tag:blogger.com,1999:blog-5908830827135060852.post8302623484426471805..comments2024-03-01T02:40:14.946-05:00Comments on Bond Economics: Overdrafts, Bank Lines, And Negative MoneyBrian Romanchukhttp://www.blogger.com/profile/02699198289421951151noreply@blogger.comBlogger32125tag:blogger.com,1999:blog-5908830827135060852.post-14675956031797043122016-08-22T15:53:49.119-04:002016-08-22T15:53:49.119-04:00No worries, Brian!
Prediction and economics don&#...No worries, Brian!<br /><br />Prediction and economics don't go well together? :) To me, at this stage, it's more about the elegance and simplicity of the theory. MMT might get the accounting correct, but the interpretation is everything: what are we really recording? For instance, a credit entry in the ledger of a central bank is not a government/CB "IOU". And no accounting entry can constitute a payment. When we make accounting entries, we are recording something. If we are recording a payment, then we have to show where and how that payment took place; the entry itself cannot be that payment.<br /><br />The advantage comes from being able to describe the economic phenomena in a parsimonius way, without leaving anything of relevance out. MMT, like other prevailing theories, adds an imaginative layer on top of the accounting, by seeing IOUs on accounts and payments being made purely by accounting entries. I don't. Hence, my model is much simpler once you get a good hold of it.Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-52937327863918109402016-08-22T09:32:48.095-04:002016-08-22T09:32:48.095-04:00At the moment, I am not sure I could look through ...At the moment, I am not sure I could look through it; I have a lot on my plate.<br /><br />The MMT description of the accounting is correct; if all you are doing is changing the interpretation, I am unsure what the advantage is. You need to focus on what you can predict with your version, and why other descriptions cannot do the same thing.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-16678449156553339562016-08-22T07:12:42.022-04:002016-08-22T07:12:42.022-04:00Yes, I'm aware of Chartalist writings. Very mu...Yes, I'm aware of Chartalist writings. Very much so. There is a lot of functional similarity between chartalist theories and my theory. At times I feel Alfred Mitchell-Innes described my model in his two articles. But in the end, not just seems my model to be clearer and simpler than chartalists'/MMT's, but I seem to manage to establish a stronger connection between the "real economy" and "monetary economy". So much so, that I sometimes wonder if I'm, after all, neoclassical :) That cannot be, but all this would speak for some kind of synthesis.<br /><br />I've been also pointed to Quantum Economics for a couple of times. This connection probably has to do with money not really existing as a medium of exchange. Frederick Soddy has also put many things in the same way as I do. But so has Schumpeter, too.<br /><br />What you say about old/new currency and various monetary instruments is for me something that happens inside the accounting system. I explain it as changes in that system. The payment of taxes with "government currency", the basic Chartalist story, I put in different terms. The idea is pretty much the same, but the link to the "real economy" becomes clearer when we consider the "tax payment" to be only an operation where the accounts are updated; taxes are paid by giving up goods without getting a permission to take goods for the same amount and be able call yourself even with the rest of the society.<br /><br />I'm not sure if you get much out of this kind of description? I'm working on a model, in the form of a story about a closed economy of ~30 individuals (I haven't so far found mathematics helpful in any way; only accounting), which should help me communicate the theory in a very concrete way. It's quite advanced already. Should you find this interesting, just let me know? I'm aiming to publish the story before the year end.Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-40344225159830229542016-08-21T09:15:20.366-04:002016-08-21T09:15:20.366-04:00When governments redenominate their currency, old ...When governments redenominate their currency, old currency notes create an enforceable claim on new notes. Currently, governments must accept their currency to pay taxes. Banks are forced to exchange deposits for currency. The various "basic" monetary instruments have the right to be exchanged for another, and they are associated with different issuers (banks, gov't).<br /><br />I am not the person to ask what is "new." A lot of different economic theories to me seem to be functionally similar. What you are describing sounds similar to the "money is credit" theories, but I could not say much more than that at this point. You are aware of the various MMT Chartalist writings?Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-32393607585289971042016-08-21T03:38:34.362-04:002016-08-21T03:38:34.362-04:00Yes, I would definitely place my theory in a broad...Yes, I would definitely place my theory in a broadly understood "credit theory" group. Where I differ from the post-Keynesian position:<br /><br />- Money is not an "IOU" (of a 3rd party). There is no "I" to point at; it's not an enforceable claim (as we know, the central bank doesn't owe a noteholder anything). It is "We owe you", 'we' being the society.<br /><br />- This makes "money" a public record which tells that the holder of it is entitled to take (buy) a good from someone without giving (selling) anything in return. This is all based on a social custom. If you sell something and your account is credited, this record means you didn't get *anything* in return for your goods; ie. you didn't get paid.<br /><br />- From this viewpoint, banks need to be seen as bookkeepers who are themselves not owed anything -- neither do they owe anything. They are the "scribes" of our society. (I believe Schumpeter would have, at times, agreed with this.)<br /><br />You might think that there is not really anything new in this? For me the new thing here is that by looking at world through this lense, we get rid of money (economics is saved from further embarrassment related to money). A credit balance in a bank's ledger just doesn't have the properties we attached to it when we described it as transferable "money".Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-89882368094344758772016-08-20T21:19:55.401-04:002016-08-20T21:19:55.401-04:00With regards to your comment, it looks like money ...With regards to your comment, it looks like money is a form of credit. That is roughly what the post-Keynesian position is. I would have to see more details to see what is different.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-14295960742383270892016-08-20T15:23:08.719-04:002016-08-20T15:23:08.719-04:00Well, I don't want to go there. All I wanted t...Well, I don't want to go there. All I wanted to point out was that Anonymous can't make the negative balance disappear.<br /><br />I think Nick Rowe is confusing things with his red/negative money. Just like you, I'm trying to abolish money from economics, and also from the real world. I mean really abolish, Copperfield style -- there is no "medium of exchange" and "means of payment" as we knew it. It's an illusion (OK, perhaps I'm the opposite of Copperfield then...). A strong one, of course. Made even stronger by the stories on how commodity money evolved into fiat money. The thing is that if you choose to call one of them 'money' you should never call the other 'money'.<br /><br />Any thoughts on my comment to Nick?Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-51568392795195624242016-08-20T14:41:51.232-04:002016-08-20T14:41:51.232-04:00Sure, the accounting depends on the convention. Th...Sure, the accounting depends on the convention. The issue with treating a negative balance as negative money revolves around default risk. Normally, we assume that money is default risk free, and so the symmetry between positive and negative balances is broken.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-83462771492804735862016-08-20T13:33:26.648-04:002016-08-20T13:33:26.648-04:00I would like to clarify this text behind Joe's...I would like to clarify this text behind Joe's link (which Anonymous quoted above):<br /><br />“At a more specific level, the negative balance term commonly refers to the checking account, where you have a negative balance if you have issued checks for a larger amount of cash than is available in the checking account. In this situation, create a journal entry to shift the amount of the overdrawn checks into the accounts payable or a similar current liability account; doing so reduces the balance in the checking account to zero, and properly displays the overdrawn amount as a current liability.”<br /><br />We need to keep in mind that these are instructions to the accountant of the *bank customer* (a firm). As far as I know, we are trying to adopt the view of the bank's own accountant here. These are two different ledgers. I suppose that the bank has no problem with having a debit balance -- instead of the usual credit balance -- on a customer's checking account (under overdraft agreement). Even if I'm wrong, it's only a question of accounting convention, and thus not really relevant :) (In case you wonder: I'm an accountant.) Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-8606367053777838952016-08-20T13:10:56.930-04:002016-08-20T13:10:56.930-04:00Brian and Anonymous: Doesn't the existence of ...Brian and Anonymous: Doesn't the existence of "negative money" depend purely on the accounting convention? What I mean is that we can always present a "traditional loan" (ie. a bank credits customer's "deposit account" and debits his "loan account") in an overdraft form, and vice versa. The form/accounting convention changes, but substance remains the same. Overdraft just gives us the net balance of "loan account" and "deposit account". I actually dare to posit that overdraft is a "traditional loan" which has met Occam's razor (this meeting took place in 18th century Scotland, I think).<br /><br />The big question is: What is the *substance* I referred to above?<br /><br />I just left Nick Rowe the following comment:<br /><br />------------------------------------------------<br />I've been working two years on a theory which seems to clear all the confusion around the red/green world you guys seemed to be experiencing (or did everything become clear already?). I would be happy to elaborate, explain my theory/model step by step, but first you have to promise me one thing: You must be ready to entertain the possibility that no "medium of exchange" (money) exists in the way we are used to think about it. Based on some comments you've made, I reckon you find this hard to accept?<br /><br />The "medium of exchange" is the ledger, the accounts -- not any*thing* on the accounts. The buyer doesn't transfer anything to the seller, and the seller transfers only goods to the buyer -- no "red money". The only thing that happens in the "monetary realm" is that the buyer's account gets debited and the seller's account gets credited. In our minds we need to build an impassable wall between the two accounts; nothing moves between them. This bookkeeping, of course, serves a real purpose, which is not to track "money holdings" (there isn't any) but to track goods given (sold) and goods taken (bought). You could think of it as a "gift economy" with an explicit tracking of the gifts (there's a connection here to Kocherlakota's "Money as Memory" and Ostroy's paper which Kocherlakota builds on). No bilateral balance in trade required -- just multilateral (ie. I can buy from you and sell to Peter, and you won't be able to claim anything from anyone, but that won't make you unhappy as you can, in turn, buy from anyone and thus get rid of your credit balance).<br /><br />This solution works, but to see that it works you might have to turn your world upside down. That's not easy -- at least it wasn't for me. Let me know if anything here resonates? (I apologize for being so mysterious. Just trying to build some drama around this, I guess.)<br />--------------------------------------<br /><br />I'm more than happy to clarify any claims I make above!Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-20811155232871802582016-08-07T22:45:04.880-04:002016-08-07T22:45:04.880-04:00That is good I convinced you. Nick, I doubt it.
D...That is good I convinced you. Nick, I doubt it.<br /><br />Do you know anyone in accounting at a big commercial bank who would be willing to verify?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-90606913330448751902016-08-06T09:03:55.066-04:002016-08-06T09:03:55.066-04:00You have convinced me; not sure about Nick Rowe......You have convinced me; not sure about Nick Rowe...Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-70018604928486149072016-08-05T21:40:10.856-04:002016-08-05T21:40:10.856-04:00I see it now. That is fine.
Can we say there is n...I see it now. That is fine.<br /><br />Can we say there is no negative money (red money) in the real world now?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-76918268697480418392016-08-03T19:49:02.232-04:002016-08-03T19:49:02.232-04:00And as I forgot to note, it is now published above...And as I forgot to note, it is now published above...Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-38308655433486323792016-08-03T19:48:33.804-04:002016-08-03T19:48:33.804-04:00Hi,
Well, assuming that you are the same "an...Hi,<br /><br />Well, assuming that you are the same "anonymous", it was caught by the spam filter. The spam filter doesn't like long anonymous posts. Thanks for highlighting that, I get very little non-spam comments caught by the spam filter, so I rarely check it.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-15327791279698192062016-08-03T15:13:55.343-04:002016-08-03T15:13:55.343-04:00I tried to post a comment.
It is not here. What h...I tried to post a comment.<br /><br />It is not here. What happened?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-28212927747798905732016-08-03T08:18:55.637-04:002016-08-03T08:18:55.637-04:00Thanks. It looks like it is in line with my argume...Thanks. It looks like it is in line with my arguments.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-22590597233711950012016-08-03T07:28:19.059-04:002016-08-03T07:28:19.059-04:00Hi Brian, I think you would find this interesting ...Hi Brian, I think you would find this interesting considering your on-going project:<br />http://www.perrymehrling.com/2016/08/financialization-and-its-discontents/Ignaciohttps://www.blogger.com/profile/16082008115484199316noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-35133373040918141342016-08-03T00:11:39.939-04:002016-08-03T00:11:39.939-04:00From Joe’s link:
http://www.accountingtools.com/q...From Joe’s link:<br /><br />http://www.accountingtools.com/questions-and-answers/what-is-a-negative-balance.html<br /><br />“At a more specific level, the negative balance term commonly refers to the checking account, where you have a negative balance if you have issued checks for a larger amount of cash than is available in the checking account. In this situation, create a journal entry to shift the amount of the overdrawn checks into the accounts payable or a similar current liability account; doing so reduces the balance in the checking account to zero, and properly displays the overdrawn amount as a current liability.”<br /><br />I would need JKH to verify, but I agree with Joe. The checking account balance either does not go negative or very quickly goes negative and then turns into a bond/loan at the bank (asset of the bank, liability of the “overdraft” user).<br /><br />“When payment clears the payee gets positive money and when the books close the bank has a receivable and the debtor has a payable. In the long run the accounting, economic, and legal implications of overdrafts are based on positive balance accounting logic.”<br /><br />It is about positive (green) money and positive (green) bonds/loans. An overdraft is just another type of loan. There is no negative (red) money.<br /><br />“Suppose my father sells hay to another farmer, who also has an overdraft (at the same bank). The bank takes some red notes out of my father's box at the bank, and puts them in the other farmer's box.”<br /><br />Let’s say both are allowed a $2,000 “overdraft”. They both use $1,000 of it. They both owe the bank $1,000 (bonds/loans). Next, nick’s father sells $500 of hay to the other farmer. The other farmer now owes the bank $1,500. $500 of demand deposits (positive, green money) goes into the checking account of nick’s father. It is used to pay back part of the “overdraft”. He now owes the bank $500.<br /><br />Checking accounts only contain demand deposits (positive, green money). Checking accounts do not contain negative (red) money. No other account at the bank contains negative (red) money either.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-42936351579039160692016-07-30T07:21:49.567-04:002016-07-30T07:21:49.567-04:00I seem to remember that American spelling was maki...I seem to remember that American spelling was making inroads, particularly for words with technical meanings. I seem to recall engineers using "analog" circuitry instead of "analogue" when I was in England, but people would still use "analogue" for its other meanings. (Certainly true for Canada; I never saw "analogue circuits," but a few holdouts would still use "analogue" elsewhere.)Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-76313526454374913522016-07-30T07:09:12.579-04:002016-07-30T07:09:12.579-04:00I agree that you can interpret the existing behavi...I agree that you can interpret the existing behaviour with red/green money; it could be viewed as a change of accounting convention. As a similar example, we could translate all Canadian dollar transactions into the equivalent amounts in Australian dollars, and the accounting would add up. However, Canadians do not generally set prices in Australian dollar terms, and so trying to get a model using Australian dollars to work would be hard to do.<br /><br />A behavioural difference is that banks limit overdrafts (red money) to customers. Transactions will be refused if your counterparty's red money hits a limit (which also has to be periodically renegotiated), while a bank customer knows that they can always spend Green money (until the limit of 0 is hit), and their is no dependence upon the credit capacity of other entities.<br /><br />Although both cases have limits on how much you can spend, the amount of uncertainty involved in the limits for "red money" means that it is much less useful in dealing with economic uncertainty (which is one standard argument for holding "money").Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-35712710815160744302016-07-30T03:50:39.787-04:002016-07-30T03:50:39.787-04:00Actually, I think it's overdraft here.Actually, I think it's overdraft here.Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-22644950790871681112016-07-30T00:09:46.558-04:002016-07-30T00:09:46.558-04:00My familiarity with banks is based on my perceptio...My familiarity with banks is based on my perceptions as a resident of the western United States. Agriculture is king in our area. From a banking standpoint, the problem is how to finance farms which buy inputs from outside the area (fertilizer, machines and parts, sprays, and taxes for examples). Obviously real money leaves the local region. None of this red stuff; red stuff will not pay the bills.<br /><br />The problem for the banks and for those in agriculture is getting money back into the local area. A one way flow out, even for vital inputs, is unsustainable for more than a season. Red money just becomes a trap, to be sprung on the unwary. Only the existence of positive money will work to pay rent, taxes, next years fertilizer bills, and food for the farmers themselves.<br /><br />I think the best way to think of agricultural lending is to consider that the bank is buying part of the potential harvest. The bank always takes first position, meaning that when the crop is sold, the bank loan is paid first. The bank becomes a senior partner to the farmer. Of course, it is the same for car loans or residential loans. The ownership position of the borrower is somewhat of a sham, the bank is the real owner if times get hard (until the loan is repaid).<br /><br />You will not be surprised when I say that the overdraft/overdraught question is mute for me. Overdrafts are just a way to accommodate careless customers, and the customers pay a premium for the privilege to overdraw. <br /><br />Along this same line, I have a new post <a href="http://mechanicalmoney.blogspot.com/2016/07/when-central-banks-buy-equities.html" rel="nofollow"> "When Central Banks Buy Equities". </a> I think it very clear that a mechanical interpretation of money flows demands that positive money must be used.Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-46399819002709726552016-07-30T00:04:22.467-04:002016-07-30T00:04:22.467-04:00Suppose my father sells hay to another farmer, who...Suppose my father sells hay to another farmer, who also has an overdraft (at the same bank). The bank takes some red notes out of my father's box at the bank, and puts them in the other farmer's box.<br /><br />(I would need to think about the case where they have different banks. But we can imagine a case where both those commercial banks also have overdrafts in their chequing accounts at the central bank, in which case the central bank transfers its own red notes from my father's bank's box to the other bank's box. It's just like the standard textbook green money case, except the notes are red, and flow in the opposite direction.<br /><br />(You could say that velocity is negative in the red world, because the notes circulate in the opposite direction to green notes ;-) )Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-71194150637345359022016-07-29T15:27:52.220-04:002016-07-29T15:27:52.220-04:00As an aside, I believe that you are UK-based. Wher...As an aside, I believe that you are UK-based. Where do you stand on the overdraught vs. overdraft question?Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.com