tag:blogger.com,1999:blog-5908830827135060852.post3871377667432255128..comments2024-03-01T02:40:14.946-05:00Comments on Bond Economics: Banks And The Acceptance Of Money: Tokens of Lower CanadaBrian Romanchukhttp://www.blogger.com/profile/02699198289421951151noreply@blogger.comBlogger17125tag:blogger.com,1999:blog-5908830827135060852.post-24435005111148939282016-02-27T08:45:51.949-05:002016-02-27T08:45:51.949-05:00The pricing of bonds at auction appears to be an a...The pricing of bonds at auction appears to be an area of disagreement here; I am a rates expectations fundamentalist. Within a simplified model, the pricing of TBills pretty much has to equal the policy rate, which is set in order to control inflation or whatever. How far those two rates can deviate in a free-floating currency sovereign (not Greece!) is open to disagreement, but I am in the "less than 25 basis points" camp. (Although t-bills can get expensive for technical reasons; it's just that I argue that they cannot be above the policy rate plus 25 bps.) Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-11172041651150160012016-02-26T18:08:21.509-05:002016-02-26T18:08:21.509-05:00I mean that it is voluntary to draw a contrast wit...I mean that it is voluntary to draw a contrast with the issuance of debt. If an issuer sells debt into the market, it cannot choose the interest rate to pay. This is a price set by the market. However, the CB can just create reserves (money), and then voluntarily tax or reward. Your distinction between what is a tax, transfer or interest rate when discussing reserves, looks totally arbitrary to me. It also appears arbitrary in practice - look at what the BoJ has just done: it is in fact using three "interest rates" - one on existing reserves, one on required reserves, and one on new reserves. The reality is that the BoJ is making a transfer to banks on existing reserves - this has nothing to do with the determination of market interest rates.Anonymoushttps://www.blogger.com/profile/13473661280678620614noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-57144615747490504162016-02-26T10:39:12.758-05:002016-02-26T10:39:12.758-05:00It's voluntary in the sense that the central b...It's voluntary in the sense that the central bank is forced into a policy of permanent ZIRP. That would cause the heads of most central bankers to explode. If you want to use interest rates as a policy variable, you have to pay interest on excess reserves.<br /><br />Thhe government can increase the amount of required reserves, and thus reduce the amount of interest it has to pay. But that's just a tax on the banks. The government could just as easily impose a special tax on banks to cover its interest expense, and achieve exactly the same effect. This is only a superficial relabelling of a policy that has the exact same effect as another possible policy - which has obvious defects.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-6429907179422491862016-02-26T10:22:33.316-05:002016-02-26T10:22:33.316-05:00Roger - nice way of putting it. Brian - QE is a re...Roger - nice way of putting it. Brian - QE is a reduction in the net debt of the government. The payment of "interest" on reserves - required, or 'excess' - is voluntary, hence not really "interest". We have seen this with the BoJ's action. The BoJ has actually moved the government yield curve while making a transfer payment to the banks on (all current) reserves. Anonymoushttps://www.blogger.com/profile/13473661280678620614noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-10737895752929351452016-02-26T08:43:47.127-05:002016-02-26T08:43:47.127-05:00Notice that the central banks are not required to ...Notice that the central banks are not required to have "reserves". Only private (meaning not-government-owned) banks have a reserve requirement.<br /><br />This availability of unlimited reserves gives the central bank the ability to loan without limit. Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-82241494246588488222016-02-26T07:28:36.352-05:002016-02-26T07:28:36.352-05:00Just one point. There are two types of reserves - ...Just one point. There are two types of reserves - required and excess. The central bank has to pay interest on excess reserves, as otherwise Treasury bill yields will go to something that is near zero. In a zero rate environment, the government does not need to pay interest on anything, so reserves are not that special.<br /><br />As for required reserves, the central bank can get away with not paying interest. This is effectively a tax on banks, and reserve requirements were actually abolished in many developed countries (the US being the main exception). Even for countries that keep reserve requirements, QE does not create required reserves, only excess reserves, as there is no reason to expect that bank lending will rise at a pace that matches reserve creation.<br /><br />There may be some small advantages of QE for reducing interest costs, but if you look at a simplified model of government finances, the introduction of QE makes no difference for the dynamics of government liabilities -- liabilities compound at the short-term interest rate.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-50415941506565984852016-02-26T06:42:46.067-05:002016-02-26T06:42:46.067-05:00Brian - excellent post. I read you as being very c...Brian - excellent post. I read you as being very cognisant of the difference between money and debt, while you rightly point out that we have typically used debt instruments as money. That is true - they are highly convenient and have value independent of the network externality, assuming the issuer is credit-worthy. It would be interesting to know if bills of exchange etc, when used as money, traded at premia to face value in the same way as gold coins did. As regards the banking system - it is of course far more convenient to net off transactions and settle the difference using "money" - i.e. banks reserves, which are not a liability in any meaningful sense. That is why our monetary system is based around credits and debits. As regards Neil Wilson - he completely misses the point. Debts are more than promises - they are promises to pay something. This is not mere definition - it is extremely important whether or not you owe something. Greece can issue debts, but it cannot create banks reserves - that is the whole problem! To spell it out: because bills are debts, the market requires a high interest rate from Greece on its bills. Reserves carry no obligation to pay anything (therefore are not a debt), but they are the means of payment (money), so if Greece could create money, instead of debt, its depression would end. The false treatment of reserves as a liability is also one of the justifications of austerity - QE exchanges bank reserves for government bonds. Because bank reserves are not really liabilities, this is a reduction in the government's net debt. So, there was no significant increase in, for example, the UK's net public debt after the financial crisis. But if bank reserves are genuine liabilities at book value - Mervyn King and Osborne had a point. I argue that there is a contingent liability associated with bank reserves (i.e. you may have to issue debt in the future to reduced the stock of reserves), but this was never significant after a financial crisis. http://blogs.ft.com/economistsforum/2012/06/governments-can-borrow-without-increasing-their-debt/ It is in fact much more defendable to say that government debt is not a simple liability, which is one of Minsky's profound insights, and in fact where Randall Wray ends up going. What is odd is the dogmatic, blinkered, denial of the independent existence of money - which I expect to hear more of from Neil!Anonymoushttps://www.blogger.com/profile/13473661280678620614noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-40432446659232834082016-02-25T12:52:30.365-05:002016-02-25T12:52:30.365-05:00It strikes me as foolish to argue the composition ...It strikes me as foolish to argue the composition of something you can hold in your hand (or in your bank account) if you do not exactly know how it has been created. You should also know how it can be destroyed (beyond the obvious fire or by-hand-destruction). <br /><br />We also need to recognize that private individuals can create money (it is called counterfeiting). Of course government can lend to itself (central bank to treasury). Government could create electronic deposits or print currency without recording the event. That action would be financial catastrophe.Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-62359356529803917922016-02-25T12:49:37.125-05:002016-02-25T12:49:37.125-05:00This comment has been removed by the author.Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-77154801244204536832016-02-25T12:32:50.466-05:002016-02-25T12:32:50.466-05:00I was looking at my American money, as I believe t...I was looking at my American money, as I believe that they used to have a similar inscription, but I guess it has been removed from more recent bills. This comment reminded me to dig up one of my old pound notes.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-6591977845256752462016-02-25T12:10:25.236-05:002016-02-25T12:10:25.236-05:00The debate between Wray and Lonergan is whether m...The debate between Wray and Lonergan is whether monetary instruments are debt, not how they are created. If money are debt instruments, they are obviously related to debt.<br /><br />The creation of money can be done without explicit lending (although one could argue that reserve creation is implicit borrowing). A private bank can create deposits by making a payment to a depositor; there is no explicit loan (other than the increase in the deposit, which is a form of debt).Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-13422911239535923392016-02-25T11:01:18.846-05:002016-02-25T11:01:18.846-05:00Brian - I don't seem to be getting the thrust ...Brian - I don't seem to be getting the thrust of your comment.<br /><br />Are you suggesting that the central bank has money that is unrelated to debt? <br /><br />I think that loans (or purchases of debt) by the central bank are always exchanges of money for debt.Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-7017749221611854462016-02-25T10:02:29.942-05:002016-02-25T10:02:29.942-05:00"Now, the holders of debt specifically do so ..."Now, the holders of debt specifically do so to receive income and repayment of principal. "<br /><br />No they don't. They hold debt as an asset. It may have a repayment of principal or it may not. It may receive an income or it may not. <br /><br />Lonergan wants a specific definition of the word 'debt' - one of owing money according to very narrow terms. But debt is wider than that in society. "I am in your debt" for example.<br /><br />Debt just means something owed. It doesn't say what. It doesn't say when. It is just a promise of some kind. Whatever kind.<br /><br />Again being British this is never a problem, because all my money has written on it in ink: "I promise to pay the bearer on demand the sum of X pounds". <br /><br />A debt is just a promise in the wider sense of the word. Why are we bothering arguing with somebody over definitions. This is worse than the word 'inflation'. <br /><br />debt comes from the Latin "debitum" - something owed. If Lonergan thinks his narrow definition has some use, then let him come up with a new word for it. NeilWhttps://www.blogger.com/profile/11565959939525324309noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-49157682764315714812016-02-24T16:30:44.138-05:002016-02-24T16:30:44.138-05:00If you sell anything to the central bank (a bond i...If you sell anything to the central bank (a bond in a QE operation, or even selling them hot dogs for their cafeteria), you end up with a bank deposit (and the bank ends up with excess reserves). This created a deposit without borrowing from a private bank. (Although the increase in reserves could be viewed as the central bank borrowing from the private banks.)<br /><br />If the Treasury mails you a cheque, you will also get an increase in your bank account (but the Treaury will have a reduced balance at the central bank).Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-23029480178384761812016-02-24T15:29:00.507-05:002016-02-24T15:29:00.507-05:00"I am unsure what you mean by "evidence ..."I am unsure what you mean by "evidence of debt"."<br /><br />Think from the perspective of an investigator. An investigator notices that an individual begins with no money in a bank account and later does have money in a bank account. How did that money arrive?<br /><br />The individual could have worked to earn money, could have sold resources, or could have borrowed. Neither work nor selling resources could actually create initial money. Borrowing from banks is accepted as a way to increase money on deposit in private accounts.<br /><br />If working and selling resources cannot create money, the only candidate left (to explain the existence of money in a bank account) is that debt (from bank borrowing) has been incurred sometime in the past. Thus we see that money is "evidence-of-debt".<br />Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-9619004187517192232016-02-24T13:55:16.619-05:002016-02-24T13:55:16.619-05:00I am unsure what you mean by "evidence of deb...I am unsure what you mean by "evidence of debt".<br /><br />The tokens are undated IOU's, which are pretty much the same thing as a cheque that is not dated with a future date. (There is a date limit for how long a cheque is valid, unlike the tokens that are discussed here.) <br /><br />Therefore the token is certainly a liability, and speaking loosely, a debt.<br /><br />I am unconcerned about how other people define "debt", I am looking at the situation like a financial engineer. A "bond" is a well-defined generic financial instrument, and can take many forms, including zero coupon, perpetual, etc. This is a generic definition, such as you would find in a finance textbook, and does not coincide with how securities laws defines "bonds". I then define a "debt" as an instrument that is economically equivalent to a bond. Most liabilities that can be considered an instrument ends up being a "debt" by this definition.<br /><br />Note that "bearer bonds" are redeemed by the holder, and this redemption can presumably be after the notional maturity date of the bearer bond. Anything that is payable on demand, like a token, falls under this definition. That is - there is a notional maturity, always equal to "today" or an arbitrary date in the past (with no interest accruing after the maturity date).Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-21651072238553884672016-02-24T12:16:00.942-05:002016-02-24T12:16:00.942-05:00Can I give you an example to mull?
The example: A...Can I give you an example to mull?<br /><br />The example: A store displays a sign behind the counter that says "Change may be U.S. Coinage or Store Tokens. All Store Tokens will be exchanged for merchandise." <br /><br />After posting this sign, the store begins distributing most change in Store Tokens. <br /><br />Are these Store Tokens debt or money?<br /><br />My answer: The tokens are money upon acceptance as change by the customer. The tokens are also evidence-of-debt because the issuing store has promised to exchange the tokens for merchandise.<br /><br />The tokens are not "debt" because there is no time period, no interest payments, and no reoccurring performance requirements placed on the issuer.<br /><br />This supports my contention that money (especially fiat money) can be considered as being evidence-of-debt.Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.com