Re a stupid argument I am having elsewhere, allow me to point out that coins and notes are government debts.
They might be freely transferable, small denomination and non-interest bearing which makes them look different to "government bonds" but in principle they are exactly the same. They record a debt from the government to whoever holds them. The note holder or bond holder has a financial asset and the government (i.e. the taxpayer) has a financial liability. Like all "money" they are not net wealth for the nation as a whole because the asset and the liability cancel each other out.
(I accept, as a matter of fact, that many governments run permanent deficits so some of the notes and bonds are never redeemed, repaid or cancelled, that is a separate issue. It does not mean that they couldn't or shouldn't be.)
Anybody who:
a) disputes, as a matter of logic, that this is the correct way of recording them and/or
b) disputes, as a matter of fact, that central banks do not record them as liabilities
is living in cloud cuckoo land.
See for example Bank of England balance sheet here, which correctly shows notes in issue as liabilities.
If anybody genuinely believes that this treatment is somehow 'wrong' then he can get in touch and tell central banks that they have been doing their accounts wrong since the dawn of time and best of luck with that.
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Please note: this is a purely mechanical thing and a description of the real world. I am not making a value judgement or taking sides.
- It does not tell us whether governments should or should not run deficits.
- It does not say whether any of this is a good thing or a bad thing.
- It applies equally to "fiat" currency (whatever that is) and gold-backed currency. With gold-backed currency, a bank note clearly was a government liability, if you wanted you could hand it over and the government was liable to give you gold.
- The way in which 'private' banks split the zero into a deposit and a loan is a parallel topic, although the basic logic is the same.
Thursday, 13 August 2015
Economic Myths: Bank notes in circulation are not government debts.
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14 comments:
Money - that is a fiat currency - is clearly a government debt when the government owns the bank and gets its bank to write on its bank notes ' I promise to pay the bearer on demand...'. Why would it 'promise to pay' if it wasn't a debt?
Not disagreeing with your basic point about Bank notes being half of an accounting instrument the half other being the loan , but that's not right to say that privately created bank deposits are not net wealth. The borrowers commitment to future production and supply is a real value.
L, that applies even more if a currency were gold backed, which few ever have been. Being linked to 'the gold standard' is far from being gold backed.
D, the deposit is certainly not net wealth in itself. The deposit is ultimately just a claim on the value of the investment made by the borrower. As long as the investment is worth more than the debt/deposit, then all is well and good and overall we are better off.
If it is a deposit secured on speculative land purchases, that is a negative sum game; if it is 1000% interest rate loans to people who can't afford to repay, that is a net loss to society as well.
(this is MW using his wife's gmail account, duh).
R, well just repost it there then and delete them here.
"See for example Bank of England balance sheet here, which correctly shows notes in issue as liabilities."
No mention of coins, though, which is interesting, because until relatively recently, they had quite a bit of intrinsic value.
B, I wondered about that, I assume that
a) their total value is so low as to be not worth bothering with
b) they are included in notes, or
c) there is a theory that coins are accounted for as liabilities of The Royal Mint rather than the Bank of England and I could't be bothered looking it up.
As you know loans create deposits, or more accurately borrowers create deposits. The supply from the borrower doesn't have to be worth more than the value of the deposit they create, it only has to equal it. Deposits are a financial measure of wealth, like share certificates, or good quality IOUs , assurances of wealth supply in the future, but as most loans are re payed , defaults are rare, deposits have the value of that supply.
Mark, or, possibly, as a hangover from the time when your sovereign contain £1's worth of gold (instead of a pound coin containing a few pence worth of copper and nickel), coins are considered to be worth their face value and remain the property of the state, so are neither a liability nor an asset.
Din, yes, agreed to all that.
B, originally sometime in the mythical past, it genuinely was a promise to pay (in gold). But a bank note is still an interest free loan from you to the government; your financial asset; and the government (i.e. the taxpayer's) financial liability.
I really don't know about coins.
"(I accept, as a matter of fact, that many governments run permanent deficits so some of the notes and bonds are never redeemed, repaid or cancelled, that is a separate issue. It does not mean that they couldn't or shouldn't be.)"
MW, please read:
https://originofspecious.wordpress.com/2015/08/10/infinite-debt-future-generations-and-hilberts-hotel/
R, yes, I know all that stuff.
IF it were a case of tomorrow's land owners paying for the benefits received by today's land owners, then fair enough.
ELSE not.
MW, remember it is all about stuff not money. We can redistribute stuff between generations while alive in such a way to create Hilbert's hotel style dynamics.
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