Kenneth
Rogoff, Carmen Reinhart and a variety of other ignoramuses (most of them at
Harvard) have spent years warning about the alleged perils of excessive national
debts. But what is “debt”?
Well
it’s simply a liability of the state, or a debt owed by the state to the
private sector on which interest is normally paid. But then base money is
exactly the same thing, i.e. a liability of the state, except that no interest
is paid on it.
So
the lower the rate of interest on debt, the more do “debt” and base money
become the same thing. Put another way, the more it becomes a nonsense to
distinguish between the two. And that’s all very much a statement of the obvious
for advocates of Modern Monetary Theory (MMT).
But
now Germany has issued 0% bonds.
Which will have Rogoff and Reinhart completely baffled. A 0% bond is
essentially base money and not debt. Indeed, if Germany carries on this way, it’s
debt will disappear. And that will have R&R baffled.
I’ve
no doubt they’ll be scratching their tiny heads over this right now, plus I
predict they’ll publish an article in a month or two which will consist of nothing more than an illustration
of the fact that they’re stumbling and fumbling their way towards an MMT view
of the world. Or perhaps they’re so utterly hopeless that they’ll never get
there. We’ll see.
Now if it becomes obvious that (government) debt and money are the same at zero interest on bonds, does that fact lead us to conclude that (1) bonds are ALWAYS money? (2) money is ALWAYS debt? (3) money is NEVER debt?
ReplyDeleteThe choices seem nonsensical at first glance, but consistent logic would not allow bonds to become money ONLY at the zero interest point. Instead, the zero interest point allows us to see the commonality between bonds and money.
To me, choice 3 is the right answer. The correct perspective is to view both bonds and money as PROPERTY. To me, we need one consistent description that will logically bridge the zero interest discontinuity.
Roger sparks-
ReplyDeleteDo you consider your money to be gone when you get a 6-month CD at your commercial bank?
So why would you consider your money to be gone when you get a 6-month CD (T-bill) at the Central bank?
Money is always and everywhere a debt, as every single unit of money is a liability for someone.
Here’s my take.
ReplyDeleteAll money nowadays is a debt (owed by a commercial or central bank). But that has not always been the case: e.g. gold coins or other commodity monies are not a debt.
As to whether money issued by a central bank, i.e. base money, really is a debt, that is debatable. I go into that in section 2.2 in the MPRA paper at the top left.
Incidentally by “bank” I mean any “bank like” entity: e.g. money market mutual funds.
Re German 0% bonds I should have looked at what the TERM of those bonds were before opening my big mouth. They’re actually 2 year bonds. Money in a term account at a bank where the depositor cannot access the money for about two months is not normally counted as money, and quite right. As to less than about two months, the less the time till maturity, the nearer those bonds become to being indistinguishable from money.
Conclusion: there is no sharp dividing line between money and bonds. Time to maturity has something to do with it, as does the rate of interest.
"All money nowadays is a debt (owed by a commercial or central bank). "
ReplyDeleteI unambiguously agree with this here Ralph
"But that has not always been the case: e.g. gold coins or other commodity monies are not a debt."
Well now, that depends doesn't it.
If you take your gold nuggets into a Govt mint to have them weighed, stamped, and certified into official coinage. And the Govt subsequently accepts that coin in payment of taxes, then that coin is a liability of the Govt, in that the Govt OWES the owner of the coin, that amount of either Govt services or tax liability extinguishing.
Interesting point, which caused me to scratch me head for a few minutes. Strikes me that if government just certifies that a lump of gold that someone claims to be worth $100 actually is the right weight etc, that does not make the coin a liability of government. After all, the lump of gold would attain its $100 worth if it was certified by some widely respected gold dealer or jeweller. But that wouldn’t make it a liability of the gold dealer or jeweller.
DeleteThat’s a bit different to fiat base money, i.e. central bank issued money. Strikes me that that has value, first because it is widely accepted as a medium of exchange, or as money. Second it has value because it is needed for payment of taxes.
Fiat base money is a liability of government in that a characteristic of a liability is that it can be used to cancel an equal and opposite liability. So if government demands $X of tax from you, you can use $X of that “base money / government liability” to pay the tax.
But that’s fundamentally different from certified gold coins which get their value essentially from their metal content.
Ralph-
Delete"Fiat base money is a liability of government in that a characteristic of a liability is that it can be used to cancel an equal and opposite liability. So if government demands $X of tax from you, you can use $X of that “base money / government liability” to pay the tax.
could just as easily read:
metallic coins are a liability of government in that a characteristic of a liability is that it can be used to cancel an equal and opposite liability. So if government demands $X of tax from you, you can use $X of that “coin money / government liability” to pay the tax. "
The two statements are equivalent because its the nature of the tax credit thats important, not the type of thing that is used to pay the tax in this instance.
I am thinking about fiat money here.
ReplyDeleteIf you work for the government or sell something to the government, what is the value of the money you receive from the government? It seems to me like it is the value of your weeks work or the value of item you sold to government.
Now, once you have accepted money for any reason, your challenge is receive value when you trade away that money. You have money in hand; what is the money worth in trade? My experience is that the value of money is different at almost every store when compared exact item to exact item.