Tuesday, February 16, 2016

Ed Lonergan — Debt-free money: A brief reply to Randall Wray


Seems he missed the point.

Philosophy of Money
Debt-free money: A brief reply to Randall Wray
Ed Lonergan
ht Ralph Musgrave

56 comments:

Brian Romanchuk said...

Lonergan is incorrect in saying that a dollar bill is not a debt. It is a debt - it represents a claim on $1 in reserves. And a reserve is a deposit at the central bank, and a deposit is a liability.

Matt Franko said...

https://www.youtube.com/watch?v=8Moh7DXMk8g

Jose Guilherme said...

The deposit at the central bank is a liiability, yes - but of an entity that cannot go bankrupt.

That makes it a very different animal from all the other liabilities.

Neil Wilson said...

Lonergan is trying to promote the asset view of central banks. He wants to turn the entire accounting around, probably because he is a believer in Central Banks Uber Alles - run by people like him without any serious democratic oversight. He is a promoter of 'Rule by Experts' - a Peritocracy if you like.

In the asset view of central banks money is an asset of the central bank and it gives assets to other banks.

Unsurprisingly in this view there is no role or reason for taxation. And I suspect that is part of the Peritocratic plan.

Alex Douglas explains the view very well imv.

Neil Wilson said...

The main point that he misses is that notes are just a receipt for a form of debt that is no longer repaid and has restricted interest payments (only to banks when they have created an equivalent deposit). You can have precisely the same type of instrument issued by banks. It is very easy to conceive of a permanent securitised interest only loan from a bank for example where the debt payment is paid to whoever is the current bearer of that loan instrument.

You then pay or do work for people in return for taking on that loan obligation, and therefore it becomes a way of receiving a capital sum in return for an income stream.

Both loan assets and loan liabilities are passed around the system in both fixed and floating forms as types of money. Obligations are settled with all sorts of assets. I use British pounds and occasionally Bitcoins. I never use US dollars at all. Lonergan's theory doesn't explain why the the type of dollar used changes pretty much abruptly at the 49th parallel. Tax driven money theory does.

So I find it a very insular single country focus philosophy. The same sort of philosophy that has driven economics right up a dead end.

Matt Franko said...

"Wray, like many others, is resistant to the uniqueness of money"

LOL.... How can something that a figure of speech allegedly represents be described as "unique"?

Here:

"Figures of speech often provide emphasis, freshness of expression, or clarity. However, clarity may also suffer from their use, as any figure of speech introduces an ambiguity between literal and figurative interpretation.

https://en.wikipedia.org/wiki/Figure_of_speech

These are two morons talking back and forth at each other about who's specific interpretation of a figure of speech is correct... science is completely missing from the scene...

Matt Franko said...

https://termcoord.wordpress.com/2013/07/11/what-does-it-take-to-be-a-terminologist/

"Help Wanted"

Andrew Anderson said...

The deposit at the central bank is a liiability, yes - but of an entity that cannot go bankrupt. Jose Guilherme

Yes, then what need for government-provided deposit insurance when all might have inherently risk-free accounts at the central bank itself alongside commercial banks, credit unions and other members of the usury cartel?

Jose Guilherme said...

then what need for government-provided deposit insurance

Because a bank deposit does not constitute "dollars" - it's merely a promise by the bank to pay the deposit holder in dollars.

Kristjan said...

"In fact, we do not hold dollar bills in order to be repaid, we use them, primarily, to buy things."

That is repaying. First you get the dollar bill by giving something in return (unless it is a gift) and you get repaid whenever you choose. The question of a debtor might come up, who is it? Like Alfred Mitchell Innes said: anyone who accepts the money as payment is a debtor.

Kristjan said...

Money is not debt crowd is starting to sound like Cullen Roche and Co.

Tom Hickey said...

The purpose of banks in contemporary capitalism is as agents of the government in creating M1 through loans. The idea is that decision making regarding the private sector should be done by the private sector rather than government to avoid favoritism, cronyism, and corruption.

The central bank creates the currency as its liability and backs the banks with liquidity provision along with operating the payments system. The cb "backs the banks" because bank deposits are convertible into currency at par as well as acting as the lender of last resort.

It's a OK system if operated properly, and government regulators are charged with ensuring it does in terms of democratically determined laws.

Giving government more power of money creation could just open another can of worms.

The system doesn't mater as much as how it is configured and operated.

Kristjan said...

"The root meaning of the verb “to pay “is: that of “to appease,” “to pacify,” “to satisfy,” and while a debtor must be in a position to satisfy his creditor, the really important characteristic of a credit is not the right which it gives to “payment” of a debt, but the right that it confers on the holder to liberate himself from debt by its means—a right recognized by all societies. By buying we become debtors and by selling we become creditors, and being all both buyers and sellers we are all debtors and creditors."

Alfred Mitchell Innes




"In fact, we do not hold dollar bills in order to be repaid, we use them, primarily, to buy things."

Yes, we hold the dollar bills to be repaid, to be appeased, to be pacified, to be satisfied. That is what (re)paying means.

Andrew Anderson said...

"Because a bank deposit does not constitute "dollars" - it's merely a promise by the bank to pay the deposit holder in dollars." Jose Guilherme

Well, duh. But so what? May the citizens not deal with their own Nation's fiat except in the form of unsafe, unwieldy physical fiat, paper bills and coins? Must we be forced to deal with a usury cartel?

Andrew Anderson said...

The idea is that decision making regarding the private sector should be done by the private sector rather than government to avoid favoritism, cronyism, and corruption. Tom Hickey

I've not said commercial banks, credit unions, etc. should be made illegal but merely de-privileged by, for instance, removing their government-provided deposit insurance and allowing all citizens to have inherently risk-free accounts at the central bank itself.

It's the current system that is corrupt since the rich are the most so-called worthy of government-subsidized private credit and the poor the least so-called worthy of government-subsidized private credit.

As for money creation, that could be handled, if necessary*, by equal fiat distributions** to all citizens until interest rates or the inflation rate reach politically agreed upon levels.

*Since deficit spending by the monetary sovereign creates net fiat.
**financed by the monetary sovereign (eg US Treasury) with trillion dollar coins, for example.

Random said...

"I've not said commercial banks, credit unions, etc. should be made illegal but merely de-privileged by, for instance, removing their government-provided deposit insurance and allowing all citizens to have inherently risk-free accounts at the central bank itself."

Most should indeed, but banks focused solely on capital development lending should be allowed. Getting the state to lend directly via agents in the field would lower the barrier to entry in lending. Doing 'market forces' puts the cost too high.

For a loan to be enforceable in the courts it has to be within the rules. If the loan can't be enforced then it is has to be written out as a bad debt.

Too many of those and the bank goes bust.

Making banks work:

http://www.3spoken.co.uk/2013/05/making-banks-work.html

"the only reason we should pay bankers to do anything is if they can demonstrate the skill of underwriting capital projects against a prospective income stream.

In simple terms this means somebody going into a bank with a proposal that requires a certain amount of money. The bank staff considers whether the prospective income stream proposed to repay that money is adequate to repay the loan and pay the wages and costs of the bank - including a reasonable return to whatever risk capital underpins the bank.

Note that there is no asset collateral involved in this process."

"The way I would narrow banks is to offer them an incentive - an unlimited cost free overdraft at the Bank of England. 0% funding costs. In return they must drop all the side businesses and just do capital development lending on an uncollateralised basis - probably in the form of simple overdrafts. In other words they become an agency businesses delivering state money to those that require it.

I'm not even sure a capital buffer is required here. Losing your lending licence if your underwriting isn't that good should be sufficient incentive to run a tight ship. Backing off the entire thing to the central bank reduces the barriers to entry in lending - making self-employed, highly dispersed and, importantly, locally focussed underwriters a possibility (the 'Provi Model').

Any lending businesses that doesn't want to take the oath, then has to fully fund their lending on a maturity matched basis Zopa style. No deposit insurance, no access to the Bank of England, and losses absorbed by those doing the lending. This then becomes the fate of the shadow banking system - the building societies and money funds.

So that sets state funded lending against fully match-funded lending in competitive tension. State funding will likely be conservative but actually injects extra net financial assets into the non-government sector economy. Fully funded lending is just patient man helping impatient man for a fee in return for the risk."

Andrew Anderson said...

"Most should indeed, but banks focused solely on capital development lending should be allowed. " Random

Who said anything about disallowing bank lending? Not me.

Ralph Musgrave said...

Brian,

You argue that a dollar is a claim on reserves, and reserves are a deposit at a central bank and a deposit at a bank is a liability. That just begs the question. I.e. the big question is whether a so called liability of a central bank is the same as a liability (i.e. a deposit at) a commercial bank.

Certainly reserves APPEAR on the liability side of a central bank, but that's just to keep the double entry book keeping in order. There is actually a HUGE difference between deposits at central and commercial banks. A central bank is part of the government machine. And the government machine has no obligation whatever to give anyone anything in respect of their holding of reserves. In fact the government machine can simply raise taxes and say to people "Give me some of your reserves else you go to prison. Now piss off". In contrast, there's no way a COMMERCIAL BANK can do anything like that.

Neil,

Your point about democracy is irrelevant. Even if central bank decisions were effectively taken by democratically elected politicians, the government machine (including the central bank) can simply scrub the central bank’s liability as I indicate above. A a liability which you can wipe out at will is not a lilability.

Andrew Anderson,

Good question. Essentially you’re asking the question which is at the root of the full reserve versus fractional reserve (aka existing bank system) argument. Full reservers (like me) claim that having the state subcontract the production of totally safe money to private banks (which then do daft thinks like bet the money on dodgy derivatives and NINJA mortgages) is not a brilliant idea.

To summarise, I agree with Warren Mosler’s view of base money / reserves: they’re like points in a tennis match. Those points come from nowhere and are produced at will by the umpire / state / central bank. Plus they are assets as viewed by players. But they are not a liability of the umpire / central bank.


Andrew Anderson said...

"Most should indeed, but banks focused solely on capital development lending should be allowed. " Random

So theft via government privilege is OK if the "loans"* are for capital development? Then say I need a capital development "loan" to develop a robot that will disemploy 90% of the population? Is that loan OK too?

*actually new liability/deposit creation.

Andrew Anderson said...

Essentially you’re asking the question which is at the root of the full reserve versus fractional reserve (aka existing bank system) argument. Ralph Musgrave

Let fully private banks with 100% voluntary depositors create as many deposits/liabilities as they dare, is my position.

Andrew Anderson said...

Btw, debt-free PRIVATE money is possible since Equity is debt-free by definition* (Equity = Assets - Liabilities). Thus, shares in Equity, common stock, are debt-free too.

*assuming non-negative Equity.

Neil Wilson said...

"A a liability which you can wipe out at will is not a liability."

Bankruptcy is in real trouble as a concept then.

Neil Wilson said...

"since Equity is debt-free by definition*"

No it isn't. As any CEO who passed a dividend and got fired found out.

Nothing is free of obligation. Because as a species we trade in promises.

"Let fully private banks with 100% voluntary depositors create as many deposits/liabilities as they dare, is my position."

They already do. You just haven't taken into account that an insured system and an in specie system are just identical mappings of each other

Kristjan said...

"I've not said commercial banks, credit unions, etc. should be made illegal but merely de-privileged by, for instance, removing their government-provided deposit insurance and allowing all citizens to have inherently risk-free accounts at the central bank itself."

Why would anyone have a demand deposit account anywhere else than at the central bank then? Market interest rates working their wonder? You would achieve your goal better if you nationalised commercial banking I think.

Jose Guilherme said...

As Perry Mehrling likes to put it, there's a hierarchy of money and credit, with dollars (central bank "liabilities") at the top of the pyramid, followed by bank deposits (a promise to pay in dollars, on demand) and then credit (a promise to pay in bank deposits, usually with interest, at a later date).

During the Gold Standard, only gold was acceptable for international payments, so it stood at the very top of the hierarchy, above dollars that were used for payments inside the U.S.

Neil Wilson said...

"Why would anyone have a demand deposit account anywhere else than at the central bank then?"

The level of interest on offer or something. Here in the UK we already have a demand deposit with the central bank. Here it is. Individuals up to £2 million

Yet individuals still have savings with banks in excess of the insured limit of £75,000.



Andrew Anderson said...

They already do. Neil Wilson

Well duh, again. But the commercial banks are hardly fully private now, are they Neil? Nor do they have fully voluntary depositors so long as government-provided deposit insurance is in effect since who will chose a zero interest paying risk-free central bank account when they may have an interest paying risk-free insured commercial bank account?

Andrew Anderson said...

No it isn't. Neil Wilson

So Equity is a liability?

Then Equity = Assets - (Liabilities + Equity) = Assets - Liabilities - Equity

Then 2*Equity = Assets - Liabilities.

Then Equity = (Assets - Liabilities)/2.

But the fundamental accounting equation is Equity = Assets - Liabilities.

So then who's correct? You or the fundamental accounting equation?

Andrew Anderson said...

Why would anyone have a demand deposit account anywhere else than at the central bank then? Market interest rates working their wonder? Kristjan

Because central bank accounts, being risk-free, should pay zero interest unless one's country believes in welfare proportional to central bank account balance rather than need?

Is that what you've got in the UK, Neil? Welfare proportional to central bank account balance rather than need? Not just for the commercial banks, etc. but for rich individuals too?

Andrew Anderson said...

Oh, I get it. Equity is normally debt-free but shares in Equity, common stock, aren't?

Then what if someone owns 100% of the common stock? Does he then owe himself the equity he already owns and legally possesses?

You do know that the share owners OWN the common stock company?

Andrew Anderson said...

You just haven't taken into account that an insured system and an in specie system are just identical mappings of each other Neil Wilson

Who said anything about specie? I'm a firm believer in inexpensive fiat for government use. I also am a firm believer in the monetary sovereign engaging in perpetual deficit spending, be the deficits ever so small if price inflation need be controlled.

Andrew Anderson said...

You would achieve your goal better if you nationalised commercial banking I think.

What do you think my goal is? To replace theft via government-subsidized private credit creation with theft by the government itself on behalf of some citizens (the more so-called creditworthy) at the expense of other citizens (the less so-called creditworthy)?

How about instead we have government created credit for the general welfare only (including welfare proportional to need) and let the private sector come up with its own financing schemes apart from government privilege?

Kristjan said...

"The level of interest on offer or something. Here in the UK we already have a demand deposit with the central bank. Here it is. Individuals up to £2 million "

Those are insured Neil. Out of context.

Andrew Anderson said...

As any CEO who passed a dividend and got fired found out.
Neil Wilson

Btw, dividends are dumb since common stock is ITSELF* a private money form and dividends dissipate the assets backing the common stock. But the purpose of a common stock company is to consolidate assets for economies of scale, not dissipate them.

*Therefore there is no need to use or borrow any other money form except fiat (for taxes, etc.) Thus the insistence, contrary to accounting, that all money must be debt? So people won't realize they don't need the commercial banks, etc. to consolidate capital for economies of scale?

Random said...

"Those are insured Neil. Out of context."

Perhaps you have bad eyesight and couldn't read the part below.

"Yet individuals still have savings with banks in excess of the insured limit of £75,000."

lastgreek said...
This comment has been removed by the author.
Andrew Anderson said...

There is a reason why liability is on the equity side of the accounting equation ... cause it is debt ... just less senior ;) lastgreek

Equity is on the Liabilities side so that the sum of the left column, Assets, should equal the sum of the right column, Equity + Liabilities as a check of Assets = Equity + Liabilities, the fundamental accounting equation.

Being on the same side proves nothing since there are three entities (Assets, Liabilities, Equity) but only two sides (left and right) of a balance sheet.

And no, Equity is not debt but what remains when Liabilities are subtracted from Assets, ie. what is truly owned, ie. not encumbered by debt.

lastgreek said...

There is a reason why equity is on the liability side of the balance sheet ...'cause it's debt ... just less senior ;)

P.S. sorry, had to delete my previous post -- careless typing.

lastgreek said...

Yes, AA, as I just posted I was careless in my typing hat is why I reposted it above.

And indeed Equity is debt -- after all the creditors are paid, any assets left over then go to the owners; equity is a residual claim on the assets.

lastgreek said...

apologies again: "that," not "hat" lol

Andrew Anderson said...

any assets left over then go to the owners;

No. Any residual of Assets - Liabilities is already owned, by default, by the share owners.

Imagine one share owner who owns 100% of the common stock and thus owns the company. Does he owe the equity in his company to himself or does he already own that equity by default? Surely the later.

lastgreek said...
This comment has been removed by the author.
lastgreek said...

Debts are claims on the company's assets by the creditors.

Equity is a residual claim on the company's assets by the owners -- a claim to any assets remaining after all creditors are paid off.

Hence, both debts and equity are claims (liabilities) on the company's assets -- the former by the creditors, the latter by the owners.

question of seniority -- equity less senior.

Hope that makes any sense

P.S. apologies again for reposting, doing several things at once here, trying to get the language right :)

Brian Romanchuk said...

(Response to Ralph Musgrave)

Yes, it's somewhat circular; currency notes are just central bank reserves in bearer form.

No matter how you slice it, reserves are still a liability of the government. They are a transferable tax credit; they are used to cancel out tax liabilities.

If you want to go down that road still, what are government bonds (in the local currency)? They are just forward money, and thus would not be a liability for the government. That statement would make fiscal conservatives' heads blow up.

Neil Wilson said...

"Who said anything about specie?"

You did. That's what 'full reserve' does over an insured system. It just creates bigger entries on the balance sheet of the central bank. So the liabilities are extant rather than contingent.

The operational effect is the same. There is no difference.

That's why bankers laugh at full reservists. They are useful fools that distract attention from solutions that actually put extra working control points into the banking system. Like restricting what banks can lend money for.

André said...

So many comments about accounting standards and definitions? That's surprising...

That's how I see it:

If you own a property, you have the OBLIGATION to pay a $1000 property tax to the government (because the government imposes it on the population). So the tax is a LIABILITY in your balance sheet.

Because the government has the RIGHT to recieve the property tax from you, it's an $1000 ASSET in the government's balance sheet.

How are you going to pay the taxes to the government? Suppose you are employed as a civil servant and do some important work for the government. Then the government will issue and pay you $1000 coins in exchange for the important work you have done.

The $1000 coins, for you, represent the RIGHT to cancel the tax obligation, so it's an ASSET in your balance sheet.

For the government, the issued $1000 coins represent the OBLIGATION to cancel its taxes rights. So it's an LIABILITY in government's balance sheet. Coins and reserves are accounted as liability in the government's balance sheet.

You must understand the chartalist and "taxes drive money approach" to get things this way...

Andrew Anderson said...

"That's what 'full reserve' does over an insured system." Neil Wilson

I've said nothing about full reserve banking; I've said "Let fully private banks with 100% voluntary depositors create as many deposits/liabilities as they dare, ...".

But please note that lending and repayment between members of the usury cartel is done with actual reserve transfers between accounts at the central bank. So when it comes to themselves, the usury cartel insists on more than full reserve lending; they insist on the actual lending of reserves.

That's why bankers laugh ... Neil Wilson

With individual citizen, business, organizational, state and local government, etc. accounts allowed at the central bank and all spending by the monetary sovereign directed, of course, to them by default, do you think the bankers will be laughing when they no longer receive reserves by default from the monetary sovereign but must instead borrow them at market rates from those individual citizen, business, organizational, state and local government, etc. accounts at the central bank?

Will bankers laugh when government-provided deposit insurance is abolished since it will no longer be justifiable? Will they laugh when they have to scramble for reserves to allow the transfer of at least some of those currently insured deposits to inherently risk-free accounts at the central bank?

Will bankers laugh when they can no longer hold the economy hostage via the payment system because individual citizen, business, organizational, state and local government, etc. accounts at the central bank will constitute an alternative payment system to the current one that must work through the commercial banks, credit unions, etc?

Will they laugh when the lender of last resort is found to be no longer necessary or desirable since all remaining accounts at the end of government-provided deposit insurance shall be, by definition, at-risk, not necessarily liquid INVESTMENTS, not co-mingled with funds for next week's bills? Which should therefore be subject to market discipline?

Andrew Anderson said...

since all remaining accounts at the end of government-provided deposit insurance shall be, by definition, at-risk, not necessarily liquid INVESTMENTS, not co-mingled with funds for next week's bills? andrew a

This should be:

since all remaining deposits at the commercial banks, credit unions, etc. at the end of government-provided deposit insurance would be, by definition, at-risk, not necessarily liquid INVESTMENTS, not co-mingled with funds for next week's bills?

John said...

Matt, I've been looking for that for years! I couldn't remember the film or the actors, but I vaguely remembered the scene. Thank you, thank you, thank you for the link!!!!!!!!!!!

"Money is money."

"What is time again?"

Andrew Anderson said...

"What is time again?" John

You remind me of "the time value of money" being used to defend usury (any positive interest rate). But if people with real capital, including human capital, eg. their own skills, work ethic, etc. can create their own money then why would they rent someone else's* money for interest?

Therefore it is in the interest (unintentional pun) of usurers, a type of rentier, that private money creation be discouraged or at least cartelized. Hence the government enforced banking cartel and hence the insistence, contrary to fundamental accounting, that all money must be debt - interest paying debt, of course, given "the time value of money"?

Interestingly (I'm having pun!), the Old Testament allows interest but ONLY from foreigners, not from one's fellow countrymen (Deuteronomy 23:19-20).


*a possible exception being fiat for the payment of taxes, etc.

Six said...

I smell me one of them free bankers! I can't wait to be paid in Koch Bucks or mebbe even some Enron Dolars. Someone cue "Sixteen Tons".

Andrew Anderson said...

Free banking has never been tried in the US since that would have required that the monetary sovereign, the US Treasury, provide inherently risk-free fiat accounts for all US citizens, if they so desired. The lack of such accounts has meant that private banks have received an implicit subsidy from government since physical fiat is hardly practical for business.

As for "Sixteen Tons" the population has already been enslaved to the government-subsidized banking cartel and to the most so-called creditworthy via debt and wage slavery.

Andrew Anderson said...
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Andrew Anderson said...
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Andrew Anderson said...

"Like restricting what banks can lend money for." Neil Wilson

Well you know that the commercial banks, credit unions, etc. don't lend money*; they create additional liabilities to their reserves (aka fiat account balances at the central bank) and the ability of their cartel as a whole to do so is near unlimited since those liabilities are largely virtual wrt the general population.** So how about we make those liabilities real by allowing individual citizen, business, organizational, state and local government, etc. accounts at the central bank?

*except to other account holders at the central bank. Lending fiat to the general public would require the use of physical cash since the general public is not allowed fiat (aka reserve) accounts at the central bank.

**Since physical fiat, ie. paper bills and coins, aka physical cash is not a practical alternative to risk-free bank accounts.

Andrew Anderson said...

"Like restricting what banks can lend money for." Neil Wilson


Since one definition of fool is someone who refuses to learn, then what is more likely to be foolish: Restricting bank lending ala the Soviet Union or the unprecedented* allowance of central bank accounts for all citizens, state and local governments, etc. AND the allowance of entirely private commercial banks, credit unions, etc. free to lend as they choose?

*Please correct me if otherwise, at least in the last two centuries or so.