Your answers to last week's Fun Online Poll were as follows:
Taking assets and liabilities into account, how much 'money' is there in the world?
None - 81%
Billions and trillions - 11%
Other, please specify - 8%
Thanks to everybody who took part, I'm delighted to see that the penny has dropped [sic] with 81% of you. While there are indeed billions and trillions in financial assets (be that notes and coins, bank deposits, corporate or government bonds) by definition, there is always an equal and opposite amount of financial liabilities (either the government, companies or the banks owe other people the same amount). Remember: if you have a stash of bank notes under the mattress, you are making an interest-free loan to the government!
Responding to ChefDave in the comments under the poll: Yes, in the very short term, there can be a mismatch between the amounts recorded as assets and as liabilities for book keeping purposes.
Let's say somebody takes out a mortgage of £100,000 to buy a house for £100,000. The house is a real asset and the mortgage is a financial liability of £100,000 to the borrower and is recorded as a financial asset in the bank's books, so on Day One, the net financial asset/liability is £nil. Now, maybe the borrower loses his job and the house falls in value to £80,000, but the bank still records the asset at £100,000. Oops, mismtach!
But that's only in the short term. Sooner or later the bank will repo' the house and sell it for £80,000 and will have to write off the rest (which is a release from a liability from the ex-borrower's point of view i.e. a windfall gain). The bank's owners (shareholders) then have to share that loss of £20,000 between themselves, so the value of their shares falls by £20,000 and the balance is reinstated.
And so on. Saying that "the economy is drowning in debt" betrays the same misunderstanding. All this really means is that some creditors will not be repaid in full; or that actually enforcing all the debts would cause more harm than writing off some of them.
Physical gold of course is not money, it is in itself a valuable asset which can be used as a medium of exchange or a way of measuring liabilities - i.e. if I borrow ten gold coins from you, then this a financial liability and your receivable is a financial asset. This still nets off to nil gold coins and does not change the number of gold coins in existence. And the fact that a country's currency is expressed in terms of gold ('Gold standard') does not stop it being a fiat currency. The government can change the exchange rate whenever it wants, this is just a question of making a foul compromise between political and economic forces.
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Ross has posted an Arbitrary list of the best to worst Republican candidates for President. Staying in the spirit of things, that's this weeks Fun Online Poll: "Whom would you like to see as the Republican candidate for President?"
Vote here or use the widget in the side bar.
And Another One Gone
4 hours ago
7 comments:
Where the currency is gold coins, surely there is no liability corresponding to that asset?
Another case where there is no corresponding liability is central bank created money (i.e. monetary base). This money is OSTENSIBLY a debt owed by government / central bank to the holder of such money, but this money is irredeemable. E.g. a £20 note (which is a form of monetary base) says that Uncle Mervyn will pay the “bearer on demand” the sum of £20 (or words to that effect). But you try turning up at Uncle Mervyn’s pad in Threadneedle St and demanding £20 of gold or anything else. You’ll be escorted off the premises, while Mervyn smirks at you from an upstairs window.
But this is all very much a smoke and mirrors area: there is no sharp dividing line between money and non-money.
RM, wrong on both counts I'm afraid.
1. Let us say there are a million gold coins in existence which people use as a medium of exchange. That is not "money" it is a valuable asset being used in barter exchanges.
It is only once people start lending out gold coins that "money" is created. If nobody ever borrowed anything of anybody and all barter transactions are settled immediately, there are no debts and no "money".
2. As to bank notes, of course they are a liability of the government/central bank.
The government's main source of income is tax. So let's assume you have a tax liability of £20 and financial asset £20 note and you intend to pay the tax liability in cash.
Until the day you pay the tax, the government has F Asset £20 tax receivable and F liability £20 bank note in issue (mirror images of your FA's and FL's).
You pay the tax in cash and hey presto, your FA's and FL's now net off to nothing and the government's FA's and FL's also net off to nothing. All they have is a bit of paper which they printed themselves and which has no intrinsic value.
Remember: there is only about £50 billion sloshing around in UK coins and notes, which is approx. equal to one month's tax payments. We could make all that paper/metal money disappear within a month if we all paid our taxes in cash for a month.
"Remember: if you have a stash of bank notes under the mattress, you are making an interest-free loan to the government!"
OTOH, if you have a stash of gold coins, you are not.
"It is only once people start lending out gold coins that "money" is created."
So, presumably, the agreement between me and the next-door peasant farmer that he owes me half a pig for me repairing his roof is also "money".
B: "the agreement between me and the next-door peasant farmer that he owes me half a pig for me repairing his roof is also "money"."
Yes of course, it is a debt, which happens to be payable in kind rather than in cash. Presumably, you and your neighbour would be reasonably happy to convert that debt to half the sterling value of the pig?
Indeed, but he wouldn't have the cash and I would prefer the meat, but I understand that the debt can be expressed in cash, even if it is to be paid in kind. (PS, for the avoidance of doubt, I haven't really got a peasant farmer neighbour and he doesn't really owe me half a pig.)
So the answer to the question, "What is money?" is that money is a record of debt?
B: "The answer to the question, "What is money?" is that money is a record of debt."
Yup, that's how I see it, it's the only explanation which always stacks up.
If your neighbour has a terrible pig year but a good firewood year, you might both be happy to commute that half a pig to a few hundredweight of firewood. Or he might come round and help you repair your roof (seeing as that was the original consideration).
if you have a stash of bank notes under the mattress, you are making an interest-free loan to the government!
Well, if you are using cash to evade (not avoid) taxes, then it could still be worthwhile.
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