal. The IOU had real value. But there was no interest.
Within my framework, it is not valid to view currency or other credit balances in the central bank ledger as CB or government liabilities. That kind of interpretation wouldn’t make sense in my world.
That’s why I’m concerned with explaining why currency is a valuable asset to its holder, although the currency itself is no one’s liability (or, not a record of anyone’s liability). Here my explanation is not wholly unlike, for instance, Mike Sproul’s explanation. The asset has value because there is a corresponding (although there is no direct link between these) liability on the LHS of the CB balance sheet (JKH: Yes, the liability is recorded on an account and only presented on the BS report!).
Those corresponding liabilities on the LHS of CB balance sheet are, to me, no one’s assets. More precisely, they are no one’s assets once they end up in the CB ledger. Do you see how this perspective is very symmetrical?
The RHS of CB balance sheet is a list of assets which are no one’s liabilities (and includes the names of the holders of these assets, except in the case of currency).
The LHS of CB balance sheet is a list of liabilities which are no one’s assets (and includes the names of those who have these liabilities — real assets are a CB liability, which might sound counter-intuitive but is a workable definition).
Those assets equal those liabilities on the aggregate level (because credit=debit), but there is no direct link between any particular assets and liabilities. The asset holders are not creditors of the ones who have the liabilities. Perhaps this is something which it is hard to get your head around? If it is, it’s probably because we need to be able to explain why the CB would be performing this kind of record-keeping.
These assets are some kind of general claims, claims on no one in particular. Not wholly unlike “green money”, which you give away when you buy goods. You clearly didn’t hold a claim against the seller.
Likewise, these liabilities are general liabilities. And here we get to your “red money”. You get rid of that kind of liability by selling goods to anyone who is able to make you get rid of the liability; that is, is able to get the credit entry made on your account. The buyer of the goods wasn’t your creditor.
I argue that we can view, or model, everything on the LHS of a bank balance sheet as “red money”. It is not relevant whether it looks like you first have to get “green money” to get rid of that liability or not. That’s just a question of accounting treatment, and shouldn’t have any real world relevance. I discuss this in great length (not without pain, on both sides) with Johan in comments to my blog post on the subject here.
Btw, Nick, I’m still waiting for your answer to my question regarding your definition of “red money”. Is the “mortgage-ovedraft” in my example behind the link above “red money”? If not, then why not? It is a liability which one gets rid of by selling goods, without any need for “green money” to intervene.
TMF: If the borrower issues the bond (Nick’s example), I think you have the accounting correct.
If we used the mechanical model, the borrower would not “issue” a bond. Instead, the borrower would “acknowledge” an obligation to return the currency to the bank.
Accounting before the exchange:
The bank’s balance sheet would reflect the value of currency printing and legal bond development as an asset, balanced by owner’s equity.
The borrower’s balance sheet would be silent.
After the exchange:
The bank’s balance sheet would reflect the estimated value of the bond balanced by owner’s equity (as an liability).
The borrower’s balance sheet would reflect the value of the cash balanced by the liability of returning the cash.
Is it just me that notices: the mind set of the borrower affects the prospective accounting?
Antti: if we take Samuelson 58 literally, so money changes hands twice per lifetime, then it’s rubbish (but a good model of unfunded pensions). We need to take it very metaphorically — the buyer and seller may never meet again. If time were circular, it would be a model of a large Wicksellian triangle/circle. But it does illustrate a positive net wealth money.
Fresh strawberries are cheaper in Summer than in Winter. So every Summer the 6-month real interest rate on fresh strawberries goes very negative. I lend you 100 berries this June, and you promise to pay me 50 berries in December. 0% (real) rates are perfectly possible, but can have the implication that the price of infinitely-lived assets (like land) become infinite.
If you have an overdraft in your chequing account, and you put up your house as colateral for that overdraft, then it is red money. But a regular mortgage is not red money. Think that’s right.
Nick said: “If you have an overdraft in your chequing account, and you put up your house as colateral for that overdraft, then it is red money.”
Is it “red money” even if
(1) I have agreed to pay interest on the full limit of my overdraft, whether used or unused, and
(2) as a consequence of 1, I have agreed with the bank that my overdraft limit will be reduced monthly by a pre-agreed sum, in pace with my income, so that the unused portion of the overdraft limit is not unnecessarily large at any time.
?
The content of this article came as somewhat of a surprise, because as an Econ major I did not think this way. However, isn’t everything in your article based on the assumption that people value liquidity the most? Although this is true in many cases there can be instances when transactions are carried out for other reasons, where liquidity isn’t the main consideration. Would Assets>Liabilities still be true in these cases?
Assets CB: $100 bond
Liabilities CB: $100 currency
Assets Bond Issuer: $100 currency
Liabilities Bond Issuer: $100 bond
For everyone, that is correct for the second step?
Let’s assume the bond is repaid. How is the currency accounted for? Currency isn’t “destroyed” here.
Roger said: “If we used the mechanical model, the borrower would not “issue” a bond. Instead, the borrower would “acknowledge” an obligation to return the currency to the bank.”
Roger, I agree with Nick. The borrower issues the bond. The bank may assist in its “production”.
TMF said: “Let’s assume the bond is repaid. How is the currency accounted for? Currency isn’t “destroyed” here.”
What do you mean by “not destroyed”? If it’s a government bond, then either currency is destroyed, or Treasury’s general account (TGA) at the CB debited (this is equivalent to “destroying” currency), when the bond is repaid (ie. the “bond account” is credited).
Probably both. First, currency is used to pay taxes, in which case it is taken out of circulation (“destroyed”) and credited on the TGA. Then TGA is debited while the bond account is credited.
Antti, let’s assume a person (not the gov’t) was able to borrow from the central bank so that:
Assets CB: $100 bond
Liabilities CB: $100 currency
Assets Bond Issuer: $100 currency
Liabilities Bond Issuer: $100 bond
Later on, the person repays the bond/loan so the currency goes back to the central bank. The central bank does not destroy the currency.
Lakshila: people (nearly) always value liquidity, to a greater or lesser extent. But when I sell my car, it’s probably not because of its liquidity (or serious lack thereof). It’s probably because the buyer values its transportation services more than I do. Or cares less about risk. But I focussed more on liquidity because I wanted to talk about money.
Antti: yes, I think so.
Nick: Cannot we then model all bank loans, even regular mortgages, as overdrafts and thus make them red money (in our model of the economy)? To me those seem “observationally equivalent”, if we don’t touch the credit contract behind the loan. The part where one receives green money which one uses to repay the debt seems to be an illusion created by the choice of accounting treatment.
Here’s a new post where I compare my world and yours: A New Monetary System From Scratch, Part 4: Nick on a Trip. Are they the same, or not? And if not, then why not?
TMF said: “…the currency goes back to the central bank. The central bank does not destroy the currency.”
The chips flow back into the hands of the casino.
Currency is “destroyed” because it is taken off balance sheet, out of circulation.
Currency is not physically destroyed, because it is in a good enough shape to return into circulation later. Currency is physically destroyed due to “wear and tear” by the central banks all of the time, and replaced by new.
In which sense do you want to use the word ‘destroy’?
“Currency is “destroyed” because it is taken off balance sheet, out of circulation.”
I agree it is taken out of circulation. Why is it off balance sheet?
Antti: ” Cannot we then model all bank loans, even regular mortgages, as overdrafts and thus make them red money (in our model of the economy)?”
No.
Let there be Apples, Bananas, and Carrots, and two sets of books: the M book and the D book.
Whenever A, B, or C change hands, we always observe simultaneous opposite changes in the M book.
Whenever the D book changes, we always observe simultaneous opposite changes in the M book.
Given those observations, the M book is the monetary book, and the D book isn’t. The D book records debts of money.
The D book might as well be a fourth fruit: dates.
It’s just Clower.
(That’s also a comment on your good blog post.)
“I give you an iPad as a birthday gift. You feel that you should return the gift, say by giving me an iPhone, when my birthday comes. You might be pissed at me for giving you such a valuable gift, but still you want to return the gift (perhaps because otherwise you’d feel inferior — to you gift-giving is a sign of power). You feel you owe me one and/or you think I think you owe me one.
I gave you an iPad and garbage.”
What if I default?
“If you (using Nick’s language) possess “red money”, then you are liable to sell, ie. give, goods without getting anything in return.”
What if the central bank would “helicopter” some “green money” to me? I would say I can get rid of the “red money” now.
“Why would I mean something else by LETS? Come on.”
Is the Wiki entry a decent description of a LETS?
TMF: “I agree it is taken out of circulation. Why is it off balance sheet?”
That’s exactly the reason. When banknotes are taken out of circulation they are accounted for as a reduction of the balance of notes in circulation. That’s literally a portion of the bank’s liabilities going off-balance. Any obligation committed through the note will seize to be an obligation when it is returned, and the physical note will simply be a piece of paper as if it was a blank piece of paper.
(You could, in principle, have newly printed notes that aren’t in circulation accounted for as an inventory item valued at the production cost, but most central banks opt out on ground of materiality.)
Nick said: “Whenever A, B, or C change hands, we always observe simultaneous opposite changes in the M book.”
(Let’s leave the D-book out for now, as it is not part of your red-green world. I’ll get back to it later.)
An example of the M-book is our shared “new monetary system from scratch”. Right?
Betty sells bananas priced at 100 units to Andy. Bananas move from Betty to Andy. Change in B-book (nominal values): Betty’s banana holdings DOWN by 100 U, Andy’s banana holdings UP by 100 U.
As you see, we have B and we have a B-book. I came up with the latter because I wanted to clarify your argument. If there is going to be an opposite change in the M-book, then it’s best to think in terms of changes in the B-book, not in terms of B moving from Betty to Andy. (Talking about bananas going up or down refers to inventory of bananas, and when we talk about inventory we are already within the accounting realm.)
M-book is special. We don’t have any M (starting from scratch, and all that). That’s why we can’t say that M moves from Andy to Betty.
This is not Clower. Clower has M. He says that A, B and C can only be exchanged, or sold, for M (and seen from another perspective, M is exchanged, or sold, for these). For Clower, M is a commodity.
Clower in “A Reconsideration…”, p. 3: “The natural point of departure for a theory of monetary phenomena is a precise distinction between money and nonmoney commodities. In this connection it is important to observe that such a distinction is possible only if we assign a special role to certain commodities as means of payment.”
When we talk about M-book (Clower didn’t), we are completely within what I call the “accounting realm”. While changes in the B-book (accounting) reflect real-life B-flows, changes in the M-book don’t reflect real-life M-flows.
I can see what you mean by an opposite change in the M-book. Andy’s account DOWN (debit) by 100 U, Betty’s account UP (credit) by 100 U. Right?
In the B-book, we are recording inventory of B.
What are we recording in the M-book? (I have given my answer to this question in my blog post. Now it’s your turn.)
While I’m waiting for Nick’s answer to my question above, I’ve decided to start to apply pressure on him: Nick Rowe Is Getting into Trouble.
I hope that with that post I’m able to shed some light on red money and Nick’s thinking more broadly. I also touch the issue of whether Nick is rejecting or embracing accounting.
I’ve seen that there are still many smart people here who understandably have trouble understanding “red money”. Am I able to offer any relief?
Antti: start with M as a real commodity, say shells, that has an intrinsic value if worn as jewelry. And it is also used as medium of exchange. Clower says it’s money. Then fashions change, so people carry their shells in their pockets, and not around their necks, but continue to use them as medium of exchange. Is it still money? Then the monopolist owner of the shell mine replaces them with paper convertible into shells. Still money? Then dropped convertibility. Still money? Then put the paper into shoe boxes at the bank with owners’ names on. Still money? Then switched to ledger. Still money? Then allowed negative entries. Still money? Then did open market sale of bonds to make net entries zero. Still money?
I answer “yes” to all.
“In the B-book, we are recording inventory of B.
What are we recording in the M-book? (I have given my answer to this question in my blog post. Now it’s your turn.)”
Break it into two items, a currency book for the inventory of currency, and a demand deposit book for the inventory of demand deposits.
“As you see, we have B and we have a B-book. I came up with the latter because I wanted to clarify your argument. If there is going to be an opposite change in the M-book, then it’s best to think in terms of changes in the B-book, not in terms of B moving from Betty to Andy. (Talking about bananas going up or down refers to inventory of bananas, and when we talk about inventory we are already within the accounting realm.)”
I would say think in terms of B moving from Betty to Andy. The change in inventory/accounting just reflects that movement. Where B is stored could come into play here also.
Johan Meriluoto said: (You could, in principle, have newly printed notes that aren’t in circulation accounted for as an inventory item valued at the production cost, but most central banks opt out on ground of materiality.)”
Why wouldn’t they be valued at a fair market price instead of production cost?
TMF: “Why wouldn’t they be valued at a fair market price instead of production cost?”
Because it’s just paper before circulation.
The bank has no obligation for notes that aren’t in circulation. The market price comes from the value of the obligation, not the paper. If you have a note in your pocket where you, yourself, have written something to the effect of “I promise the bearer of this note the sum of X…” there’s no obligation for you until you actually issue it to someone.