I've been having a short email debate with Paul Grignon of the Money As Debt films. As part of that, it occurred to me that not all "money" need be backed by debt, as he, and indeed Karl at http://market-ticker.org/akcs-www?post=2...., have suggested:

Karl Denninger wrote..

Since all money is debt-backed in our system every dollar of additional spending power, whether credit or currency, is always reflected in debt somewhere.

I'd be interested to hear others' viewpoints. It's fairly simple to state.

It seems to me that bank credit (deposits created by banks, fungible with central bank currency) is any liability of a bank which is labelled as a deposit. While bank credit is usually created when a loan is made to a customer, with a matching promise to repay on the assets side, there is nothing to stop the bank from decreasing any other liability or increasing any other asset in order to create the deposit. For example, if a bank buys a desk and some chairs for $500, doesn't its balance sheet get two new entries:

Assets
Furniture: $500

Liabilities
Deposit (ACME Furniture Suppliers): $500

That's creating "money" without there being any debt involved, isn't it? Is that how a bank's accounts appear, when it buys goods or services? Or does it do it some other way?

Thanks.

Sorry, I don't see the point of defining some new "money" (ie, money in quotes) when other superior definitions exist already. Money should be a unit of account, capable of being used to conduct exchanges, and able to serve as a store of value. The bank's new furniture doesn't meet all of those criteria. Nor is it portable.

"it occurred to me that not all "money" need be backed by debt"

Must not spend much time conversing with the PM crowd. That's their mantra.
Gold isn't anyone else's liability. If the fiat system craters, it may be what is left standing. Cigarettes, TP, ammo, and whiskey could work too.

Thanks for your reply.

I put money in quotes because some people are more specific than others about what constitutes money, and I didn't want to imply that I meant a specific kind. I think some people use the term money to mean liabilities of the central bank, and credit to mean liabilities of a retail bank; my example is the latter kind.

I wasn't suggesting that the furniture was money. I was suggesting that the deposit in the ACME Furniture Suppliers account at the bank was money. After all, it is a store of value, is measured in a unit of account ($ in the US), and can be exchanged for goods and services (e.g. by using a debit card).

More importantly, I was suggesting that it was money that was not debt-backed, which seems to disprove what Karl (and others) have said about all money in our current monetary system, and which I believed too until a few hours ago. It seems to be backed by a tangible asset i.e. the furniture. Even if you dispute this, perhaps due to the gradual depreciation of the furniture, there still wasn't a new debt created when the money was created, at least as far as I can see.

"Debt-backed", as I understand it, does not mean *all* money is *only* backed by future production. It just means that *some* money is backed that way, but since all US dollars are fungible, especially on deposit at that bank, that means *all* money is in some part backed by that future production.

Going to "One Dollar of Capital" or an asset-backed currency just ensures that all money is backed by something that can be both acquired and sold now-ish, and no money is backed by future production.

Edit: I think of $1 as 1 share of something. What is that something? Right now, it's the sum of all collateral behind all loans plus all future production promised. That's a ****ty thing to own, since you know that so much of the future production won't come to happen.

I would much rather that something just be a basket of tangible, existing goods. I may not know what the demand for those goods will be, but I can at least understand and know the supply of those goods. I have no idea what the supply of future production looks like.

Mrbill wrote..

"Debt-backed", as I understand it, does not mean *all* money is *only* backed by future production.

I think you're right. I think it means that all money is created at the same time as a debt - a promise to repay in future. That repayment could come from either existing stock or future production, but there is always a new debt whose principal exactly balances the new money created. Again, this is if money is debt-based.

But I think that this isn't the whole story. Banks don't sit on their interest - they spend some of it in costs (employees, suppliers, taxes). And they ultimately give the rest to their shareholders as dividends. The money spent in costs and the money paid in dividends, I now believe, are not created at the same time as a debt. So the total amount of debt does not equal the total amount of money. Having said that, I think they never were exactly the same, because there are debts throughout the economy which do not have matching amounts of money e.g. when goods are supplied on 30 days' credit.

But Mrbill, that share of the collateral is meaningless absent an economy rolling along. Credit is all about future production.

If you are going to lend at all, collateral is better than nothing.

It's not meaningless if you can use the collateral either.

Collateral is useful defense against individual default, but becomes meaningless at a systemic level. The future economic output and its ability to render a return is the only meaningful backing of the asset/liability pair. There's plentiful real estate collateral about, but limited prospect of sufficient economic output to make it useful. Thus, the future economic output is all that backs the currency.

Can I just bring the discussion back to whether money is debt-based? That is: is all money in our monetary system created together with an equal amount of debt? I now don't think it is.

Does anyone agree or disagree with me?

You dilemma is why there are different M's. There is always the question of whether a CD represents bank capital or a deposit.

As far as "backing" goes, it really amounts to pegging, and how much capital can be thrown at maintaining the peg value. That goes with gold, silver or any other commodity.

I don't think there's a dilemma. I know something about the reason for different Ms - the Wikipedia page describes it reasonably well.

My question relates to the relationship between money and debt. Some people have said that for all money created, there is a corresponding debt of the same amount - a promise to repay that amount. (Some people who are not careful say that the money is a debt, which seems to me to be confusing the bank's asset with the bank's liability, but that's another story).

My question is: is that true? Does every unit of money have a matching unit of promise to repay that amount of money? I no longer think it does (see furniture example above), but Karl is very knowledgeable, and he has said that it does (if I've understood him correctly). So I'm wondering who is right. And if I'm wrong, I'd be interested to know how the balance sheet of a bank looks when it buys some furniture.

I say that, yes it is true. A currency unit (unit of account) is an artificial construct that has no meaning, absent an agreement between two parties (that being an investment/obligation pair).

If it was a commodity, then it would be a kind of barter; commodity for commodity, or commodity for service.

Giving it a 'currency' denomination usually goes hand-in-hand with creating an obligation at the barrel of a gun. The corresponding investment being the promise to let you live another day.

Quote:

There's plentiful real estate collateral about, but limited prospect of sufficient economic output to make it useful.

Then it's current value as collateral is just too high.

But everything's value today is based on future perceptions of having a useful function.

I paid $4 for scissors because I expect to need to cut things. What if I don't cut anything ever again?

Transparency about collateral and values assigned to that collateral is the only way to trust the value of the currency, just like transparency about earnings is the only way to trust the value of a stock.

I need to know when the values are wrong so I can convert my savings to another form.

Is a printed dollar debt backed? I don't think so, it is just a unit for transaction purposes and, it is a store of value which varies with the strenght of the economy and with how many dollars the government is emitting.

It is money that results from fractional reserve lending that is debt money. If the government would print enough money to allow the economy run and outlaw fractional reserve lending then we could use a fiat currency that would not be debt backed.

Flap

"Is a printed dollar debt backed?"

Yes. See at the top .. "Federal Reserve Note" .. "Note" means its a Fed IOU.
Back before 1965 or so, they sometimes said "United States Note" which meant they were an IOU of the US Treasury.

Debt, either way.

The only time money is not debt, is when the currency has some intrinsic value, independent of its use as money. Cigarettes and whiskey, for example. Its because of that value, roughly uniform quality, and high value to weight and volume that these at various times ever became money.

The Fed has actual capital. That dollar bill is a share of that capital.

Right now most of it is Treasuries and MBS :) Probably some stock in member banks too.

Mrbill ... the Fed has "assets" that are in turn someone else's liabilities. In this case, the IOUs of the USTreasury. If that gives YOU all kinds of comfort, it doesn't give me all that much. Not anymore. And especially not with the MBS.

And what are the bank shares paid in as capital to comprise the stakes in the regional banks worth, if those banks are insolvent? ... If ??? LOL.

My comfort is indicated by my smiley face after "Treasuries and MBS". That's the "used car salesman" smile.

Flappingeagle wrote..

If the government would print enough money to allow the economy run and outlaw fractional reserve lending then we could use a fiat currency that would not be debt backed.

If there was no commodity value to the currency, you would find it would turn out to be only a "store of value" commensurate with the value of the paper it was printed on.

But, if the 'governemnt' required you to pay taxes denominated in this currency, then they have just created an obligation at the barrel of a gun, per my earlier post.

I'm puzzled. A different accounting would be as follows:

1. Before furniture acquisition:
Balance sheet: $10000 paid in capital

2. After:
Balance sheet: $9500 paid in capital, $500 furniture

I dont think a bank can just print money for itself this way.

Marvinmartian - thanks for the comment. Let's look at that in a bit more detail.

First, I think paid in capital is on the liability side of the balance sheet (representing the amount owed to shareholders), and there would be a matching cash entry on the asset side. So when a bank is first created, the balance sheet would be like this:

Assets
Cash: $10,000

Liabilities
Paid in capital: $10,000

---

I think the bank could buy furniture by creating a deposit for the supplier as I suggested before, but let's assume the bank pays cash as in your example:

Assets
Cash: $9,500
Furniture: $500

Liabilities
Paid in capital: $10,000

---

What if the furniture supplier now pays their $500 cash into an account at the bank?

Assets
Cash: $10,000
Furniture: $500

Liabilities
Paid in capital: $10,000
Deposit (ACME Furniture Suppliers): $500

---

Notice how this is exactly the same as if the bank had simply created the deposit to pay the furniture supplier, as in my first example. Therefore I don't see why banks would not be allowed to do this directly, as long as they meet the capital adequacy requirements.

The bank has created extra credit, but there is no corresponding debt. Instead the value of the money comes from a tangible asset.