Money demand and supply in a red/green world

Because it's Sunday.

"Green" money has positive value; "red" money has negative value. (An overdraft in your chequing account is red money.) We live in a red/green world with both types of money, so we ought to start thinking about money supply and demand in a red/green world. The red/green world is the real world.

For simplicity, consolidate commercial banks and central bank into One Big Bank.

In the green world, the bank issues green bits of paper worth plus $1 each. If you buy $10 worth of apples, the buyer must give the seller 10 green bits of paper.

It doesn't make any difference if people keep their green bits of paper in a cardboard box at the bank, instead of in their pockets. It doesn't make any difference if the bits of paper and cardboard boxes disappear, if the bank keeps a record in a ledger.

In the red world, the bank issues red bits of paper worth minus $1 each. If you sell $10 worth of apples, the seller must give the buyer 10 red bits of paper.

It doesn't make any difference if people keep their red bits of paper in a cardboard box at the bank, instead of in their pockets. It doesn't make any difference if the bits of paper and cardboard boxes disappear, if the bank keeps a record in a ledger.

There is a symmetry between the green world and the red world. Both worlds have a Cash-In-Advance constraint. In the green world the buyer of goods must have green cash to give to the seller; in the red world the seller of goods must have red cash to give to the buyer. But there is also an asymmetry: in the red world the bank must impose collateral constraints to put a limit on how many red notes an individual can hold, otherwise an individual would want to accumulate an unlimited number of red notes, and die holding more red notes than his wealth.

The red/green world is a composite world where both red and green notes are used as money.

The bank ensures that one red note is always worth exactly minus one green note, in exactly the same way that banks ensure that one $20 note is always worth exactly two $10 notes. The bank will freely swap one green note plus one red note for nothing, and vice versa. Just as banks will freely swap one $20 note for two $10 notes, and vice versa.

Define the "gross" money stock as the number of green notes plus the number of red notes. Define the "net" money stock as the number of green notes minus the number of red notes.

The bank has four monetary policy instruments:

1. Open Market Operations. If the bank buys $100 worth of bonds (or buys $100 worth of anything), this increases the net money stock by $100.
2. Collateral requirements. If the bank tightens collateral requirements, and if those are binding constraints, this will reduce the gross money stock but not the net money stock.
3. The green interest rate (which may be positive or negative) it pays on holdings of green notes. Increasing the green interest rate increases the demand to hold green notes.
4. The red interest rate (which may be positive or negative) it charges on holdings of red notes. Increasing the red interest rate reduces the demand to hold red notes.

The red interest rate cannot be below the green interest rate, or the bank would create arbitrage opportunities. The red-green interest rate spread cannot fall below zero. If you like, we could replace the fourth monetary policy instrument (the red interest rate) with the red-green spread.

The demand for gross money will be an increasing function of the volume of transactions and will be proportional to the price level. It will be a decreasing function of the degree of synchronisation of payments and receipts, and it is costly to synchronise your payments and receipts.  Standard Quantity-Theoretic stuff.

The demand for net money will be an increasing function of both red and green interest rates. The demand for gross money will be a decreasing function of the spread between red and green interest rates.

In a representative agent model, where payments and receipts of money are perfectly synchronised by assumption (if I buy $100 worth of goods from others, then others buy exactly $100 worth of goods from me at exactly the same time) the demand for gross money will always be zero. (In Michael Woodford's "cashless" representative agent model, the demand for gross money is always zero, and the central bank ensures the supply of net money is always zero, and sets the spread between red and green interest rates at zero.)

The bank controls the net money supply via open market operations, and controls the net money demand via red and green interest rates. An open market purchase increases the net money supply, and an increase in red and green interest rates raises the net money demand. So the bank can use open market operations and interest rates at the same time in an offsetting way without affecting the excess demand for net money.

If collateral constraints are non-binding, the bank controls the net money stock, but individuals determine the gross money stock. Any individual can go to the bank and ask to be given one green note and one red note. The only way the bank can reduce the gross money stock is by tightening collateral requirements, or by increasing the spread between red and green interest rates. With zero spread, and non-binding collateral constraints, individuals are satiated in gross money, but may or may not be satiated in net money.

I think that's right.

Comments

[Min]

Nick Rowe: "The underlying question is this: does the green world economise on information compared to the red world?"

No.

Nick Rowe: "My hunch is that the green and red world are perfectly symmetric when everybody trusts everyone else. But the green world requires less trust than the red world."

Right. As I pointed out with my nearly red world example of the town where nearly everybody owes money to the general store, which functions as a red bank, that does not get us to **anonymous** red notes. In the real world, green notes are anonymous, which is why they economise on information. (BTW, national green notes are more economical of information than notes issued by private banks. :))

[Nick Rowe]

Oliver: "If I borrow money via an overdraft, then I have green money plus a red debt (the money I borrow is not red, at least once it changes hands."

No.

Think of a pure red world. You have a $100 overdraft and I have $0 balance but permission to run an overdraft. You sell me your bike for $100. Your balance goes to $0 and my overdraft goes to $100. I accepted your red money in exchange for your bike.

[Nick Rowe]

Min: economising on information is another way of saying requiring less trust.

[Steve Roth]

@Nick: "Define the "gross" money stock as the number of green notes plus the number of red notes. Define the "net" money stock as the number of green notes minus the number of red notes."

Oh my gosh, Nick, you're singing my song -- almost.

Define the gross (private sector) money stock as total household assets (because households ultimately own firms). Green money.

Define the net (private sector) money stock as total household net worth -- assets minus liabilities. Green money minus red money.

If those are our definitions of money: what does "demand for assets" mean? "Demand for net worth?"

[Jussi]

@ Majromax:

Thanks, I think you are right in every respect. Maybe to add that also in the green world you need some assets for the bank, equity, before anyone will accepts its liabilities, originally asset certificates, which then can be used as money. I'm not sure whether this is true for the red world.

I wasn't clear but you do need to work you way out of debt in the green world. And the same is true in the red one - only that "the debt" can now be used as medium of exchange - or sort of, I still stick with the idea that true medium of exchange do not need third party, bank, monitoring and limitations.

And in the red world everyone wants to run a red bank as their assets are like green money (mirror of red money they issue). The only issue for a red bank is that it has to make sure that it holds enough collateral which might be difficult as the underlying is circulating.

[Majromax]

@Nick Rowe:

> Aside from the purely intellectual side of this discussion, there is also (I think) a fairly immediate real-world application: most clearing houses (I think) run on a red/green system where net money is very small (maybe zero) relative to gross money. But if the participants fear that one party may hold too many red notes at the end of the day, the whole thing could seize up.

That's exactly what happened with the ABCP crisis in 2007 where liquidity suddenly disappeared from the market, even if that commercial paper did not circulate directly as cash.

> But that's liquidity risk, whereas the main risk we are worried about in red and green (a)symmetry is (I think) default risk.

That's why I don't think a red-only world is stable. The default risk can be mitigated by a well-trusted entity securitizing its own credit limit, which would then create a fictitious green asset that could circulate as money. A green-money "beta bank" in the red world is more trustworthy than red-money "beta banks."

In contrast, red-money beta banks in a green world are generally less trustworthy than green-money beta banks. We only see mixed red/green operation in either controlled environments (clearing houses with collateral and membership controls) or in communities where "green" liquidity is in tremendously short supply.

@Jussi:

> Maybe to add that also in the green world you need some assets for the bank, equity, before anyone will accepts its liabilities, originally asset certificates, which then can be used as money.

Only if there's a lack of trust in the bank. If there is trust in the bank, then people would be willing to exchange assets for easier-to-carry pieces of paper even if the bank does not start with any net asset. In the red world, however, since the flow of goods and paper is in the same direction there is no way even a trustworthy organization could induce people to take red money without having goods or services.

> I wasn't clear but you do need to work you way out of debt in the green world. And the same is true in the red one - only that "the debt" can now be used as medium of exchange - or sort of, I still stick with the idea that true medium of exchange do not need third party, bank, monitoring and limitations.

Think of the implications of default in both worlds.

In the green world, debts are charged against a counterparty in particular. If I default, my bank must take a loss, and it must write down my debt.

In the red world, however, debts in the form of red money have the whole financial system as a counterparty. If I default on a red-money debt by burning the paper, I've increased my own net worth but there is nobody in particular to assume my debt. Burning red money is equivalent to counterfeiting green money.

[Market Fiscalist]

I am starting to suspect I am missing something obvious here, can someone help ?

JKH says "When the bank earns interest on an asset which is the medium of exchange, that is inherently Ponzi in the bank's favor. The only way interest on red money can be paid with red money is to increase the red money balance by the same as the amount of interest. That's obviously not usually the case when a bank is paid green money interest on a regular loan. In that case, the payment of interest on a loan destroys a green money deposit.".

For red money: A loan is the bank allowing me to go positive in red money. Interest on my loan causes my red money balance to go even more positive, and if I don't do something to reduce it (like sell something and remove red money from my account) to reduce it, the bank will eventually take action.

For green Money: A loan is the bank allowing me to go negative in green money. Interest on my loan causes my green overdraft to become even more negative , and if I don't do something to reduce it (like sell something and bring green money into my account ) to reduce it, the bank will eventually take action.

Where is the difference ?

[JKH]

MF

A green money overdraft is equivalent to a loan of green money. The overdraft/loan is not the medium of exchange. Green money is the medium of exchange. The borrower pays interest -  using the medium of exchange - usually by sourcing it from income, although compound interest arrangements may be possible as well. And the borrower repays the loan with the medium of echange. The credit risk paradigm is fairly straightforward for all this.

A red money balance is a quantity of the medium of exchange. It is not a loan of the medium of exchange. Interest paid on red money is paid in the medium of exchange. Unlike green money, payment of interest implies compounding as a structural feature because of this. You can't pay interest on the medium of exchange without increasing the outstanding size of the balance. That is not necessarily the case with a green money loan.

And therefore the credit risk paradigm is not so straightforward.

[Nick Rowe]

Steve: No. We are singing totally different songs. I am singing about money. You are singing about something else (it's certainly not money, and it's not even assets, and I'm not sure what it is).

MF: Not all financial assets (and liabilities) are money.

Red world: I start out with $0, the bank gives me an overdraft limit of $100, I buy something for $60, so have an overdraft of $60, and pay the bank the red money interest rate on $60

Green world: I start out with $0, I give the bank a non-money IOU for $100, the bank gives me $100 in green money, I buy something for $60, so have $40 green money left. I pay the bank the non-money rate of interest on $100, and the bank pays me the green money rate of interest on $40.

[Oliver]

@ Nick

OK, let me rephrase my question. Is red money translatable into anything in the real world?

To my mind, your example would have to work as follows: I sell you my bike for money that you borrowed which I then may or may not use to cancel my own debt. Your debt is a new thing, it has nothing to do with mine. It hasn't moved anywhere. Debt is not transferable in the way you posit with red money. And to my mind it cannot be any other way, except in an abstract thought experiment.

The other line of reasoning that seems to be catching on in the comments, is that the distinction between red and green is an inside vs. outside money thing and that systems with purely inside money are not stable. To which my answer would be that monetary systems are ultimately all closed and such discussions only make sense in a world in which monetary systems are subdivided into hierarchies that can be long / short red or green with one another.

[Oliver]

Red world: I start out with $0, the bank gives me an overdraft limit of $100, I buy something for $60, so have an overdraft of $60, and pay the bank the red money interest rate on $60

Green world: I start out with $0, I give the bank a non-money IOU for $100, the bank gives me $100 in green money, I buy something for $60, so have $40 green money left. I pay the bank the non-money rate of interest on $100, and the bank pays me the green money rate of interest on $40.

May I translate that into the world as I see it:

World 1: I start out with $0, the bank grants me an overdraft limit of $100 based on some assessment of my credit worthiness or pledge of collateral. I use $60 of that limit with which I have implicitly issued a $60 IOU. The bank sends $60 of (green) money to the payee while I'm left with the debt of $60 (my end of the IOU) and the interest that comes with it.

World 2: I start out with $0, I give the bank an IOU for $100 of which I decide to spend only $60. I immediately pay back the $40 I didn't use because I would otherwise end up subsidising the bank for no reason.

The only difference between the two worlds seems to me to be the possible difference in quality of the IOUs involved in which case this would be a discussion about secured vs. unsecured lending or something like that.

[Market Fiscalist]

"Something must constrain bank Ponzi in the red world.".

Some vague ideas on that:

In a red world banks in effect provide "liquid debt" to their own customers who pass this on to buyers when they sell stuff. The recipients of the red money (those who have bought the goods) now hold some of the banks assets. (unless their is some mechanism I am missing to convert this into the buyers bank's red money?).

The banks will not want its assets to decline in value , which is what will happens if net buyers of goods are allowed to hold too much of its red money and consume rather than invest with it. If that happens the value of red money will decline.

The banks customers who have sold stuff will (potentially) now have negative balances of red money. These are bank liabilities. These customers will not want to keep their assets in a bank that is becoming insolvent and whose money is declining in value. This will cause a further decline in the value of red money.

The bank may have even have made negative red money convertible into something, in which case the system should be self correcting just like in a green world.

[Market Fiscalist]

Hope its not by design (I'll take the hint if it is !) but a couple of my comments didn't appear today. Did they go into the trash by any chance ?

[Market Fiscalist]

Oh, ignore that - they reappeared now. Must be my browser I think.

[Nick Rowe]

MF: you are safe.

[Min]

Nick Rowe: "economising on information is another way of saying requiring less trust."

Isn't it saying more than that? It is possible to regard markets as information processors. A purely red money economy is less efficient than a purely green money economy of the same size precisely because markets require more information to operate. That should be so, regardless of why more information is required.

Back in the free banking era of the 19th century, a bank note from a Georgia bank might circulate in Illinois, but it would be heavily discounted because of the lack of information about the Georgia bank. It is not that the bank itself was distrusted, there was simply a lack of information about it.

[Min]

Majromax's point about Warren Buffet got me thinking about a purely red money world where even the richest person would have only red money in the bank. In that case the average person would have billions in red money in the bank, with no hope of getting rid of it. As the song says, "I owe my soul to the company sto'."

What about a company town peopled by workers who, indeed, are so indebted to the company store that it is impossible, or nearly so, for them to get out of debt? Wouldn't that town be a red money world?

Actually, no. In real life companies paid workers in scrip, which circulated as green money.

[Frank Restly]

Min,

"Majromax's point about Warren Buffet got me thinking about a purely red money world where even the richest person would have only red money in the bank. In that case the average person would have billions in red money in the bank, with no hope of getting rid of it."

If Nick's red money and debt are equivalent, then death absolves the borrower (holder of red money) - debts are not passed on to heirs and so red money would sit there with no defined owner.

Despite the central bank be willing to always create and destroy $1 green / $1 red note pairings, that may not be enough to fix the relative values of green and red notes.

What I mean is suppose Warren Buffett passed away holding half of the red notes in circulation. Suddenly those red notes have no owner and no way to either circulate through the economy or be cancelled by the central bank. Red notes become scarce relative to green notes. Does that change the relative values of green and red notes - irrespective of what the central bank says?

[Jussi]

"Only if there's a lack of trust in the bank. If there is trust in the bank, then people would be willing to exchange assets for easier-to-carry pieces of paper even if the bank does not start with any net asset. In the red world, however, since the flow of goods and paper is in the same direction there is no way even a trustworthy organization could induce people to take red money without having goods or services."

That's IMO semantic point - "trust" in economic sense, meaning the trusted entity can and will pay back, requires that the trusted person owns some kind of assets. If not there is no hope of payback.

"That's why I don't think a red-only world is stable. The default risk can be mitigated by a well-trusted entity securitizing its own credit limit, which would then create a fictitious green asset that could circulate as money. A green-money "beta bank" in the red world is more trustworthy than red-money "beta banks.""

I think that's right.

Just an interesting side note: what is the quantity of money in the red world? Is it the aggregate amount of red notes (or deposits) circulating? It cannot be because if you max that no one can transact anymore! So the max quantity (in a sense) of red money is when all the predetermined overdrafts / credit limits are not in use. A kind of symmetry!?

[JKH]

Nick,

From your post:

"I think that's right."

So do I.

Excellent analysis - very tight, and very worthwhile going through.

Just a couple of points that are already implicit in what you wrote.

(The single bank assumption is helpful for this.)

The bank can do OMO easing operations by puchasing assets and injecting green money, which expands the balance sheet, or by purchasing assets and draining red money, which leaves the balance sheet the same size.

And it can tighten by selling assets and draining green money, which shrinks the balance sheet, or by selling assets and injecting red money, which leaves the balance sheet the same size.

One can also work through those 4 modes again with the central bank using liability management rather than asset management as the balancing transaction for the money effect.

For example, as one of those liability management techniques, the bank can tighten by issuing term liabilities and injecting red money, which expands the bank's balance sheet. This goes to my earlier comment about how the bank can expand the red money supply, although it can also be done by selling assets.

Very good analysis on interest rates and interest rate spreads.

I guess the one aspect I'm still working on is the credit risk asymmetry that you also noted. I'm not quite there yet in terms of understanding it fully in my own way. Credit risk on an overdraft is straightforward when the criterion includes the ability to pay it back with green money. It gets a bit weird when one flips to a pure red world. Which leads me to question whether a pure red world is logically feasible even in theory. But that's where I'm still hand waving for sure.

[Jussi]

Hmm. never mind should think first. (Nick delete previous two if you have spare time..)

[Nick Rowe]

Min:

In the green world, each individual can get rid of green money, by buying something, even though people in aggregate cannot get rid of green money, unless the bank sells something.

In the red world, each individual can get rid of red money, by selling something, even though people in aggregate cannot get rid of red money, unless the bank buys something.

JKH: I really appreciate that, because you know real world banking much better than I do.

"I guess the one aspect I'm still working on is the credit risk asymmetry that you also noted. I'm not quite there yet in terms of understanding it fully in my own way."

Same here.

"Credit risk on an overdraft is straightforward when the criterion includes the ability to pay it back with green money. It gets a bit weird when one flips to a pure red world."

Well, an individual can pay it back by selling something (labour, other assets) to reduce his overdraft. The red money gets transferred from his account to the account of whoever he sold that thing to. Your $100 paycheque is an instruction to the bank to deduct $100 from your overdraft and add $100 to your employer's overdraft.

[Majromax]

@Frank Restly:

What you describe is not possible in a red-only world. The financial system applies some sort of constraint so that one cannot die with unresolvable red money, which is why much of this discussion has focused on collateral requirements for red money's use.

Somehow defaulting on red money has an identical effect on the financial system as counterfeiting green money.

@Nick Rowe:

Consolidating some of the conclusions of my comments in this thread, I think that red money cannot act as a store of value, which limits it as a viable 'money' candidate. Red money can be a medium of account and exchange, but value is had in its absence.

[Steve Roth]

@Nick:

FWIW, not using the "hands up and gimme all your money" usage -- all the bills in your pocket. That's conceiving money as all those different types of money things out there.

Rather, "how much money do you have?" -- iow what are your total assets, or your net worth? Your house and your stock portfolio aren't money in the above, but you certainly include their value in your answer to this question (and you you may well ignore the currency in your pocket or your checking-account balance).

So just to say that "money" is widely used in this sense.

[Min]

Nick Rowe:

"Min:

"In the green world, each individual can get rid of green money, by buying something, even though people in aggregate cannot get rid of green money, unless the bank sells something.

"In the red world, each individual can get rid of red money, by selling something, even though people in aggregate cannot get rid of red money, unless the bank buys something."

Did I say something that made you think I didn't know that?

[Min]

Frank Restly:

"If Nick's red money and debt are equivalent, then death absolves the borrower (holder of red money) - debts are not passed on to heirs and so red money would sit there with no defined owner."

Debts were inherited in India within living memory, and may still be, as far as I know. 25 years ago some people there were still paying off their grandfather's debts.

Frank: "Despite the central bank be willing to always create and destroy $1 green / $1 red note pairings, that may not be enough to fix the relative values of green and red notes.

What I mean is suppose Warren Buffett passed away holding half of the red notes in circulation. Suddenly those red notes have no owner and no way to either circulate through the economy or be cancelled by the central bank. Red notes become scarce relative to green notes. Does that change the relative values of green and red notes - irrespective of what the central bank says?"

In an all red world Buffet would hold very few red notes. If I passed away, what would happen to the billions of red nots in my bank account? (In real life I suppose that the company sto would just write them off. After all, their purpose of keeping me in debt bondage has been served.

[Frank Restly]

Min,

I wasn't aware of transferred debt in India, so thank you for bringing me up to speed.

"In an all red world Buffet would hold very few red notes."

Here is a question to think about - in an all red world, what happens to the demand for liquidity during a recession? In the green world, a recession is often thought of as an "excess" demand for the most liquid asset (green money). If red money is the most liquid asset in a red money world (it is used to facilitate trade), would the same hold true?

The question isn't whether Buffett (or anyone else) holds a few or a lot of red notes. The question is does the demand for those red notes rise during a recession in a red money only world.

[Tel]

Roger: If you give me a drink, and I give you my IOU for $5, that IOU is not money. It's just an IOU. But if you then use my IOU to buy apples, and the apple seller uses it to buy fertiliser, and it circulates around the town, then my IOU is money, and I have created money.

I kind of disagree, an IOU is red money with the small additional asymmetry that only green money can be used as final settlement. That is to say, the cowboy cannot transfer tab from saloon A to another saloon B, but can start running up his tab at saloon B while paying down his tab at saloon A, providing some income in green money exists. Lack of red money circulation is better because it solves the problem I mentioned above with people "losing" the red notes, and also automatically decentralizes risk calculation, red interest rate calculation, and credit control (as it should be).

The limitation that red money cannot circulate sounds like a bigger deal than it is, because in the absence of clearance (i.e. everyone owes to everyone), you get an unstable equilibrium such that any particle of green money can destroy arbitrary amounts of red money as it circulates.

http://macromarketmusings.blogspot.com.au/2014/04/observational-equivalence.html

As should be obvious, such an unstable equilibrium situation can (and will) be sorted out relatively reliably, especially in the "Information Age" where excellent tools are available.

I would argue that traditionally this is the standard mechanism for monetary elasticity, before government attempted to (badly) fill that role with Keynesian wot-not.

[Min]

@ Frank Restly

Thu near red world examples in the real world that I have thought of are depressed economies, I think. In the slave economy neither the slaves nor the slave owners have much use for cash on a daily basis, and the wages of non-slave workers are depressed by competition from slave labor; the debt bondage regimes in India I don't know much about, but there does not seem to be enough cash in circulation for the laborers to get out of debt, and their debt burden is passed on to their children; the company town issues scrip, a kind of green money but not enough for the workers to get out of debt; the frontier town is also starved of cash, which is why the general store acts as a bank. It seems to me that an all red world is in a permanent depression.

[Too Much Fed]

JKH, is this accounting correct for an overdraft from a checking account?

Right before the transaction, the entity wanting to use an overdraft creates a bond that is both an asset and a liability to the entity. The central bank creates “green money” that is both an asset and a liability to the central bank. The entity and the central bank then do an asset swap.

The central bank has a bond from the entity as an asset and “green money” as a liability.

The entity that wanted an overdraft has “green money” from the central bank as an asset and a bond as a liability.

[JKH]

TMF,

I think the simplest way to think of the accounting is that an overdraft appears as a liability for the customer and an asset for the bank. This would be both a gross and a net position in the money position of the customer, since there would be no sense in depicting a bank account position that included both a gross overdraft position alongside a somehow “separate” positive balance position. The idea of the overdraft is that it nets the flows in and out of the bank account to arrive at a net negative balance.

Alternatively, an overdraft might be construed as a negative asset for the customer and a negative liability for the bank, but that’s awkward.

I think the post interprets an overdraft as “red money” – a medium of exchange unto itself - rather than a loan of “green money”.

Whereas I think the conventional interpretation in banking would be more consistent with the latter.

I think that’s right, but I haven’t revisited the topic of the post in suggesting it.

[Nick Rowe]

JKH: "I think the post interprets an overdraft as “red money” – a medium of exchange unto itself - rather than a loan of “green money”."

That is right.

"Whereas I think the conventional interpretation in banking would be more consistent with the latter."

I think that's right.

[Too Much Fed]

JKH said: "I think the simplest way to think of the accounting is that an overdraft appears as a liability for the customer and an asset for the bank."

OK. That means the customer issued the overdraft (liability), right?

[JKH]

TMF,

I’d steer clear of over-generalizing on the use of the term “issuer”. It gets into semantic aspects that aren’t very helpful.

“Issuer” in finance most commonly applies to issuers of securities such as bonds and commercial paper, which are liabilities of the issuer. The idea refers to paper that is being issued to a buyer of the securities.

Similarly - in more abstract mode - the infamous MMT use of the term “currency issuer”.

The language gets a little dicey in the case of mortgages – it seems awkward to describe a residential mortgage borrower as an issuer of a mortgage, although technically it may be arguable. Still, it’s enough to get people to understand that a mortgage borrower is the mortgagor and the lender is the mortgagee, which is correct usage.

And even more so with overdrafts – it’s strange to think of an overdraft borrower as an issuer of the overdraft. It's a stretch. I wouldn’t be too concerned about it.

[Nick Rowe]

JKH: Good answer.

Here is an alternative answer, but I'm not sure how helpful/useful it is:

In the green world the issuer writes "IOU" on bits of green paper which circulate.

In the red world the issuer writes "UOMe" on bits of red paper which circulate.

[Too Much Fed]

JKH, the one Big Bank in this post, can't force anyone to take out an overdraft, right?

Also, let's say a household has a 0 balance at the one big bank. It wants to spend $1,000 so decides to take out an "overdraft". Is this accounting correct right after the overdraft?

Borrower/Household balance sheet:

Assets: $1,000 in green money
Liabilities: $1,000 owed to big bank

Big Bank balance sheet:

Assets: $1,000 from the Borrower/Household
Liabilities: $1,000 in green money

[JKH]

Nick,

Works for a single bank defined as issuer of money – green or red – liability or asset.

Rather weird to consider what a loan of red money means.

Or how a red money banking system with a central bank and reserves works.

[JKH]

TMF,

Assuming a pure green money system (not red money):

For banks, gross green money balances (bank liabilities) increase.

The bank can record the overdraft as as an offsetting loan asset (probably) or a negative liability (probably not).

Converse entries for the aggregate household balance sheet (gross green money balances as assets increase, etc.)

The individual household borrower will show an increase of green money liabilities (the overdraft) with zero green money assets. The overdraft is both the gross and the net position in green money for the individual borrower. The net change in the individual green money position will be reflected as some combination of an increase in other assets, a decrease in other liabilities, and/or a decrease in net worth.

[Too Much Fed]

JKH, one other thing.

The liabilities parts/sides do not circulate in the real economy. It is just the asset parts/sides that circulate in the real economy, right?

[JKH]

Nick,

OT (way OT)

Comment thread here follows up on my interpretation of your OLG model/discussions with Murphy:

https://larspsyll.wordpress.com/2016/01/04/does-more-government-help-or-hurt/#comment-27478

[Nick Rowe]

JKH: thanks for the tip. I like your comment there.