Money. Doing it Right this Time.

[Traitorfish]

What is a debt, really? A debt is an exchange where there is a time difference between when one party receives the value of their end of the exchange and the other party receives their end of the exchange.

I don't think that's actually true. We might describe some forms of debt in that manner- a bar tab, for example- but there are plenty of forms for which that description is not simply inappropriate. A money-loan cannot easily be characterised as a deferred exchange, because what you would described as the deferred half of the transaction consists of the return of that which was lent in the first half; to describe it as an "A-for-B" exchange is to retreat into grammar, and to miss on the practical content of the debt. When we move from this into loans structured around a system of honour or social standing, as found in many pre-monetary societies, squeezing the debt-form into the structure of "A-for-B" becomes not simply contrived but impossible, because what we actually find a never-ending chain of social obligations that can never be finalised.

 

[Cutlass]

I don't think that's actually true. We might describe some forms of debt in that manner- a bar tab, for example- but there are plenty of forms for which that description is not simply inappropriate. A money-loan cannot easily be characterised as a deferred exchange, because what you would described as the deferred half of the transaction consists of the return of that which was lent in the first half; to describe it as an "A-for-B" exchange is to retreat into grammar, and to miss on the practical content of the debt. When we move from this into loans structured around a system of honour or social standing, as found in many pre-monetary societies, squeezing the debt-form into the structure of "A-for-B" becomes not simply contrived but impossible, because what we actually find a never-ending chain of social obligations that can never be finalised.

I'm not really seeing how that contradicts what I was saying. A money exchange over time is in fact a deferred exchange, with the proviso that there is a fee for the exchange, one that is commonly, but not exclusively priced in terms of interest. But it could also be priced in terms of a flat fee either before or after the payoff.

Now in a non-monetary economy things become more complex. But not different in kind. It's only a matter of having a set of customs in place that place limits on the situation.

 

[Traitorfish]

I'm not really seeing how that contradicts what I was saying. A money exchange over time is in fact a deferred exchange, with the proviso that there is a fee for the exchange, one that is commonly, but not exclusively priced in terms of interest. But it could also be priced in terms of a flat fee either before or after the payoff.

It's an exchange of like for exactly like, which is in practice no exchange at all; it would be like somebody buying a pound of rice with a pound of identical rice. Just because it is grammatically possible to describe money-loans as an A-for-B exchange doesn't mean that it is a useful or enlightening way to look at the process.

Now in a non-monetary economy things become more complex. But not different in kind. It's only a matter of having a set of customs in place that place limits on the situation.

In what sense is a gift-economy of the same "kind" as a money-economy? One is a system of personal obligations fulfilled through heterogeneous means and very often without a clear end, the other is the finite exchange of commodities mediated by a homogeneous mediator-commodity. I really can't see how you could fold them into each other without retreat to an unworkably distant level of abstraction.

 

[Cutlass]

It's an exchange of like for exactly like, which is in practice no exchange at all; it would be like somebody buying a pound of rice with a pound of identical rice. Just because it is grammatically possible to describe money-loans as an A-for-B exchange doesn't mean that it is a useful or enlightening way to look at the process.

With money there is no ultimate difference between and a A-for-A exchange and an A-for-B exchange. I have money because I sold a product or I sold a service. Let's say I'm a carpenter and I make furniture. I made and sold a table and bought some rice for it. The rice farmer or merchant doesn't happen to want a table at the moment, but does want to sell his rice.

The money is a stand-in for the product or service sold, but it still represents that product or service sold. It just does so in a manner which greatly simplifies the transactions.

In what sense is a gift-economy of the same "kind" as a money-economy? One is a system of personal obligations fulfilled through heterogeneous means and very often without a clear end, the other is the finite exchange of commodities mediated by a homogeneous mediator-commodity. I really can't see how you could fold them into each other without retreat to an unworkably distant level of abstraction.

Maybe, maybe not. But both really accomplish more or less the same thing in the end.

 

[Cutlass]

I don't think this is what Keen claims, or the designer of that model for that matter. They're talking about credit extension on the basis of monetary expansion. It really is a form of base money creation that happens independently from the control of the central bank.

When you look at the phenomenon of vendor financing, it is actually not a very strange thing at all that such a thing can happen. For the a government to render it "illegal" for example would disrupt one of the most elementary functions of a market economy. Let me explain:

Take a situation in which a producer of a good has $100 in possession and wants to sell a good to a client on the basis of a loan. For this purpose it can make use of two separate basic economic transactions: first lending the $100 to the client and then accepting the money back as payment for the produced good. The result is that the money goes from producer to client, back to the producer. The good goes from the producer to the client and an IOU for the future payment of $100 is issued by the client and given to the producer.

Now let's make one simple shortcut: instead of making the money change hands twice only to end up in the same place at the end of the transaction, we simply make it not change hands at all. The good is simply exchanged for the newly issued IOU.

Now let's observe an interesting implication: this second process can take place even when there is no money in possession by either person in the first place. When this happens, the situation is equivalent to one in which money is temporarily created ex nihilo to settle the transaction. This is to say, if we were to disallow the exchange of a good for an IOU, the process would be impossible to perform without the creation of new money out of nothing. This is why money creation in the process of extending credit is a very normal thing.

Having given that some thought, I wouldn't call that an expansion of money. Rather a term of sale with delayed payment. Neither party actually has more money on their balance sheets.

 

[innonimatu]

Now let's make one simple shortcut: instead of making the money change hands twice only to end up in the same place at the end of the transaction, we simply make it not change hands at all. The good is simply exchanged for the newly issued IOU.

Now let's observe an interesting implication: this second process can take place even when there is no money in possession by either person in the first place. When this happens, the situation is equivalent to one in which money is temporarily created ex nihilo to settle the transaction. This is to say, if we were to disallow the exchange of a good for an IOU, the process would be impossible to perform without the creation of new money out of nothing. This is why money creation in the process of extending credit is a very normal thing.

And that is why money is even today a measurement of debt first and foremost, and only a unit of accounting as a consequence of that. And debt would be better described as an outstanding obligation rather than a deferred exchange, for there are debts which do not start with any exchange (or, to be precise, no deliberate, negotiated exchange).

It's so damn simple that it is amazing how people believe they need bankers, economists, brokers et al for dealing with it, and must always bow to their supposed superior knowledge.
Finance is the art of obfuscating the obvious, and bankers are modern shamans. Their power derives from having most people believe that they practice some form of dark magic. The dark magic of finance is no more than a collection of deliberately confusing rituals of exchange gradually piled up in order to make these shamans "necessary".

 

[Monsterzuma]

I'd like to propose a bit of a thought experiment and I'd like some input on it:

Suppose I'm in control of the monetary policy of a small Western European country with monetary sovereignty. For example, I control the monetary policy of Denmark. Now I decide to withdraw all monetary stimulus to the economy. I raise interest rates as far as they will go.

What happens?

The interest yield on any fixed income assets denominated in my currency go through the roof, but as they do this, they immediately become attractive to foreign investors via the carry trade. Although domestic banks can no longer draw on the funds of my central bank, they can get loans from carry traders at similarly low rates. Since the world is to such an extent awash in savings (brought about mainly by loose monetary policy worldwide), it is as if no monetary stimulus was withdrawn in my country's economy at all.

The only disruptive effect in all this is that the currency of my country comes in high demand, meaning that consumer prices denominated in said currency will rise due to cheapened imports. This will likely cause problems for several domestic industry. Think about it this way: if all the world starts offering you goods for free, what's the point of producing anything of your own? Of course in this example the goods aren't exactly free, but you get the picture. Instead of countering this effect with monetary policy, however, I would propose a floating, adjustable subsidy and tariff on respectively exports and imports to counteract the effect until prices are stabilized at the desired level.

What prevents a country from doing this? Am I making a mistake anywhere in this narrative?

 

[innonimatu]

The interest yield on any fixed income assets denominated in my currency go through the roof,

Why?

but as they do this, they immediately become attractive to foreign investors via the carry trade. Although domestic banks can no longer draw on the funds of my central bank, they can get loans from carry traders at similarly low rates. Since the world is to such an extent awash in savings (brought about mainly by loose monetary policy worldwide), it is as if no monetary stimulus was withdrawn in my country's economy at all.

What about capital controls. Money is another trade good, it can be controlled.

I would propose a floating, adjustable subsidy and tariff on respectively exports and imports to counteract the effect until prices are stabilized at the desired level.

What prevents a country from doing this? Am I making a mistake anywhere in this narrative?

WTO treaties?

 

[Monsterzuma]

Why?

Because I constrain the supply of credit on the basis of which their yield is in part being bought down.

What about capital controls. Money is another trade good, it can be controlled.

All the world would have to instate them.

WTO treaties?

What is the consequence of defying them? Do economies in as weak a state as they are in today use measures that incur a cost to them in order to spite violators?

 

[innonimatu]

All the world would have to instate them.

What is the consequence of defying them? Do economies in as weak a state as they are in today use measures that incur a cost to them in order to spite violators?

Any country can do that alone. But it will gets a lot of hate from very influential people. And who knows what else.

 

[Cutlass]

I'd like to propose a bit of a thought experiment and I'd like some input on it:

Suppose I'm in control of the monetary policy of a small Western European country with monetary sovereignty. For example, I control the monetary policy of Denmark. Now I decide to withdraw all monetary stimulus to the economy. I raise interest rates as far as they will go.

What happens?

The interest yield on any fixed income assets denominated in my currency go through the roof, but as they do this, they immediately become attractive to foreign investors via the carry trade. Although domestic banks can no longer draw on the funds of my central bank, they can get loans from carry traders at similarly low rates. Since the world is to such an extent awash in savings (brought about mainly by loose monetary policy worldwide), it is as if no monetary stimulus was withdrawn in my country's economy at all.

First of all, you don't control interest rates to that extent. You just don't.

What would happen in a small country that tried to maximize domestic interest rates by withdrawing as much money from the system as possible would be that the economy would seize up. You would not get very high interest rates on bonds and savings, because no one would borrow that savings above a certain point.

Now this assumes money won't just flow across the border, which is a false assumption. And that cross border flow would largely counteract the local monetary policy. So you would seriously disrupt the local economy with no positive effect.

The only disruptive effect in all this is that the currency of my country comes in high demand, meaning that consumer prices denominated in said currency will rise due to cheapened imports. This will likely cause problems for several domestic industry. Think about it this way: if all the world starts offering you goods for free, what's the point of producing anything of your own? Of course in this example the goods aren't exactly free, but you get the picture. Instead of countering this effect with monetary policy, however, I would propose a floating, adjustable subsidy and tariff on respectively exports and imports to counteract the effect until prices are stabilized at the desired level.

Why would your currency be in high demand? Your economy is in the crapper, and you can't repay any loans. What your currency is worth at any given time is what people will trade for it, not what you claim it is. And a small country has very little power to change that on its own. I the starting point is, say, 1 kroner = 1 euro, then you don't suddenly get 1 kroner = 1000 euro. Or even 2 euro. You have done nothing which can be expected to have any real affect on the exchange rate.

What prevents a country from doing this?

Sane central banks don't go and disrupt their own economy to that extent.

Am I making a mistake anywhere in this narrative?

The loose money does not come from central banks.

 

[Monsterzuma]

First of all, you don't control interest rates to that extent. You just don't.

I'm not implying there is "control" of interest rates here. Isn't it a basic fact that if the central bank unloads it's government bond holdings on the market, the yield on newly issued bonds rises due to the increase in the supply of those bonds?

What would happen in a small country that tried to maximize domestic interest rates by withdrawing as much money from the system as possible would be that the economy would seize up. You would not get very high interest rates on bonds and savings, because no one would borrow that savings above a certain point.

Now this assumes money won't just flow across the border, which is a false assumption. And that cross border flow would largely counteract the local monetary policy. So you would seriously disrupt the local economy with no positive effect.

I get the impression that your argument revolves around frictions occurring in the process, i.e. the shock delivered by lessened monetary stimulus would do harm to the economy before foreign savings can fill in the gap in credit availability this gives rise to. Would it dispel your objections if the process was enabled in a gradual way over time?

Why would your currency be in high demand? Your economy is in the crapper, and you can't repay any loans. What your currency is worth at any given time is what people will trade for it, not what you claim it is. And a small country has very little power to change that on its own. I the starting point is, say, 1 kroner = 1 euro, then you don't suddenly get 1 kroner = 1000 euro. Or even 2 euro. You have done nothing which can be expected to have any real affect on the exchange rate.

This rests on the assumption that the economy is harmed by the policy change. If markets can anticipate and price in the effects of monetary policy, they should be able to do the same thing for the inflow of foreign capital. Absent major frictions, the substitution of the former by the latter should not leave a lasting negative effect on economic conditions.

 

[Cutlass]

I'm not implying there is "control" of interest rates here. Isn't it a basic fact that if the central bank unloads it's government bond holdings on the market, the yield on newly issued bonds rises due to the increase in the supply of those bonds?

What's the demand for those bonds? I'm not a finance person. But there are general rules and then there are specific cases. The effective yield depends on the spread between the sale price of the bond and the face value. Does the CB dumping the bonds mean that the sale price plummets? In a small economy, I don't know to what extent you can state that in advance. Foreign investors may buy them all up if they seem a safe bet at a high price, or a low price if they don't look so safe.

I get the impression that your argument revolves around frictions occurring in the process, i.e. the shock delivered by lessened monetary stimulus would do harm to the economy before foreign savings can fill in the gap in credit availability this gives rise to. Would it dispel your objections if the process was enabled in a gradual way over time?

I'm having trouble picturing this. I don't see how you are not just being disruptive for the sole purpose of being disruptive. And that's never good for an economy.

This rests on the assumption that the economy is harmed by the policy change. If markets can anticipate and price in the effects of monetary policy, they should be able to do the same thing for the inflow of foreign capital. Absent major frictions, the substitution of the former by the latter should not leave a lasting negative effect on economic conditions.

And no benefit from doing so either, in that case.

You have essentially concocted a scenario that has no foreseeable upside and plenty of downside.

 

[Monsterzuma]

The upside is that it strengthens your currency, which constitutes a direct addition to real GDP. Of course there are some frictional effects that disturb this process, but that's where the subsidy and tariff come in.

Basically the plan is all about hitching a ride on the monetary stimulus efforts of other nations. When everybody is trying very hard to chase investors out of fixed income denominated in their own currency with the intention of making them consume instead, give those investors a place to run to. That way you become a magnet for flight capital.

 

[Cutlass]

It only strengthens your currency to the point where people on the outside buy into it. And that assumes you do not care about earning money through exports.

 

[Monsterzuma]

I have another idea I'd like to bounce off against you all.

http://krugman.blogs.nytimes.com/2011/09/06/treasuries-tips-and-gold-wonkish/

In the blog post above, Krugman makes an argument for the rise of the price of gold and other commodities under a scenario where interest rates are falling under influence of the response of central banks to disinflationary pressures.

My question is: doesn't the rise of commodity prices that is brought about in this way ultimately make inflation rise after all? I would imagine this is particularly harmful because it makes demand side disinflation get counteracted by supply side inflation, meaning that a loss of real economic output takes place. Think of it as a form of capital flight into the commodity markets.

 

[Cutlass]

My inclination is to think that capital is broadly out of real equity investment and in to speculative investments. And that includes the bidding up of prices of commodities. Now what is the effect of that on the real economy? That depends on how much of it is real inputs to the real economy. Oil matters a ton. Copper matters a lot. Gold matters essentially not at all.

 

[Monsterzuma]

I had a thought about the treasury market that I need to put down before I forget about it again:

Suppose that the market is divided into a bull camp (50%) and a bear camp (other 50%).

Now the US government issues a quantity of treasuries that is small enough to be bought up entirely by the bull camp. Since the bulls have the highest estimation of the solvency of the government and the lower expectations of inflation (no need for the government to engineer it), they will pay the highest price for these. As a result, all treasuries get bought by bulls.

Now since the government's strategy is NOT to issue new treasuries under influence of the high offered price so far, the point is never reached where the price of treasuries reflects the evaluations of the entire market. The price reflects the bulls' opinion only.

This is likely to an extent analogous to what is really happening in the market. It should serve as a warning to those who think the US treasury market is an indication that bearish outlooks on the economy are wrong.

 

[Cutlass]

I don't believe that tracks. In any market for anything there are differences of opinion concerning what things are worth, what the risks of them are, other factors. When we speak of "the market", we are speaking of the aggregate actions of the collective market participants. The fact that some portion of the market participants have a different opinion on something is not really relevant to anything.

It is, in fact, the evaluation of the market as a whole if it is the outcome the collective market participants acting in an uncoerced manner.

Everyone knows that not all market participants have the same opinions. The dissenters are certainly vocal enough about it.

 

[Ayatollah So]

Plus, a binary division into "bulls" and "bears" is too simplistic; the continuous nature of the spectrum of outloooks is important.