Thursday, October 12, 2017

Brian Romanchuk — Understanding Why Fiat Money Is A Liability Of The State

One of the topics I discussed in Abolish Money (From Economics)! returned to Twitter today, and I just want to give a long form version of my arguments. The debate was with Eric Lonergan (web site) regarding where money should show up on the government's balance sheet. I discussed this topic in Chapter (Section?) 14 of Abolish Money -- "Money as Debt."
I am keeping the core of my argument short, since I am actually just applying boring mainstream logic to the question. As that section of the book noted, there's a lot of complicated questions that arise in this area. I am only interested in a narrow technical question.
The first thing to note is that all of the national accounting conventions that I am aware of treat money as a liability on the balance sheet of the issuing government. Note that we cannot use the terms "debt" and "liability" interchangeably: debts are undoubtedly liabilities, but not all liabilities can be classified as debts. For example, a corporation might have a liability that is an accounting provision for potential legal liabilities; such a provision does not meet the definition of debt according to almost any definition (legal, accounting). Instead, what I am interested in here is: how should we treat the monetary base from the perspective of economic analysis (the accounting conventions be damned).
Bond Economics
Understanding Why Fiat Money Is A Liability Of The State
Brian Romanchuk


Ralph Musgrave said...

Fiat money a liability of the state? I’m 100% sure that if I went along to the Bank of England with some of their £10 notes and demanded they give me gold or anything else in exchange, they’d tell me to shove off. So I don’t see where the liability is there.

Second, the state has the power at any time to impose taxes on me and other citizens and confiscate some of our £10 notes, which makes the claim that those notes are a liability of the state even more bizarre.

The only sense in which base money is a liability of the state is that if the state imposes £X of tax on me, that becomes my liability; I can then use base money to cancel out that liability. So that’s arguably one liability cancelling out another liability. I.e. it could be argued that base money becomes a liability of the state once the state imposes taxes on citizens.

Matt Franko said...

It might look better or more understandable as a liability (right side) if state could also accrue taxes payable as an asset (left side) in the same amount as the double entry...

But Modified Accrual state uses doesn't let you accrue anything on the left side....

So you are left with a liability on the right of state balance sheet and then awkwardly have to say that it the public' s asset as the 'matching' entry but now you are splitting the balance sheet across two entities (state and public) which is also improper....

You have to understand Modified Accrual will always leave the state with unmatched liabilities if you try to construct a Balance Sheet for the state entity... its just the way Modified Accrual works...

Tom Hickey said...

Look at how cb liabilities are generated. The asset on banks' books got there not by the cb creating the asset there but through transfer of a Treasury asset from the TGA to the banks through spending and transfers. The other way that cb liabilities are generated as assets on the bank's book is through cb lending and the asset is the collateral. REPO is actually a repurchase agreement rather than collateral held by the bank and pledge to the cb as lender.

André said...


"It might look better or more understandable as a liability (right side) if state could also accrue taxes payable as an asset (left side) in the same amount as the double entry..."

Agreed. It makes perfect sense that money is a liability for the government. What doesn't make sense is the lacking asset representing the taxes that the government has the right to collect. But the asset wouldn’t necessarily match the liabilities – the state can and do issue more money than collect taxes.

You would recognize the double entry like this: liabilities against equity (so, double entry in the “right side”), and assets against equity (one entry in the “left side” and another in the “right”). Equity can be negative, no problem.

I guess governments don’t recognize collectable taxes as assets because of the practical problems involved. It is not so easy to know how much taxes are owed. The government knows exactly the value after the collection, not before. I think that’s why the governments usually recognize assets using the cash method instead of the accrual method (which is some kind of aberration in the traditional accounting standards). But I may be wrong...

Tom Hickey said...

The government has to spend before it taxes.

The asset used is a cb credit (cb liability) to the TGA (Treasury asset).

When the government spends or transfers it directs the cb to debit the TGA and credit a bank's cb account (cb-liabiltiy-bank asset), directing the bank to credit a customer's account (customer asset-bank liability).

The Treasury and cb books balance, the cb and banks books balance, and the bank's books balance — all the time.

The trail of assets and liabilities and how they flow is traceable.

Matt Franko said...

Andre here in US we use what is termed Modified Accrual which is as you describe:

"Modified accrual accounting is an accounting method commonly used by government agencies that combines accrual-basis accounting with cash-basis accounting. Modified accrual accounting recognizes revenues when they become available and measurable and, with a few exceptions, recognizes expenditures when liabilities are incurred."

Read more: Modified Accrual Accounting
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There is nothing wrong with this as long as you understand Accounting Science... the first question in accounting is "what basis are you using?"....

We have to challenge the dip-shits as untrained and unqualified and not competent in the accounting sciences they are all journos and economists and political science people...

Tom Hickey said...

Accrual would only be meaningful if the US needed to tax to spend instead of spending first and then taxing.

In fact, booking taxes due as an account payable would bolster the erroneous view that this is an operational requirement.

Matt Franko said...

Well if you feel the need to prepare a govt sector Balance Sheet without showing negative equity then you have to accrue taxes receivable as an asset...

I don't need to do any of this I'm not a libertarian .......

André said...

Accounting is useful even when you consider the fact that spending comes before first and then taxing.

Accounting can tell a lot of things about the organization. Don't downplay it. Of course, you need to understand the accounting standards before interpreting it. And you need to understand how the financial system works.

If you were a neoliberal economist, you would understand everything wrong, no matter how and if you do government accounting...

Tom Hickey said...

Well if you feel the need to prepare a govt sector Balance Sheet without showing negative equity then you have to accrue taxes receivable as an asset...

In the US, the Fed is capitalized by the member banks. I don't think that the Fed has ever had to run negative equity.

I don't now how other cb's are capitalized.

Tom Hickey said...

André, I don't think it is just the neoliberals. There are Post Keynesians that disagree with the MMT economists and other PK economists on how to interpret the accounting. They agree on the accounting but not on what it implies operationally.

Matt Franko said...

How about getting some qualified accountants involved for a change....

Matt Franko said...

Tom the balance sheet I'm talking about would be for the us Treasury not including their fiscal agents...

Tom Hickey said...

2016 Financial Report of the United States Government

This is a summary statement.

1. The Treasury states the the balance sheet doesn't reflect total assets and liabilities of the US government.

There are, however, other significant resources available to the Government that extend beyond the assets presented in these balance sheets.

As with reported assets, the Government’s responsibilities, policy commitments, and contingencies are much broader than these reported balance sheet liabilities.

They see no issue with this.

2. The balance sheet does show accounts receivable (taxes and loans receivable) on the LHS and accounts payable on the RHS.

3. The total net position is negative.

Cash and other monetary assets (Note 2) 464.6 305.1
Accounts and taxes receivable, net (Note 3) 133.3 117.8
Loans receivable, net (Note 4) 1,277.6 1,216.0
Inventories and related property, net (Note 5) 314.3 320.6
Property, plant, and equipment, net (Note 6) 979.5 925.3
Debt and equity securities (Note 7) 48.2 104.4
Investments in government-sponsored enterprises (Note 8) 108.6 106.3
Other assets (Note 9) 144.4 165.7
Total assets 3,470.5 3,261.2
Stewardship land and heritage assets (Note 24)

Accounts payable (Note 10) 62.4 68.3
Federal debt securities held by the public and accrued interest (Note 11) 14,221.1 13,172.5
Federal employee and veteran benefits payable (Note 12) 7,209.4 6,772.4
Environmental and disposal liabilities (Note 13) 446.6 411.6
Benefits due and payable (Note 14) 218.2 213.9
Insurance and guarantee program liabilities (Note 15) 122.3 170.3
Loan guarantee liabilities (Note 4) 18.2 36.3
Other liabilities (Note 16) 464.7 659.5
Total liabilities 22,762.9 21,504.8
Contingencies (Note 18) and Commitments (Note 19)

Net position:
Funds from Dedicated Collections (Note 20) 3,374.3 3,247.7
Funds other than those from Dedicated Collections (22,666.7) (21,491.3)
Total net position (19,292.4) (18,243.6)
Total liabilities and net position 3,470.5 3,261.2

The accompanying notes are an integral part of these financial statements.

André said...

"2. The balance sheet does show accounts receivable (taxes and loans receivable) on the LHS and accounts payable on the RHS."

That's very odd, because the government's balance sheet does not show tax receivables... maybe what's being recognized is just a small part of tax receivable for some reason, I don't know.

The Central Bank balance sheet is unique. It has Treasury bonds in the asset side, which interest. The CB issue currency when it buy bonds. So the currency liability is offset by the bought bonds.

But when you consolidate the Treasury and CB into a single balance sheet, that kind of "intergroup" bond operations vanish. So the consolidated government may have negative equity...