Saturday, March 14, 2015

Making Credit(s)

Instead of money, it is credit, in the form of an IOU, which functions as a medium of exchange and a store of value. Only credit takes a concrete form through debt contracts, while money remains an abstract measure -- a unit of account -- of the assumed value of these contracts (for my definition of "money", see an earlier post).

As I have stated earlier (see this post), a seller does not receive a payment when he receives an IOU. To claim otherwise would be illogical. "IOU" is an abbrevation for "I owe you"; it is synonymous with a "promise to pay (back) (later)".

I understand very well how this might cause confusion. And, as my statement is strictly unconventional, and for many even counterintuitive, it would be only natural if the ones I manage to confuse assumed that I, the writer, must ultimately be the one who is confused. The source of the confusion must be me, because the "facts" seem to be clear: money must exist and it is silly to suggest that money cannot pay for anything.

Perhaps I could be dismissed as a confused philosopher -- a logician who doesn't understand economics and the real world. But that would be wrong. Everything I say here is either derived from real world observations, or, tested against real world evidence.

This is science. This is economics.

Once we accept that where we used to see money is only IOUs, then many things start to make more sense. There's no more mysterious money that can be created "out of nothing". Paul Krugman's "debt is money we owe ourselves" loses all the meaning it might have previously had. The money which sloshes around the world is drained -- for good. (Was money yet another "flood myth"?) No more headlines like "ECB unleashes a wall of money" in The Financial Times. Note that here I'm only referring to respected sources, not to any fringe theory advocates who think that real money must assume material form.


  1. I did not find most of this post unconventional or counter-intuitive. But then, as you know, I am very comfortable with thinking about the IOU nature of money.

    I am not sure about your concept of payment, though. I would define "payment" as either
    1. very generally, any *exchange* of assets (financial or otherwise)
    2. more narrowly, exchange of assets that some *cancels previously agreed upon terms* ("destruction" of an IOU)


    - when I "pay" $10 for a movie ticket, I still think of it as "payment", even though I receive a concrete good (a right to enter the building and see a movie) for cash (which is an IOU of the central bank; this IOU is backed by no other physical asset).

    - when, say, a futures contract at CME is settled, the buyer can take physical delivery of some specified good (oil, gold, etc) and the quality and quantity of that good must be within the contract specs. Before the settlement, an IOU existed. After the settlement, the IOU disappears -- the obligation has been "paid off".

    An IOU can be "created out of nothing", just like in 0 = (-1) + (+1). No problems there, because any two people can agree today to do something tomorrow. Just like a future contract can be bought or sold without any physical delivery taking place until (much) later.

    1. I think this is about perspective now. When you "pay" for a movie ticket, you are the buyer. According to my theory, you have *paid* for the ticket (actually the service it entitles you to: the movie experience) if you have previously sold goods or services, in exchange for which you have received the IOU worth $10.

      But what I say in the post is about the seller, not the buyer. The seller doesn't receive a payment when you hand/transfer him the $10 note/deposit. You were in the exact same situation earlier when you received the $10 for your goods or services. Once you have seen the movie, you have finally received the payment! Assuming now that the service was as promised.

      Are you able to follow my thought?

  2. I can follow your thought. But (I always have a "but"):

    But I think you're drawing a distinction at an arbitrary point: something like "consumption of a good/service is the real moment of payment".

    It could be workable if it were easy to define, but I think it isn't: what if I saw the movie but consider it "bad" and so feel that I paid too much? Or perhaps the seats were uncomfortable and so my experience was not up to my expectations? This throws in doubt your claim that payment actually took place.

    Then there is the issue of it being a "moment". A movie is reasonably short. What about paying for a house? I give someone $1m for a house. Then I live in the house for 10s of years, consuming this good and making changes to it. At which point did I receive this payment according to you?

  3. You present fairly relevant points. But they are not that relevant when it comes to a *credit theory*. I invited focus on the universal truth that receiving IOUs, credits, in a transaction (an exchange) cannot be viewed as receiving a payment. Any difficulties in defining the final moment of payment do not weaken this point. You're right -- you can't always know what you're going to get when you go to movies or buy any other service or good. And a house can be seen as providing housing services. Again, this doesn't weaken my point about IOUs being "non-payments".

    Don't you agree?

    I'll be offline the rest of the evening, but I'm looking forward to continue discussing this. Thanks for your comments so far -- I really appreciate them!

  4. The difficulty of defining the final moment of payment I can agree to ignore/postpone for the moment (as it were), but the other difficulty seems more fundamental to me: I think a "payment" is complete when both parties agree that it is. (Think of the legal definition of "legal tender", for example.) But you seem to be hung up a little on what "IOU" means *literally* (the "owe" part in it).

    To sum up the above paragraph, I would have to disagree with your more fundamental claim, that "receiving IOUs in an exchange cannot be viewed as receiving a payment".

    In my mind, the counter-argument is very simple. If "I owe X" I can see myself paying X with a "Y owes X". After I do this (and importantly, X agreed to that as well), whatever "payment" X may have expected from me is no longer my problem -- it is now Y's problem. But me, I am done. Meaning, "I have no more debt that I need to pay to X". Maybe *X* does not consider himself/herself to be "finally paid", but *I* consider *myself* to be free of any further obligations to X.

    This asymmetry of how both sides view the transaction may seem to complicate matters ("I think I've paid X but X does not consider himself/herself to be in a state of having been finally paid"), but we just have to concede that no system of payments can ever have a "true final payment". The IOUs just form a hierarchy of acceptability: maybe X was not Ok with an IOU from me, but would be Ok with an IOU from Y.

    Real world analogy: officially minted coins and notes are considered "legal tender" (you cannot be sued in court for non-payment if you paid with those), but bank deposits are not, AFAIK. A coin is an IOU of the central bank. A bank demand deposit is an IOU of the bank. Maybe the former is slightly higher (more acceptable) than the latter in the hierarchy. Still, why is one IOU allowed to be "legal tender" while the other one doesn't? I think purely for obsolete/historical reasons: in reality, the bank deposit IOUs work for making payments as well as official coins.

  5. I think we are mostly on the same page here, even if it might seem otherwise.

    As I said, this is not about the buyer, but the seller. And my point is not legal, but logical. I'm not looking at the transaction from a microeconomic perspective (here, between two parties), but from a broader, macroeconomic/societal perspective.

    Cash and deposits are more or less anonymous IOUs, right? Usually, the seller doesn't even know -- neither does he care -- if the buyer has paid (by selling goods or services) in advance for the purchase he makes, or if he has acquired the anonymous IOUs (he hands over to him) by means of a loan (bank loan or otherwise).

    So, any (pre-, or post-) payment made by the buyer involved in a "cash or deposit transaction" (or even by means of a credit card; i.e. not involving "barter" nor "personal IOUs" -- e.g, a check -- issued to the seller), is not relevant for the seller. What is relevant is that the seller receives an IOU, "a promise to pay", not a payment.

    It seems clear to me that when we do macroeconomics, we need to adopt the society's point of view. And from this perspective, no payment takes place when an IOU changes hands; or, to be precise, a payment takes place in the direction the goods or services move, but not in the direction the IOU moves. My viewpoint of payments being made *to the society* is not wholly unlike the concept of "national dividend", something which our early economists used to discuss.

    This might sound very technical, and in a sense it is, but I insist that this is not about what "IOU" *literally* means. This is about having a firm, logical foundation to build on. We can pass on these IOUs to each other in the course of exchange, daily business, but the promised payment behind the IOU takes only place when debt is repaid. And here we need to remember that debt is actually repaid when the debtor sells goods and services -- this is true also when he receives "anonymous IOUs" (more or less "legal tender") which he will use to formally cancel his bank debt.

    1. Here is Pigou on "national dividend":

      "It is only possible to define this [national dividend] concept precisely by introducing an arbitrary line into the continuum presented by nature. It is entirely plain that the national dividend is composed in the last resort of a number of objective services, some of which are embodied in commodities, while others are rendered direct. These things are most conveniently described as goods—whether immediately perishable or durable—and services, it being, of course, understood that a service that has already been counted in the form of the piano or loaf of bread, which it has helped to make, must not be counted again in its own right as a service. It is not, however, entirely plain which part of the stream of services, or goods and services, that flows annually into being can usefully be included under the title of the national dividend."

      The idea of individuals enjoying the "national dividend" in proportion to their efforts in creating it (i.e. their "payments") is important for my theory. By incurring a debt (which he uses to purchase goods or services), an individual consumes more national dividend in this period than his efforts which went into creating it would allow. He promises to pay for this "over-consumption" during later periods by creating additional national dividend which he then lets others enjoy.

  6. I've just read the Pigou piece and added a comment, but somehow it got lost. So, a shorter version:

    - "national dividend" seems hard to define without getting twisted in all sorts of double-counting issues; Pigou chooses Marshall's version but admits it's not perfect ("we must compromise")

    - I am unsure at this moment whether this can be swept under the rug or is a sign of some fundamental pathology in the approach

    - ultimately, I am skeptical that "final consumption" is a well-defined concept.

    Obviously, it is desirable to build a kind of a differential/difference equation that takes some "economy" from "state" i to "state" i+1. It sounds to me like you want the difference to be some kind of a "national dividend". But if we can't define it very well, we get stuck at the very beginning...

    1. Sorry if I wasn't clear enough. With...

      "My viewpoint of payments being made *to the society* is not wholly unlike the concept of 'national dividend'"

      ... I meant that thinking in terms of this "national dividend" might help to understand how payments (especially the ones behind generally accepted IOUs) are "made to society" (macro-view).

      As you see, this "national dividend" is very much a precursor to *GNP and GDP*. There are problems with it, and I don't build my theory on it.

      Let us not lose sight of my main point, which I think we are still debating:

      An IOU, even if it is a generally accepted one ("legal tender" or close to it), is a "promise to pay later". Therefore, the value behind an IOU lies always in the future, in the expected, or anticipated, *payment* in form of goods or services. If we can agree on this, then the road to further insights on debt/credit (incl. what was formerly known as "money") is open.

  7. "The value behind an IOU lies always in the future/expected... payment in form of goods or services".

    Would you accept a rewording of this as follows:

    "The value behind an IOU lies always in the future/expected... receipt of (or exchange for) goods or services".


    1. I'll hint at why I am asking for this: an IOU is not just "I owe you" -- it is always "I owe you XYZ". The XYZ part is not some ambiguous "future goods and services", it is always spelled out.

      And what's crucial to my understanding of how money works is that, for example, US$ is the only IOU where XYZ is US$ itself :) This ends any and all IOU chains denominated in US$. A lot of people don't appreciate that...

    2. Well, I'm not sure I appreciate that :-) But let's discuss.

      We have an IOU with a nominal value of $100. Let's say it is a 100-dollar (Federal Reserve) note.

      Are you saying that what is owed in this case *is* $100? I say that what is owed is *worth* (nominal value) $100, but what it is which is owed is not specified. Nevertheless, I argue that whatever is owed must *ultimately* be goods or services.

    3. That's exactly right. A $100 is an IOU of the Fed/US gov that entitles you to nothing more than another $100. There is no promise that "$100 will buy you 10 chickens" or anything like that. If you put this $100 in a safe and get it back in 50 years, there is no guarantee of what the purchasing power of that $100 will be then. In fact, if there is a revolution in the US in the meantime and some new government adopts new currency of, say, "Rubic's cubes", your original $100 will be worthless to you.

      If you buy a bond future or some such derivative, the IOU deliverable might be a bond of specified parameters (maturity left, etc). In practice, you will get what is "cheapest to deliver". Now, that IOU #1 has been "paid" (in my terminology) -- it is hard to argue that it is still "owed", right? It was paid with another IOU. This IOU #2, the bond, pays an interest rate in $s, which are IOU #3 (IOU of the Fed). But that's where it all ends: IOU #3 is the last one. You will likely be able to redeem $s, i.e. IOU #3, for goods and services in the markets that exist within the world at the time, but *nobody* out there has *guaranteed* you that. (Although some entities obviously do try: the gov, the Fed, etc).

      As another example, one that gets us closer to my view of money, consider the US debt to China, $1.2tn. A lot of people fret about it. What would happen if China somehow (say, through force) made the US pay this off all at once? The US will say, "do you want paper or plastic?", meaning does China want paper $s or $s in a Fed reserve account. In the former case, there will be a slight delay as much paper will be needed :). In the latter case, China's account at the Fed will be incremented by 1.2tn, very quickly. It will cost the US *nothing*, no goods or services, to do that.

      Why is that? Because when China bought US bonds they knew that the only thing they were "owed" at the end were US$, nothing else. They were not promised chickens, cars, or anything else.

      Of course, sudden appearance of a buyer with $1.2tn in cash will probably cause $ to depreciate significantly. So then, knowing this full well, will China "cash in" their debt chip? Of course not. China will prefer to maintain US' state of indebtedness because China gets interest on the debt, they get political concessions from the US (a kind of a "service", you might say), etc.

      The world is a game with competing agents each trying to optimize their own utility function. Each agent is more or less rational, but in aggregate they are not a rational collective. And "money" has this game-theoretic aspect to it -- that is my view on money. Agents hold mutual IOUs in the form of money and other resources and continuously worry about future depreciation of *both*. I think not having this game-theoretic element to a monetary theory would be naive, or at least not representative of the real world.

    4. Well, that is your view on money. There is not much new in it to me. This is pretty much how money has been viewed by economists for 100 years, or much more. If not by all economists, then at least by a large number of them. Am I right?

      Then there is my view on money. It is based on a *general credit theory* I have built during the last 12 months. It is this theory I'm trying to open up here, and I really appreciate it that you have been very responsive. You've helped my put my thoughts into words -- and clarify those thoughts. Thank you.

      Let me ask you a question: How did China (People's Bank) get the *dollar* deposits it needed to buy those Treasuries?

    5. You wrote: "A $100 is an IOU of the Fed/US gov that entitles you to nothing more than another $100."

      It is this prevailing view my theory is questioning.

      The Coinage Act of 1965 says:

      "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are *legal tender for all debts, public charges, taxes and dues*."

      There's a text on every Federal Reserve note: "this note is legal tender for all debts, public and private".

      If a debtor (incl. taxpayers) usually needs to get his hands on these notes -- or bank deposits -- to repay his debt (incl. taxes), doesn't that entitle the bearer of these notes, or the owner of bank deposits, to receive goods or services from the debtor? And doesn't the market value of these goods and services match the nominal value of the IOU (cash or deposit)?

      Of course, this entitlement of the creditor is dependable on a "market mechanism", because the IOUs have not been issued by the ultimate debtor personally.

      It is now important to keep in mind how these notes (cash) and bank deposits ended up in the hands of the public: It happened either through *government spending* (taxpayer is the debtor) or through a *commercial bank loan* and subsequent purchase (borrower is the debtor).

  8. Well, I don't claim to have a new theory of money but I did expend some effort on understanding what money is. If there is an existing theory that fits well with the real world, so much the better. I am not trying to prove your approach wrong, I am debating by contrasting it with mine.

    So far, I have been channeling Werner and a little bit of MMT. I do NOT think this is a prevailing school of thought about money. Certainly MMTers call themselves "heterodox" and Werner distances himself from a lot of schools (classical and neoclassical for sure, because those guys either have no money at all or bring it in in various self-contradicting ways).

    Certainly, if you stop a random person on a street and tell them that the $100 in their pocket entitles them to nothing more than a replacement $100 from the Fed, they will likely be surprised. It is not a common held belief.

    This way of describing money IS compatible with the western central bank practice at least since 1960s -- even though those central bankers were trained in some classical school of thought. This contradiction is part of why economics is not yet a real science :)

    There is an analogy: you can still buy a textbook that was perhaps edited in 2014/15 (e.g. that talks about things like "money multiplier" and "money supply" (as if money is a commodity of some kind) -- and yet these things are patently not correct and do not represent any reality of central banking. Bindseil, for example, is a former central banker (worked at BIS and ECB, I think) and critiqued the multiplier as early as 2005 and has a whole book on the subject ( Why do we still have textbooks that teach things that do not exist? Whatever the reasons are, they are probably similar to why Werner's/MMT views are not more widely known.

    I will stop here now and then add another post where I try to directly answer your challenges.

  9. Ok, now trying to answer your questions one by one:

    >"Let me ask you a question: How did China (People's Bank) get the *dollar* deposits it needed to buy those Treasuries?"

    Short answer: China manufactured some goods, exchanged them for $s in one Fed reserve account, then transferred them to another Fed reserve account. Specifically:

    1. let’s say at some point a US consumer wanted to buy a Chinese-made car. The consumer had some $s in his US commercial bank deposit account. How they got there, does not matter — it all happened prior to this particular exchange;

    2. this consumer’s $s are transferred to China’s Fed reserve account and in exchange the consumer receives the car.

    [note: at this point China has some US $s in a Fed account that is not bearing any interest]

    3. now China wants to buy some US Treasuries. What effectively happens is some of their $s held at the Fed account from step #2 are transferred to another Fed reserve account, this one bearing interest equivalent to the bond’s yield.

    That is all. By buying a US Treasury bond China basically transfers some US $s from a non-interest bearing account to an interest-bearing account. All accounts as well as their interest rates, if any, as US $-denominated. Should China demand to have their US Treasury holdings to be “paid off”, an opposite transfer will occur. China has no guarantees regarding purchasing power of US $s in either of their accounts.

    Mind you, all these transfers are of course electronic. Some accounts are just marked up and down. Any “missing” money is just created on the fly, from thin air — as it always does.

  10. Now, tackling this one:

    >”If a debtor (incl. taxpayers) usually needs to get his hands on these notes -- or bank deposits -- to repay his debt (incl. taxes), doesn't that entitle the bearer of these notes, or the owner of bank deposits, to receive goods or services from the debtor? And doesn't the market value of these goods and services match the nominal value of the IOU (cash or deposit)?”

    In my view of the world, the answers to both of the above are “not exactly”. Especially the first one, I just don’t see a connection between debtor’s having a $ debt and his counterparty’s being entitled to receive goods and services. A note saying “I owe you $100” says nothing about any goods or services — it seems hard to argue this point, doesn’t it?

    Here is how a fiat currency happens, conceptually:

    1. imagine that the government and the Fed *first* create some amount of money ($s) and distribute it to the population entirely for free. Of course, it never happened this way literally but conceptually we know that money *has* to get created first, before it can actually be used as a medium of exchange.

    2. at this point, the population looks at this “money” and says, “we don’t care for this, these $ tokens are worthless and we don’t know what to do with them”.

    3. then the government, being a legal force starts doing things that *force* non-zero velocity of these new money tokens. At the very least, the government will collect taxes — and, importantly, these taxes will be denominated in $s.


    4. now, the population has a permanent and strictly non-zero need for these $ tokens, at the very least to be able to pay their taxes (which are mandatory). And so on: the gov can create more “services” (armed forces, gov jobs, etc) for which it will pay in $ tokens, at various rates, so for some people it becomes a rational choice to do those jobs in order to receive these $s. And to manage their liquidity some people will need to hold more $s than they actually need for taxes. And eventually, the $s become an accepted medium of exchange/store of value/unit of account/etc for way more things that just paying taxes or dealing with gov in general.

    Note how I’ve succeeded in launching a fiat monetary system and a currency to go with it without needing to postulate any equivalence between “debt” and “entitlement to some nominal amount of goods and services”. The population starts using fiat tokens because it is mandatory for certain things and that initial need seeds widespread acceptance. Nominal prices are continuously set via market forces in this system of exchanges and transactions.

  11. Yes. I cannot expect that you'd have any formal theory of your own. What is important to have -- and this I think you do have -- is a strong urge to understand how the economy works. I myself "struggle" every day to understand it a little bit better, a little bit more. You seem to pick anything that seems to be useful -- what you judge to be in line with reality -- from the various "special theories" (as opposed to general) that are available out there, and you try to put them together so that they form a coherent picture of the whole. You are a free thinker, and so am I.

    You write: "I just don’t see a connection between debtor’s having a $ debt and his counterparty’s being entitled to receive goods and services. A note saying “I owe you $100” says nothing about any goods or services — it seems hard to argue this point, doesn’t it?"

    I mentioned "market mechanism". Especially in the case of generally-accepted IOUs, both the debtor and the creditor have very much *freedom in choosing* how the debts will be settled (remember: economics is a social science).

    If you're a debtor, how can you get your hands on cash or a deposit worth $100 when you need to meet a repayment obligation? By

    1) selling goods (incl. real assets) you possess already
    2) selling services (for instance, your «labor»)
    3) selling financial assets (exchanging IOUs you possess to generally-accepted IOUs)
    4) borrowing it (issuing a personal IOU in exchange for a generally-accepted IOU)
    5) stealing it.

    It is important to keep in mind that the government is never an ultimate debtor, nor a creditor. The government represents the people -- the taxpayers. Government issues IOUs (mostly deposits) on behalf of taxpayers when it *spends*. These IOUs are indirect IOUs issued *by* the taxpayers *to* the recipients of this government spending. When the budget is balanced, there is always a tax obligation which matches the nominal value of these IOUs. (I’d suggest we assume, for the sake of clarity, a balanced budget when we discuss this *mechanism* behind debt/credit.)

    We also need to recognize the fact that commercial bank deposits can be IOUs indirectly issued by taxpayers, and that the Federal Reserve notes can be IOUs indirectly issued by private debtors (the latter is because for the public, cash and deposits are, in practice, interchangeable). This is how our monetary system is built – there is no clear (“physical”) distinction between public and private IOUs. We need to look at government spending to find out the nominal value of “public” IOUs (which have been indirectly issued by taxpayers).

    In cases 1 and 2 above (by selling goods or services) there is no complicated “chain of IOUs” involved. A debtor has issued his indirect IOUs (deposits) when he (can be a business, too) spent, and now that he wants/needs to repay his debt, he needs to get his hands on those IOUs by selling goods or services *on the market*. Once he manages to do it, those IOUs will be “destroyed” and his debt is settled. This is the way most of the household debt, non-financial corporate debt and tax obligations are settled today.

    In cases 3 and 4, there is clearly a longer chain of IOUs. In case 3, the debtor is already a creditor to someone else, and possibly not a net debtor at all. This will allow him to settle his debt, *unless* he cannot find anyone who is willing to take the IOU he possesses (AAA-rated bond, HY bond, a stock…) in exchange for a generally-accepted IOU. (Again, the *market* is heavily involved. I have said that the financial market is a place where we *barter* IOUs.) In case 4, it is clear that the debtor *doesn’t* settle his debt, but effectively only rolls it over.

  12. So this is where I'm coming from. In my eyes, there is an underlying structure, or logic, behind our monetary system, and this has not been widely recognized. To me, viewing "money" as a "non-ear-marked", indirect IOU makes all the sense in the world. It is logical, and it is *fully in line* with reality (once you see it). Now, in saying this, I'm not necessarily saying anything new. Wicksell, Keynes and Minsky, for instance, have entertained this thought. So has Mitchell-Innes and Knapp. My real contribution comes, if it is to come, from extending all this to create a "general theory of credit" where there is no more money, but only various kinds of IOUs which all have a clear link to the real economy, and *none is payable only in itself* (as you and others suggest).

    When you talk about these "tokens"... It still reflects "money as a thing", as opposed to "money as an IOU", doesn't it? I know you know better. And in my opinion, this better knowledge of yours should lead you to see how these IOUs really come to being only when they are *spent*. Before that, they might be technically something, but they are not *issued IOUs*. Before they have been spent, they are just... tokens. For instance, a casino can create as many plastic tokens as it likes, but they only become IOUs when they are given out to customers. Before that, in the hands of the casino, they are just pieces of plastic. The same is true about Federal Reserve notes, and, if we stretch this a bit, it actually is true about a bank deposit "created" on a borrower's account *before* he transfers it to someone else by spending or investing. While the deposit sits with the borrower, he owes the bank, and the bank owes him (see my first post ever for details). As I said, this is a small "stretch", but holds more than a grain of truth. Doesn't it?

    I'm familiar with many different explanations of how this system came to being, but I'd like to focus now on explaining the current system *as it is*.

    Again, I think your understanding of our monetary system and the economy in general is very, very good. Just a short while ago, I had no reason to think I'd understand it better than you -- and I have no doubt that you possess a lot of knowledge I don't yet possess, if I ever will. But now that I have, almost by accident, come up with what looks like a new general theory -- a theory which seems to be both simpler than any prevailing theories and better at explaining real phenomena --, I have no other option but to believe that my "big picture" is clearer than anyone else's. Saying this doesn't give a humble picture of me, but in many ways I'm a humble man :-) Humble, but very confident in my ability to understand the economy. I have really gone through a "hell" during the last 12 months while "unlearning" money and building my theory. And I'm still working hard on it, 24/7.

  13. Let me do this. In the rest of this post I will list a few bullet points as additional thoughts to the above. Then in one more post I offer some options for how to go forward.

    (1) You seem a little disappointed at my recent renewed push on the "token" side of money. I'll explain briefly why I did that:

    I cannot help but interpret your approach through a prism of my own set of understandings. I also have a study list of books and papers that I believe to be explaining in part the current system *as it is*. I try to make progress through that list as I have spare time. (I am frequently a "synthesizer" of best ideas, less frequently a true "innovator".)

    As a consequence of such studies, the "token" side of money is important to me because I believe that your list

    >"1) selling goods (incl. real assets) you possess already
    2) selling services (for instance, your «labor»)
    3) selling financial assets (exchanging IOUs you possess to generally-accepted IOUs)
    4) borrowing it (issuing a personal IOU in exchange for a generally-accepted IOU)
    5) stealing it.
    is missing an important option:

    6) creating it (if you happen to be a sovereign government)

    I want to be precise: "creating" precisely from thin air, Fed "fountain pen" style, not "borrowing" by issuing bonds and such.

    Because IOUs as "general obligations deliverable via some agreed-upon amount of goods and services" (hopefully, I am being close to your way of defining them here?) are still denominated in "units" or "tokens" *and* because option #6 above exists, all agents in the economy are necessarily concerned about two things simultaneously:

    (a) how likely the IOUs they hold are to be repaid (in your way, in goods and service)
    (b) what the risk is of the amount of "goodness" that they will receive to be re-denominated because the amount of "goodness" contained in one unit/token changes over time (because the counterparty may resort to option #6 and because debt and repayment are separated in time)?

    Rational economic agents act so as to minimize both risks, to maximize goods and services (yes, the true economic benefit, not tokens) they actually receive while at the same time minimizing the amount of the same they give up.

    A related historical example:

    - after Bretton Woods, the US was in a very advantageous position relative to many other nations and happily proceeded to print US $s and acquire *real* resources in Europe without so much as a look back at how much gold was needed to back up all that token creation. This is despite the fact that Bretton Woods was a commodity monetary system, not a fiat one: everybody knew exactly how much gold a single US $ was convertible to and where that gold was stored.

    - eventually, some nations got suspicious and demanded explicit conversion to gold. We know how it all ended in 1971.

    There are similar, less overt, historical examples: Japan during the period of their rapid export expansion, etc. Something similar is probably taking place with Chinese yuan right now despite their currency controls.

    (2) As I am sure you are aware of, other economic theories have tried to remove money (either entirely, or keep it as commodity with production cost so low and velocity so high so as to qualify for some "special commodity" status). In doing so they suffered fatal disconnects from reality.

    I am not saying you have fallen into a similar kind of trap, but it's just a warning kind of thought in my head for now, until I learn more.

    Ok, enough for now. A second post in an hour or two on suggestions for how to proceed.

  14. First of all, I appreciate that you find this much time for our discussion! Thank you, Sardonic.

    We *should* expect "incommensurability" between our views, and I think we are now witnessing partly that. I don't think we are talking about the same thing here.

    You wrote: " missing an important option:

    6) creating it (if you happen to be a sovereign government)

    I want to be precise: "creating" precisely from thin air, Fed "fountain pen" style, not "borrowing" by issuing bonds and such."

    What you suggest here is *exactly* the way a government *issues* a new IOU on behalf of taxpayers -- if we now assume that it will spend this "thing" it created. Remember, there is no physical thing called money to be created. No matter if it is a paper note or an electronic deposit, this "thing" which is created "from thin air" becomes an IOU when it is spent by the government.

    A government issues these IOUs only by spending -- not by printing -- them. As I said, before they are spent, they are comparable to some plastic chips a casino holds. They only affect the real economy once they are transferred to the public.

    So this #6 doesn't really belong to my list, because my list was about the ways a *debtor* can repay his debt. I did mention that when the government is a debtor, the ultimate debtor is the *taxpayer*. I explained how a taxpayer gets hold of these IOUs which will release him from his tax obligation.

    Nevertheless, if you insist, your #6 can be viewed as loosely belonging to my #4: "issuing a personal IOU in exchange for a generally-accepted IOU". A government can always "roll over" its debt (a bond) by paying the bondholder with newly-created deposits that will be accounted as government spending. And, as I say, government spending equals "issuing new IOUs" which are *expected to be* redeemed through taxation, in the way I've explained.

    I suggested we assume balanced budget, for now. It doesn't mean that I hold any illusions about governments. Throughout ages, there's been problems with government spending not being redeemed in taxes later. This will often lead to weakened trust in the currency, and it will have inflationary effects. My theory does take this into account, too. But I cannot go there as long as we cannot agree that the logic behind the value of cash and deposits, and other IOUs, is as I suggest -- that they are IOUs redeemable in goods and services -- not in "money".

    1. By the way, I'm familiar, for instance, with the Weimar economy in 1914-1924. Actually, my theory builds partly on what I've learned about inflation by studying that episode -- mostly via Adam Fergusson's "When Money Dies" (1975). What is good about this particular book is that it tries to tell the story "as it happened", without any "They were just printing too much money!" simplifications. To say that my theory has been rigorously tested against the data from that period would be an overstatement, but let us say that it has been loosely tested against it.

    2. If you paid attention, you might have seen how I made a big mistake:

      "A government can always "roll over" its debt (a bond) by paying the bondholder with newly-created deposits that will be accounted as government spending."

      The government cannot PAY the bondholder with newly-created deposits! This is what I have insisted all the time: One cannot pay by handing over an IOU.

      It is very hard to get away from bad thinking habits and language... ;-) But I must try and stay vigilant.

  15. (I started reading "When Money Dies" but could not finish it -- I think I found it overwhelmingly boring at the time. Money is a social thing, as some put it. The way I put it, money has game-theoretic aspects and cases of extreme loss of trust in tokens ("hyperinflation") do not interest me right now.)

    What would you say of #6 when applied to the US paying off its debt to China? I don't see how the *US government* is necessarily going to spend those newly created tokens... What if China transfers those $s to some EU bank and essentially converts these US $ to Eurodollars? That cash could get spent entirely outside of the US and in a manner that links back to the "US taxpayer" very tenuously at best -- are you now going to insist on increasing the scope from one "government" to "the world"?

    Perhaps the terminology difficulties indicate that different terms need to be used? Instead of "payment", use something else? 'Cause if you yourself are going to make mistakes, what about those who try to understand you?

    Anyway, what I was going to say in this post:

    - I hypothesize that perhaps it would help *me* if your approach were described in a bigger piece so that all terms and ideas are available at once. Otherwise I am too prone to finding flaws in individual definitions.

    - so, would it help you (and thus, me) if you wrote your theory up in a doc of some kind? So that I could read something relatively compete?

    - if not "complete", could you write up at least your terminology and "bird's eye view" of the theory (list of main claims/conclusions)

    - perhaps this could be a kind of doc that could be shared for comments or something. Google doc, etc.

  16. I might be wrong in saying this, but I don't see much point in trying to give you more material before we can agree on these key details. I have all kinds of drafts, but they are too "clumsy" -- much like Keynes's General Theory, but even worse ;-) I'm not much into "game theory" before we even agree on what "money" is and what it isn't.

    You wrote: "What would you say of #6 when applied to the US paying off its debt to China? I don't see how the *US government* is necessarily going to spend those newly created tokens... "

    Are we now talking about the Fed buying PBOC-held Treasury bonds with some newly-created deposits? This would be QE. I don't know if PBOC has sold any Treasuries in connection to QE, but I guess it has. If we assume so, do you think PBOC is happy or unhappy now?

    If we are talking about the Treasury -- in the absence of a budget surplus -- issuing new IOUs to replace PBOC-held Treasuries as they mature, then again PBOC would end up holding $-denominated deposits -- right?

    I can't see how anyone is getting "game-theorized" (screwed?) here. But I assume you had another type of scenario in your mind. If this is true, and it is a fairly novel one, could you also explain what you think would be its implications on general inflation expectations?

  17. By the way, I'm a big fan of George Cooper's two books -- if I haven't told you yet ;-) I view my theory as being mostly in line with his thinking, as it definitely is with Minsky's thinking. Cooper's "MBR" played a big part in my "going nuts" last spring and starting to work 24/7 on my theory ;-) It was inspirational.

  18. As you wish. I am sure you know of a saying "he who thinks clearly, speaks clearly". Right now, I do not think you speak clearly -- at least to me, but it could also be my fault.

    Let's recap:

    1. I think we have agreement on "money" (unit) and "money things" (accounts, derivative instruments, etc) and "money tokens" (coin, notes), yes?

    2. I do not think we have agreement on what an IOU is, correct?

    I think that "IOU" includes a precise specification of what is actually owned and it *may* not be acceptable to substitute that for some kind of monetary equivalent. For example, an IOU for $100 in coin may not be substitutable (fungible) with "$100-worth of some good or service".

    I believe you disagree, or at least want to redefine "IOU" to be a debt obligation in terms of "some amount of goods and service". I am less clear on whether you consider such an IOU to be "measurable" in term of monetary units or not -- that's a question for you.

    3. I do not think we have agreement on what "payment" is, correct?

    I consider "payment" to be "delivery of the what an associated IOU specified as deliverable". If another IOU was the deliverable, so be it.

    My understanding so far is that for you "payment" is somehow tied into actual consumption of goods and services -- but I get fuzzy trying to go beyond just saying these words...

    1. Thanks! This is a good, clear recap. Helps us keep focus. I'll take my time and answer it tomorrow. Perhaps it's best if we debate one point at a time and write shorter comments on it. Let's see! Have a good night.

      (I asked you at about how we can tell if "cash" has been invested or not... We can take it here later, unless I just misunderstood you.)

  19. re: Your comment about Cooper's two books.

    I don't know if you saw my today's reference to one of them on (Wolf's "strong currents against interest rates" or smth like that thread). I posted that before I read your new comments here today.

    Yes, I read them both as well. I consider the "Origin of Crises" to be an elaboration of Minsky's "stability breeds instability" point of view. I also consider "MBR" to be Werner/MMT-compatible, but perhaps you disagree :)

    1. I saw it, that's why I commented now.

      Naturally, Cooper hasn't got the benefit of my theory, so he misunderstands "money" which is evident in his "Circulation Model" :-) But it's fairly good, nevertheless. Have you read Cooper's criticism of Positive Money? I somehow take that as MMT criticism. I might be wrong. Check it out.

  20. I suggest we just take your points one by one:

    "1. I think we have agreement on "money" (unit) and "money things" (accounts, derivative instruments, etc) and "money tokens" (coin, notes), yes?"

    I understood Wray like this: "money" is a unit of account (~an abstract measure of value). "Money-things" are the physical tokens (coins & notes) or the electronic tokens (deposits). Money-things are denominated in money, meaning that their nominal/monetary value is expressed in money (dollar, euro, etc).

    I don't find any reason to separate money-things and "money tokens". Neither do I see that, for instance, derivatives should be included in "money things". In my opinion, Wray's "money-things" refer mostly to M0-2, but because it is hard to draw a line between M2 and MX (where X>2), I'm not too happy to call these "money-things" at all, but just "IOUs". It is best to define these IOUs more accurately (deposits, MMM accounts, etc) depending on the context.

    How do you view this?

    1. Just an overall comment:

      I get the feeling that you are sometimes thinking in micro terms when I'm trying to discuss these "money-things", or IOUs, from a macro perspective. For instance, when I talk about "payments", it's from a macro perspective. It's not about the contract between buyer and seller.

      Just think about it? I don't need an answer from you to this. I just thought this might be good for you to keep in mind when you read me.

  21. I am fine with Wray's definitions. Yes, there's no particular need to split up "things" and "tokens". (I just used "tokens" in my story about starting a monetary system, which started with physical "tokens" of some kind. It was a re-make of Mosler's story about parents using "coupons" to get their children to do household chores.)

    For Wray, "money things" is just a generic term, made clear in each context by identifying what it is: a coin, an account, etc. He does say that "money things" is shorthand for "money denominated IOUs".

  22. OK, perfect!

    If money-things are "money denominated IOUs", then we have a big variety of these. Like you say, it is good to identify them more accurately depending on the context.

    I think we shouldn't leave this here, though. I'm not sure about the following, so I'd like to hear your opinion on it:

    What about IOUs that are created when another IOU is borrowed/lent -- should these be in any way separated from "primary IOUs" (or, "first-order IOUs")? Here we need to see through banks. We know that a commercial bank doesn't lend IOUs to its loan customers. It creates those IOUs. So, for me, deposits are "primary IOUs". A share in a money market fund (MMF), or a corporate bond, is not a "primary IOU" to me. When these are issued, a primary IOU is lent by the investor to the issuer of the "secondary IOU" (or, "IOU squared").

    Some "primary IOUs": coins, notes, demand deposits, time deposits.

    Some "secondary IOUs": a share in MMF, a corporate bond, other private IOUs.

    A secondary IOU is redeemed in primary IOUs (as a repayment of the debt, the debtor delivers cash or deposits to the creditor).

    As long as we *see through* banks, this should make sense. Does it?

  23. I don't know how the primary/secondary distinction will be useful, but for now I will take it on faith that it will be.

    However, your definition here so far is too ambiguous for me. (It is vaguely reminiscent of my claim that $s are Fed's IOUs for just replacement $s, but I won't pursue that for now.)

    What you need to do is two things:

    (1) you skipped a definition of an "IOU". Based on our prior discussion and not wanting to go round in circles, I must ask you for one. For instance, is an "IOU" always specified in money units? Or would you consider it possible for an IOU to be defined in terms of goods and/or services, *without* specific money unit amounts (e.g. "I owe you one massage")?

    (2) use balance sheet diagrams (assets/liabilities) to illustrate states of *both* parties to an IOU before and after the IOU is created to make your distinction b/w primary and secondary cases 100% unambiguous.

    I will not attempt this myself so as not to bias your answer. But I suggest thinking about certain cases: a deposit IOU created when a bank customer brings $100 in coin to the bank and another case when such a deposit IOU is created when the bank customer instead asks for and receives a $100 loan from the bank. Is primary/secondary nature of the deposit IOU the same in both cases -- according to you, that is?

    Another case to consider is from "micro", as you put it: when two parties enter a futures contract for delivery of a certain amount of gold on a certain future date but leave it optional whether the final delivery will be physical (actual gold) or cash-settled.

    Balance sheet diagrams are great at clarifying what might otherwise be vague statements.

  24. Thanks again, Sardonic! Sorry for the delay with answering. I'm traveling.

    You're right. We need to define these "money-things" in an agreeable way before we continue.

    An IOU doesn't need to be specified in monetary terms / denominated in money. I don't think we have any disagreement on that part, so I want to focus on notes and deposits now. It is here where we don't yet find ourselves in full agreement, I suppose.

    Let's take the $100 Federal Reserve note. I'm not saying that it is clear, explicit, that what is ultimately owed must be goods or services. Here's a statement (in four parts) I'd like you to challenge, or agree with:

    #1: $100 note, *in the hands of a member of the public*, is an IOU
    #2: It is an IOU which *doesn't* state *what* is owed
    #3: The bearer of this IOU is a creditor, but the *ultimate debtor is not defined*
    #4: What is, explicitly, defined is the *nominal value* -- in monetary terms -- of the IOU (i.e. it is denominated in money -- in this case, dollar)

    What I state here regarding the $100 note, is true for bank deposits too.

    What do you say? Remember that I'm interested in how things work in real life, how these notes and deposits really work as a part of the economy. I argue that this is how these IOUs work, and by adopting this perspective to these "money-things", we can understand the economy better than before. This is not about any *legal, or contractual* matters.

    I don't go to balance sheet diagrams yet, but you're right about the usefulness of those (my major subject in business school was, after all, accounting). Overall, when I talk about "seeing through banks", it's about looking at, on one hand, the *debtors* on the bank asset side and, on the other hand, the *creditors* on the liability side of a bank balance sheet. So, if I don't state otherwise, my debtors and creditors are these, not the bank itself.

    You wrote: "I don't know how the primary/secondary distinction will be useful, but for now I will take it on faith that it will be."

    I'm not sure either, but my intuition says it might be useful :-) Perhaps it needs to be modified, though. We'll see.

  25. So, a "general IOU" can be measured in anything. Ok, we agree on that ("I owe you one massage" is a non-monetary IOU measured in massages).

    Now, a "monetary IOU" (notes and deposits). I cannot agree with your #1-#4 example except as a possible re-definition/co-option of a term. The specific parts I disagree with are #2 and #3.

    If you look at the UK 10 pound note, it says, very unequivocally: "I (Bank of England) promise to pay the bearer on demand the sum of ten pounds".

    There is no ambiguity here. It is clear cut who the ultimate debtor is and what is owed. As you say, this is real life.

    Like I said, you *could* redefine "bank note" to mean something else in your theory but that would be an unfortunate choice as it would coerce a commonly used and understood term to mean something else.

    Likewise, with a $100 bank deposit it seems crystal clear in real life who the debtor is: it is the bank. They owe you $100, nobody else. If the bank goes out of business and there's no deposit insurance, you lose that asset. There is no other "ultimate" debtor to recover it from.

    Perhaps you could introduce a close, but different, term like an "obligation" or something just to make progress with your theory, but even so, it won't describe what a $100 bank note or a $100 bank deposit are in real life.

  26. I see what you mean.

    I think I wasn't clear enough. I wrote:

    "I argue that this is how these IOUs work, and by adopting this perspective to these "money-things", we can understand the economy better than before."

    What I meant was that these "generally-accepted IOUs" work like this *in practice* (rather than just "in real life"). Another way to put it could be "substance over form". For instance, the text on the £10 note hasn't got much practical relevance, has it?

    The text on the Federal Reserve notes has already more practical meaning: "this note is legal tender for all debts, public and private".

    I won't argue against what you say. This is about adopting another perspective to these IOUs. I don't find the reference now, but even Keynes has entertained the thought that deposits are *indirect* business IOUs -- back then, household debt wasn't as common. Here is Minsky in "Can 'It' Happen Again? A Reprise" (1982):

    "Money is created as banks lend--mainly to business---and money is destroyed as borrowers fulfill their payment commitments to banks. Money is created in response to businessmen's and bankers' views about prospective profits, and money is destroyed as profits are realized. Monetary changes are the result, not the cause, of the behavior of the economy, and the monetary system is "stable" only as profit flows enable businesses that borrow from banks to fulfill their commitments."

    It might not be that explicit, but I find more than echoes of the perspective I'm advocating in Minsky's lines above.

    Why do banks go out of business? They go out of business if they make bad loans. Another factor that can make trouble more likely is a shortage of assets with short maturities -- i.e. there is too big "maturity mismatch" between the bank's assets and its liabilities. Does the perspective I have taken fit with this picture? It does. When the ultimate debtor (bank borrower) defaults, then the ultimate creditor can lose his asset. These ultimate creditors include the holders of bank equity, but as we know, banks are often 90+ % financed by deposits and other -- mostly short-term -- debt.

    I would like to be flexible, but at the same time I want to make strong points, and the latter goal is helped by clear language even when it goes against conventional wisdom.

    This is not physics, but economics. In my opinion, we need to be more flexible in our thinking when we deal with *social constructs*.

    What do you say about my claim that this is how these "generally-accepted IOUs" works *in practice*, in the vast majority of cases?

  27. Peter, I honestly don't know if you said anything that would be new to me compared to Werner and/or MMT. I am still not sure I understand where you are going against "conventional wisdom".

    >"Why do banks go out of business? They go out of business if they make bad loans."

    Yes and no. "Yes" in the philosophical sense that for long-term sustainable existence the banks need to see positive returns on their loans -- on average. In that regard a bank is like any business concern. "No" in the more practical sense of having a liquidity constraint: it is illegal for a bank to conduct some business, e.g. create new credit once they become insolvent (which has a very specific operational definition, or rather several of them: accounting insolvency, actual insolvency, etc) so it cannot make itself solvent by issuing a loan to itself (for example).

    In some ways the insolvency rule is arbitrary: it is quite possible that, given some temporal reprieve or temporal "reshuffling" of incoming and outgoing money flows a bank could survive a given liquidity squeeze.

    But it still exists and is a real life constraint. (Note that a sovereign currency issuer state cannot be insolvent in the same sense.) Because it is such an abrupt condition, we can experience two different modes of a bank's failure:

    1. "slow" mode: a bank makes loans, their returns are poor, and after some time they close down or get bought etc. It would likely be a single bank failure. There is no particular single loan that "gets them over the edge" -- their execution was poor on average and for a period of time.

    2. "cascading" mode: a bank may become "insolvent" and face margin calls -- a process that can propagate through the system and result in simultaneous failure of many banks.

    Maybe -- and I am just guessing here -- your theory likens a sovereign state in a situation like the US is in right now as being in this "slow" decaying mode (new credit is duly issued, there is no insolvency constraint on a sovereign, but some measure of "real net worth" is decreasing over time or decreasing per capita, etc).

    However, -- and I am still just guessing here -- your desire to "see through the banks" sounds a bit sketchy to me: the banks are the main source of credit in today's economy, so let's not "see through them" to a point where we remove banks and money from the theory, or we will end back in classical school.

    >"What do you say about my claim that this is how these "generally-accepted IOUs" works *in practice*, in the vast majority of cases?"

    Are you asking me to accept your #1-#4 in some more "generally accepted IOU" sense? Maybe I can contort myself to adopt such an IOU definition, but again, without knowing a rough outline of the theory or how this definition will be useful I will say "yes, provisionally". And we are spending a lot of energy on just definitional stuff...I hope we can make more progress...


  28. Yes, this is getting frustrating at the moment :-) I'll write a new post in the coming days to elaborate this.

    You wrote: "However, -- and I am still just guessing here -- your desire to "see through the banks" sounds a bit sketchy to me: the banks are the main source of credit in today's economy, so let's not "see through them" to a point where we remove banks and money from the theory, or we will end back in classical school."

    What I'm trying to say is that we'd better view bank liabilities (incl. deposits) as IOUs issued *indirectly* by bank borrowers. We both know that banks don't lend "money". They create deposits on the borrower's account, and then the borrower goes and spends these deposits (IOUs). How does the borrower pay back his loan? He (incl. any business borrowers)

    * goes out on the market (jobs and goods markets, i.e. the economy)

    * by selling goods and services (incl. labor) on the market, he tries to get his hands on the deposits (his indirect IOUs) he once spent

    * once he has got into possession of these deposits, the bank writes them off and considers part of the loan having been paid back (IOUs disappear when a debt is paid back)

    I don't really understand how you don't get what I mean, and instead suggest that I'd like to overlook "banks and money" like neoclassicals have done. It must be because of some "incommensurability"?

    Why do I suggest this new perspective? Because the prevailing perspective is a dead-end to me. If a bank owes a depositor "money", and this "money" in its most "high-powered" form is a Federal Reserve note / bank reserve, which in turn is said to be an IOU where *what* is owed is, for instance, "twenty dollars", then we don't get further with this reasoning. This is the enigma called "money", and my goal is to break it. I think I've done that already, but now I need to convince others.

    If you have time, it would be great if you could take what I say and try to find out how it matches with what Mitchell-Innes writes here:

  29. I will read Mitchell-Innes and come back.

    Meanwhile, you are forgetting that we were in the process of defining "IOUs" and "payment". If you want to abandon that, that's fine, but then every time you use those terms (like above) you risk confusing matters.

    I do not find your description of how a bank loan gets repaid to be much different from how I would describe it. Again, you still haven't described what is different about your perspective from the "prevailing" one -- if you have time, could you describe what you think the prevailing one is (maybe you could cite another reference)?

    NOTE: I do NOT consider *my* perspective to be a "prevailing" one because I think the prevailing view of money is something like a "commodity that's lost its backing (gold)".

  30. Sorry it took so long.

    I agree, "prevailing perspective" is hard to define. It's a mess.

    I felt that I showed how, in practice, deposits are indirect IOUs issued by borrowers, and fulfill these:

    #2: It is an IOU which doesn't state *what* is owed
    #3: The bearer of this IOU is a creditor, but the ultimate debtor is not defined

    What is owed is decided on the market where creditors and debtors meet and transact. A debtor offers something for sale. He won't be able to pay back his loan if he doesn't find a buyer for this something. Once he finds a buyer and receives deposits which his bank writes off as a repayment of a loan, he has redeemed those deposits (his indirect IOUs) in goods or services.

    The creditor doesn't usually know if he is trading with some ultimate debtor. For instance, your employer doesn't need to know if you're going to pay back your loan with part of your salary.

    As I said, this is how it works in practice. No one owes the bank money, as the bank has never lent out any money. Neither does the bank owe anyone money, as no one has lent the bank money. The bank is just a middleman between debtors and creditors.

  31. I probably won't get to read Mitchell Innes until this weekend. I noted, BTW, that he and MTT are close in their chartalist roots: note all the reviews etc done by Wray ( or

    Anyway. Of course, I understand *intuitively* what you are trying to say. You seem to want to view the economy as some primal "barter market" scheme, with people meeting and interacting via purchases and sales of goods and services and having banks acting as their "bookkeepers" adjusting various IOU accounts on their behalf. Correct, more or less?

    I fully expect you to run into logical -- or at least terminological ("borrowers" vs "debtors", etc) -- difficulties further down the line (IMHO, there is no possible practical utility for a theory of IOUs that leaves "what is owed" "unspecified"), but for now the only way to proceed is to agree with you.

    Also, and to hint at difficulties you are going to have, let me ask: if "deposits are indirect IOUs issued by borrowers", how do you reconcile that with then saying "the bearer of this IOU is a creditor, but the ultimate debtor is not defined". Take this example:

    - I applied and received a bank loan of $100. I now have a $100 demand deposit. And IOU now exists, correct?

    - please confirm: I am the borrower, so I issued that IOU, correct? who is the "bearer" of this IOU? It can only be the bank, correct? Two questions here, please reply "yes/no".

    [will add more when I read Mitchell Innes within a few days]

  32. You are quite correct. I view the banking system more or less as a book-keeping system for credits and debts. And my understanding is that MMT is very much built on Chartalism and Innes. But to me it seems that MMT hasn't finished the job, and is still floating somewhere between Innes (Innes strictly intepreted by me) and a more traditional view of "money" (monetarism; somewhat consistent with Quantity Theory of Money).

    I don't, strictly speaking, leave "what is owed" unspecified. I leave it *non-predetermined*. And I do it because that is how these IOUs work in practice -- which makes my choice practical almost by definition. "What is owed" will be determined on the market. A debtor offers something for sale, and a creditor either accepts it or doesn't accept it. If the debtor is selling something of use to others, he will find a creditor willing to give deposits (or, cash; IOUs issued indirectly by the debtor) for it. The debtor's fate doesn't depend on any whim of a single creditor, neither needs any creditor accept anything of no use for him as a repayment of a debt. This is quite common-sensical, right? This is how a market economy works.

    What I say above is true for a bank loan. But it is also true for loans where what is directly owed is a deposit or cash (e.g, peer-to-peer loan or a bond). Again, the debtor has the freedom to get those deposits from the market by selling what he chooses, and once he hands those deposits to his non-bank creditor, the creditor remains *generally* a creditor (now to someone else) and can go out on the market to buy what he pleases. Often, he doesn't buy directly from any debtor, but the debtor is always there behind these deposits -- as they were created through a loan -- and he is the ultimate source for demand for these deposits (his indirect IOUs). If a government spent these deposits into existence, then the debtor behind them is the taxpayer who needs to get his hands on these "tax credits".

    To your $100 bank loan example in which you raise relevant points:

    Unfortunately my answer to your first question is "yes and no". To your second question, it is a clear "no". It is your deposit, so you -- not the bank -- are the bearer of your own IOU. How? You haven't used the deposit to buy anything, so you haven't yet indirectly issued the IOU. It's like the plastic token in the hands of the casino. Once you spend and transfer the deposit to someone else, then you have issued it. Until then, there is not much real world relevance here -- you and the bank are even.

  33. But I need to correct one thing:

    I don't view the economy as a *primal* barter market scheme. I try to view the economy *as it is*. I think you might be tempted to agree with me that it would be primitive to state that the "medium of exchange" is or needs to be a commodity? What I'm saying is that the medium of exchange is credit/debt, and this must be connected to a higher form of civilization and based on well-established institutions and increased trust between people ;-)

  34. Quick follow-up.

    Your last paragraph echos Werner & Co where he says that when bank-created money (deposits) is spent, that's when "money enters economy".

    Follow-up questions:

    - do you use "borrowers" and "debtors" to mean the same thing?
    - are "creditors", "borrowers" ("debtors" ?), and "bearers of IOUs" two types of entities or three (all distinct)?

  35. A 2nd quick follow-up:

    - modify my example with $100 bank loan. I now use the $100 to buy shares of XYZ stock. How many IOUs exist now? Who are the creditors/borrowers/bearers of IOUs?

  36. Yes, "borrower" is "debtor". I'll try to stick with "debtor" from now on.

    A creditor is someone who holds "a credit" (Innes), or is the "bearer of an IOU", or a "deposit holder", or "holds cash". Is this confusing, or can we use these more or less interchangeably?

  37. "- modify my example with $100 bank loan. I now use the $100 to buy shares of XYZ stock. How many IOUs exist now? Who are the creditors/borrowers/bearers of IOUs?"

    Person B owned the XYZ stock. He held an IOU. You didn't hold an IOU.

    You took a loan and bought the XYZ stock from Person B. You end up holding an IOU in form of XYZ stock. Person B ends up holding a deposit worth $100. It's an IOU too.

    You are a creditor (very loosely defined; really "an owner") of XYZ. XYZ has a liability to you, so in that sense we can stretch a bit and say it is a debtor. Person B is, through his deposit, a creditor *indirectly* to all kinds of debtors, including you.

    But a stock as a contract is very much different from our "generally-accepted IOUs" (deposits and cash), so I don't want to mix these. Nevertheless, we need to understand stocks as well. They, too, represent net present value of anticipated, future deliveries of goods and services (via "cash flows"), just like deposits do.

  38. I wanted to use a stock because I wanted the $100 to buy some financial asset, as opposed to a real "good or service". We could use a simpler asset for the example, e.g a bond and future contract for delivery of, say, 1 barrel of oil.

    1. Yes, in that case you take the role of a classical banker as someone who "discounts a bill". You are both a debtor and a creditor, and you earn a "spread". I'll get back to this in the weekend!

  39. So, I've just finished "What is Money?". This was a good read and Mitchell Innes is doubly impressive for having written this in 1913 (England was still on the gold standard).

    A couple of quick thoughts for now:

    (1) As I was going through the part where he describes the antique history of credit it seemed familiar. When I got to a point where he describes the wooden "tally" system I knew where I'd seen it before:

    "Where Does Money Come From?: A Guide to the UK Monetary & Banking System" ( is a little known book by a team of authors -- one of them R. Werner. Indeed, the book quotes Mitchell Innes in at least one place (although I didn't pay attention at the time) and even Mosler (calling him a "heterodox economist"). I found the book as one of the references in those BoE 2014 papers on the nature and creation of money that I constantly post to FT. It's a good book, it qualifies as "21st century's version" of Mitchell Inness, I think.

    (2) I can now appreciate better where you are coming from with your desire to talk about clearing of credits/debts and viewing banks as just intermediaries in the process. By itself, I do not find anything wrong with this approach (and, as we discussed, this seems quite compatible with Werner and/or MMT).

    Still, while I would not yet presume to critique Mitchell Innes, I offer the following thought:

    - in the paper, he considers situations whereby debt comes due on some date and is cancelled ("repaid") with credits acquired from somewhere/someone else and it all must happen *at the same time*:

    "Debts due at a certain moment can only be cancelled by being offset against credits which become available at that moment; that is to say that a creditor cannot be compelled to accept in payment of a debt due to him an acknowledgment of indebtedness which he himself has given and which only falls due at a later time. Hence it follows that a man is only solvent if he has immediately available credits at least equal to the amount of his debts immediately due and presented for payment."

    - I will posit that our modern society evolved to a state where such strict criteria of "insolvency" no longer apply and where a debt payment is frequently a process stretched out in time (with interest on principal compounding over time, etc):

    - as one example, "debt restructuring" and "haircuts" have become very common, even on the scale of entire countries.

    - as another example, there are many situations where it is more advantageous for the creditor to maintain the debtor's state of indebtedness rather than get paid off in full on a give date. Reason: because this way the creditor can collect a lot more money that the original debt amount and because while it lasts they have a steady P/L flow. Consider a typical US consumer: lots of credit card debt and interest payments are made monthly, with no appreciable reduction in the principal. It's become like paying rent. I would argue that the credit card companies prefer it this way, it's more or less their optimal business model.

    Thus, where Mitchell Innes talks about currency appreciation because of perceived improvement in creditworthiness of the debtor ("the monetary unit" appreciates), I think these days creditors just care about the debt being serviced -- *not* about the final payment. To put it another way, "can X pay off his entire debt at once" has been replaced by "can X service his debt".

  40. Good to hear that you found Innes of interest!

    In case you have some spare time, here is his somewhat extended follow-up (1914) to the first article from 1913:

    You raise very relevant points. When I read Innes for the first time, I made the same observation about the "due dates" as you made. I think here Innes was mostly thinking about bank deposits being due instantly, while bank loans were of longer maturity -- the famous "maturity mismatch". We have to remember that this was still time of bank runs. Today, with deposit insurance and the implicit state guarantee of most commercial bank liabilities -- remember, FDIC guaranteed basically all bank debt at one point in 2008! -- the situation is of course different; even unnatural, some could say.

    Here's more about the FDIC guarantee, which I feel hasn't got the attention it deserves: " guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding company, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount."

    So not only was there deposit insurance for smaller deposits, but this TLGP practically stopped any bank runs?

    I also agree with your observation about "debt servicing" replacing "debt repayment". This is of course good for any financial institution, while I'm not so sure about it being good for the consumers. I view this mostly as a feature of our common push to sustain *aggregate demand* at all costs. In my opinion it is unsustainable, and while maintaining employment now it will lead to job losses later. It is also helping us to postpone much needed "structural reform". Instead of sustainable growth, we get "Generation Broke" and the human suffering which comes with the lack of prospects for higher living standards going forward.

    But let's not go there yet :-)

    Are we any wiser regarding these (as applied to deposits):

    #2: It is an IOU which doesn't state *what* is owed
    #3: The bearer of this IOU is a creditor, but the ultimate debtor is not defined


  41. Btw, I don't know if I've said it already, but the BoE 1Q 2014 Bulletin was a very important eye-opener to me too! It helped me to take a leap forward with my theory. That and George Cooper's two books made me realize in spring 2014 that I'm onto something here. As a consequence, I quit my day job and went "all in", having found my calling :-) I've been doing this pretty much 24/7 for some time now.

  42. I've started on Innes' 2nd paper but it will be a few days before I finish -- I haven't quit my day job yet :)

    (Regarding the tangent on deposit insurance and guarantees, you might find the 1st 30 mins of this EconTalk interesting: It is quite unfortunate that Fisher quit the Fed -- I was surprised by how much I agreed with his views on QE.)

    Going back to our system of definitions, it seems to me that two approaches are possible:

    (1) more "micro" (as you put it), where the banks are not considered just intermediaries. In this view, when you get a loan, it's between you and the bank. The deposit is an IOU of $100 from the bank to you.

    Both the "European" (bill discounting) and "American" (loans) ways of financing can be described in this framework.

    (2) more "macro", where we try to "transitively close" all intermediaries and abstract them away into some anonymous "exchange" of sorts, a giant ledger for credit accounts of "final" producers and consumers of "real" goods and services.

    Mathematically, it seems to me that if all accounting is done right, both approaches should lead to the same results. I think I am not lying to myself when I claim that I can adopt either framework. At the same time, I honestly don't see why #2 is better than #1, especially when we consider payments that are separated in time: a bank seems a convenient place for "credit storage" and accounting for "interest on credit"...

    What am I missing? What are the advantages of the "giant credit ledger" approach?

  43. (I am not sure my prev post was as clear as I wanted to express myself. Maybe I am a bit tired right now.)

    Another thought that occurred to me:

    - it does not seem 100% correct to me to claim that two states:

    1. I do not have a $100 loan
    2. I do have a $100 loan (and consequently, the $100-size deposit account) but have not made use of that money yet

    are the same. Yes, in both cases the bank and I are "even". However, in the 2nd case I have the right to transfer my $100 deposit to another bank, etc on a moment's notice.

    Furthermore, in our economy, as it "works in practice right now", we do know that a great number of people find it difficult to transition from state #1 to state #2. Because in #2 some amount of "trust" has been extended by the bank -- and that is a non-negligible thing. A theory of economy/credit probably should not dismiss this effect...

  44. If we follow your 1st approach, then "money" still is, at least partly, a commodity? What is owed is, for instance, 20 dollars -- that's what the bank owes a depositor?

    To me, deposits and notes (which are in many ways interchangeable) have value *because* they are indirect IOUs which have a debtor behind them, and this debt is payable in goods or services.

  45. >"If we follow your 1st approach, then "money" still is, at least partly, a commodity? What is owed is, for instance, 20 dollars -- that's what the bank owes a depositor?"

    Not sure it is a "commodity" in the sense of being directly consumable as a good/service. Certainly not.

    But it is something people desire for sure. Casino tokens are not commodity but once you obtained some tokens the casino owes you certain things: ability to use these tokens to pay for things inside the casino and a commitment to exchange them for $s should you wish to leave the casino and go somewhere else.

    However, just because the casino tokens need to be exchanged for other, truly valuable, things we should not forget that it was the casino that provided the tokens.

    So, what the bank owes me with a $20 deposit is the services that come with such a deposit: transfers, demand withdrawals, etc. A "line of credit" has been opened and that implies some obligations on the bank's part. In particular, I can exchange the full deposit amount of $20 for $20 in cash *at par* -- that is not a mean feat. I am able to exchange $20 of *bank money* for $20 of *government money* with no haircuts ("leaving the casino"). I was able to transfer a notional credit amount of $20 from one ledger to another and in the process switch from one guarantor of my credit line to another.

  46. In other words, "money is credit", as per Mitchell Innes, or "trust inscribed" as per famous quote of Niall Ferguson's.

    If I have a lump of gold I only have the market value of that bullion. But if I go to a gov Mint and they stamp that lump, the resulting coin will have a notional value likely higher that its bullion value -- because the coin now became my ticket to a vast market of goods, and services -- and further credit if I so desire.

    Something happened at the moment the stamp was made. I refer to this as "I got a ticket/token I can redeem for something else". Nobody else became indebted to me yet. Only the government, by virtue of guaranteeing that the coin is a valid ticket.

  47. I'd rather keep gold out of this for now -- OK? :)

    I'm not convinced about the source of value you try to give deposits. They are transferable? Exchangeable to cash? Sure. But those are still similar IOUs. And I'm trying to describe how these IOUs work as IOUs. If we imagine a one-bank system with no physical cash (which is not that big a stretch today)... Wouldn't deposits work much like they work today? Loans are made and deposit entries created. Loans are paid back and deposit entries written off. In this case, what is owed? Entries in a ledger? Some imaginary "money"?

    I'm just saying that my approach, which you seem to accept as an alternative, has a firm connection to the real economy and does not rely on the metaphor called "money". This metaphor works in some cases, but is very misleading when we try to understand debt from a macroeconomic viewpoint.

  48. As an ex-physicist (one of several ex-things that I am), I am used to having models at different levels of approximation of reality. It all depends on what phenomena you want to capture. Thinking at different levels of abstraction is not a conceptual hurdle for me.

    The problem is, so far you have not described what economic reality you want to capture in your theory. So, I am struggling to go along but I cannot second-guess you and I don't really know which details we can strip off on our route to ... what exactly? I've asked for a high-level schematic of the theory, but you don't wont to give "more material" until we agree on all bottom-up steps.

    Fine, perhaps. But at some levels of approximation, your claim that "money" is a "metaphor" would be laughed at, you agree? If you need a loan to buy a car and you cannot get one, the story ends there, right? Your inability to secure a certain amount of credit from a very real actor influences what economic impact you can have. Right?

    Once again, I claim that there is difference b/w two states of the world:
    (1) you have no loan
    (2) you have a $100 loan and the corresponding $100 demand deposit
    even though you are "even" with the bank in both.

    Do you agree or not?

  49. Sardonic,

    Apologies for late reply! I was at the INET conference in Paris. A lot of interesting stuff! And familiar faces, like Bill White, Adair Turner, Martin Wolf, John Kay and Steve Keen. I'll blog later this week about some topics that came up there.

    Let me try to get us back on some kind of track :-)

    I agree with your last claim. There is a difference. What I meant was that we are not yet talking about an IOU having been issued in any material sense, and so there is very little effect on the real economy. But no doubt the borrower is in a situation where he can at any time issue his indirect IOU by spending the deposit, so for him the difference is substantial.

    Money as a metaphor... Perhaps it was somewhat provocative. What I refer to is thinking in terms of *money* flowing from an account to another account, or from a country to another country. In the first case, there is often only a bank deposit which changes its holder (only a flow of *ownership* from person A to person B) and in the latter case -- between countries -- there is often similarly only, say, a dollar deposit which ends up being held by a foreign entity. Still, we often think in more physical terms, almost as there would be dollars or euros flowing from one account to another, much like goods flowing from one warehouse to another -- don't we?

    Where am I going with my theory? A fair question. Let me try a simple answer and you can tell me if it sounds in any way interesting:

    I'm trying to show how "money" (deposits and cash) represents the *net present value* (NPV) of some future deliveries of goods and services, just like bonds represent the NPV of future "money flows". When I eventually pay back a loan by selling my labor, someone (a deposit holder) has been already *anticipating* the value of my (future) labor, often for several years. As I pay back the loan, the deposit (carrying the NPV of my labor) disappears and the economy gains the real value of my labor. The increase is always marginal.

    Ok, a creditor has been anticipating the value created by the debtor's future delivery of labor (from a macroeconomic perspective, that is). What has the debtor been anticipating? The coming *disutility* arising from having to work to pay back the debt. Should we think that these "positive and negative anticipations" are comparable and somehow cancel each other out? I don't think so. Is there any deposit holder in the world who would, seen from a microeconomic perspective, feel that the deposit he holds works like I just have explained, and that the value of it is connected to some debtor's future deliveries?

    I leave it here for now. I feel it's a bit clumsy, so I won't take it further before receiving some feedback.

  50. I think I get the literal mechanics of your approach... I will admit honestly that right now I am not sure what insights open up when "money" is viewed this way. But that does *not* mean that they don't exist.

    Just to offer an idea why I am uncertain, one example: suppose in one case I borrow $1000 and pay back $1100 worth of goods and services as someone's employee. Now suppose another case: I use the $1000 to work on an invention and end up inventing a cheap and practical source of energy (say, a cold fusion reactor). The amount that I end up returning back into economy or to the society at large seems vastly different in these two cases. Yet they both started with the same nominal deposit value. I am not sure if this example is for or against your approach. Seems to me accounting in terms of monetary units is easy (but less insightful), but in terms of NPV of future goods and services is hard (but maybe more insightful).

    Anyway, let me suggest this: you can try to write it up in a bigger piece, like a paper or perhaps one blog entry long enough to be self-contained. Perhaps I would find it insightful. If that is not convenient or interferes with you plans, that is fine as well. Otherwise, I think it's become clear that very long comment chains are not super-productive. Blogs are good media for discussing current events and even papers available elsewhere in one piece, but not so good for building them up "in installments".

    I have plenty of stuff to read and understand in my queue already. You might have missed a neat thread on FT just this past weeekend which resulted in my adding more books and peoples' names to my list of "sane starting points":

  51. Sardonic, thanks a lot for your comments so far! I fully agree with you, and I've been planning to write a post where I try to address your concerns, taking into account what we have discussed here. This is a thought process for me, too, but I agree it has been dragged long enough already.

    Nevertheless, I'll shortly address the example you gave. Yes, debt can be used very beneficially. It might help the debtor produce a lot of value later. I'm only saying the IOU issued carries the NPV of that part of future deliveries that go into paying back the debt. This is still quite clumsy, I admit, but the big takeaway from this is that *increase in total debt in the economy translates to increased anticipation ("discounting") of future value*.

    Think of stocks. The higher the stock prices, the more future value we are anticipating, and usually this means that the future has a better chance of disappointing us than surprising us positively when the stock price is high. An even broader example from human life: People who anticipate a great summer vacation often end up being disappointed.

    Humans are the only animals who anticipate the future, and there are pros and cons to it.

  52. "increase in total debt in the economy translates to increased anticipation of future value" is actually a good insight. There is something utility theory-like about it...

    Of course, I wouldn't be me if I didn't think of some caveats:

    - the one I often repeat: increase in total debt could also reflect some economic agents' preference for other agent's state of indebtedness. Think US economic "policy" in Ecuador, Guatemala, etc. Or China extracting various concessions from the US as one of their largest creditors.

    - a technical one: what about those economic agents who appear, at least on the surface, to be able to control the rate of their total debt growth? E.g. the US selling their bonds to the whole wide world but also controlling, to a large extent, the interest rates on those. We could also think of events in the past like wars that caused very rapid changes in countries' total debt.

    Anyway, what you're saying is when I buy my first Greek island, it will be small and not as sunny as I expect? :) Not worth getting into debt over.

    I am looking forward to your future posts.

  53. What I say is more about the creditor, not the debtor. I say that the creditor already anticipates the future "added value" provided by the debtor. As the total amount of debt in the economy increases, so does the amount of anticipated future value, or utility (which will be provided by the debtors, to the creditors).

    I'm mostly interested in household debt, which is to a large extent used either for consumption (I include autos here) or for arguably less profitable real estate investment. Buying one's home is only seen as an investment in a rising market, and I think in this area we are blinded by the massive worldwide housing boom which cannot last.

    So, let us assume for the argument's sake that a debtor has got into debt due to his willingness to consume more than his *current* income would allow (permanent income hypothesis).

    I'm wondering: What would the world look like later had the debtor not gone into debt? Would this debtor create value which was not previously anticipated by any creditor, like it is now that he is in debt and has issued an IOU (which represents the NPV)? Yes?

    Like I said, the creditor ends up anticipating (discounting) some future value, or utility. Thanks to maturity mismatch, this is rarely connected to the debtor anticipating *disutility from work* that goes into paying back a loan. Maturity mismatch I view not only arising through banks, but also through liquid markets which create a false sense of liquidity -- see Oaktree's Howard Marks's latest memo. And even in absence of this maturity mismatch, what bothers me is if we can compare the anticipated disutility related to work with the anticipated utility related to consuming the fruits of this labor.

    Of course, this is all subjective. But economics cannot get around the fact that the judgments we make are subjective.

    I read through the FT thread you linked to -- thanks for the tip, it was very interesting! I got the feeling that we should meet in person one day, so it could be easier to discuss these matters. No pressure, but don't hesitate to send me an e-mail if you feel you can drop your anonymity! I will keep it safe.

    1. And if we take this article -- -- which I mostly agree with, can we assume that there are many debtors who are not anticipating any disutility connected to paying back a loan by performing labor, so that it is all one-sided: the creditor is anticipating, in the form of the IOU he holds, the future value provided by the debtor, and thus current perceived total wealth (debtors and creditors combined) is very high?

      As you see, I'm not even talking about the maturity mismatch which leads us to an even more twisted situation where each deposit holder feels he holds some "current wealth" in the form of "money", even though all these deposits are linked to the ultimate debtors and serve as their indirect IOUs -- if it wasn't so, these deposits would have very little value.

      Btw, I'm not taking any drugs -- I just feel we need to free our minds when we try to create new ideas.

  54. I am feeling that my level of intuitive comfort with your approach is increasing, so definitely no suggestions about "drugs you might be taking" etc.

    As further fuel for your thought process regarding creditor/debtor "expectations mismatch":

    (1) I owe a house. I got a 15-year fixed mortgage which I paid off faster than 9 years. That was all planned. At the time of negotiating the terms of this loan, I was meticulously going through my entire set of parameters and optimizing my future outcome: I knew I was going to pay more than the present value of the house, I set the upper cap on that extra, and I negotiated until I got the desired interest rate. Subsequently, I configured the monthly mortgage payments to create this shorter-than-15-years payout schedule and put it on autopilot.

    The thing is, had I sold some long-term investments I could have gotten the house for cash. But I valued the positive impact on my credit history from taking on and paying off a loan provided the actual monetary cost to doing that was acceptable. And I was also expecting a higher return from the investment portfolio than the cost of the mortgage.

    Anyway, as you can see, this was all very uber-rational and long term planned. But publicly available statistics tell us that I am a rare specimen and that the vast majority of would-be US home owners do not even come close to any "expectations calculation" process like that. Most just care about "can I afford these monthly payments?". There is no financial planning because (a) it requires some "math" and so is "hard" and (b) it makes you confront risk and thus possible unhappy events in the future. We are the only animals capable of planning for the future, but we are still plenty irrational about it.

    So, I agree with you that a "typical" debtor is *not* anticipating "disutility from work". Many elements of public culture (at least in the US) encourage blurring the distinction b/w "living in a house" and "owning a house outright", etc. Some of this no doubt goes back to the invention of "down payment plans" for appliances, etc.

    (2) This leads to a couple of elaborations on your idea of "future [dis]utility mismatch":

    (2.1) different economic agents have different *time horizons* over which they will entertain such planning (both utility and disutility). In that regard, their "degree of rationality" could be vastly different. I haven't been to an actual bank branch in a while, but usually if you happen to show up on a pay day, there is a queue of people that need to deposit their paychecks as fast as they can because they have urgent bills to pay. After years of living paycheck to paycheck like that, is it any surprise that these people will not frequently plan for, say, 5 years ahead? However, their bank is a cold calculating entity that will happily do that (to the bank's own advantage).

    (2.2) there is evidence that this "planning horizon" might be increasing as we age. Health deteriorates and shows the manifest value of health insurance, cars needs to be fixed/replaced, etc. To the extent that this effect aggregates across a population, it could have a macroeconomic effect (similar to what is usually lumped into "demographics effects").

    Whew! Didn't mean to write such a long reply.