Let us get this clear: One person's debt is not another person's asset. Debt is one person's liability and another person's asset.— Peter Golovatscheff (@golowitz) November 4, 2015
Can we all agree on this one?
Krugman?
Antonio Fatas?
Let us get this clear: One person's debt is not another person's asset. Debt is one person's liability and another person's asset.— Peter Golovatscheff (@golowitz) November 4, 2015
Within the class of environments under consideration, I show that adding money may expand the set of incentive-feasible allocations. However, I also show that the set of incentive-feasible allocations can be expanded by adding collective memory [a "social bookkeeping system"] to these environments. Here, memory is defined to be a historical record which reports to any agent at any date the full histories of all agents with whom he has had direct or indirect contact in the past. The main result of the paper is that in all of these environments, the set of incentive-feasible allocations generated by adding memory contains the set of incentive-feasible allocations generated by adding money. In this sense, in all of these environments, money is merely a primitive form of memory.
There is a simple reasoning behind the main proposition. John and Mary meet. John has apples and wants bananas. Mary wants apples but doesn't have bananas. In monetary economies, this problem is solved by Mary's giving John money in exchange for apples. John then uses the money to buy bananas from Paul; if John doesn't give the apples to Mary, John doesn't get the money and can't buy the bananas from Paul.
But of course the money itself is intrinsically useless. In terms of the reallocation of intrinsically valuable resources, we can think about the situation as being one in which John is considering making Mary a gift [see my point 1 above: this is reciprocity] of apples. If he makes the gift, Paul will give him bananas in the future; if he doesn't make the gift, Paul won't give him the bananas [point 1: "give and take"]. The money that John receives from Mary is merely a way of letting Paul know that John has fulfilled his societal obligations and given Mary her apples [Here the Bookkeeping View disagrees strongly: John possessing "money" obviously doesn't prove that he has fulfilled his "societal obligations"; he could be in debt. In other words, the possession of "money" doesn't reveal anything about the holder's trading history].
Thus, if we account for the fact that money itself is useless, monetary allocations are merely large interlocking networks of gifts [sounds like a "pure credit economy", or a "complicated and perfected system of barter"]. The point of this paper is to show that these same reallocations of resources are feasible if agents knew the past history of all actions: Paul could react to different histories of gifts on John's part in the same way that he reacts to John's having different amounts of money. It follows that any function performed by money can be provided by an ability to access the pasts of one's trading partners, their trading partners, and so on [our banking system makes, or at least should make, it unnecessary for individuals to access each others' trading histories; but the system itself tracks our historical, cumulative debits and credits, incurred and earned, respectively, by trading with others].
"Mr Supplier, please take these IOUs and trust that they will be redeemed by taxpayers, sooner or later."
Dear Mr Supplier / My Beloved Taxpayer:
Take these IOUs but understand that they are not really IOUs at all. My firm intention is not to bother taxpayers, You included, by placing any burden whatsoever related to this spending on Your shoulders. Not even by issuing bonds later to cover the deficit I am incurring through this spending, because the bonds would burden You with unnecessary interest charges.
Having said this, I can assure You that personally You have nothing to worry about. These IOUs are fungible. By this I don't mean that they will be consumed by some eukaryotic organism, but that no one can tell them from the IOUs that are matched with a real tax burden. (On a more personal note: I cannot express in words how sorry I am for this real burden I impose on You, but that is unfortunately the only way my spending can be financed in any meaningful sense of the word -- rest assured that I will never forget Your sacrifice.) The fungibility of these IOUs will ensure that you are able to give them up in exchange for goods or services as before, just like they were real IOUs.
But please consider this friendly advice: If You take history as your guide, You might want to get rid of these IOUs rather quickly. This is because my honesty -- I scarcely need to remind You that I am a lady of high ethical standards, and, additionally, transparency seems to be in fashion -- around this matter should, if not in practice then at least in theory, cause any rational human being to expect higher inflation sooner or later. And any economist can tell you that if a sufficient amount of people expect higher inflation later, the inflation will actually arrive much sooner than expected.
Always at Your service, Truly Yours,
Mrs Government
Suppose then that society is civilised, and that money does not exist. Goods are brought to market and exchanged. But even though there is no medium of exchange, it does not follow that they must be bartered directly for one another. If a man sells a ton of coals to another, this will create a debt from the buyer to the seller. But the buyer will have been himself a seller to someone else, and the seller will have been himself also a buyer. The dealers in the market can meet together and set off their debts and credits. But for this purpose the debts and credits, which represent the purchase and sale of a variety of goods, must be reduced to some common measure. In fact a unit for the measurement of debts is indispensable. .... Where there is no money, the unit must be something wholly conventional and arbitrary. This is what is technically called a ''money of account". ... This is an approximation to the state of affairs which we are assuming. But however conventional and arbitrary the unit may be, once it is established as the basis of the debts and prices and values of a market, it is bound to assume a certain continuity.
[…]
Each dealer in the market calculates his own command of wealth in the same unit; it affords the basis for his valuation both of what he wants to buy and of what he wants to sell, and he looks for only such divergence from the previous prices as variations of supply and demand will justify. The total effective demand for commodities in the market is limited to the number of units of the money of account that dealers are prepared to offer, and the number that they are prepared to offer over any period of time is limited according to the number that they hope to receive. Therefore, arbitrary as the unit is, capricious variations in its purchasing power will not occur.
"The second, related, issue is what happens to the funds that private banks have parked as spare reserves at the central bank in recent years. In the five years before the 2008 crisis, these “reserves” were tiny, just $11bn on average each day, partly because the Fed did not pay interest to banks.
But by 2014 the reserve balance had risen to $2.6tn and the Fed pays 25 basis points of interest."
"...the vast majority of the newly-created reserves will end up being held as excess reserves almost no matter how banks react. In other words, the quantity of excess reserves... reflects the size of the Federal Reserve’s policy initiatives"
"The interest rate paid on balances maintained to satisfy reserve balance requirements... is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate paid on excess balances... gives the Federal Reserve an additional tool for the conduct of monetary policy. ...during monetary policy normalization the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances."
The Example of Nations in relation to Money would be a very uncertain Rule... opposite measures have been us'd in some Countries to what have been used in others, and contrary measures have been used in the same Countries to what was used immediately before, not because of any difference in their Circumstances, but from the Opinion, that since the Method used had not the effect design'd, a contrary would; And there are good Reasons to think that the Nature of Money is not yet rightly understood.
- Money and Trade Considered, With a Proposal for Supplying the Nation with Money, John Law, 1705
The monetary base does not drive the money supply. In fact, the reverse is true. So the reserves at any point in time will be determined by the loans that the banks make independent of their reserve positions.
Modern monetary theorists consider the credit creation process to be the “leveraging of high powered money”. The only way you can understand why all this non-government “leveraging activity” (borrowing, repaying etc) can take place is to consider the role of the Government initially – that is, as the centrepiece of the macroeconomic theory. Banks clearly do expand the money supply endogenously – that is, without the ability of the central bank to control it. But all this activity is leveraging the high powered money (HPM) created by the interaction between the government and non-government sectors.
HPM or the monetary base is the sum of the currency issued by the State (notes and coins) and bank reserves (which are liabilities of the central bank). HPM is an IOU of the sovereign government – it promises to pay you $A10 for every $A10 you give them! All Government spending involves the same process – the reserve accounts that the commercial banks keep with the central bank are credited in HPM (an IOU is created). This is why the “printing money” claims are so ignorant. The reverse happens when taxes are paid – the reserves are debited in HPM and the assets are drained from the system (an IOU is destroyed).
[...]
So HPM enters the system through government spending and exits via taxation. When the government is running a budget deficit, net financial assets (HPM) are entering the banking system. Fiscal policy therefore directly influences the supply of HPM. The central bank also creates and drains HPM through its dealings with the commercial banks which are designed to ensure the reserve positions are commensurate with the interest rate target the central bank desires. They also create and destroy HPM in other ways including foreign exchange transactions and gold sales.
We can think of the accumulated sum of the vertical transactions as being reflected in an accounting sense in the store of wealth that the non-government sector has. When the government runs a deficit there is a build up of wealth (in $A) in the non-government sector and vice-versa.
... the security of their promises to pay is accepted generally enough for it to be possible to make payments in those promises.
to exchange things (such as products or services) for other things instead of for money
The usual instrument of commerce having lost its value, no exchanges could be made but either by barter or upon credit. (Book II, Chapter II)
The United States experienced two major economic crises over the past century—the Great Depression starting in 1929 and the Great Recession starting in 2007. Both were preceded by a sharp increase in income and wealth inequality, and by a similarly sharp increase in debt-to-income ratios among lower- and middle-income households.
Politicians, always sensitive to their constituents, have responded to these worrisome developments [growing inequality] with an attempt at a panacea: facilitating the flow of easy credit to those left behind by growth and technological progress. And so America's failings in education and, more generally, the growing anxiety of its citizenry about access to opportunity have led in indirect ways to usustainable household debt, which is at the center of this crisis. (p. 23-24)
While not formally modeled there, the link between income inequality, household indebtedness and crises has been recently discussed in opinion editorials by Paul Krugman, and in books by Rajan (2010) and Reich (2010). Both authors suggest that increases in borrowing have been a way for the poor and the middle-class to maintain or increase their level of consumption at times when their real earnings were stalling. But these authors do not make a formally consistent case for that argument. Our model allows us to do so.
[...]
Rajan’s argument is that growing income inequality created political pressure, not to reverse that inequality, but instead to encourage easy credit to keep demand and job creation robust despite stagnating incomes.
They also present some interesting statistics:
Figure 1 plots the evolution of income inequality and household debt ratios in the two decades preceding the two major U.S. crises - 1929 and 2007. In both periods income inequality experienced a sharp increase of similar magnitude: the share of total income (excluding capital gains) commanded by the top 5% of the income distribution increased from 24% in 1920 to 34% in 1928, and from 22% in 1983 to 34% in 2007. During the same two periods, the ratio of household debt to GNP or to GDP increased dramatically. It almost doubled between 1920 and 1932, and also between 1983 and 2007, when it reached much higher levels than in 1932. In short the joint evolution of income inequality across high and low income groups on the one hand, and of household debt-to-income ratios on the other hand, displays a remarkably similar pattern in both pre-crisis eras.
"The rise in household debt that has occurred over the past two decades reflects the response of households to lower interest rates and an easing of liquidity constraints. This is likely to have allowed households to achieve a more desirable path for lifetime consumption."
If the expectation is first that inflation will continue to fall and second that central banks will continue to intervene in markets to try to prevent inflation falling, then yields will continue to fall without limit.
Even in a deflationary environment, retail customers — who provide the majority of banks’ stable funding — are generally unwilling to accept negative rates on deposits, especially as physical cash is an alternative. This, of course, is the reason for the ECB’s minus 0.2 per cent limit. It cannot lower the interest rate on excess reserves much without hitting the “slightly negative lower bound” at which banks would exchange reserves for vaulted cash.
First, the investment function of government bonds is changing. Traditionally, they have been used as hedges in a diversified portfolio. But once yields are deeply negative and falling, they can no longer be regarded as hedges: since holding them incurs an inevitable loss, they must be regarded as risky, not risk-free, and therefore actively traded for a capital return. Their replacement would, of course, be physical cash and other zero-yielding assets, possibly including zero-coupon issues from blue-chip companies.
Investing in government bonds is proving to be a profitable move for banks. They’re making over a full percentage point more by purchasing five-year Treasuries instead of leaving the idle cash parked at the Fed, where they earn only 0.25 percent.
P = r x [P]
“Money-of-Account, namely that in which Debts and Prices and General Purchasing Power are expressed, is the primary concept of a Theory of Money.... Money itself, namely that by delivery of which debt-contracts and price-contracts are discharged, and in the shape of which a source of General Purchasing Power is held, derives its character from its relationship to the Money-of-Account, since the debts and prices must first have been expressed in terms of the latter”