The US financial system is extremely complicated and this series shades light only on some corners of that system by focusing on the banking sector. Here is a broad picture of the US financial system (some things have changed since the time I made this). Since the beginning of this M&B series, posts have emphasized the importance of balance sheet to get a solid understanding the mechanics at play in the financial sector. This post continues that trend.…New Economic Perspectives
Money and Banking-Part 8: The Private Banking Business
Eric Tymoigne | Associate Professor of Economics at Lewis and Clark College, Portland, Oregon; and Research Associate at the Levy Economics Institute of Bard College
6 comments:
"Bank accounts (“deposits”) are still the main liability of commercial banks …" Eric Tymoigne
These liabilities are largely virtual with respect to the general population since physical fiat, the only(!) form of fiat the nonbank private sector is allowed to deal with, is vastly inferior to accounts at the central bank wrt safety and convenience.
And if/when physical fiat is abolished then the actual liabilities of the usury cartel toward the nonbank private sector will be precisely ZERO.
How that’s for honesty, ye accountants? Largely virtual and perhaps soon to be ZERO actual liabilities to non-cartel members in the private sector?
The liabilities of the banks with respect to depositors will not change. (Barring some sort of fundamental legal construct, i.e. a bail-in etc.)
There are no one sided entries, so if the deposits of the bank's customers are not recorded as liabilities, then what will they be recorded as?
e.g.
1. Customer deposits their eft payroll (aka virtual, to borrow the phrase)
This is what the bank records on their books.
(Asset) Debit: Banks Reserves Account $100.00
(Liability) Credit: Customers account $100.00
2. Customer deposits $100 in physical bills (gift from gandma)
This is what the bank records on their books.
(Asset) Debit: Vault Cash $100.00
(Liability) Credit: Customers account $100.00
From the customer's point of view
(Asset) Debit: Cash on Hand $200.00
(Income) Credit: Wages $100.00
(Income) Credit: Gift $100.00
So, should the customer wants to buy a pair of shoes for $40 with a debit card, he/she can do so since the bank legally owes him $100 (from his/her payroll deposit and $40 < $200). No physical cash, coin or paper is involved.
It should be obvious at this point that regardless of the form of money, the substance doesn't change.
The liabilities of the banks with respect to depositors will not change. Seve141
You're missing the point. The liabilities of a bank with respect to its depositors is for fiat, which exists in only two forms, physical fiat, aka cash, and account balances at the central bank, aka "reserves." So if physical fiat is abolished and an individual does not have an account at the central bank himself then how is that individual supposed to exercise his claim on his bank's reserves? He can't since reserves only exist in the form of account balances at the central bank and he doesn't have an account there.
That's what I mean by virtual liabilities - liabilities that in practice can't be redeemed.
Andrew-
You're being too narrow here: "o if physical fiat is abolished and an individual does not have an account at the central bank himself then how is that individual supposed to exercise his claim on his bank's reserves? He can't since reserves only exist in the form of account balances at the central bank and he doesn't have an account there."
Currently the bank OWES you either cash or payment settlement worth the number in your bank account, if cash was eliminated, the bank still OWES you payment settlement worth the number in your bank account. Dont get too caught up in the reserves, because due to the size of our national private banks, many payments are settled WITHOUT reserves at all. IOW if you buy something from someone else who also banks at your bank, then no reserves get exchanged at all. So is the bank not providing you anything in this example since they didnt give you cash or give reserves to some other bank? Of course not.
banks promise to settle your transactions and thats what they do. Thats part of what they OWE you.
"Currently the bank OWES you either cash or payment settlement worth the number in your bank account, if cash was eliminated, the bank still OWES you payment settlement worth the number in your bank account." Auburn Parks
Looking at my checkbook, it's written on the checks "Pay to the order of [so and so] [so many] Dollars." That is the liability of the bank; for dollars. Now dollars exist in only two forms, physical cash (eg. paper bills and coins) and reserve balances at the Federal Reserve.
So if physical cash is abolished and I am forbidden from having an account at the Federal Reserve then it will be impossible for the bank to redeem its liability to me. Ergo the bank's liability to me is not really a liability but a sham/virtual liability regardless of whether the bank has the necessary reserves since those reserves cannot be transfered to me since I'm not allowed to have an account at the Federal Reserve.
Moreover, since individual citizen, business, etc. accounts are not allowed at the central bank then all payments by the monetary sovereign must be directed to depository institutions that do have accounts there. But a deposit at a depository institution (eg. commercial bank, credit union, etc.) is legally a loan to that institutions. Therefore, using the US as an example, every month millions of Social Security recipients, the military, Federal employees, etc. are FORCED to lend the fiat that should go to them directly to a commercial bank, credit union, etc. Currently, the victims can, at least in principle*, undo that forced loan by withdrawing physical fiat (eg. paper bills and coins) from the commercial bank, credit union, etc. But if physical fiat is abolished then it will be IMPOSSIBLE to undo that forced loan and the commercial bank, credit union, etc. will have stolen that fiat and replaced it with an impossible-to-honor promise to repay it.
Moreover, fiat is the money of a Nation and all its citizens have an inherent right to use it so the abolition of physical fiat without the allowance of individual citizen accounts at the central bank constitutes the complete abolition of the right of citizens to use their own nation's fiat.
Finally, I'm not being narrow here since individual citizen, business, etc. accounts at the central bank and the abolition of government-provided deposit insurance would be an effective means to short-circuit bubble blowing by the banks and also would free the economy from being held hostage by the banks since those individual citizen, business, etc. accounts at the central bank would constitute an alternate payment system independent of commercial banks, credit unions, etc.
*Since physical fiat is a very poor substitute for inherently safe, convenient accounts at the central bank itself.
I think that it's a very interesting way to look at finances. But if everybody was to think about the asset-liability perspective of things, things are going to go downhill very fast when people cannot find the physical cash to meet their obligations fast enough.
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