« Assignment of targets to instruments, stability, and Functional Finance | Main | Why the USA Has A Trump and We Don’t (Yet...) »

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Majromax said: "In the red+green world, a transaction requires either a buyer with green money or a seller with red money."

OK. So you can sell without possessing red money. I didn't catch that you meant red-only world. I'm afraid this whole discussion about red/green is turning into a waste of time, but I'll continue anyway... I think the language used is confusing. "Requires a buyer with green money" doesn't mean that the buyer should be in possession of green money as a consequence of a previous transaction; the buyer could as well overdraw his account, in which case Nick would conclude that

1. there was already Greens and Reds waiting in the buyer's shoebox, reflecting his UNUSED overdraft, or
2. Greens, and Reds, were put into the buyer's shoebox at the moment he requested entries related to the transaction to be made.

Which one? I go for #2. It is clear that the Gross money stock cannot have anything to do with the unused overdraft (the limit), because Nick takes the Gross stock to be equal with non-synchronisation, and the latter is only about USED overdrafts. So this is not about trading being limited by existing possessions of Reds and Greens, but by the bank's willingness to make certain entries on certain accounts (or play with bits of paper and shoeboxes).

I'm getting tempted to conclude that Nick has just found a twisted, complicated way to talk about simple accounting. But there are still important insights here (which could have been explained in a much easier way, though). There is truth in Nick's argument that "negative money" is no one's asset, just like "positive money" is no one's liability. But this should be expanded: a bank holding any agent's liability (not just an overdraft, but "loans" and bonds too) makes that liability no one's asset. Fed holds Treasuries and MBSs -- no one's asset, someone's liability. I'm writing blog posts where I'll go through all this and much more. Stay tuned :-)

Henry: Ask Nick why one MUST sell if one has red money. I think he explained that bad things happen to you in after-life if you die while in possession of red money.

As I said earlier, it's the green-only world (and red-only world) which create the problems in this discussion. This is because green+red world is a world of ACCOUNTING, whereas green-only and red-only are worlds where there only exists CREDITS or DEBITS, not both. Makes no sense. Well, perhaps to a monetarist, but not to an accountant :-)

Antti: "By selling things you get rid of both "red money" and (bank) debt. Where's the difference?"

One is a commonly accepted medium of exchange, and the other isn't. Just like some positively-valued things (financial or real assets) are commonly accepted media of exchange, and others aren't.

If you have a regular debt, you sell goods to acquire green money, then use the green money to pay off your debt. With red money you just sell goods to get rid of it; no intermediate step.

«My sponsor is Carleton University (and University of Adelaide and government-owned Bank of Canada for sabbatical years)»

Well, those are not sponsors, those are people who pay you an upper middle class salary for indulging in doing research. The really big money in Economics is made by those who are aligned sponsors who can pay millions or dozens of millions a year for "speaking fees" and "consultancy" or "strategic advice", and a lot of Economists take notice of that. Plus big sponsors try to influence negatively the careers of those whose theories are not validated by the desired policy recommendations, perhaps not as obviously as the campaign against Tarshis in the 1940s/1950s, but still. C Ferguson has made a rather revealing movie about how sponsors influence Economics:

https://en.wikipedia.org/wiki/Inside_Job_(2010_film)

Spending time on reinterpreting New Keynesian models seems rather futile: if the reinterpretation results in the same policy recommendations it is futile one way, if it does not it may be more academically interesting but will not be popular. It is not by chance that many interesting insights in political economy research come from countries where political economists are content to work in obscurity for middle class wages.

As to this:

«The comment section of this blog is reserved for people trying to understand economics, not to drag their political knuckles along the ground. Mark Thoma may not police his comment section, but I do. And we have a different culture here.»

I am sorry to see that you shame yourself with malicious and gratuitous insinuations and personal attacks.

Graziani triangle - type in more than three letters in my citation manager

Graziani, Augusto (1989), Theory of the Monetary Circuit, ISBN 978-0-902169-39-5

Nick: I was slightly frustrated yesterday, but perhaps it was a sign that I'm very close to understanding exactly how you think. It seems I didn't manage to offend you, so you must have recognized the friendly undertone in all I said.

I think this is getting very, very interesting. It seems you and I have encountered the same problem, and our solutions to it are exact opposites. (I'm partly guessing, but think about it and let me know if this resonates?) The problem has to do with green money being a medium of exchange (MOE). In red+green world, green money cannot be a MOE unless red money is too. This is why you go to great lengths to explain to yourself -- and few others who might be able to follow your thought -- how red money is a MOE. It seems to work OK, at least when seen from where you're looking at it (being a monetarist of a sort, right?). But like I said, to me it seems you just double the trouble. If people have not been able to agree on the definition for "positive money", they won't be able to agree on the definition for "negative money" either.

My solution to the same problem is simple, yet even more radical (in some sense). I conclude that green money is not a MOE, and definitely not a "means of payment" -- that its role has been misunderstood. I don't need to come up with labored explanations about how red money acts as a MOE. Instead, I need to change the way we see green money. That's easy! It took me a year or two to change the way I see it (it was intense; even many of my friends think/thought I've gone slightly mad, and I cannot know for sure if this is true or not). The pessimist in me says that trying to make people change the way they see green money is a "Sisyphean task" (I must be wrong, right?) while the optimist in me says that it is a "Copernican task" (there's a small chance that I'm right).

What is good about my solution is that it doesn't double the trouble. Instead, we get rid of the "money problem" in economics. (Big talk, I know. I'm expecting a call from Earth.) In a way it makes a lot of sense: we were never able to agree on a definition for money, because money as we knew it doesn't really exist. Our "axioms" were invalid.

Going forward, observational equivalence is an important concept. That's why I'd like you to confirm that the way I see the bank-gnomes working (see my earlier comment) with their bits of paper is observationally equivalent with the way you see them work? What matters is not how Greens and Reds are moved between shoeboxes, but the amount of Greens or Reds in a shoebox at each moment. It is irrelevant how the bits of paper got into the shoebox and whether they are the same bits that have previously been in another shoebox. For all we know, the bank-gnomes could have a rule which says that a certain piece of paper can only be used once / can only visit one shoebox during its existence. It is created just before it is put into a shoebox and it will be destroyed once it is taken out of a shoebox.

Especially Post-Keynesians (including "circuitiste" and quantum-economists) will find much to agree with in my theory. (They might even feel that I'm not saying anything new -- perhaps because I focus on the same accounting as they do.) But so should you, Nick, because you and I live in the same world, even though we describe it differently.

Here's one way of depicting both green and red money as media of exchange in a balance sheet context:

Consider a transaction involving some type of “durable” asset in exchange for some type of money. For this purpose only, by durable asset I mean any real asset that appears as a balance sheet asset – i.e. that it is not immediately “consumed” – or any type of financial asset other than money.

Now consider a household balance sheet. Green money is a household asset. Red money is a household liability.

Then the following types of durable asset transactions are possible, involving either green or red money as media of exchange:

a) The purchase of a durable asset in exchange for the sale of green money (an asset). In this case, the size of the balance sheet remains the same while the asset composition changes.

b) The purchase of a durable asset in exchange for the assumption of a red money liability. In this case, the size of the balance sheet expands to reflect the increase in both a durable asset and a red money liability.

c) The sale of a durable asset in exchange for the purchase of green money (an asset). In this case (similar to case a)), the size of the balance sheet remains the same while the asset composition changes.

d) The sale of a durable asset in exchange for the removal of a red money liability. In this case (obverse to case b)), the size of the balance sheet shrinks and both asset and liability disappear.

@ JKH

So the measure gross money signifies the size of the balance sheet?

But would you agree with Nick that you are describing red money, i.e. a commonly accepted medium of exchange? Sounds to me more like conventional debt that each individual has to negotiate with his own bank.

The illusion of it becoming an ordinary medium of exchange can only arise in the context of identical agents who bank with the same bank, all have the same overdraft limit and towards which the bank is completely indifferent.

It seems to me that when green money is extracted from Nick's fantasy world and inserted into real world examples, it retains most of its characteristics. But if one does the same with red money, it falls flat on its face.

Antti: you are not offending me. You are trying (like me) to get your head around this stuff. Yes, it can be frustrating.

What you say resonates. I *think* I get where you are coming from (not 100%). Let me expand on where I'm coming from (what you say about this is right but incomplete). I want a definition of money that can include not just green and red paper, but gold and shells and cigarettes (at one end) and ink marks and electrons on books and computers (at the other end). And I want it to *exclude* all the other physical assets and bits of paper and ink marks and electrons that are not money. And that's because I see medium of exchange as central in understanding recessions, whether the medium of exchange is cigarettes or electrons on silicon.

JKH has it right (I think).

Nick: I find myself in partial agreement with Antti (Nov. 10, 2016 05:09) when he writes "I conclude that green money is not a MOE, and definitely not a "means of payment" -- that its role has been misunderstood."

I posted a related article (updated this morning) at

http://mechanicalmoney.blogspot.com/2016/11/the-ngc-model-banking-and-creation-of.html

Extending from my post, we could conclude that green money (in the most basic concept) is simply evidence of a delayed barter exchange. It is NOT payment. It is evidence that something will be available from a specific responsible entity upon demand.

Your red money would be a notation that evidence-of-a-delayed-barter-exchange has been issued and then transferred to someone who has agreed to return it to the issuer.

Thanks for sustaining the discussion. Your green-red money analogy continues to create lots of interest.

JKH: I have noticed that whatever you happen to say usually makes a lot of sense. You can count me as a fan. But I think a balance sheet is, more or less by definition, a poor tool if one wants to highlight the medium-of-exchange role. Your example says nothing about flows between the balance sheet owner and other agents. So I think Oliver has a point when he talks about your "red money" being conventional debt.

You might agree?

If you stayed fully within the balance sheet context, you could actually only say that certain account balances go up or down. A liability disappears / is removed when a durable asset is sold. Makes sense. The liability is not transferred to someone else, it just disappears. Similarly, there are no sales or purchases of green money (this is language used by Clower; I find it misleading; interesting that you didn't talk about sales or purchases of red money?) in the balance sheet context. Instead, a checking account balance is increased or decreased, without any knowledge about where that green money ended up, if it was even transferred somewhere (I argue not). If I sold green money, who bought it? Not the seller of the durable good, because he might have sold me red money with the durable good, or so he thinks (I didn't buy red money, of course).

Nick: Good to hear that what I said made at least some sense to you. Very good.

First, it's interesting that you mention understanding recessions. I came up with my theory when I was trying (hard) to understand how credit/debt really works at the macro level, because I thought THAT was central in understanding recessions. I guess we all want to understand what happened in 2008-2009, and will IT happen again (another discussion).

You say: "I want a definition of money"

Do you see yourself as trying to come up with a definition, or do you already have a definition and want it to be commonly accepted? It sounds you already have a definition, because you are able to say what it should include and exclude.

I see two problems with the definition you are after:

1. You want to call money three things/concepts that are different in kind: a nominal asset (green money; credit balance), a nominal liability (red money; debit balance) and goods. It is common to call two of these -- green money and certain goods; both are assets -- "money", and I think even this has been a mistake. I don't care which one people call money (the word doesn't belong to my terminology), but they shouldn't call both money.

2. You want to call money something that is NOT different in kind from something you don't want to call money. You say that certain nominal assets (credit/positive balances) are money while others are not. This alone might not be a serious problem if you're able to make a clear distinction between your two types of nominal assets. (Money is no one's liability? Is a positive/negative balance on a checking account in a commercial bank "money"?)

When it comes to, for instance, cigarettes as "money", they could be compared to a kilogram of salt ("s-kilo") I talk about in my first blog post (if someone hasn't read it, you find it by clicking my name). I understand how cigarettes can function as a unit-of-account and a numeraire (and how they could, just like "skilo" in my blog post, cease to function as a numeraire and become an abstract unit of account; the price of a cigarette could be 1.20 cigs). I also understand how people (say, POWs) can use them in trade. But like I said, if I'd call cigarettes "money", then I couldn't call green paper "money".

I don't know if this makes any sense. I'm a bit tired. I think we will have a lot more to discuss when I have published my next blog post (any day now...).

A distinction between liquidity and credit risk:

Red money can be used to pay for stuff, with the buyer assuming the red money liability of the seller. In that context, red money is liquid and a medium of exchange.

However, buyers cannot be allowed to accumulate red money liabilities without limit. There must be credit risk rules for red money. Those rules are imposed by the bank(s) that hold red money as an asset. Operating within such credit constraints, red money is nevertheless liquid as a medium of exchange.

Antti,

Using red money, the seller of an asset transfers both the asset and the red money liability to the buyer. The seller’s balance sheet shrinks on both accounts and conversely the buyer’s balance sheet expands.

Using green money, the seller of an asset transfers the asset to the buyer and takes back a green money asset from the buyer. Both balance sheets are unchanged in size.

"There must be credit risk rules for red money."

I am wondering if this is necessarily so. There is no restriction on green money - no-one worries about whether the CB will honour its green money liability.

I presume the CB is the issuer of green money. How does it arise? The CB can't purchase haircuts (presumably).

Who issues red money? How does it arise? Does the CB sell haircuts with red money?

Henry,

Nick’s starting point is a single central bank (no commercial banks) that issues both green money and red money.

Green money, like conventional money, is on the liability side of the CB balance sheet.

Red money is on the asset side. (Alternatively, it might be represented as a negative liability, but that just muddies things).

As is the case with conventional money, a household holding green money has no credit risk exposure, given the general nature of fiat central banking. (This is also true of money that households hold with commercial banks, up to the limits of deposit insurance).

In this case, a central bank holding red money has credit risk exposure to the household or business whose liability it is. Consider a household that otherwise runs up a negative net worth in financing consumption by assuming red money liabilities to excess. Without credit risk limits, at least some of that money becomes worthless as a CB asset. This will show up in a truly meaningful way if the CB runs monetary policy with positive interest rates charged on red money. Hence the need for credit risk limits. This holds a fortiori when commercial banks that hold red money as an asset are added to the system.

aside:

Red money is an interesting idea in the sense that you can think about debt and equity as a conceptual, instrumental evolution of red money. Capitalism would be a pretty tough functional challenge if red money were the only type of non-bank financial liability.

Antti: suppose I'm an anthropologist, visiting a new island. I observe 3 goods: apples, bananas, and mangoes. No bits of paper, records, or anything else. I observe: a market where apples are traded for mangoes; a market where bananas are traded for mangoes. I do not observe a market where apples are traded for bananas. I conclude that mangoes are used as money (in the medium of exchange function). Replace "mangoes" with green bits of paper -- same conclusion.

JKH: agree with your above comments (except maybe the last one, which I maybe don't follow).

"Consider a household that otherwise runs up a negative net worth in financing consumption by assuming red money liabilities to excess."

But who is going to call them on their liability?

Presumably, just as the CB doesn't expect to be called on it's green money liability, it doesn't expect to call on its red money asset?

OK the CB could end up with a worthless (red money) asset but the public could also end up worthless (green money) asset - it doesn't stop them playing the game.

And I know this can lead to absurd situations.

Theoretically, ANYBODY could buy a $10M yacht from someone with the yacht and $10M in red money. Where would it end? (Anybody could become a Donald Trump and run for president. :-) )

Doesn't it get back to how much red money is issued, presumably by the CB? And again, how is the red money put into circulation? Does the CB sell a yacht with each $10M tranche of red money? Where did the yacht come from?

And it could not be called money if the CB charges an interest rate on it, can it?

"This holds a fortiori when commercial banks that hold red money as an asset are added to the system."

JKH,

How would a commercial bank come to hold red money? Would it because it accepts red money deposits on which it is paid interest by the depositor? Or could it acquire red money from the red money market for on lending?

Could it lend out red money and expect to pay the borrower interest?

How would this be different from banking based on green money?

Perhaps someone wishing to sell their $10M yacht could borrow $10M in red money from the bank?

Nick,

My last comment was premature and cryptic as a result.

Requires more thought on my part.

Henry,

Red money is Nick’s baby. I’m just interpreting the nature of his creation. I’m playing at Nick’s slot machine of truth, and so far I seem to be coming up OK in the interpretation process.

I think it’s an interesting and challenging abstraction. As an abstraction, the starting point for my own thinking is that red money is similar to an overdraft position or a line of credit. But what makes it different is that a red money balance is a medium of exchange balance.

There are two things to consider:

a) How is the medium of exchange created

b) How does it circulate

This first example shows how red money is created:

Suppose a yacht buyer starts out with balances of zero green money and zero red money. The yacht buyer pays $ 10 million to the seller. Because the buyer has zero green money, he pays for the yacht from his red money balance. That balance becomes $ 10 million as a result. The buyer now has a $ 10 million yacht asset and a $ 10 million red money liability. His bank has created $ 10 in red money.

The yacht seller now settles that payment with his bank. (This could all be done through Nick’s single central bank idea, or through a commercial banking system with both red and green money.) The yacht seller’s bank credits his account with $ 10 million in green money. This begins to look like the “loans create deposits” mantra of MMT. In this case, its “red money creates green money”. So this is the example of the creation of both media of exchange – red money and green money.

Now consider a second example. Suppose the yacht buyer again has a zero balance in both green and red money. Suppose the yacht seller has a red money balance of $ 10 million. Then, the buyer can pay for the yacht by assuming the seller’s liability of $ 10 million. He ends up in the same position, but in this case the transaction took place using existing rather than newly created red money. That’s what makes red money a medium of exchange. The trick I think is that there must be some credit risk mechanism that allows the buyer to assume such a liability.

If interest rates were eternally zero for all financial assets, then the issue of credit risk might be moot. But that’s not the case. And non-zero interest rates matter, because they affect income and income distribution.

I still earn positive interest on my Canadian dollar chequing account – even at this low general level of rates. I consider that to be a money account, particularly in the context of how Nick has set up his framework for red and green money – he hasn’t restricted it to non-interest bearing currency (on the contrary). And I pay interest on my line of credit. CB’s around the world now pay interest (positive or in some cases negative) on some portion of excess reserves. CB reserves are also a type of money.

"Red money is an interesting idea in the sense that you can think about debt and equity as a conceptual, instrumental evolution of red money. "

I would think that the more interesting question is why has not red money, unlike green money, become a feature of the real world economy.

Equity probably arose in part because of people's differential attitude to low risk/expected higher payoffs and a willingness to risk some portion of held wealth.

Henry said: "TMF,

Look at it from the green money point of view.

In your terms (i.e. you see red money as a bond), you would have to argue also that the CB had issued a bond to the holders of green money. Strictly speaking, when the CB issues green money it generates a liability in its balance sheet - but this liability is really only notional. If you take your green money to the CB and ask it to exchange this for some other asset do you think they will do so?

We normally don't think of green money in this way. So why think of red money in this way necessarily?

(I hope I've got that right?)"

Green money point of view where "red money" is a bond/overdraft is a loan.

When Andy gets a loan/overdraft, there is an asset swap (bond for green money). Now I am not sure what that money is (it is a liability of the CB).

Is it currency? I thought Nick said no because there is no "negative balance" of currency, which I would agree with.

Is it a central bank reserve or a demand deposit similar to what the commercial banks issue? Not sure.

Is the CB acting like a storage facility for currency (asset remains Andy's, I think) or more like the commercial banks where there is an exchange (currency for demand deposits)? Not sure.

"If you take your green money to the CB and ask it to exchange this for some other asset do you think they will do so?"

You can buy back your bond from the CB at fixed, preset price (1 to 1). I assume that is at any time. Any other asset? Probably not.

"Suppose a yacht buyer........"

To me this just seems to be no different than the standard money/credit system we are used to in the real world.

I think of money as something I can fold and put in my pocket. If I had a red money note I could do this. If had a thousand of these I could sell my old car and hand over a $1000 in red money. The purchaser would happily do this because he could go to work and sell one week of his labour for $1000 in red money. His employer would accept this because when he sells his goods the purchasers would happily accept his red money, etc..

That's the system I thought Nick was talking about in his original green/red money blog.

As far as the current blog is concerned, bringing up green/red money seems to be an unwelcome diversion and distraction and not applicable. And of course Nick is not in this blog interested in getting people to think about money per se but how the NK model can be rethought - something I have not got any where near understanding, seemingly bogged down in this money business.

"Red money is Nick’s baby."

JKH,

I beginning to think Nick has created a monster. :-)

"Green money point of view where "red money" is a bond/overdraft is a loan."

TMF,

And what is green money?

"I beginning to think Nick has created a monster."

Would a bank robber be indifferent between green money and red money? I can't see why he wouldn't.

And of course new meaning has been given to the saying "Show me the colour of your money". LOL!

My green money point of view.

If there is a CB and commercial banks, currency, central bank reserves (caveat, I think they are vault cash substitutes), and demand deposits of the commercial banks.

Nick has a CB only here, but the CB has "checking accounts" for private entities.

I believe he says no currency in this model.

Not sure if green money is central bank reserves, demand deposits of the commercial banks, or both for his model.

JKH said: "The buyer now has a $ 10 million yacht asset and a $ 10 million red money liability. His bank has created $ 10 in red money.

The yacht seller now settles that payment with his bank. (This could all be done through Nick’s single central bank idea, or through a commercial banking system with both red and green money.) The yacht seller’s bank credits his account with $ 10 million in green money. "

So does the CB have green money, red money liability, and red money on its balance sheet?

@ JKH
I see I stand corrected but not completely disarmed.

I think this distinction of your's is very important:

a) How is the medium of exchange created

b) How does it circulate

The monetarist world is typically a green money only world in which money creation is a unilateral act performed by a (central) bank. The economy is then a sequence of bilateral exchanges of goods for money and money for goods. It is this taxonomy that the abstraction of bits of green paper is good at capturing.

You say : This begins to look like the “loans create deposits” mantra of MMT. In this case, its “red money creates green money”.

Those were exactly my thoughts when Nick replied to me confirming that an act of red money creation automatically creates an equal amount of green money somewhere else. Add credit risk management to that and it becomes apparent that a red & green world of credit money cannot easily be divided into acts of money printing and subsequent acts of money circulation. It always takes three to tango. And it is at that point that I question the usefulness and intention behind the red / green abstraction.

Within a science, even if it's a social science, abstraction seems only legitimate if it manages not to omit any essential details. You're smarter than most when it comes to these things, so you can 'read' Nick's language while filling in the blanks as you go along. I personally feel that for example the Graziani triangle that Andrew Lainton mentions above, does a much better job at 'permissible abstraction' and is by no means more complicated. I think Nick wants to expand his view of the monetary system to incorporate credit money but isn't prepared to leave his 'native taxonomy' to do so.

I will put what I said earlier slightly differently:

Nick, or "Dr Frankenstein", is not happy with the "accounting view" of money. Reducing the monetary system to nothing but an accounting system takes the magic of money away, because the system itself is the medium of exchange, while (green) money isn't anymore. It's the credits AND debits, building blocks of our ingenious record-keeping system (JKH: There are people who say that capitalism is the child of double-entry bookkeeping!), that are the medium of exchange.

Someone might conclude that there isn't really money in this system, as nothing in reality (only in our minds) moves BETWEEN the accounts. But Nick cannot let go of money. So Nick MUST insist that the debit balances are also money, so that it could still be money which functions as a medium of exchange.

It is obvious that we can build a lot simpler view of the monetary system, and the economy, if we are ready to let go of money altogether. As I said, GREEN money is not a medium of exchange either (physical cash is, in a way, but that is not needed in the accounting realm). In my coming blog posts I will present you this alternative view, so stay tuned :-)

Antti: I read your first post. It's interesting and good. It reminds me of my old post Media of exchange and the Clearing House. It requires multilateral trust, as opposed to bilateral trust between each individual and the CB.

Nick: Thanks! Your post reminds me of Jevons' chapters XIX-> in his "Money and The Mechanism of Exchange" (which is famous for the phrase "double coincidence of wants"): http://oll.libertyfund.org/titles/jevons-money-and-the-mechanism-of-exchange -- For instance J.S. Mill, in his "Principles", recommended those chapters as a good overview of the British banking system at the time.

It also reminds me of Wicksell's "pure credit economy" (I have a feeling Wicksell got the idea from Jevons).

Multilateral trust is an important concept in my theory. But it doesn't mean that everyone has to trust everyone else. It's more like trust towards the whole system, or the key players who are expected to guarantee that the system works like it's expected to work. Well, this sounds like a description of our monetary system -- and it is. Nothing new, I guess.

When it comes to your island economy, the problem is the usual: Why do the intrinsically worthless bits of paper have value? They are clearly very different from mangoes as "money".

Antti: I'm impressed how much you've read.

Each individual has an incentive to build up a big stock of red money, then vanish. Who has the incentive to stop him doing that? In my system, it's the CB, because the CB is left holding the bag if he vanishes. The CB is like the cop, because each individual in a large population has only a very small incentive to monitor all the other individuals.

"When it comes to your island economy, the problem is the usual: Why do the intrinsically worthless bits of paper have value? They are clearly very different from mangoes as "money"."

True. Short answer: by controlling some mixture of gross/net money stocks, and interest rates, to make sure it does have value (target inflation, price level, NGDP, whatever).

Nick: [Nov. 11, 2016 at 08:08]

In addition to green and red money, we have bananas. Andy wanted bananas. Betty was outside(?) the money system UNTIL she exchanged the bananas for green money.

Now think of "value". How would Betty build the interrelation of bananas, money, and value? Would future bananas be a consideration?

Nick said: "Each individual has an incentive to build up a big stock of red money, then vanish. "

Yes of course. However, I can't see red money being created in the first place if it is created by the CB. How can the CB create red money? It needs to have goods/services/assets to sell with the money, otherwise, who would accept it?


"Would a bank robber be indifferent between green money and red money? I can't see why he wouldn't."

I wrote this earlier on. I see now it was a stupid thing to say.

A masked man rushes into a bank, sticks red money into the till, then rushes out again to the getaway car!

Starting from scratch, a central bank that owned some assets originally could create red money by selling those assets. Or it could simply open for business, and let one customer sell something to another customer.

Nick: I haven't read more than others (but thanks for the compliment!). Probably less, because I've done almost all my reading after 2013 (full-time, though). Perhaps it helps that I haven't wasted my time on a PhD or Economics courses above 101 ;-) And I definitely haven't used my time on trying to learn the math required from an economist nowadays. Instead, I've focused on what my intuition said is the most relevant material for someone trying to understand the real world economy. Most of that material is pre-WW2. It could be that there hasn't been big enough crises since the Great Depression, and we need big crises to advance the science? Now we have got one, and lo and behold: here we are, advancing the science by discussing "red money" ;-) Desperate times call for radical solutions!

You said: "Each individual has an incentive to build up a big stock of red money, then vanish. Who has the incentive to stop him doing that? In my system, it's the CB, because the CB is left holding the bag if he vanishes. The CB is like the cop, because each individual in a large population has only a very small incentive to monitor all the other individuals."

Yes. Although you could replace "red money" with (any) debt/liabilities and the statement would still be true (even in a community without money or banks). What exactly does it mean to you that the "CB is left holding the bag"? I agree on the CB being like the cop. But the cop doesn't usually end up holding the bag if someone manages to commit a crime. Right?

"A masked man rushes into a bank, sticks red money into the till, then rushes out again to the getaway car!"

Very good :-) So good, that I have to try to build on it:

A masked man rushes into a bank, points his gun at the teller, gives him a big bag of red money (without a dye pack) and commands him to take the money, calmly, out of the bag and to put it into the till, then rushes out again to the getaway car! A moment later, the cops arrive at the bank. They ask the teller to give them the red money in a bag. Then they jump into their patrol car, throwing the bag on the (plastic) back seat. Now the chase begins! Finally, after an hour-long pursuit on the highway, the masked man crashes his car. He is barely conscious when the cops get to him. They hear the man say: "Don't give me the money, you pigs...". The cops push his face in the mud, cuff him, and with another pair of handcuffs they attach the money bag on the man's left leg and take him to jail.

A masked man rushes into a bank, sticks red money into the till, then rushes out again to the getaway car!

Great stuff! Thanks for the good discussion! It has been very interesting!

While doing some research for my next blog post, I stumbled upon this line from Fed (I'm looking for something a bit silly they have said which I think is in this same document -- yes, I've read a document like this before... crazy):

"An institution sending payment orders to a Reserve Bank is required to have sufficient funds, either in the form of account balances or overdraft capacity, or a payment order may be rejected."
https://www.federalreserve.gov/paymentsystems/files/fedfunds_coreprinciples.pdf (p. 7)

Look carefully at the wording. FUNDS. What are 'funds'? Obviously not just "green money", but an overdraft CAPACITY as well (if we overlook the word 'capacity', then 'funds' would be Nick's 'money'...). This is getting close to a definition for 'purchasing power' (another problematic concept!). What do native speakers say: Is this proper use of the word 'funds'?

Fed's 'Funds' (pun intended) seem to match Keynes' 'Cash Facilities' (“A Treatise on Money”, Bk 1, Ch 3, 8ii(i.) “Deposits and Overdrafts”):

“... it is the total of the cash-deposits and the unused overdraft facilities outstanding which together make up the total of Cash Facilities. Properly speaking, unused overdraft facilities – since they represent a liability of the bank – ought, in the same way as acceptances, to appear on both sides of the account. But at present this is not so, with the result that there exists in unused overdraft facilities a form of Bank-Money of growing importance, of which we have no statistical record whatever, whether as regards the absolute aggregate amount of it or as regards the fluctuations in this amount from time to time.

Thus the Cash Facilities, which are truly cash for the purposes of the Theory of the Value of Money, by no means correspond to the Bank Deposits which are published.”

I thought this is somewhat relevant to our discussion, so I wanted to share it.

It happens that the line I'm looking for in that Fed document also is about 'funds'. And I think the definition of 'funds' in that sentence must be different from the definition above. I'll get back to it later.

An alert reader might notice that Keynes would have liked to see Nick's bank-gnomes put Reds and Greens in an overdraft customer's shoebox already before he had even used the ovedraft facility/capacity:

"Properly speaking, unused overdraft facilities – since they represent a liability of the bank – ought, in the same way as acceptances, to appear on both sides of the account."

How about that, Nick?!!

I apologize for the spam... But this is just so interesting stuff! Look at what Fed has to say about banks that exceed their (daylight) overdraft limit:

"Counseling --- Institutions that incur daylight overdrafts in excess of their net debit caps are contacted by the Reserve Banks and counseled to keep future overdrafts within the appropriate limits. Institutions that frequently exceed their net debit caps may be required to apply for a higher cap, to increase their balances, to pledge collateral, or to have payments monitored in real time."

COUNSELING. You exceeded your net debit cap... It's bad, mmmmkay? You have to promise to try to not do it again, mmmkay? But if you do, then you should apply for a higher cap, mmmmmkay.

Nick: I suggest the central bank should adopt the role of a counselor, not a cop. Or then they could have a good cop / bad cop arrangement, where the good cop would be a counselor and the bad cop would be a... cop.

Have a nice weekend, all of you!

Nerds like me might also appreciate this from the Fed (regarding computation of required reserves): "Overdrafts in demand deposit or other transaction accounts are not to be treated as negative demand deposits or negative transaction accounts and shall not be netted since overdrafts are properly reflected on an institution's books as assets."

So the Fed (in full agreement with Too Much Fed...) says that overdrafts are NOT "negative money" (negative demand deposits), but should be recorded as assets (LHS of balance sheet; what TMF calls "bonds"). I don't present this as any conclusive evidence against Nick, but as something to take into ACCOUNT (bad jokes continue...).

Nick: Are you familiar with the following papers?

Ostroy. 1973. "The Informational Efficiency of Monetary Exchange"
Ostroy & Starr. 1988/1990. "The Transactions Role of Money"
Kocherlakota. 1996. "Money Is Memory"

In my next post I will refer to this "tradition" (Kocherlakota builds on Ostroy 1973), so it would help if you and others have an idea on what these people are talking about. Just checking.

Here is finally my (over-advertised) second post: http://gifteconomics.blogspot.com/2016/11/a-new-monetary-system-from-scratch-part_14.html (or just click my name to get to the blog)

Any feedback appreciated! I'm slightly worried that there might be too much to handle in that post. I'm happy to elaborate, so don't hesitate to ask if something is unclear.

(Sorry, guys. I got a bit carried away on Friday/Saturday. Looking at my comments, it might seem I was drunk -- but I wasn't.)

this looks like a great case study for monetarists:

http://www.thehindu.com/news/resources/the-political-economy-of-demonetising-high-value-notes/article9348002.ece

JKH, what happens from a balance sheet perspective when someone deposits currency at a commercial bank? Thanks!

TMF, and others:

In order to understand what I mean when I say that no asset changes hands, or accounts, when we make entries on two checking accounts, please have a look at my comment to Roger Sparks here. (It's so long that I don't want to paste it here.)

Put in the language I use in the comment, Nick is seeing rabbits in boxes (or should it be 'hats'?), because he doesn't want to accept that there are only ducks in existence. Currency is the original "rabbit illusion", the reason why we see rabbits where there are none. (Did I mention that I'm not 100% sure if I've gone slightly mad? But please read the comment before you judge.)

I find Nick’s posts on green and red money fascinating. I don’t see how economics can progress without an agreement on the underlying logic of money. Specifically, I don’t see how any model of the macro-economy can be critiqued without an understanding on how it diverges from the “real” logic of money.

After one of Nick’s previous posts on this subject, I set myself the task of defining a basic set of “big rules” for the logic of money which build on Nick’s ideas and could be understood by any interest party, but which would also satisfy at least my own concerns with the details (but not the main principles) of Nick’s logic, and my frustrations that these debates never lead to an agreed conclusion.

I documented my version in a pack of Google slides. After reading most of this current thread, when many of the same detailed concerns and frustrations have been raised but again not agreed, I have adapted my slides to create a tailored version relevant to some of the points in this thread. I have published these slides at the link below. You should be able to navigate through the slides using a mouse or using the arrow keys on any keyboard. You can see the specific impact of the individual steps in my simple examples by using the arrow keys to move back and forward between the slides for neighbouring steps.

I would be interested in Nick’s comments on my version of his ideas. However, I would make a couple of points of my own first.

On content. It seems to me that money and loans are two closely related, but not identical, concepts. My version considers BOTH concepts in green and red terms. For example, when Nick’s dad has an overdraft, the overdraft is a relationship between Nick’s dad and the bank. It is NOT a relationship between Nick’s dad and whoever currently has the green money which Nick’s dad spent after taking out his overdraft. This is important. For example, it explains why Nick’s dad cannot just walk away from what Nick calls his “red money”.

Also, my version is consistent with the quote from the Fed, mentioned earlier: "Overdrafts in demand deposit or other transaction accounts are not to be treated as negative demand deposits or negative transaction accounts and shall not be netted since overdrafts are properly reflected on an institution's books as assets".

On method. Irrespective of opinions on the content of my version, one of the problems in these debates is that there is no agreed format for articulating the logic of money. My version explicitly sets out my assumptions and my big rules for the underlying logic. It also shows the position of each actor in my toy economy at each step in a set of simple example transactions, and it shows these positions in an easy to understand diagrammatic style. It also shows explicitly that, at all stages, the gross amount of money and loans in the economy is zero.

I don’t see how these debates can ever reach an agreed conclusion without this level of explicit documentation and easy to follow format. I don’t mean that my format is the only possible format. Rather, I mean that the absence of an agreed format between economists is one of the reasons for the many misunderstandings on display every time these subjects are debated.

Anyway, here is the link to my slides. Let me know if there are any access problems.

https://docs.google.com/presentation/d/1F1PtEv-PARUzzAxS4Bk3HY5l3jMwW8M4i-c9kDRSNV0/pub?slide=id.p

Sounds good, Jamie! Your attempt at clarification is more than welcome.

I'll go through your slides tomorrow and will comment when I find the time! (If you have time, check out the comment thread on my own blog post -- link above. That might help you understand where I come from, and where I come from will probably affect how I interpret your slides.)

Jamie: When you say that gross money is zero, do you really mean NET money?

Jamie, I like the idea that you stated assumptions.

I am going to partially disagree with A6:

Currency can't be directly defaulted on. Electronic "money" (which I consider bonds) can be directly defaulted on.

I don't get P4, which means P2 and P3.

Why not just when a borrower takes out a loan with the commercial bank, it is just "green money" and "green loans denominated in green money"?

Jamie: Only once through but I seem to agree with you all the way except maybe at the conclusions.

I say "maybe" because you have government concluding with assets on account. To me, that takes the slide sequence back to just after government had created a green loan and sold it to commercial bank. Government had not yet paid all it's newly acquired green money to Nick, Nick's dad, and the produce store and therefore, still had green money in hand.

It took a lot of work to create your slide series. Thanks for sharing it.

Now, if someone has an easier-to-understand model, I guess it would be up to them (or a creative friend) to build a presentation of assumptions, rules, and accounting records. Not an easy challenge!

Nick, any way to extend this post so the comments don't close?

Jamie: I've gone through your slide set. I like the explicit format! What bothers me is that it seems your "red money" is not Nick's "red money", so that we have again new terminology to learn. But perhaps I interpret you wrong. Let's see.

I'll start with questions regarding slide 8 (commercial bank creates money and loans):

Is this an imaginary step (like Nick's creation of red and green bits of paper), without any entries made in real-life ledger? As far as I know, the real-life entries, one credit and one debit, are made only on accounts where the holder of the account is Nick's dad (his checking account and his loan account).

Correct me if I'm wrong, but it looks like your red and green money, as well as your red and green loans, are actually one money (a credit balance on Nick's dad's checking account in the bank ledger), and one loan (a debit balance on Nick's dad's loan account in the bank ledger), seen from two different perspectives -- the bank's perspective and the non-bank's perspective? This makes your "red money" the same as Nick's "green money". With the color code you only want to emphasize that it is considered -- due to an accounting convention only -- the bank's liability (red) and the account holder's, Nick's dad's, asset (green). The same goes for the loan: an asset (green), accounting-wise, to the bank and a liability (red) to Nick's dad.

Antti: I had roughly the same thoughts.

Thanks for the comments. I have split my replies into multiple comments. Sorry for the length of the replies.

Antii: When you say that gross money is zero, do you really mean NET money?

I mean that green and red money together always total to zero. I might change the word Gross to Total in any future version of my slides as that would be less ambiguous.

Roger: I seem to agree with you all the way except maybe at the conclusions

If you are referring to slide 24, I intended that as a general conclusion rather than as a re-statement of the position at the end of my examples. For example, only the central bank CAN and DOES hold red money issued by itself. All other parties CAN and DO hold green money issued by the central bank, but that does not preclude them from having no green money at certain points - such as the government in my examples after it distributed the green money it raised by selling the bonds. On the other hand, the central bank and the government DO NOT hold green money issued by commercial banks at all. Maybe my slide is ambiguous about what I intended.

Roger: It took a lot of work to create your slide series

Not really. It doesn’t take long when you know how to use the presentation tool and it’s free to use for anyone with a Google email address. I used to be a management consultant. In that world, the extra time producing easy-to-follow slides is more than offset by the reduced time in explanation and argument with clients.

TMF: I like the idea that you stated assumptions

Another idea from consulting. Most people are quite smart and can articulate the logic of their own position. Disagreements often arise from underlying assumptions rather than from the logic of a position. However, people defend their positions using their logic and leave the assumptions unstated so disputes are never resolved. Making my assumptions explicit forces others to declare their assumptions. It also helps control the scope of the discussion.

TMF: Currency can't be directly defaulted on. Electronic "money" (which I consider bonds) can be directly defaulted on

I hadn’t thought of defaults but they are not central to the argument so I would add another assumption that exceptions such as defaults are out of scope. The main argument here is about whether green and red loans are required in a model such as this in addition to Nick’s green and red money.

Another point here is terminology. I have tried to define terms explicitly. My argument is based on that terminology. When you say that you think of electronic money as bonds, we have a terminology dispute. We can’t proceed with a discussion of logic until we agree a common set of terms. That doesn’t mean that you are wrong. You can use whatever terminology you like. However, you can’t criticise my argument based on your terminology. Think of my terminology as further assumptions if that helps.

TMF: I don't get P4, which means P2 and P3

I can’t remember why I included P4. Maybe just for emphasis. You are correct that it doesn’t really add any substance.

TMF: Why not just when a borrower takes out a loan with the commercial bank, it is just "green money" and "green loans denominated in green money"?

Accounting is mostly about the principle of conservation. We are all taught at school in physics and chemistry classes that certain things are conserved under change in the physical world.

The same principles apply in the real world. If a car factory takes in parts for five cars, it can manufacture only five cars. If six cars emerge, the factory would have broken the laws of physics. If only four cars emerge, we know that the parts for one car are still inside or that they have gone missing. It is the laws of conservation that provide that discipline.

Money and loans are artificial human constructs. However, they have been designed such that they are conserved. That is really the main point that I understand Nick is making by talking about green and red money – they are equals and opposites, so money is conserved. I am just extending that to loans as well.

Also, we need to look at money and loans from the point of view of BOTH parties. In my example of a loan, that is the commercial bank and Nick’s dad. Nick’s dad sees the green money as an asset he can use to buy other things (a positive thing). He sees the red loan as a debt he must repay (a negative thing). The bank sees the opposite view.

In these discussions, you often see people who work in finance say that “money is a liability”. That is because they look at money only from the bank’s perspective. Accounting, at a macro level at least, requires us to look at money from BOTH perspectives at the same time. That is why there is always a combination of green and red at a macro level, even though each party sees only one or the other colour at a micro level.

Antii: It seems your "red money" is not Nick's "red money", so that we have again new terminology to learn

I am just putting forward a position developed after reading earlier posts by Nick on this subject. The key difference I see is that Nick says that his dad has red money when he runs an overdraft. I say that he has a red loan, so the difference in terminology is central to the debate.

As I said previously, I don’t see how you can discuss macro-economic models without discussing money. Yet Nick is the only mainstream macro-economist I know who engages in debates about the logic of money. My understanding of one of Nick’s complaints about New Keynesian models is that they don’t consider money properly. I’d guess that is why there is no agreed terminology and why these discussions are always painful.

Antii: Is this an imaginary step (like Nick's creation of red and green bits of paper), without any entries made in real-life ledger?

No and neither is Nick’s step imaginary. Think of the accounting tables in my slides as the macro-economic ledgers. See my answer to TMF for more. If we are dealing with the macro-economy, we must view the economy from all perspectives at the same time.

Forget about creating money for a moment. Imagine the simplest possible economy where only one economic transaction takes place anywhere in the entire economy during an accounting period.

Imagine that the transaction is that my business sells you a bicycle for €100. Let’s look at this from both our perspectives.

Jamie’s perspective: I lose a bicycle and gain €100.
Antii’s perspective: You gain a bicycle and lose €100.
Macro-economic perspective: No gain or loss of either bicycles or money as the changes in Jamie’s position and Antii’s position cancel out. The macro-economy doesn’t care who has the bicycle and who has the money.

Note that there are FOUR position changes in the macro-economy that we must account for even in this simplest possible economy with only one transaction (two changes in bicycle inventories, two changes in money inventories).

In monetary terms, using Keynes’ terminology, I have saving of €100 and you have dissaving of €100 so there is no overall saving at the macro level.

Antii: It looks like …. seen from two different perspectives.

Exactly. That’s the difference between macro and micro. That’s why “thinking like a household” doesn’t work in macro. Thinking like a household means thinking from only one perspective.

Jamie:

I would like to add another perspective to this excellent quote of yours:

"Forget about creating money for a moment. Imagine the simplest possible economy where only one economic transaction takes place anywhere in the entire economy during an accounting period.

Imagine that the transaction is that my business sells you a bicycle for €100. Let’s look at this from both our perspectives.

Jamie’s perspective: I lose a bicycle and gain €100.
Antii’s perspective: You gain a bicycle and lose €100.
Macro-economic perspective: No gain or loss of either bicycles or money as the changes in Jamie’s position and Antii’s position cancel out. The macro-economy doesn’t care who has the bicycle and who has the money.

Note that there are FOUR position changes in the macro-economy that we must account for even in this simplest possible economy with only one transaction (two changes in bicycle inventories, two changes in money inventories)."

An additional perspective: When the bike is sold, we have TWO barter transactions. The bike is bartered for 100 units of money AND 100 units of money is bartered for the bike. Money is a simple link used in the transaction; the value established arbitrarily to be 100 units. There was no time delay in your example, but if there was a time delay, money would have been the barter counter-product in a more obvious fashion (fitting with Antti's gifting model)

I think this is a macro-economic perspective which may-or-may-not include a time perspective.

Does this make sense?

Jamie: "If we are dealing with the macro-economy, we must view the economy from all perspectives at the same time."

I fully agree, but I wouldn't try to achieve this by splitting one object into two separate objects, just because I want to highlight that the same object can be viewed from two opposing perspectives. It looks to me that this is what you do, and instead of double-entry bookkeeping you end up with quadruple-entry bookkeeping. In your macro-economic ledger you combine two different ledgers: the bank ledger (which is often a real, physical ledger) and non-bank's ledger (which, like in the case of Nick's dad, is not a real, physical ledger; unless Nick's dad keeps other than just mental records). Perhaps it's partly because I'm an accountant, but I don't see any need to do this. It's clear to me that a credit balance on a checking account in a bank ledger is my asset, but that the same credit balance is conventionally considered the bank's liability.

This all reminds me of what one of my favorite thinkers, Jacob Bronowski, talks about in his magnificient little book "Science and Human Values". Starting on page 39, he tells the story of how some experienced native climbers in the Himalayas were not able to fit together different faces of a mountain; they didn't think of it, or even see it, as one mountain.

If I talk about Mount Everest, I talk about the mountain -- not one specific face of it (say, the north face). The same is true when I talk about a credit balance on a checking account in a bank ledger ("money"). I'm viewing the object from both perspectives at the same time (as you say, this is macro). By talking about "green money" and "red money" as if those were two separate objects, you bring in two micro-perspectives without, at least explicitly, combining them into one.

I don't see what you would lose if you only talked about money and loans (I'd prefer 'debt' instead of 'loans')? At least part of our disagreement might be due to the fact that for me the bank ledger (or all banks' ledgers combined) is in itself a "macro-economic ledger". In it, all the agents of the economy -- or these agents' debts and credits, to use the language of Alfred Mitchell-Innes -- come together.

Nick had his reason to talk about red and green money (those are two separate objects; not perspectives). I don't yet see your reason.

Jamie: "If we are dealing with the macro-economy, we must view the economy from all perspectives at the same time."

I fully agree, but I wouldn't try to achieve this by splitting one object into two separate objects, just because I want to highlight that the same object can be viewed from two opposing perspectives. It looks to me that this is what you do, and instead of double-entry bookkeeping you end up with quadruple-entry bookkeeping. In your macro-economic ledger you combine two different ledgers: the bank ledger (which is often a real, physical ledger) and non-bank's ledger (which, like in the case of Nick's dad, is not a real, physical ledger; unless Nick's dad keeps other than just mental records). Perhaps it's partly because I'm an accountant, but I don't see any need to do this. It's clear to me that a credit balance on a checking account in a bank ledger is my asset, but that the same credit balance is conventionally considered the bank's liability.

This all reminds me of what one of my favorite thinkers, Jacob Bronowski, talks about in his magnificient little book "Science and Human Values". Starting on page 39, he tells the story of how some experienced native climbers in the Himalayas were not able to fit together different faces of a mountain; they didn't think of it, or even see it, as one mountain.

If I talk about Mount Everest, I talk about the mountain -- not one specific face of it (say, the north face). The same is true when I talk about a credit balance on a checking account in a bank ledger ("money"). I'm viewing the object from both perspectives at the same time (as you say, this is macro). By talking about "green money" and "red money" as if those were two separate objects, you bring in two micro-perspectives without, at least explicitly, combining them into one.

I don't see what you would lose if you only talked about money and loans (I'd prefer 'debt' instead of 'loans')? At least part of our disagreement might be due to the fact that for me the bank ledger (or all banks' ledgers combined) is in itself a "macro-economic ledger". In it, all the agents of the economy -- or these agents' debts and credits, to use the language of Alfred Mitchell-Innes -- come together.

Nick had his reason to talk about red and green money (those are two separate objects; not perspectives). I don't yet see your reason.

Antti: instead of double-entry bookkeeping you end up with quadruple-entry bookkeeping

Yes, that’s the point I am making! See my example of the simplest possible economy which you seem to have ignored. It has one transaction and four accounting entries.

Quadruple entry bookkeeping is used in the national accounts. See paragraph 1.63 on page 10 at this link with quoted extract below:

http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf

“As two matching entries are also needed for the buyer, the transaction must give rise to four simultaneous entries of equal value in a system of macroeconomic accounts covering both the seller and the buyer. In general, a transaction between two different institutional units always requires four equal, simultaneous entries in the accounts of the SNA (that is, quadruple entry accounting) even if the transaction is a transfer and not an exchange and even if no money changes hands”.


You understand the difference in our views but my view (backed up by the SNA document) remains that quadruple entry is required in the national accounts i.e. at a macro level.


Antti: I don't see what you would lose if you only talked about money and loans (I'd prefer 'debt' instead of 'loans')?


You would lose the bank’s perspective. The fact that you want to replace ‘loan’ with ‘debt’ means that you don’t think that the bank would also record the loan as an asset from its own perspective. That is wrong. The borrower has green money and red loan. The bank has the opposite. The bank records all four.

Roger Sparks: There was no time delay in your example

I agree with that, and that time can be significant in accounting, but I don’t understand your point, I’m afraid.

If I were talking about time in my bicycle example, I would point out that there could be a time difference between me providing Antti with the bicycle and him paying me the money. For example, we might agree that he can pay me any time in the next month, or that he can pay me in instalments. However, that takes us from cash accounting to accruals accounting which only adds another layer of complexity.

I don’t think that is the point you are making, though, as it’s not about barter. I would be happy to discuss further but I don’t understand why you think that we should introduce barter into the discussion. (Maybe it was discussed earlier and I have missed it. I have not read every reply in this thread in detail).

Roger Sparks: … fitting with Antti's gifting model …

I don’t know what this is. I searched the thread for ‘gifting’ but your mention of it was the only hit I could find. All I can say is that there are no gifts in my examples.

Jamie: "The bank records all four."

Does it? On which accounts exactly? Are all four in the General Ledger (GL)? I can only think of the checking account (account-holder: Nick's dad) and the loan account (account-holder: Nick's dad). What are the other two? As far as I know, they cannot be in the GL, because that would lead to double-counting.

Regarding SNA: Notice that in the document they talk about a buyer and a seller of goods. In your example, the bank is neither buying nor selling goods (incl. services; banks do sell and buy goods, but not in your example). Banks don't produce or sell money -- they perform accounting services, and "money" is just a part of that accounting.

You said: "You would lose the bank’s perspective."

Because I see the bank ledger as a macro-economic ledger in itself, I kind of want to lose the bank's perspective. (This doesn't mean I'm blind to it.) My thinking is not that far away from Nick's thinking. In Nick's world, the whole point is that "red money" (I agree with you: this is the same as "loan") is not the bank's asset and "green money" is not the bank's liability. In other words, in Nick's world we can forget the bank's perspective as you describe it.

You said (earlier): "Note that there are FOUR position changes in the macro-economy that we must account for even in this simplest possible economy with only one transaction (two changes in bicycle inventories, two changes in money inventories)."

Correct. And the bank is involved only on the money side: it debits my account and credits you account (two entries, not four). This is what I mean with the bank ledger being a macro-economic ledger. The bank doesn't record its own trade; it records our trade.

Jamie: You did not understand my sentence "The bike is bartered for 100 units of money AND 100 units of money is bartered for the bike." You seemed to think it was not about "barter".

I am not surprised. After I wrote and posted, I wondered what I had written. Could I defend it? Please let me try.

First, I differ from Antti. I think money is much more than an accounting entry. I think it is real property that represents the results of labor performed sometime in the past.

To me, money is a tool that can be used universally to represent value. Because money in the most basic analysis represents labor-past-performed, and because labor is required in some fashion to prepare every property prior to exchange, money becomes a bridge that can link two very disparate decision makers, with vastly different motives and goals, as they decide whether to make an exchange or not. These same two decision makers likely received the money they are trading in very different ways.

Let's use an example of a worker in a car manufacturing plant who wants to buy a piece of hand-made pottery direct from the pottery maker. What is their common link? Certainly not the car that the manufacturing worker spent his time building. The pottery? One wants it and one (the seller) does not want pottery. How about the desire or need for money? One has a steady job with benefits, the other sales of a handmade item when a customer can be found. Very probably there is a wide difference in perceptions of the value of money.

Yet they can come to agreement (or not) on the value of a piece of pottery and the exchange can be made. To me, that is clearly barter. Money as a form of property, a very dividable form of property, has been used as an intermediate store of value, forming a meeting point that unifies two vastly different perspectives of value.

Please notice that this example (upon completion) would represent an increase in the GDP calculation. Both the money value and the pottery are counted. The money is counted as the value of the exchange while the pottery is counted as a value of one(1).

Is my comment making sense now?

My Sisyphean task continues: A New Monetary System From Scratch, Part 3: Give and Take.

If Nick is Sisyphus, I'm probably on the other side of the boulder and my task is to keep it at full rest at the foot of the hill.

Nick, a question orthogonal to the green/red money paradigm, but rather just about one of your conclusions:

It is not sufficient for a central bank to set a rate of interest (or one rate of interest plus a spread) and let the stock of money be determined by demand at that rate of interest. Long run output (not to mention the price level) is indeterminate if it does that, even if it sets the correct rate of interest. It needs to control the nominal quantity of money too. The central bank needs to set some nominal anchor, not just to make the price level determinate, but to make the level of output determinate.

The only mechanism that can provide an automatic tendency towards full employment (if, and that's a big "if", the central bank does the right thing) is the hot potato mechanism. If we reinterpret and reform the New Keynesian model the way it needs to be reinterpreted and reformed, we end up with Keynso-monetarism.

If the Fed pays interest on excess reserves equal to the target rate, then doesn't your conclusion imply long-run output is indeterminate / not trending to full employment and that the CB has no real control over the price level?

The hot potato is the wedge between the price of risk-free short-duration bonds and reserves. If I'm earning interest on my excess reserves they aren't hot at all - I have no reason to want to trade them for those bonds.

In this scenario, the Fed's only way to change the size of the combined stock of (excess reserves + short-term bonds) is through something like Operation Twist, buying longer-term bonds. (This is assuming the Fed sticks to only buying government debt.) That... seems like a really weak source of a hot potato effect?

In general, I find the idea that monetary policy's effectiveness is conditional on that wedge concerning.

Jamie: "The bank records all four (accounting entries)."

Antti: Does it? On which accounts exactly?

Loans are assets for a bank. Assets are usually recorded in asset registers. I can’t say if banks have a specific name of their register of loans but I am pretty confident that this is correct.

My view is based on listening to the views of people who work in banking and finance via their blog posts and comments, and on a number of independent articles. For example, JKH who posts on here and elsewhere knows what he is taking about. Nick and others can confirm that if you don’t believe me. I have merely documented what the experts say in an easy to digest format.

You can also confirm that this view is correct by a quick search on Google. For example, it took me about 10 seconds to find this:

“A bank makes a loan to a borrowing customer. This simultaneously, creates a credit and a liability for both the bank and the borrower. The borrower is credited with a deposit in his account and incurs a liability for the amount of the loan. The bank now has an asset equal to the amount of the loan and a liability equal to the deposit. All four of these accounting entries represent an increase in their respective categories: the bank's assets and liabilities have grown, and so has the borrower's”.

Roger Sparks: To me, that is clearly barter. Money as a form of property, a very dividable form of property, has been used as an intermediate store of value, forming a meeting point that unifies two vastly different perspectives of value.

I agree that money is an intermediate store of value. Nick and others often say that “money is unit of account, medium of exchange and store of value” and this seems like a good concise summary to me. Based on that quote, the store of value aspect of money represents timing imbalances between different exchange events.

However, I don’t understand why you want to introduce the term “barter” into a discussion on money. I don’t see that as adding anything to the quote in the previous paragraph. The first sentence of the Wikipedia entry on barter is:

“Barter is a system of exchange where goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money”

In mature subjects, such as the natural sciences, there is an agreed vocabulary to which everyone conforms. Unfortunately, many economists seem to ignore money so, when it is discussed, there is no such agreed vocabulary. Einstein said “everything should be made as simple as possible, but no simpler”. The lack of agreed vocabulary on money over-complicates any discussion on the subject, so I prefer to minimise the use of terms that are contrary to their common definitions, wherever possible.

I like Nick’s use of “green money” and “red money” as they are neutral terms which allow discussion of the underlying logic of money without requiring us to agree on the many ambiguities in existing terminology. I tried to keep to that principle – my version just adds in the term “loan” which is well understood and which I think is essential to the logic.

"I hadn’t thought of defaults but they are not central to the argument so I would add another assumption that exceptions such as defaults are out of scope."

Eventually, defaults need to be in a model, as in 2007 and 2008.

"When you say that you think of electronic money as bonds, we have a terminology dispute. We can’t proceed with a discussion of logic until we agree a common set of terms. That doesn’t mean that you are wrong."

You have commercial banks in your model. I would say demand deposits are a certain type of bond that is used as "electronic money".

Your model has a commercial bank, a central bank, and a gov't. You should have currency, central bank reserves, demand deposits, and bonds in it along with goods/services. Stocks can be skipped for now.

"Money and loans are artificial human constructs. However, they have been designed such that they are conserved. That is really the main point that I understand Nick is making by talking about green and red money – they are equals and opposites, so money is conserved. I am just extending that to loans as well."

I would say green money does not have to conserved. The system is set up that way. I would also say it is about how the green money is "backed". Maybe a better description is if green money is put into an economy, how can green money be taken back out.

"Also, we need to look at money and loans from the point of view of BOTH parties. In my example of a loan, that is the commercial bank and Nick’s dad. Nick’s dad sees the green money as an asset he can use to buy other things (a positive thing). He sees the red loan as a debt he must repay (a negative thing). The bank sees the opposite view."

OK, except that I see a red loan as a green bond denominated in green money.

"In these discussions, you often see people who work in finance say that “money is a liability”. That is because they look at money only from the bank’s perspective. Accounting, at a macro level at least, requires us to look at money from BOTH perspectives at the same time."

OK.

"That is why there is always a combination of green and red at a macro level, even though each party sees only one or the other colour at a micro level."

I don't agree with that one. Take green money as an example. It is a liability to central bank (I reserve the right to change that one in the future), and it is an asset to the holder. There may be no red money and/or red view at all. It is asset and liability view(s).

Alex said: "If I'm earning interest on my excess reserves they aren't hot at all - I have no reason to want to trade them for those bonds."

Exactly how are you (*Alex*) earning interest on my excess reserves?

"My view is based on listening to the views of people who work in banking and finance via their blog posts and comments, and on a number of independent articles. For example, JKH who posts on here and elsewhere knows what he is taking about. Nick and others can confirm that if you don’t believe me. I have merely documented what the experts say in an easy to digest format.

You can also confirm that this view is correct by a quick search on Google. For example, it took me about 10 seconds to find this:

“A bank makes a loan to a borrowing customer. This simultaneously, creates a credit and a liability for both the bank and the borrower. The borrower is credited with a deposit in his account and incurs a liability for the amount of the loan. The bank now has an asset equal to the amount of the loan and a liability equal to the deposit. All four of these accounting entries represent an increase in their respective categories: the bank's assets and liabilities have grown, and so has the borrower's”."

Jamie, I seem to remember going over this with JKH. I like to think of it this way.

During the loan process, the borrower creates a bond. It is an asset and a liability to the borrower. The bank creates a demand deposit (a type of bond that is used as "electronic money"). It is an asset and a liability to the bank. This is referred to as "blowing up the balance sheets".

When the loan is approved and used, there is an asset swap. The borrower gets the demand deposit as an asset. The demand deposit is still a liability to the bank. The bank gets the borrower's bond as an asset. The bond is still a liability to the borrower. The borrower usually spends the demand deposit.

Jamie, what happens if you remove red money and red loans from your model?

"I like Nick’s use of “green money” and “red money” as they are neutral terms which allow discussion of the underlying logic of money without requiring us to agree on the many ambiguities in existing terminology."

I am not sure about that. Let me try this way. Nick's dad gets a $2,000 loan. It is "loans create demand deposits". No red money. I think Nick would agree with that.

Nick's dad gets a $1,000 loan and a $1,000 "overdraft". I would say that is $2,000 of "loans create demand deposits". No red money. I believe Nick would say $1,000 of "loans create demand deposits". No red money. I believe Nick would say $1,000 of "overdraft". There is red money. Now which is it?

As of right now, I can't make the accounting work for red money.

Jamie, I think this post will end its comments soon. Any other place to continue the discussion?

"Exactly how are you (*Alex*) earning interest on my excess reserves?"

That may not be clear. I will try:

Exactly how are you (*Alex*) earning interest on excess reserves?

Jamie: I'm quite confident that you've got it wrong. Your CNBC quote is not convincing: everything before it mentions four entries describes a case of two entries in the bank ledger (a credit balance on customer's checking account is at the same time an asset for the customer and a liability to the bank), and the four entries is most likely about the bank ledger and the customer's (real or imaginary) ledger seen together.

Would be great if Nick or JKH could confirm.

Antti, if this is the post:

http://www.cnbc.com/id/100497710

Basics of Banking: Loans Create a Lot More Than Deposits

then I am pretty sure JKH will agree with it.

I can't remember if it was here or at another site, but I remember JKH agreeing with the article at the time.

If I was an agent in your model I would never bother working since there is no particular consequence of running up a big overdraft. All agents live forever so they can always pay back mañana.

Mind you, since all the agents are thinking the same way, probably no one else would do any work either. Voluntary "full employment" of zero, regardless of what the Central Bank does with rates.

"Assume that the central bank sets a spread between the interest rate it charges on negative balances and the interest rate it pays on positive balances."

That's going to quickly violate the rule "Net money is zero by assumption," presuming at least one agent is silly enough to do a day's work.

Suppose all accounts start at zero, then one haircut is purchased for $100 and one agent has a positive $100 balance (green if you like) while the other has negative $100 balance (presumably red). Central bank pays out 1% on the positive, and then charges 2% on the negative, you get a positive balance of $101 and a negative balance of $102.

Net money is now negative $1.

If you want the central bank to put together a special account for payments you can make that the "figure to balance" at positive $1 but that's kind of a meaningless accounting trick if this new account never gets involved in any commerce. I guess the central bank could somehow disburse the left over amongst the population as some type of incentive payment, but that's getting fanciful.

Jamie’s general point on quadruple entry accounting is correct (supported obviously by the SNA quote).

A simple example is the same as included in that discussion - a new bank loan creating a new bank deposit. The result is a loan asset and a deposit liability for the bank, and a deposit asset and a loan liability for the customer.

Quadruple entry accounting is a notion that has been picked up by some post-Keynesian writers who focus on macro level accounting (e.g. the book by Godley and Lavoie). Double entry accounting is required for a given counterparty to a particular transaction. Quadruple entry accounting acknowledges that there are two counterparties to a given transaction. So the quadruple entry idea is essential to a macro perspective on the accounting.

That CNBC post by Carney is pretty messy in the particular details. He works through some weird, idiosyncratic operational scenarios. To my liking, it’s a bit too “bottom up” and unwieldy in the actual examples he uses. But the general thrust behind it is correct.

My main point there would be not to think of the reserve requirement and the capital requirement as “liabilities”. That just messes up the discussion. Think of them as regulatory requirements concerning balance sheet structure. As to how banks ensure that their reserve and capital requirements are met – that is a matter of ongoing balance sheet operations. So they respond to regulatory requirements governing balance sheet structure by making various asset, liability, and equity adjustments through regular operations. There is an infinity of examples as to how they might get this done in full detail.

It’s not rocket science, but it is operations and accounting. Which I suppose can sometimes feel like rocket science.

:)

If I sell my car to JKH, there are 2 changes in my balance sheet (cars down, cash up) and 2 changes in JKH's balance sheet (cars up, cash down). 4 changes in total. It's always going to be quadruple entry (or sextuple if there are 3 people involved in a trade) in general (as opposed to partial) equilibrium analysis.

Too Much Fed: do you mean "how does Alex as private citizen earn IOR"? The answer is I don't, obviously, but neither do I hold reserves. I have interest-bearing (well... lol) bank deposits, private money.

But if you mean, "how does Bank of America earn IOR"? Well, the Fed is paying it.

JKH, is this correct?

During the loan process, the borrower creates a bond. It is an asset and a liability to the borrower. The bank creates a demand deposit (a type of bond that is used as "electronic money"). It is an asset and a liability to the bank. This is referred to as "blowing up the balance sheets".

When the loan is approved and used, there is an asset swap. The borrower gets the demand deposit as an asset. The demand deposit is still a liability to the bank. The bank gets the borrower's bond as an asset. The bond is still a liability to the borrower. The borrower usually spends the demand deposit.

The demand deposit gets a reserve requirement attached to it.

The bond/loan gets a capital requirement attached to it.

Alex at 11:19, that sounds right. You have the demand deposits, and the bank has the (central bank) reserves.

Nick said: "Reinterpreting the New Keynesian model as a model of a monetary exchange economy, where every agent has an interest-earning chequing account at the central bank, kills two birds with one stone (it explains how the central bank can set the rate of interest, and explains how this can cause deficient-demand unemployment)."

I can't tell what is in the checking account at the central bank.

Is it (central bank) reserves or demand deposits?

JKH: Jamie’s general point on quadruple entry accounting is correct

Thanks. I thought I had represented you correctly. I am sure you are correct about reserves and capital. I was merely using the quote to show that I was not alone in my view of the quadruple entry point.

Nick: If I sell my car to JKH, there are 2 changes in my balance sheet (cars down, cash up) and 2 changes in JKH's balance sheet (cars up, cash down). 4 changes in total. It's always going to be quadruple entry

Yes!!!! Now we are getting somewhere, so if we throw away everything else in this entire thread and we can use that statement as a starting point to build on. A few further points in the same spirit.

The four entries form into two pairs. Two always represent the medium of exchange and two always represent the thing that is being exchanged.

In an exchange-only transaction, the four entries always cancel out at a macro level i.e. they obey basic accounting conservation laws. If Nick sells his car to JKH, they swap the car and they swap the money. However, the macroeconomy still has the same number of cars and the same amount of money. This really ought to be called the first law of macroeconomics.

Manufacturing of cars and “manufacturing” of money change the totals (the equivalent destruction events also change the totals). These events also obey conservation rules. Manufacturing a physical product obeys the conservation laws of physics. Manufacturing of money and loans obeys the artificial conservation rules of equal and opposite green/red pairs (or asset/liability pairs). This is analogous to creating matter and anti-matter from nothing in physics.

When Nick’s dad takes out a loan with a commercial bank, the bank first “manufactures” the medium of exchange (as a green money/red money pair) and it “manufactures” the thing that is being exchanged (as a green/red loan pair). The exchange then involves transferring two of the four things to Nick’s dad and keeping the other two.

Normal businesses manufacture only the thing that is exchanged. They are merely users of the medium of exchange (as are households). Commercial banks “manufacture” the medium of exchange AS WELL AS the thing that is exchanged (the loan). That is why banks are special.

Businesses manufacture the things that are exchanged. That is why they are special. Households are users of both the medium of exchange and the things that are exchanged.

When economists say that non-economists “think like a household”, what they mean, in these terms, is that households see only their own two accounting entries and ignore the other two. As Paul Krugman says “my spending is your income and my income is your spending”. That is why thinking like a household is wrong in macro. Households don’t understand quadruple entry bookkeeping.

Unfortunately, when most economists think about money, they too think like a household as they do not understand quadruple entry either – which is why it all goes wrong, and why these threads are frustrating for everyone! And, of course, many economists don’t seem to think about money at all – which is my limited understanding of Nick’s complaint about New Keynesian models! How on earth can anyone claim to be an expert in monetary economics without understanding money? That’s like claiming to be an expert in chemistry without understanding atoms and molecules.

Finally, Keynes’s two sector identity has four terms: I + C = C + S.

These are the same four terms! That is why it is called an accounting identity and why two of the terms represent the medium of exchange and two represent (a monetary evaluation of) the things that are exchanged.

However, many economists don’t seem to understand this either as they think of the terms in the identity in very abstract terms rather than as totals that are built up transaction by transaction. Note that this MUST be true as we can carry out a thought experiment where only one transaction takes place anywhere in the economy during an entrie accounting period e.g. Nick’s business sells a new car to JKH’s household. Keynes identity MUST then be consistent with the quadruple entry accounting for that single transaction.

Of course, virtually no-one will believe this – particularly economists! And don’t mention “profit” as that will make everyone’s head explode!

I second Jamie, Nick an JKH's vote (FWIW).

TMF: When the loan is approved and used, there is an asset swap. The borrower gets the demand deposit as an asset. The demand deposit is still a liability to the bank. The bank gets the borrower's bond as an asset. The bond is still a liability to the borrower. The borrower usually spends the demand deposit.
Yes. That is the same as what I am saying. I am just using Nick’s green/red terminology. Let’s break down your point.

The borrower gets the demand deposit as an asset (yes, I’m calling that green money)

The demand deposit is still a liability to the bank (yes, red money)

The bank gets the borrower’s bond as an asset (yes, green loan)

The bond is still a liability to the borrower (yes, red loan)

The borrower usually spends the demand deposit (yes, green money).

Note that green = asset and red = liability.

My point to you is merely that we must use consistent terminology to communicate effectively. We can’t mix and match. Otherwise, we just pass in the night and everyone gets frustrated.

TMF: I think this post will end its comments soon. Any other place to continue the discussion?

I’d prefer to stick here as my objective is to help this whole debate move forward and reach a consensus rather than going round in endless circles. Success for me would be reaching a common view acceptable to, say, Nick and JKH which was also easy to understand for you, me and others. That’s the only way for me to test that my own understanding makes sense. I don’t see the point in developing a Jamie view or a TMF view with which no-one else agrees.

Sorry, but let's take this again: four entries in a real-life bank ledger, made by a real-life bank? Or four entries in a macro model where one tries to take into account that one man's credit is another man's debit (a positive checking account balance is a debit balance in the OWNER'S ledger, while it is a credit balance in the BANK'S ledger)?

I earlier said I understand the idea of quadruple entry (although I don't agree it should be used to describe the relationship of a bank and its customers; in case of two non-banks I get it).

What I've been arguing that in a real-life bank general ledger there is only two entries. The debit entry/balance on customer's loan account in the BANK'S ledger serves at the same time as a record of the customer's liability AND the bank's asset. The same goes for the credit entry/balance on the customer's checking account in the BANK'S ledger. Outside the ledger there are of course loan contracts, etc. Often the customer himself doesn't keep records (unless it's a company).

Seriously? I'm an accountant, and as you see, I hate to be proven wrong on an accounting point by what I assume to be non-accountants :-)

"When Nick’s dad takes out a loan with a commercial bank, the bank first “manufactures” the medium of exchange (as a green money/red money pair) and it “manufactures” the thing that is being exchanged (as a green/red loan pair). The exchange then involves transferring two of the four things to Nick’s dad and keeping the other two.

Normal businesses manufacture only the thing that is exchanged. They are merely users of the medium of exchange (as are households). Commercial banks “manufacture” the medium of exchange AS WELL AS the thing that is exchanged (the loan). That is why banks are special.

Businesses manufacture the things that are exchanged. That is why they are special. Households are users of both the medium of exchange and the things that are exchanged."

Leaving aside green money/red money pair, I'd rather think of the green loan being "manufactured" by the borrower because it is the borrower's liability. The bank may assist in its production. That is a minor point. The point is the bond/loan is the borrower's liability, and the commercial bank can't force the liability onto a borrower.

Another minor point. Households could manufacture things that are exchanged. I could grow some apples and sell them.

"The borrower gets the demand deposit as an asset (yes, I’m calling that green money)

The demand deposit is still a liability to the bank (yes, red money)

The bank gets the borrower’s bond as an asset (yes, green loan)

The bond is still a liability to the borrower (yes, red loan)

The borrower usually spends the demand deposit (yes, green money).

Note that green = asset and red = liability.

My point to you is merely that we must use consistent terminology to communicate effectively. We can’t mix and match. Otherwise, we just pass in the night and everyone gets frustrated."

True about the frustration. You will need to ask Nick about the red money and red loan part.

"I’d prefer to stick here as my objective is to help this whole debate move forward and reach a consensus rather than going round in endless circles. Success for me would be reaching a common view acceptable to, say, Nick and JKH which was also easy to understand for you, me and others. That’s the only way for me to test that my own understanding makes sense. I don’t see the point in developing a Jamie view or a TMF view with which no-one else agrees."

That is fine with me. I think Nick will need to extend the comment post period or start another post.

Nick said: "If I sell my car to JKH, there are 2 changes in my balance sheet (cars down, cash up) and 2 changes in JKH's balance sheet (cars up, cash down). 4 changes in total. It's always going to be quadruple entry (or sextuple if there are 3 people involved in a trade) in general (as opposed to partial) equilibrium analysis."

JKH and Nick, is this correct?

If I (Nick) sell my car to JKH, there are 2 changes in my (Nick's) balance sheet (cars down, demand deposits up) and 2 changes in JKH's balance sheet (cars up, demand deposits down). 4 changes in total.

Jamie: "This really ought to be called the first law of macroeconomics."

Agreed, and based on that you need to check Godley & Lavoie book JKH was refering to (e.g. http://www.palgrave.com/br/book/9780230301849) if you hadn't already.

Jamie: "However, the macroeconomy still has the same number of cars and the same amount of money. This really ought to be called the first law of macroeconomics."

I don't think Nick, deep down, agrees with this. For him, the amount of money changes if one of the parties to the transaction uses an overdraft.

It is also clear to me, like I said already in my first comment on your slides (a comment which seemed to express Nick's thoughts as well), that your "green money" AND "red money" is Nick's "green money" seen from two perspectives. You seemed to understand this (?), but then you say that you are using Nick's terminology. I would say you use Nick's words but give them a wholly new meaning.

I'll try to be more constructive, so I'll create an Excel for illustration. One can expect slides from management consultants and spreadsheets from accountants...

I think this discussion shows how the implicit models we all use to make sense of all this are very different. I can live with only accounts and balance sheets as the things I picture in my head, but many of you seem to prefer "manufacturing", on top of the accounting itself, some things that are transferred between agents/accounts. Perhaps it's "observationally equivalent", as Nick says. We'll see. It would also be good to be absolutely clear about whether we are talking about phenomena (real-life accounting entries) or a model.

"I'll create an Excel for illustration"

This became a full blog post (on double-entry and quadruple-entry) which I will publish tonight (GMT+1 time zone). If we need to change the discussion venue (hopefully not), then one option would be to continue in my blog. Up to you.

Here's the post: Double-Entry and "Quadruple-Entry" Bookkeeping

I really hope we could get to a common understanding on this issue. There are not many things in this world which are more frustrating than talking past each other.

Antti's post said: "To simplify things, we can assume that Jamie sells the bicycle "at cost", so that his inventory is diminished by €100. It seems the purpose of Jamie's example is to highlight the asset positions, so we can overlook the income side (zero effect if goods are sold "at cost"). So, two entries: CR 100 Inventory, DR 100 Cash.

In the example, I, Antti, am not a business. That most likely means that I keep records only of my assets – not of my income. Two entries: CR 100 Cash, DR 100 Inventory (of assets/of bicycles)."

Notice there is an asset swap. Also, notice both people are storing the currency themselves. Let's add a storage facility for currency (NOT a commercial bank) that both people use. Now what does the exchange (currency and bicycle) look like?

Antii,

I took a look at your last referenced post. Good work.

For what it’s worth, a couple of points:

a) At some stage, where more than one bank is involved, one must consider one type of double entry event (for example) being that of a bank crediting its reserve account and debiting a chequing account – as a reflection of a cheque drawn on it and presented to another bank. You’ve no doubt considered that, but I didn’t see reference to this category of transaction in your write up.

b) My own impression of Nick’s green and red money world is that the idea of a normal loan of money in the real world is fully displaced by the idea of red money. Red money takes the place of that kind of real world loan. It also serves the purpose of real world overdrafts. I think if you allow both red money and “loans” (of some type of money) to exist in Nick’s world, you get unnecessary ambiguity in the logical structure of his model. Maybe I’m wrong in that interpretation. Only Nick knows for sure.

Thank you, JKH!

Regarding your point B: You're absolutely right. Well spotted. I should have clarified that Nick would call that a "loan", and has done it in his posts I believe, but that "loan" doesn't exist in Nick's basic setup of green/red money. (Side note: I've been actually arguing, to no avail, that the "loan" is not different in kind from Nick's "red money"...)

I fully agree with your point A as well. But I'd like to hear how exactly do you see that relevant in this context? Is it because it can be seen as a case of quadruple-entry when we consider that the other bank makes equal and opposite entries in its own ledger? And much like in my scenario 1 (the bicycle trade), the bank between the two banks -- in this case the central bank -- would make two entries: credit and debit the reserve accounts of the two banks, respectively. Hence, sextuple-entry? :-) (Another side note: In the theory I'm working on, transactions between banks are seen as a case of making changes in the record-keeping system. I don't view it as "money transfers", nor do I see the banks trading "central bank money". I'll try to explain all this in more detail in my coming posts.)

TMF: I see that me arguing earlier that a "book transfer" (a bank crediting your checking account and debiting mine)is not really an "asset swap" is still bothering you, right? I stick to it. What I mean is that it can be argued quite convincingly it is not an asset swap, although you're free to view it as such; especially if you don't see any alternative way to think about it. I have an alternative -- that's why I'm arguing this.

You won't prove me wrong by insisting on the storage facility idea or similar. A bank is not a storage facility for currency. And I'm talking about a bank.

The comments to this entry are closed.

Search this site

  • Google

    WWW
    worthwhile.typepad.com
Blog powered by Typepad