A number of my recent posts seem to have wound up some of the more sensitive ‘mainstream’ economists, who don’t like the suggestion that the likes of Minsky deserve their own ‘school’. Some philosophers of science have similarly taken offence: even eclectic economists apparently are not eclectic enough. As a heterodox philosopher of science myself, I find all these disputes a bit too, well … conventional.

Jacques Derrida was taken very seriously by many of his disciples, ridiculed by those convinced he was a charlatan, but I always assumed he had a sense of humour. Who knows.

One thing (the only thing?) I learnt from Derrida was to always check footnotes. He argues that every theorist knows the weakness of his own argument – and often reveals it in the footnotes. So, pay attention to footnotes – but also remember, there’s a flaw in every theory.

If Derrida was alive and an economist, he would surely have written a heterodox paper on methodology: “MMT – revolution, cult, religion, or science?”

I’m a fan of MMT. As I have argued before, it is right about a lot. It is also a remarkably accessible and complete approach which has real world relevance. In many ways it is better than mainstream economics.

That said, I feel the need for balance. So at the risk of winding up what sometimes feels like 25% of the econo-blogosphere, here goes: accounting is convention, not truth.

If you wonder why I even raise this issue either do a search for “money is a liability” on twitter, or read this from L. Randall Wray (where he explains why he will not do a radio interview on the subject of ‘debt-free money’):

“Sovereign government can no more borrow its own IOU than you can borrow your own IOUs … Money is always and everywhere else an IOU. As my prof, Hyman Minsky, always said, discipline the analysis with balance sheets. Show me the balance sheets in which government creates and spends money that is not its liability […]

… all money … is debt. It is on the liability side of issuer and asset side of holder. You cannot change that through confusing semantics.”

Typically in accounting, the difficult stuff to measure is either on the income statement – i.e. what are the ‘profits’ generated by writing insurance policies – or on the asset side of the balance sheet – i.e. valuing intangible assets, in particular things like ‘goodwill’. But occasionally ‘liabilities’ are also misleading. A classic example of this is the accounting treatment of the float of insurance businesses. ‘Float’ designates the amount of money on hand that an insurance company has collected as premiums but not yet (perhaps never) paid out in claims. It is always treated under accounting rules as a liability. Now anyone who thinks that accounting treatment equals truth, needs to read Warren Buffett. Here’s what he says when discussing Berkshire Hathaway’s float in his 2014 shareholder letter:

“So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to think of float as strictly a liability is incorrect; it should instead be viewed as a revolving fund. Daily, we pay old claims and related expenses – a huge $22.7 billion to more than six million claimants in 2014 – and that reduces float. Just as surely, we each day write new business and thereby generate new claims that add to float.

If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this liability is dramatically less than the accounting liability. Owing $1 that in effect will never leave the premises – because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the door tomorrow and not be replaced. The two types of liabilities are treated as equals, however, under GAAP.

A partial offset to this overstated liability is a $15.5 billion “goodwill” asset that we incurred in buying our insurance companies and that increases book value. In very large part, this goodwill represents the price we paid for the float-generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on its true value. For example, if an insurance company sustains large and prolonged underwriting losses, any goodwill asset carried on the books should be deemed valueless, whatever its original cost.

Fortunately, that does not describe Berkshire. Charlie and I believe the true economic value of our insurance goodwill – what we would happily pay for float of similar quality were we to purchase an insurance operation possessing it – to be far in excess of its historic carrying value. Under present accounting rules (with which we agree) this excess value will never be entered on our books. But I can assure you that it’s real. That’s one reason – a huge reason – why we believe Berkshire’s intrinsic business value substantially exceeds its book value.”

Buffett has made very clear that Berkshire’s float is inaccurately treated as a liability in balance sheet accounting. The ability to generate float would be better thought of as an asset. Forty plus years of trading has proven him right, and more importantly, to buy this ‘liability’ off him would require a huge positive sum of money – that makes a nonsense of the accounting treatment. Think of it like this: if someone offered to take your mortgage off your hands, would you charge them?

If Warren Buffett can argue that float is not a liability, even though accounting convention treats it as such, so what about base money? How would Warren Buffett think about valuing a central bank’s printing press. A central bank can buy assets at will: let’s say it buys equities, like the Bank of Japan has been doing – those are assets, because equities generate cashflow and pay dividends. What is the accounting treatment of this process, and what should it be? Accounting convention, in this case an accident of history (and a mechanical transfer of commercial bank accounting), treats the bank deposits at the central bank as ‘liabilities’ of the central bank. Now let’s apply some simple ‘Buffett tests’.

First, does the CB owe anything? No. In theory a commercial bank can ask to convert reserves into cash – the CB can choose to do this or not, but the whole point of having deposits at the central bank is to settle payments between banks. The CB determines the quantity of reserves, it does not depend on ‘investor appetite’. What about the introduction of an ‘interest rate’ on reserves (IOR)? I put ‘interest rate’ in italics, because it is not really an interest rate. An interest rate is typically the price of a debt instrument set in a market – it is the rate at which a borrower and lender are willing to transact. The IOR is fundamentally different – it is a transfer or ‘tax’ (if negative) which one party (the CB) determines. That’s nothing like an interest rate. If you’re not clear about this, go to your mortgage lender and say that you are setting your mortgage interest rate at minus 0.75% and you’ll be expecting a check in the post. That’s what CBs can do (are doing) with reserves. These are not the characteristics of liabilities!

Now it is true that cash and reserves are not ‘owned’ by the central bank, so it cannot claim that they are assets. But the ability to create them is obviously hugely valuable – to the state and the society it represents. The best way to think about money created by the state is the production of a ‘liquidity service’. Liquidity is extremely valuable to a modern financial system and economy – and the government is monopoly provider of the purest liquidity. Base money creation should really be showing up on the central bank’s income statement as a sale of liquidity services. Every time a central bank buys bonds and creates reserves there should be an equivalent increase in its revenues, which given the zero cost of production, will translate into an equivalent increase in its profits, and an equivalent increase in its equity. Balance sheets will still balance, of course – accounting makes sure they do – but the convention will be a more accurate representation of the reality.

So the question that follows is: if the accounting standards authorities adopt my suggestion, will L. Randall Wray start doing radio interviews on debt-free money again – or does he still think base money is an IOU?

Now, L. Randall Wray is very smart, and he probably knows most of this, but he still doesn’t want to admit that money is not debt, so he has constructed a fantastic linguistic contortion – which is pure semantic confusion:

“Imagine a sovereign that issues “debt-free” coins. They look like normal coins, but when you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a bit of base metal.
[…] Why would you want the debt-free coin? Only for its wealth-value (whatever that might be). It is not money.
As MMT says, “taxes drive money”. If you cannot use the sovereign’s token to pay your taxes, it is nothing but a piece of paper, hazelwood stick, or metal.
If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it?
A “debt-free money” would not be evidence of a debt. What would it be?”

Now Derrida tells us to look in the footnotes. There aren’t any. Fortunately, there is something close enough – a hidden definition slipped in between dashes. ‘Debt’ has been defined by L Randall Wray as “a promise to redeem yourself in tax payment”. What?! That is NOT the definition of ‘liability’. The ability to pay taxes is a feature of money issued by sovereigns – a very important feature and part of how the government establishes its monopoly in the creation of money, but just because the government accepts money in payment for taxes (what else would they accept?) does not make the money they issue their ‘liability’.

If anyone has any doubt, it is worth considering Randall Wray’s example. Let’s say the government stopped accepting money in payment for taxes. I guess that would be a zero tax regime – an extreme version of low tax Hong Kong, where the government raises all its revenues from land sales, would money still be a ‘liability’ of the state, even applying Randall Wray’s linguistic gymnastics? Presumably not. There’s a separate issue, would money still have value and be used. Why not? Money’s value resides in a network externality, i.e. acceptance as payment by others – this property is not affected by zero tax. There is nothing about zero tax that says the state would no longer issue currency and require it to be accepted for payment in private sector transactions – it’s damn useful after all.

Now I should be clear, the role of taxation and state power in establishing a monopoly currency is a highly plausible hypothesis – but it does not in any way render money a ‘liability’.

Accounting is important, balance sheets should be studied, Minsky is very interesting (as is L. Randall Wray’s book), but money is not a liability of the state.

About The Author

Eric Lonergan is a macro fund manager, economist, and writer. His most recent book is Money (2nd ed) published by Routledge. He is also a supporter of Big Issue Invest (BII), the investment arm of The Big Issue, and is one of the initial limited partners in BII’s Social Enterprise Investment Fund LP. In a personal capacity, he makes direct investments in social enterprises. He also supports and advises The Empathy Museum.

87 Responses

  1. MrKEmail2@googlemail.com'

    Hi Eric, I suggest you read this excellent piece by Alex Douglas:
    The problem with the asset/equity view is as described by Alex Douglas – it doesn’t explain taxation. If you are handing out smarties why do you then take the smarties away again?

    And that’s because money isn’t liquid to drink. It is lubricant like oil in the engine. Ideally you don’t want anybody hoarding the oil of money any more than you want people hoarding copper.

    The problem people have is failing to recognise that the government is a bank and therefore accounts like a bank. To a bank loans are assets, not liabilities. Reserves are actually completely irrelevant and completely unnecessary to the process of banking. They are simply loans made by banks to the state – and are therefore assets in the hands of the banks – so that banks will create deposits for some people in bank accounts.

    You can see from the language of the statement that failing to use the correct viewpoint leads to mistakes. Central banks don’t buy bonds and create reserves. The government sector supplies reserves and then drains them with bonds. You can’t do a reserve drain until you’ve done a reserve add.

    Moreover when central banks do repos and reverse repos, they do make a charge and their profit goes up. That is then paid to the Treasury as income. In other words it is just a tax – as any government ‘profit’ is.

    In any accounting system somebody has to account in the opposite way to you do to make your side read as it does. If people find that confusing, then they need to refer to an accountant to translate.

    • Eric Lonergan

      Thanks Bob, if you check my post again, you will see that I don’t think reserves should be treated as ‘equity’ either – they are not equity. This is important if the CB follows the proposal of Simon Wren-Lewis, Mark Blyth and I (and also Steve Keen, Frances Coppola, Matt Klein and others) and gives cash to households. I think changes in reserves should be treated as revenue when the CB uses them to buy assets – the CB is in fact producing liquidity services. As I show with the HK example, the issue of taxation is an obfuscation. Saying that money is a liability of the state because taxes can be paid with money, is equivalent to saying that money is a liability of anyone who sells anything. That’s not what ‘liability’ means – it’s a semantic error. A more enlightening question might be: how would you treat ‘float’ in Buffett’s example? This is very similar to the issue of reserves in my view. Is Buffett right?

    • Eric Lonergan

      Hi Ramanan – this is a novel approach! I need to think about it more, but it strikes me as very similar to Randall Wray’s linguistic gymnastics. He seems to think that because currency can be used to buy things it is a liability of everyone who sells things (he focuses specifically on the sale of government services – but the point can be generalised). Your device is similar, you say, “Suppose foreigners hold £1bn in currency notes among other claims on residents”. You’re assuming what you want to prove. I hold US dollar bills and am not a resident in the US. I can buy things from America if I go there, of course if I live in Argentina I can buy things in Argentina (this does not make them a liability of Argentinians, by the way), in some jurisdictions outside of America I might even be able to pay taxes using US dollars. None of these dollars are ‘claims on residents’ – they are dollar money. If there is free exchange in FX markets currencies will go up and down in part dependent on how much issued. But no Americans owe me anything, they can’t default on my dollar bill. Now if I hold US treasuries, that’s different – the US government can stop paying me interest or principal. It can default. It can’t default on the US dollars I hold – their value can change, that’s a property of money (in fact it’s a property of anything that trades) but that’s not default: ‘defaulting on a debt’ means failing to deliver a payment.

      I think it is much easier to start by being clear about what money is and what debts/liabilities are. Once the properties of money and debt are defined clearly, it’s obvious that “=” is not applicable – the concepts refer to different things. Consider the basis of money’s value: it’s a network externality (hence the value of dollars also in Argentina); by contrast debts have value contingent on the issuers ability to pay (by the way they start having a different, independent value when they are also used as collateral). Money and debt serve different functions and have different properties. There is no reason to believe that the existence of an ‘external sector’in any way changes these fundamental observations.

      • superpoincare@gmail.com'

        Hi Eric,

        The reason I love national accounts and flow of funds is that it is watertight in logic. And the reason I chose the open economy is to illustrate that one lands into inconsistencies with some viewpoints. It is a bit like proof by contradiction in mathematics.

        About your points – yes Americans owe you x hours of work. That is one way of looking. That you can use it in Argentina doesn’t negate the point. If you spend a dollar in Argentina, Americans owe an Argentinian. But I look at it more as just debt and illustrate it by showing how market mechanisms can convert it to a foreign currency where everyone would agree that it is “debt”.

        “There is no reason to believe that the existence of an ‘external sector’in any way changes these fundamental observations.”

        Harry Johnson, a monetarist once remarked that Keynes’ biggest error is to not start with the open economy. I am no Monetarist but agree with him. It’s a bit like travel widens your horizons kind of thing. A lot of things about a closed economy can be understood by thinking of open economies. But more importantly the success of nations depends on how they compete in the world markets. So open economy macroeconomics is important.

        But I don’t insist on semantics. I am okay with others not using standard language. What matters to me is whether it is just semantics or not. That is, many times in economics … semantic issues confuse users of the underlying dynamics.

      • Eric Lonergan

        Ramanan – Americans do not owe me X hours of work. I can buy things off anyone who accepts dollars (be they American or not). That’s it. The American firm which has issued corporate bonds which I own, owes me something. There are two distinct phenomena which are being conflated. My point is that money is used to pay for things, and its value resides in a network externality. The existence of an external sector adds weight to this because people use dollars outside of America as money without any obligations to pay taxes etc. Debt is issued for whole host of reasons – not including to be used by others to pay for thing – and its value resides in the ability of the issuer to make interest and capital repayments. (As an aside, misleading accounting convention is in part an historical accident: bank debt was in the past used as money for convenience, but the very fact that I can describe that transformation highlights the distinction).

        We use language, accounting categories, and theory to identify distinct phenomena in the world. It does not help to put distinct phenomena is the same category by conflating the definition or the properties they identify.

        Ask yourself a simple question, ‘Why does society use money & why does it use debt?’ It should immediately be apparent that they are totally different.

  2. jh@rogers.com'

    The generic case is that an entity can use an asset to repay a liability.

    So for example a non-bank can use money to repay the holder of a bond it has issued.

    A central bank can use a bond asset to repay the holder of money it has issued. That happens in regular open market tightening and will happen in planned QE exit. The liability is contingent on the issuer exercising his option to repay it.

    And as MMT points out, a government can use  a tax asset to repay the holder of money that its central bank has issued. The government tax asset is a tax receivable – the same thing as the taxpayer’s liability. The government money liability is contingent on the issuers option to repay it.

    All of these cases require coherent accounting interpretation. And some accounting cases require more imagination than others in the corresponding use of semantics that fit to the accounting. But the accounting is coherent.

    • jh@rogers.com'

      Point restated / plus, regarding Buffet and float:

      The government issues money as a liability. It can repay that liability through fiscal tightening (taxes) or monetary tightening (asset swaps).

      In the case of fiscal tightening, the money liability is extinguished when the holder of the money asset chooses to use it to pay tax to the Treasury. Having chosen to tighten policy, the government is liable for the extinguishment of that money liability (i.e. to repay it) when the money holder wants it back to pay taxes.

      In the case of monetary tightening, the money liability is extinguished when the holder of the money asset chooses to use it to buy a bond from the central bank. Have chosen to tighten policy, the central bank is liable for the extinguishment of that money liability (i.e. to repay it) when the money holder wants it back to buy the bond.

      Regarding Buffet, the market is perfectly capable of incorporating an assessment of balance sheet “float” into the market valuation of the firm without mangling sensible accounting. The market views the situation for what it is – a continuously renewing aggregate stock of non-interest paying liabilities with an obviously favorable effect on profit relative to a counterfactual of more expensive funding. There’s no need to view it as book equity. The market interprets a thousand other things relating to the balance sheet that aren’t reflected in book equity. That’s why the market value of equity is different than the book value of equity.

      Buffet is just interpreting the beneficial effect of having a revolving stock of low cost liabilities. You can make the same argument about core bank deposits. But in both cases these are liabilities – payable at the requirement of the holder of the corresponding asset. The fact that the stock of liabilities is sustained in aggregate and that low or no interest is paid are just facts to be analyzed by the investor – not to be distorted by the company in the presentation of the accounts.

      Sorry, I can’t make this out:

      “‘Float’ designates the amount of money on hand that an insurance company has collected as premiums but not yet (perhaps never) paid out in claims.”

      What does “perhaps never” mean? The Buffet excerpt certainly doesn’t read that way. He says “daily, we pay old claims and related expenses”. That clearly refers to claims that have been approved and that are now payable. It’s a liability. There’s no “never” there.

      And when you say “the ability to generate float would be better thought of as an asset” – that’s already the case. Such asset value is reflected in a goodwill asset if the company is acquired. Buffet says that too. I think instead that the comparison you implicitly want according to the rest of your argument against the actual liability treatment is book equity treatment – not asset treatment.

      • Eric Lonergan

        This is a good description of how float works. If claims are over-provisioned they are not paid out. The main point I am making with the example of float, is that even private sector accounting ‘liabilities’ are highly contentious categories – Buffett, who is reasonably well-informed, does not believe his float is a liability, or if it is, it is hugely overstated in accounting convention (float is clearly v different to deposits – but you are also making a valid point about accounting for deposits – people will pay for deposit franchises – so the nominal ‘liability’ may be an overstatement too).

        What I am making explicit is the argument – “look at the balance sheet” – is not a valid argument when someone is expressly questioning the accuracy of the balance sheet classifications. A manufacturing plant might be an asset if it produces at a profit. It might become a liability if it contains asbestos. It might be an asset if it has insurance against asbestos claims, and a liability if its insurer defaults!

        It might help to think like this: instead of starting with the existing accounting convention, imagine you are setting the accounting standards – how would you treat base money & why? My essential point is that base money is in no meaningful way a liability of government. Appealing to the coherence of flow of funds methodology or accounting convention is not relevant. Alternative accounting treatments would be just as coherent – balance sheets balance by design, even if they are complete fictions (ie fraud). The whole question is how ‘should’ we account for base money – that cannot be answered by assertion, existing convention, or changing the definition of ‘liability’ – which is reasonably clear.

      • jh@rogers.com'

        are you saying that actuarial liabilities are not true liabilities?

      • scottenter@gmail.com'
        Ernest Scott


        Based on your two comments above, it seems that you, as a prominent proponent of Monetary Realism, hold a viewpoint similar to MMT to the effect that money is a liability of the government or state because the state is “liable” to accept it in payment of taxes (or in the case of the central bank, bonds).

        Whenever I hear people express this viewpoint I always want to ask them what they think about the alternative viewpoint, which sees the concepts of “debt” and “liability” as highly contingent upon the balance of power between counter-parties.

        I ask because I have always felt that this is where many people encounter a problem with the MMT/MR viewpoint. When it comes to taxes, obviously there is a significant imbalance of power between the state and the taxpayer, such that the state can unilaterally set terms of the transaction as it chooses, and the taxpayer, as the putative “creditor” as MMT/MR holds, has no power to enforce its so-called “claim” on the state, but is instead itself the subject of enforcement. For people whose concept of debt or liability, or whose concept of what “really counts” as a debt or liability, depends crucially on this balance of power, this particular aspect of the MMT/MR viewpoint comes across as really awkward to say the least, an awkwardness that doesn’t go away even when one understand the accounting operations and consistency in terms of double-entry bookkeeping, which I believe many critics do.

        It seems that a large part of the disagreement between the two sides in this debate stems from the fact that when it comes to categorizing something as a debt or liability, the MMT/MR crowd is more flexible and agnostic on the matter of power dynamics, whereas for the other side the power dynamics are the critical, necessary condition that determines whether something “really counts” as a debt or not, all accounting conventions aside.

      • jh@rogers.com'

        Hi Earnest

        My thoughts are my own, so I can’t speak properly for MMT or MR. The tax interpretation is MMT influenced, but I think the true effect is subtler – taxes have an effect on the value of the currency, insofar as the currency is required to pay them. But I don’t think taxes are absolutely necessary. Legal decree is enough. I think that may be consistent with your idea.

        I haven’t thought much about the network idea that Eric espouses. I also don’t know much about it. It seems to make sense as a characterization of what goes on, but my immediate reaction is that there is a regress problem to be resolved before accepting it as the full explanation.

        My interpretation of money as a liability is soft. I think there can be a gradation of qualifying characteristics under the general classification of liability. A number of characteristics discussed in this thread qualify in my view. Maybe think of money as a “tier 2” liability, sub-classifying it like what is done in the case of regulatory capital for example.

        In the end, I prefer to categorize the right hand side of the balance sheet as liabilities or equity. Liabilities have an interest cost (which may be positive, zero, or negative) that is contractual (and/or with some other direct contractual arrangement such as with borrowing stock). Equity participates in profit as a non-contractually determined residual amount. I don’t see the need for either exclusion or separate classification for base money. It’s not required to explain the potential benefits of base money.

    • Eric Lonergan

      Money never gets repaid. When the central bank sells bonds, it is selling bonds and someone is buying bonds – nothing is getting repaid. Selling a good or service for money is distinct from repaying a loan. The word ‘repaid’ specifically designates the latter. Using money to buy a bond is described using the word ‘buy’, which designates something completely different to ‘repay’. If we use the same words to describe completely different phenomena we will be communicating at cross purposes.

    • jh@rogers.com'

      “I think there can be a gradation of qualifying characteristics under the general classification of liability”

      that might best summarize the difference in approach between Eric and myself

  3. Winslowrecnics@yahoo.com'
    Winslow R.

    The ‘debt free’ money slam seems kinda like the basic income slam. Both slams are based on the idea excessive net financial assets might lead to inflation.

    The idea that future tax liabilities might float forever and never be collected might be clear to some but too hard to digest for others so, for political resons, not worthy of discussion.

    Wray is way ahead on the social aspect of the whole scheme and has chosen the accounting that has the best economic and political chances of succeeding.

    Denying money as a liability of the state is denying an important social relationship. Footnote: watch debate on elr and bi.

    • winslowreconomics@yahoo.com'
      Winslow R.

      You are saying ‘future tax liabilities’ (aka money) are not a true liabilities as they will never be collected.

      Wray doesn’t break the current social contract, you do, why? Are you for basic income over an elr?

      Worth exploring in case the elr (and current accounting system and its implied social contract) is unable to save capitalism from itself?

      Where are you headed?

      • Eric Lonergan

        I think we may be talking at cross purposes. The value of money resides in a network externality. Future tax liabilities are not money.

      • winslowreconomics@yahoo.com'
        Winslow R.

        ” so if the CB acquires assets and creates base money its equity will rise, but if it does cash transfers to households as Steve Keen, Simon Wren-Lewis, Mark Blyth, myself and others have advocated….”

        Okay, I see where you are headed. The idea an unelected CB should be creating fiscal policy would disassociate any social contract between a population and the money it creates.

        Why try and coopt our current system? Why not create your own? Create a bitcoin alternative that has an unelected governing body (rather than mining) that limits its issuance.

        I’d think you’d rather promote a true democratic money that had issuance voted on by users (perhaps one dollar one vote, and one person one vote).

      • Eric Lonergan

        R. Winslow – apologies for not replying more promptly. I have thought a lot about the democratic and ethical implications. This might be of interest – would be interested in your thoughts. Eric

      • winslowreconomics@yahoo.com'
        Winslow R.

        “We could say, distribute according to need – that’s really hard to do and the debate might last longer than the recession. Or we could give everyone the same amount.”

        If I view this from a historical perspective, it looks like a way for the Fed to bribe the general population into allowing it to do fiscal policy.

        Perhaps you are just interested in the ECB implementing a basic income in Europe where there is no central fiscal institution with the authority to solve its deflation problem?

        Perhaps you are up to date on the debate between the elr and bi and Tcherneva’s 20 years of research but feel your time is best spent focusing on a onetime fiscal transfer performed by the ECB?

  4. jh@rogers.com'

    “It might help to think like this: instead of starting with the existing accounting convention, imagine you are setting the accounting standards – how would you treat base money & why?”

    If the generic balance sheet looks something like:

    assets = liabilities plus equity

    what new category would you invent for base money?

    or don’t you believe that central banks should have balance sheets?

    (they do have assets, and they do have equity, and they do have a profit calculation arising from that framework)

    and if establishing a new category is problematic, I’d say the usefulness of the non-liability idea stops there

    (i.e. I wouldn’t be bothered arguing the case that money is a liability unless somebody else argues the case that money is not a liability)

    • Eric Lonergan

      JKH, I think everything on the balance sheet has to be categorised as an asset or liability, perhaps sub categories of assets and liabilities can be ‘invented’. I don’t see why base money shows on CBs balance sheets at all as a liability – because they owe nothing. If I understand Ramanan correctly, in a vein similar to Randall Wray, he thinks it should be a liability on everyone’s balance sheet (not sure if he includes the CB, and presumably in proportion to how much they produce …?). I don’t agree – nobody owes anything: money has value as a means of payment, and it’s value resides in a network externality – not as a liability to anyone, as under a gold standard. So base money wouldn’t show as anyone’s liability. Of course, the balance sheet is designed by convention to balance (using a balancing item – equity), so if the CB acquires assets and creates base money its equity will rise, but if it does cash transfers to households as Steve Keen, Simon Wren-Lewis, Mark Blyth, myself and others have advocated, there will be no change in the equity of the CB. So, to be clear, I don’t believe base money is ‘equity’ either. It is a liquidity service, which the government produces as a monopoly (domestically), which is unique and extremely useful as a phenomenon.

      • jh@rogers.com'

        Let’s start from the premise that you believe a convertible currency is a liability (e.g. gold for money). If I’m mistaken and you don’t believe that, the rest below doesn’t apply.

        So the liability is the promise to exchange the conversion object for money (e.g. pure gold standard).

        My earlier analogy was that when the central bank tightens, there is a promise in effect to exchange bonds (for example, or maybe repos) for money – at the price offered by the central bank.

        So I see that as a contingent liability, where the contingency is the execution of a tightening strategy, which indeed shrinks reserves/money outstanding. The central bank can’t tighten money unless it agrees to “convert” money to bonds for example.

        That broadly speaking is how I would categorize it as a liability – a contingent liability to be sure, as opposed to a liability certain, but both of which are liabilities in a broad sense.

        And to use your previous counter-argument, if money is not “repaid” in contingent conversion, then neither is it repaid in the case of a convertible currency where it is presumably a liability, so that doesn’t seem to be a standard for the right logic – if you believe that a convertible currency is a liability.

        BTW – I’m sympathetic to the view that the Chartalist tax argument is not essential (along the lines of your network externality idea), although it is supportive for the value of money.

      • jh@rogers.com'

        ” Of course, the balance sheet is designed by convention to balance (using a balancing item – equity), so if the CB acquires assets and creates base money its equity will rise ”

        Not sure where that came from. It’s certainly not true in any coherent sense of accounting or the meaning of equity.

        Separately, so called “helicopter drops” are fiscal actions which when carried out by central banks generate negative central bank equity at the margin.

      • Eric Lonergan

        As currently treated in accounts cash transfer will result in reduction in equity. If treated as I think it should be, this would not be the case. This is clearest statement of how I interpret.

        JKH – did you notice that I am suggesting that base money does not show at all on b/s of CB – it is neither asset nor liability: therefore if base money used to buy assets, CBs equity rises. If CB transfers cash to Households, no change in equity. This is the most realistic description of what is actually going on – with caveat regarding withdrawing base money in the future, a point we agree on (there are lots of complications here, btw – see Does the central bank’s balance sheet matter.)

        As regards cash transfers being fiscal policy – that is totally arbitrary distinction between fiscal and monetary. Friedman argues that cash transfers are monetary policy. As do I.

      • jh@rogers.com'

        i.e. helicopter drops create base money – they don’t deplete it

        there’s a real tangle in there somewhere

        That’s the problem with economists attempting to abandon coherent accounting – it always comes back to bite them in the ass – because referencing some piece of it at some point is unavoidable

  5. superpoincare@gmail.com'

    Eric @ http://www.philosophyofmoney.net/accounting-as-religion-buffett-derrida-and-mmt/#comment-3159

    “Americans do not owe me X hours of work. I can buy things off anyone who accepts dollars (be they American or not). That’s it.”

    Funnily, you and Randy Wray have the same view on this. So your differences are pure semantics. Mine is different from just semantics.

    The potential for liabilities to get dollarized is enough to treat them as debt in the ordinary sense of the word.

    For the US it is more difficult to imagine as the US dollar is a reserve currency, but think of something like the Indian Rupee. If you hold a Rupee, Indian residents owe you a Rupee collectively. As simple as that!

    I mean extrapolate your logic. If currency is not debt, a government can purchase anything from foreigners and distribute it among its citizens. It obviously cannot do that because debts become unsustainable due to current account deficits.

    • Eric Lonergan

      Ramanan, ‘if you hold a rupee, Indian residents owe you a rupee collectively.’ That statement is a semantic error. Semantics refers to meaning. The meaning of most words is identified by common use or reference to particular things. There are two ways to test if that statement is meaningful – define ‘owe’ and then see if it is correct that ‘Indian residents collectively owe me a rupee’ – give it a go! Alternately, you can try using the word and see if it is understood – that is a standard test of meaning. If I go to India and get some rupee and say to someone ‘I intend to buy things with my rupees’ they will understand me fine. If I say ‘I am worried about you defaulting on my Rupees’, they will be totally confused – because it has no meaning. Now, if you say, “sorry I am using ‘default’ in a totally eccentric way – I mean ‘accept payment’?” They’ll find it a bit odd – probably check my rupee are not counterfeit, and go “OK. But if you talk to anyone else in India, when we use the word ‘default’ we mean miss a payment on a debt, and like everywhere else we pay for things with money all the time. We have two words, ‘money’ and ‘debt’ and they designate two very different things!”

      • Eric Lonergan

        Ramanan, in the system of language you have created, base money should not be a liability on the CBs balance sheet – because the CB does not sell anything. It should be a liability of all residents who sell things (and those who sell in the future?). How then do you allocate this liability across the selling residents, and what significance does it have? People only choose to sell what they want – so if a worker refuses to work longer hours for more money are they ‘defaulting’ or is their liability capped by the hours in the day? Does this also mean that people who can produce more have more liabilities because we can buy more things off them? I’m not sure this redefinition of the words ‘owe’ and ‘default’ are operational substitutes for ‘pay’, ‘accept’ and ‘transact’.

      • superpoincare@gmail.com'

        There is no semantic error on my part. I am simply using the language of national accounts and flow of funds. It is the only way to understand economics.

        Suppose you hold a Rupee and that’s the only claim between Indian residents and foreigners. Indians owe you a rupee and India’s net international position is Re 1.

        Your terminology is strange. Money itself is debt. You seem to think that money not being debt makes it money. What is the problem with money being debt?

        What about bank balances in transaction accounts? Do you consider them not debt? That is as much money to me as a government note or coin. Even standard definitions of the money stock such as M1, M2 and so on consider them as money.

      • Eric Lonergan

        Ramanan – I don’t think money is money because it isn’t debt. I think money is different from debt, which is why we have two different words. Anyway – great debate!

      • superpoincare@gmail.com'


        That link doesn’t work. At any rate, James Tobin was the one who started this stock flow consistent modeling. In that currency notes are liabilities.

        For people bank deposits are as much money as cash notes. So as per you bank deposits shouldn’t be considered debt. Are they debt?

      • Eric Lonergan

        Ramanan, to be clear you need a test for whether or not something is a liability. What is your test? Let me know. Tobin recognised that base money was qualitatively different to bank deposits. He was right. Why do bank deposits need to be insured, but cash and base money does not? I think if you answer those two questions we will be in agreement. In fact, everyone involved in this discussion needs to answer these two questions.

  6. jh@rogers.com'

    I read your post “Does the central bank’s balance sheet matter?” and quite liked it. I approach the world differently, but I liked it.

    Let me try some comments arising from that top down. This is pretty quick and dirty.

    Regarding the general area we are discussing, I think a useful perspective is a view of the consolidated financial effect of the treasury and central bank functions. I got in a dust up discussion with MMT people on this a few years ago. My objection to their typical presentation was their tendency to depict “the reality” of operations as if the manager of the Federal Reserve System Open Market Account was also the one cutting social security checks (that’s an implied example). There’s a difference between understanding the consolidated financial effect and utterly confusing operational distinctions that move forward to that effect. I’m in favor of using a consolidated financial view where it’s illuminating. I’m not in favor of mangling operational descriptions that may fit that financial outcome as a counterfactual, but that are completely misleading as description of actual operations.

    Just before I go on, I think that “semantics” is a boxing match. It’s one person’s semantics versus another’s. It’s never a question of “just semantics”.

    And I think there’s another boxing match, which is the relationship between economics and accounting. My approach is to go for an accounting foundation that allows for consistent lift off to economic arguments. As a rule, I do not believe that economic arguments should drive one-off approaches to accounting, because the consistency of the full accounting terrain will probably fall away into internal contradiction in that event. Conversely, I don’t believe that the accounting foundation should impede effective explanation of good economic arguments, nor the translation of the latter into friendly popular language for purposes of explaining such ideas as “Peoples QE”.

    Regarding the consolidated financial view, I think the base case is a government operation funded by currency, bank reserves, and debt. You know how that works, I’m sure.

    At that level, I’m prepared to be open about what the concept of a balance sheet means. My technical leaning tells me that there is a net funding position offset by a negative equity position. One could get cute by plugging in the present value of contingent taxation as an asset, instead of negative equity. Or one could just leave a dangling mismatched net funding position. These are big ideas, worthy of discussion, but not worth doing a microscopic accounting evaluation at this point. But there is some concept of accounting at that level of course.

    That base case in my view represents a cumulative deficit, funded by different instruments. You can fit the net result of QE in there (i.e. bank reserves displacing debt) or the net result of people’s QE (just bank reserves).

    The most important thing in that funding structure is interest rate risk. And the most important thing within that idea is to recognize that there is a future contingency regarding what the interest rate may look like on bank reserves. That contingency needs to be taken into account in doing a proper economic evaluation of the entire funding structure. If PQE is to be sold by way of a public relations campaign, to any stakeholder, some sensible evaluation must take place about the probabilities of higher interest rates, viewed from the current context of low interest rates and an arguable need for stimulus of some sort at this point. Not a fear mongering. Just a reasonable evaluation and explanation of the risk. Because this factor is part of the truth of the situation. It is a funding mix with different interest costs and those interest costs become part of the deficit, and all that needs to be take into account in making reasonable economic arguments about the future trajectory of consolidated government funding.

    When it comes to unpacking that consolidated view into its actual institutional components, I turn to a more nuanced approach.

    I think the purpose of accounting is to keep track of stuff and so I approve of disciplined and consistent accounting structures in the case of an institutional entity like the central bank – including classification into assets, liabilities, and equity. And I just don’t believe in the idea that the classification of “liability” need constitute an impediment to an effective public relations campaign for PQE for example. That to me would be a weak intellectual argument failing as the foundation for a doomed popular argument. You’re not going to convince Austrians by banning the word “liability”, and you’re really not going to convince anybody else – if the economic argument itself is wrong. Coherent, consistent accounting is not a booby trap for clear thinking. Quite the opposite.

    Drilling down a bit, the idea of the government “gifting bonds” to the central bank in order to supply an asset offset to an otherwise expanded reserve base is of course technically a re-capitalization of a central bank that has negative equity due to reserve expansion alone. The advantage of doing this is to reassure that there is a supply of assets in case of a future strategy to unwind some of that reserve expansion, as well as a supply of interest revenue to mitigate some or all or more of actual or potential interest expenses on the expanded reserve base.

    And I agree that the potential negative interest margin due to People’s QE can be fitted into a higher category that includes the potential negative interest margin due to standard QE. They are differently configured events of course, but there is a similarity in the fact of the interest rate risk that the institution should deal with in some way.

    Regarding the classification of fiscal and monetary, I think that monetary policy touches fiscal policy through the equity account. Monetary policy in the usual sense (including QE) involves mostly exchanges of principal value at the margin, which has no instantaneous fiscal effect. But the calculation of income resulting from monetary operations is the calculation of a fiscal effect – as evidenced in the transfer of profit from the central bank equity account to Treasury. People’s QE complicates this in an obvious way. My approach would be to use standard equity accounting at this institutional level, and to have the government continuously recapitalize the central bank with bonds, as PQE proceeded with reserve expansion in implementation That makes things clean, and should not in the least impede an effective explanation of a good economic argument for PQE.

    That’s enough for now. I may have a few other comments later on that same post.

  7. agrippaskeptic@gmail.com'
    Agrippa the skeptic

    Hi all.

    Nice post and discussion.
    I believe it’s correct to define base money as a liability of the CB. A few thoughts on this:
    1- I really like the scoreboard analogy and the idea of money as a social debt, as a claim on society with the score being kept, at the top of the pyramid, by the CB.
    Liabilities of the CB (as well as the government) are ultimately liabilities of all of us, so with base money being a claim on society, and consequently a liability of the society it makes perfect sense to consider it a liability of the CB.
    2 – If base money is not a liability of the CB, why should a bond issued by the CB (or the government) be any different? The way I see it base money is just a 0-maturity bond of the CB. To make thinks simpler, imagine there were no commercial banks, everyone had an account at the CB and base money would equal money. A CB bond would simply be a promise to credit your current account at the CB, why should a CB bond be any different than base money?

    • Eric Lonergan

      Thanks Agrippa,

      Regarding your second point, a bond would be different be cause a bond is an obligation to make principal and interest payments, and the nominal price and yield of the bond fluctuate depending on market demand for bonds. A bond can be defaulted on – which specifically means a pre-agreed payment of interest or capital can be missed. These are all properties of bonds. None apply to base money. On the other hand, you cannot usually pay for things with bonds (if you can they stop being straighforward bonds) , but you can pay for things with base money. So there is a major difference between the two, the qualitative difference is such that we have two different words – money and debt. The case where we bank directly with the CB that you describe is helpful, because in contrast to the case where deposits are liabilities of banks, they would not be liabilities of the central bank, apart from the cost of converting to physical cash.

      Also, if base money is everyone’s liability, is the liability a burden on everyone equally, including corporates – or would you allocate more of the liability to certain entities or households.

      • agrippaskeptic@gmail.com'
        Agrippa the skeptic

        I agree they base money and bonds are different things, where I don’t agree with you is when you say that they should be accounted differently regarding being a liability of the CB or not.

        Why, in the no commercial banks example, should our deposits at the CB not be liabilities of the CB? How would you account for it? How would you represent it in a balance sheet? Why would a term deposit (bond) be any different than a demand deposit (base money)? (sorry too many questions…)

        Regarding if base money is everyone’s liability, I don’t think it matters very much. Expanding the idea a bit… It’s a claim on society’s output, the value of this claim depend on what we are able to produce. If by some tragedy our productive abilities decline dramatically, the value of this claim (money) declines as well internally ( in our country via inflation) and externally ( devaluation). Hope you see what I mean :)

  8. odavey@hotmail.com'

    I haven’t read through all the comments yet, but I’m sure JKH and Ramanan have contributed in their usual impeccable quality.
    I have a feeling you’re committing the opposite error of those caught in pure barter modes of thinking.
    What is it in the real world, i.e outside of financial claims, that makes money an asset? If money is a claim on future goods or services, it is those goods that desgnate money’s worth, i.e. make it an asset to the holder.

    Now, whose liability is it? That of the economy that will (or will not) produce those goods or services in future.

    Where does that leave banks & particularly the central bank? It banks that first transform p2p loans into a debt plus a general asset we call money. Otherwise loans would not create deposits, but merely IOUs. They do this as an act of insurance by means of novation, issuing their own liabilities instead of the IOUs while accepting those claims in repayment of the initial debt and guaranteing a stable exchange rate into goods & services over time.
    The central bank effectively does the same with bank liabilities, thus managing the exchange rate between individual member bank liabilities + targeting an exchange rate with outside money ( foreign currency) as best it can.

    In all, I think one has to follow the whole daisy chain of from real goods and services ‘consumable’ to the management if claims on them within and without a currency area to make any sense if the question: us money a liability?

  9. jh@rogers.com'

    Buffet is confused. He thinks that something that is a liability in substance is no longer a liability because of the portfolio effect in aggregation. It’s the fallacy of composition in reverse – he’s inferring a fallacy of composition (in order to jigger the meaning of the term liability) where there is none. What is actually happening is that the portfolio effect of an aggregation of liabilities is such that it becomes a semi-permanent zero cost funding source. That does not mean that the aggregate is not composed of individual liabilities. And the latter is what the classification refers to. Accounting classification is according to the nature of the item – not according to the portfolio effect of the aggregation of such items. Playing fast and loose with definition based on aggregate behavior is not what accounting is about.

      • jh@rogers.com'

        Or right.

        Under almost any other example I can think of in Buffet’s case, I would agree with you.

        But this is exactly the error I’m referring to:

        “Owing $1 that in effect will never leave the premises – because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the door tomorrow and not be replaced. The two types of liabilities are treated as equals, however, under GAAP.”

        Those aren’t two different types of liabilities. They’re two different portfolio behaviors.

      • Eric Lonergan

        I’m afraid I think it is very clear that Buffett is right, and it is relevant to how to treat base money. Something which is never redeemed and pays no interest is not a liability. I’m afraid I also reject the convenience/stick to convention approach – getting it right actually matters! For example, if base money is a liability, equivalent to its face value, of every resident, a helicopter drop of cash won’t work – think about it. If it is not a liability, a helicopter drop will. Arguing that base money is a liability of the population v quickly descends into Ricardian equivalence – which, in this case, really is nonsense.

      • jh@rogers.com'

        In the Buffet case, individual payables are definitely liabilities according to the facts – insurance claims are payables to be repaid. The zero interest rate and the beneficial portfolio effect are separate characteristics. This is clear cut if you think about it.

        The base money case is more nuanced. It’s contingent – contingent in aggregate, and contingent at the level of each dollar of base money (which is also why the comparison with the Buffet case is not helpful). You’re implying that central banks never reduce base money though QE exit, and that the resulting bond debt that replaces base money is not a liability. That’s clearly unrealistic. And/or you’re implying that a hypothetical government would never run surpluses to apply in facilitating its hypothetical helicopter dropping central bank to reduce base money in the future. Outlawing these future contingencies is unhelpful. And therefore they are an argument for defaulting to a liability classification, with a helpful footnote perhaps, because they are unique types of liabilities.

        Also, the holders of base money do not participate in central bank profits. The true equity position is the correctly defined residually determined balance sheet position that does participate in correctly defined profits. Which is a common sense argument for why base money should not be treated as equity.

      • Eric Lonergan

        JKH, the question at hand is not about individual claims it is about the treatment of float: a) is it a liability, b) what value should it be given (even as a liability).

        If your argument is that base money is a contingent liability only, you and I are in agreement, it follows that you too do not agree with current accounting treatment – which does not treat base money as a contingent liability – if it did the value of the ‘liability’ would be far smaller.

        Also, if it is only ‘contingent’, as I have argued elsewhere (below), and there is reason to believe that, for example, that QE is never reversed, then this value can be zero.

        Also, given that we agree it is only ever a contingent liability, if the central bank has the power to set required reserves, it again could be close to zero.

        Finally, to be clear, I am not suggesting that base money should be treated as equity – it is not equity! The ability to create base money is a source of CB equity – that is a separate point.

        When the CB creates base money under near zero interest rate or deflationary threats, the value of the contingent liability is a fraction of the base money created (this is also Buffett’s point about float). That is not how it is currently treated. The issue of reversibility/contingency is dealt with in detail here, in the ‘Note to economists.’

        Finally, you also need to consider the fact that if the economy ‘needs’ more liquidity and the higher base money raises its growth trajectory (which is highly plausible in many circumstances – ie if cash transfers were done in Europe), future taxes would be lower not higher.

        It is ironic that the ‘accounting convention is truth’ camp logically end up very close to Barro’s Ricardian equivalence.

        Anyway, very interesting discussion!

      • jh@rogers.com'

        “the question at hand is not about individual claims”

        I think you’re arguing from invented authority. The actuarial valuation for the expectation of individual claims, then summed, is the basis for the liability classification. And you’re wandering off Buffet’s page on this. Even he referred to ‘float” as a “type of liability”.

        “If it did the value of the ‘liability’ would be far smaller”

        That’s getting a little too cute I think. I referred to a footnote. I’m not proposing an actuarial valuation of the probability weighted expectation for the ultimate quantity of a QE exit.

        Speaking of actuarial valuation, you were silent on my earlier question. I’ll expand it slightly. Please tell me the relationship of an insurance companies float to its actuarial liabilities, and then tell me whether you believe actuarial liabilities are liabilities.

        And then just for fun tell me whether you believe bank credit float is a liability.

        “The ability to create base money is a source of CB equity”

        Agreed. But if you check out your earlier comment to somebody else in this thread, I think you said it the other way. That said, your earlier post was much clearer on this.

        “When the CB creates base money under near zero interest rate or deflationary threats, the value of the contingent liability is a fraction of the base money created”

        I’d do that in a footnote if you think it’s a necessary observation. Let’s just not mangle that idea by jamming the present valuation of future interest margins into a balance sheet presentation. Apocalyptic accounting dysfunction arises when the difference between marked to market (or present value) accounting and accrual accounting is not understood and then mixed holus bolus, without more careful construction and overall coherence. Bank interest margins are accounted for and rolled out to profit effect normally using the latter (BTW, the Fed does not reflect MTM of Treasuries on its books, thank God).

        “the ‘accounting convention is truth’ camp logically end up …”

        Not necessarily. It’s just that the “economic sophisticates” group can’t bear not making things much messier, noisier and more confused than what they need to be. The entire economics profession suffers from accounting phobia. The sensible alternative is a coherent financial analysis of straightforward income statements and balance sheets, using knowledge of specific detailed composition to arrive at the final analysis. In this case, I think in effect you’re wanting to extend actuarial type valuations to banking events, and then wanting to jam the modelling of the risk into the financial statements. That is very messy and unnecessary. Economists need to learn how to use financial statements in their modelling – not mangle the statements themselves out of modelling desperation.

        Agreed. Interesting discussion.

      • odavey@hotmail.com'

        Liability: A duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services, or other transaction yielding an economic benefit, at a specified or determinable date, on occurrence of a specified event, or on demand;

        Money qualifies under that definition, since it must be convertible into goods, services or assets on demand if it is to have any value (its actual value being that amount of stuff it effectively commands). Assets include foreign currencies.

        Also, you use liability and debt interchangeably. It could well be considered a liability but not debt in a stricter sense, no?

      • jh@rogers.com'


        I can look at a standard balance sheet presentation for a central bank or a commercial bank and make any correct argument I want about the duration or size of the interest margin effect of all manner of liabilities (I used to do it for a living). This includes any effects arising from QE or helicopter how-are-you’s or whatever.

        So the question I have for the economists is – who is it that is really hung up on this whole accounting question?

      • jh@rogers.com'


        I can tell by the way that he writes about banking (central and commercial) that Krugman has never had a course in financial accounting.

        That’s why the likes of Fullwiler can demolish him through effective analysis.

      • jh@rogers.com'

        From your other linked piece:

        “In other words, quantitative easing amounts to the cancellation of government debt.”

        I see that all over the place, and it’s false.

        The central bank has a put option (back to the market) on the debt that it continues to hold (put at market price).

        That’s what QE exit is all about.

        An option to “un-cancel” amounts to contingent cancellation.

        Ha ha.


        Sorry for all the separate comments. It’s not deliberate. Just on the run.

  10. jh@rogers.com'

    Ramanan’s general point along the lines of common sense in maintaining accounting coherence and consistency is the most intelligent top-down approach to the subject. The dysfunction caused by insisting that money not a liability is just counterproductive, whereas there is a sensible consistency and convenience in allowing it to be classified as a unique type of liability, but a liability nevertheless. Unlike a loan of money, there is no contract that specifies certain cash flows relating to money itself. But there are other implicit liabilities of value (e.g. taxation authority) and explicit contingent liabilities of quantity (e.g. QE exit). The dysfunction of not including money as a type of liability is only compounded by the more serious error of inventing it as a type of equity. If it is deemed to be equity, then the government can pay down its debt with deemed equity surpluses generated by quantitative easing, instead of taxation. Given the contingencies of interest rate payments on bank reserves, this is rubbish. It is the nuclear option for the destruction of common sense in coherent balance sheet accounting.

  11. odavey@hotmail.com'

    …an extreme version of low tax Hong Kong, where the government raises all its revenues from land sales, would money still be a ‘liability’ of the state, even applying Randall Wray’s linguistic gymnastics? Presumably not. There’s a separate issue, would money still have value and be used. Why not? Money’s value resides in a network externality, i.e. acceptance as payment by others …

    That just proves that MMT / chartalism is a special case, whereas a more general case would start from private bank credit. Or at least that a complete view would have to account for both private and sovereign money circuits.

    In an economy with only one privately owned bank and no central bank, would you argue that deposits are not a liability of the bank, or that this was a moneyless / barter economy? And what would an economy with no bank but only a central bank look like?

    • odavey@hotmail.com'

      Where I do agree with you generally, is that you cannot argue truth of accounting with consistency. Consistency is a neccessary but not a sufficient criterion.

      Suffficiency in this case demands verification from outside of accounting, otherwise you run into some kind of Goedel, I’d imagine.

      So while I’m absolutely certain JKH can take any case thrown at him and correctly atrribute it to the ‘right’ parts of any given balance sheet, that proves nothing more than that accounting is complete, in the sense that it can deal with all cases, and internally consistent, in the sense that it does not produce any contadictions.

      So he can rightly claim that treating money as equity is nont consistent with current accounting standards, and from that perspective may well be reagreded as a nuclear option, but that does not prove that a fictional accounting system in which it is, is either less consistent, less complete and certainly not that it would be less true, in a realist sense.

      Having said that, I do think that treating money as a liability has more truth value than thinking of it as equity, for the reasons mentioned above. You desperately need the reference to real stuff and services for accounting to have any relevance, and thus at least truth potential, whatsoever.

      • jh@rogers.com'

        ” accounting is complete, in the sense that it can deal with all cases, and internally consistent, in the sense that it does not produce any contradictions ”

        good fundamental point Oliver

        ” that does not prove that a fictional accounting system in which it is, is either less consistent, less complete and certainly not that it would be less true, in a realist sense. ”

        no, but it is incredibly unlikely

        this reminds me of the endless debates about the definition of saving

        it remains to be demonstrated that there is any holistic approach whereby saving can be defined coherently other than how Keynes defined it (income not consumed)

        so it goes with accounting

        nobody has come within a light year of proposing an alternative coherent system in either case; everything ventured by economic sophisticates is one-off tinkering that is doomed to contradiction when it meets up with a mother ship that it can never depart from

        of course, Keynes was the master macro-accountant

        that’s what enabled him to invent macroeconomics

  12. jh@rogers.com'

    Just watched your December 2014 presentation.

    Very nice.

    I’ll just add that PQE is a fiscal deficit operation.

    It’s a deficit because of the contingency that it will have to be reversed in future by bond sales (which is why recapitalization of the CB’s negative equity position resulting from PQE is advisable). And those bonds eventually sold into the market become indistinguishable from bonds outstanding that never touched the PQE process. And they are all liabilities subject to repayment obligations (refunding notwithstanding).

    It’s also a deficit because of the actuality/contingency that the incremental bank reserve liabilities (sorry) pay interest, just like floating rate debt. That makes it economically equivalent to government debt. It’s just the yield curve difference and whatever basis exists between bill yields and reserve yields.

    It’s the interest margin effect of the CB that is fiscal. The CB as an institution may be uniquely responsible for monetary policy, but there is a fiscal link through the income statement and the profit remittance process. This is essentially no different for the Eurozone according to the ECB capital keys of Eurozone members.

    • jh@rogers.com'

      I could see PQE as an authority delegated by the treasury to the central bank. The authority is necessary in the case of PQE (as opposed to QE) because it should require concomitant incremental capitalization of the CB. That’s the “honest” way of doing it. But it could still have the desired effect.

      • Eric Lonergan

        Thanks JKH, I’m not entirely sure where u stand, do u agree that base money should only show, if at all, as a small contingent liability on the CB’s balance sheet? I would have no base money on the balance sheet as a liability, and add a footnote that the CB may have to reduce the stock of base money in the future, and outline the options available to it. That is crystal clear.

        On the other hand, if you would leave the current accounting convention unchanged, you sit with most economists – hence I discuss this issue here as a ‘Note to economists’ http://www.philosophyofmoney.net/wp-content/uploads/2015/01/The-definition-of-money-website1.pdf

        Have a look – only some economists think physical cash is a ‘liability’ (because it’s not!).

        Ironically, I find accountants – including Buffett – much more sympathetic to my view that the existing convention, as applied to central banks is nonsense. To them, it is obvious that standard accounting has not been designed for CBs, and that convention is just a mapping of commercial bank accounting onto the CB, and an anachronism of the gold standard – when reserves were liabilities.

        Accountants are very aware that all standards get revised/changed – so dogmatism is not an option – and most I have discussed this with have no problem seeing that base money is not a liability. Physical cash is the easiest case to prove – the test is simple: what does the CB owe the holders of cash? Nothing. So it’s not a liability. IOR tends to cause a bit of confusion – but not for long (it’s voluntary – true interest is not).

        Economists however are far harder to convince of the blindingly obvious – they confound themselves with ideas about payment of future taxes and claims on goods and services. None of which is, in fact, relevant. Hence the irony that Randall Wray seems closest to hardline mainstream economists on this (like Sims and Barro).

        Anyway, I feel we may now have exhausted the subject!

      • jh@rogers.com'

        I would show a central bank balance sheet the same way as it is currently depicted. I might well include a footnote summarizing an interpretation of the monetary base. That’s not a bad idea. But I wouldn’t directly muddy the accounting presentation with the type of scenario analysis I’ve suggested is essential for financial analysis and risk management purposes. I certainly would not drill down to the calculation a “contingent liability” quantum for purposes of a financial statement presentation or a even a footnote to it. That is simply too macro and probabilistic a calculation to put into that box. I would include analysis of it in a separate reference.

        Which leads me to a basic point – financial accounting is not the same thing as the use of financial accounting statements for financial analysis. And scenario analysis falls into the second category.

        I can say confidently that I understand what you are saying about the monetary base not being a liability. But it is not the only argument in my view. On that basis, I don’t think it is decisive enough to go messing about with the existing accounting presentation. The existing accounting presentation for a central bank has a usefulness in financial analysis that totally dominates the usefulness/validity/decisiveness of the not-a-liability argument in my view.

        Perhaps my view is also along the lines of – don’t tear down a fence until you understand why it was put up in the first place.

        In other words, show me something decidedly better for a balance sheet presentation that assists in a clearly superior way with the use of the central balance sheet in financial analysis.

        I never think of the subject of accounting in terms of accountants. It’s too fundamental as a type of mathematics and too important in cross-disciplinary application to be viewed through that professional box. And I think its relationship with economics is woefully underdeveloped and should be more formal in terms of structured thinking. My earlier comment on Keynes is along those lines.

        I don’t think we’ve exhausted the subject, but mostly likely we have exhausted our marginal efficiencies of mutual communication and understanding this go around.

        Good luck with PQE. I’m always available as an epistemological advisor on that subject.

        : )

      • Eric Lonergan

        Those are all good points JKH. My original motivation – hence the reference to religion – was really to dispel a widespread view that simply says ‘it’s a liability because it says so on the note, or because it says so in the accounts’. The simple point you made in a prior comment that market values diverge from book values is another way of stating this.

        For a similar reason this discussion matters a great deal. It was very clear to me that QE was a huge reduction in the net debt of the government – particularly because there was a huge increase in demand for reserves simultaneously (ie the increase in reserves is near-permanent). As a consequence, public net debt did not rise after the financial crisis. Bond markets got this – those taking conventional accounting at face value did not – they predicted large rises in yields, and were confounded. It also highlighted a huge difference between the Eurozone bond market and that of the ‘money-printing’ world. This makes the point – and the response of economists is interesting (hindsight is not kind!). http://blogs.ft.com/economistsforum/2012/06/governments-can-borrow-without-increasing-their-debt/#axzz1z4jNOxCR

      • Eric Lonergan

        I should also point out that the same error is being made right now, by people who should know better – such as William White (formerly of BIS). Debt levels are not at all time highs, if public sector debt is (correctly) viewed on a net basis.

        Precisely because of this analysis, I would not be surprised if the US proves to be a lot more resilient than many assume – because it is not nearly as leveraged as it appears.

        We can argue to our heart’s content about how to classify things – but reality will intervene! So too for those who think that money is debt. If you have a lot of debt, asset price and goods price deflation are catastrophic. But the value of (base) money rises, and the ability to print money saves society. That’s the proof – sorry everyone: money is money, debt is debt. If in doubt, take a trip to Greece – why are its banks not waving their magical money-creating wands, and why does its government wish it had not given away its printing press?

        [note: bank deposits do not rise in value in deflation – a point Kalecki makes – because default risk is rising. Which answers very clearly an earlier question: are bank deposits liabilities of banks? And are they fundamentally different to base money?]

  13. Eric Lonergan

    Btw, Scott Fulwiller’s post on how deposit creation occurs is superb – although, it is important not to underestimate the importance of reserves (ie Greece). Scott also has no problem accepting that base money not a liability.

  14. superpoincare@gmail.com'


    ” what does the CB owe the holders of cash? Nothing.”

    The CB owes the holder of cash the amount written in the currency notes.

    If I hold $100 and you hold nothing, there’s obviously a difference in your relation than mine with the central bank.

    In the simplest case assume I can pay taxes at the central bank office. I am supposed to pay $100 in taxes. This cancels the central bank’s indebtedness to me and my indebtedness to the federal government.

    • Eric Lonergan

      Ramanan – I’m afraid when you move off a gold standard to fiat money, no one owes you anything for a dollar bill. You can use it to buy things, or pay for things (including, but by no means critically, taxes.) It is a valuable thing because you can buy things with it and it has a fixed nominal value. But no one owes anyone anything. The central bank is not indebted to me, it owes me nothing. That’s the beauty of it!

      • odavey@hotmail.com'

        I think you’re misreading Wray, because I don’t think he would disagree with your point above (although others would).

        Money = debt refers to the fact that 1$ owned by someone = 1$ owed by someone else (or 1$ worth of assets sold / QE, in which case there is no change in overall non-bank assets and which, for the endogenous money folks, would not count as money proper). The special MMT point being, that 1$ owed by government to its own central bank is not the same as 1$ owed by a private entity to a commercial bank, because gov. debt can be rolled over indefinitely.
        I think the first point is indisputably true regardless of whether there is a gold standard or not. The latter may well depend on whether there the CB is bound by a promise to either pay out specie, or exchange its money for some other asset at a fixed rate. According to Ramanan and others, and I’m inclined to agree, a floating exchange rate and non-convertability into gold are not sufficient criteria to the claim that there are no constraints to gvt. borrowing other than the availability of domestic real ressources. National sovereignty is not an absolute concept.

      • Eric Lonergan

        Oliver – Buffett’s point is that a “debt” which is “rolled over for ever” actually isn’t a debt. People say “money is the same as a government bond with an infinite maturity and a zero coupon” – which means it’s nothing like a government bond!

        Now you have raised a separate subject: : are there constraints on government borrowing other than the availability of domestic real resources? That is a very different complex question …

        I continue to reiterate a point that no one in this discussion is willing to address: the value of money lies in a network externality; the desire to describe money as a claim on something is the same as the desire to have a gold standard – money’s value does not reside in a thing or a claim, it resides in a network externality. As Friedman says, it has value because it is accepted … it is accepted by one, because it is accepted by many.

        It is a profound irony that the the psychological motive behind the argument that “money is a claim on future taxes” is actually the same as that behind the gold standard – an unwillingness to accept that money, which is backed by nothing (but is finite in supply), can have value.

        As I have said before, and no one takes up, this is why we know that money is not a debt or a liability. The value of debts does not lie in network externalities – it lies in the ability to meet interest and capital payments.

        If you want to find things that are analogous to money, don’t look at other financial assets, look at other payment related businesses: why do Visa and Mastercard have market values way in excess of book value, for example? They don’t raise taxes! Why does Facebook have a market value way in excess of book value – if you can make the connection between Facebook and money, you understand my argument …


      • odavey@hotmail.com'

        Thanks for your reply.

        I understand Buffet’s and your point about an infinite maturity bond with a zero coupon. And if the world were as black and white as MMT claims it is, I would agree.

        The MMT claim, as far as I’ve understood that, is that the above is absolutely true for a sovereign because it faces no market or foreign constraints on its borrowing. The only MMT approved constraint is, as I put it, the availability of domestic real resources. So I think, at least in MMT-land, the two issues are interrelated.

        Personally, I think it is less absolute than that and very much a function of which country you’re talking about and its position vs. the rest of the world, even if it does have its own printing press.

        As to your point that the value of money lies in a network externality, and from a first glance into your book, I’d say:

        A $100 corporate bond has a face value of $100, just as a $100 bill has. Both are valued at $100. And apparently the bond is accepted by one, despite not being accepted by many. Otherwise it wouldn’t exist.

        The difference in value, owing yes to money’s unique ability to make payments / settle debts, is only visible in the the liquidity premium.

        As to: the desire to describe money as a claim on something is the same as the desire to have a gold standard.

        The commitment that monetary authorities make nowadays is that money will convert into a vague consumer goods basket at a predetermined, but adjustable declining rate. If a CB committed to holding the exchange rate of its money into, say meteorites or rare earths or any other thing it had no veritably control over, constant that would indeed be similar to a gold standard. In those terms, MMT is actually a labour standard.

        But maybe we’re talking past each other (or I’m just confused). I’ll give the rest of your reply some more thought.

      • Eric Lonergan

        We may be slightly talking at cross purposes. Personally, I don’t find it helpful to think in terms of what “MMT thinks” or “Monetarists” or any group – because this is not football, it’s thought! So I do not subscribe to any “school” – it is obvious that they are all wrong! (They are also usually right about something). The very existence of “groups” is a failure of independent thought. I guess that is a tautology.

        The point about value residing in a network, works like this: the only reason anyone uses twitter is because lots of people use twitter. I could create something much “better” than twitter, but if a critical number of people don’t use it, it will be valueless. For sake of argument, imagine Twitter as a business has no physical assets, no financial assets – nothing except some code on a machine rented for free. In some sense it is worthless. The code has no “intrinsic value”. Twitter, however, has a huge market value – primarily because people use it, and its value is intrinsically linked to the number of people using it. This is true of many social media businesses (and language, btw), it is also true of payment businesses – visa, master card etc (and money, btw). [It is no coincidence that the great Scottish philosopher/economist, David Hume drew a comparison between language, law and money]

        Now think about about a corporate loan. Imagine my friend runs a great business, but he needs $10,000 to expand, which he doesn’t have. I lend him the money because he is generating 30% cashflow after taxes, depreciation etc. Now, this loan is a sound credit and has value as long as his business does well. But its value resides in his ability to repay. There is no network – the value of the loan does not depend on other people ‘using’ it. Network effects are simply irrelevant to a loan’s value. Of course, other people would also consider the loan valuable – but that is not the source of the value. Things that have value because of network externalities are COMPLETELY different to debts and liabilities. Think about why people use mastercard or visa, or Facebook or twitter – then apply the same logic to money. The reality here – something I explore in depth in my book – is that people find it disconcerting that something so important as money has no “backing” and only has value because it is accepted by everyone as payment.

        Now, tax payment is not totally irrelevant – it can facilitate the establishment of a network. Governments can of course impose a standard and create critical mass by law, but also by requiring citizens to use the money they issue to pay taxes. But just because tax may historically have been the means by which the government establishes its network, it does not change the economics of network effects. As I showed in the example of Hong Kong, we would of course continue to find money extremely useful even in a zero tax economy.

      • odavey@hotmail.com'

        I’ve given the network view some thought and I think I like it as a general analogy of a distinctive feature of money. An asset that isn’t generally accepted in payment is indeed worthless and cannot be called money.

        I’m much less enthusiastic about your distinction between money and credit though.

        When taking out a new loan, I sell my IOU, which nobody would accept in payment, to a bank. The bank then transforms my IOU into a liability of its own, which it promises to be generally acceptable in payment of debts to itself (or any other bank). That transformation is what banks are liable for, the latter is where central banks come in. And in this case, the network effect and credit are inseparable. They are two sides of the same coin.

        Banks can of course also buy existing ‘market vetted’ assets and emit money in exchange. But in that case, no new venture is funded and nobody is obliged to add value to the economy by earning money / working to pay back debt.

        And it is precisely this distinction that is lacking in both a network view of money as well as in a hierarchical view, in which you have credit at the bottom and base money as means of final settlement on top. And while I’d say they’re both essential to understanding money, they lack a qualitative measure and thus point straight at some form of quantity theory. And personally, I feel that if any part of theory has fallen apart since 2008 it’s QTM.

        So to recap, I like the network analogy, looking at hierarchies is also important, but you also need a third dimension that lets you make qualitative distinctions within a given asset class.

      • odavey@hotmail.com'

        And just in case it wasn’t clear. I’m not trying to pin you to any school of thought. I can see from your most recent blog posts, and generally from your blog, which I enjoy reading very much btw., that you’re more than just a bit eclectic. I look forward to reading your newest thoughts on network externalities, too.

      • odavey@hotmail.com'

        I’m not sure where my own comment above leaves me in the discussion about money’s value. I would intuit that it makes no sense to speak of the value of money in terms of itself, unless you add time as a dimension. So while other goods’ value may be expressed in terms of how much money they can be sold for, money is unfortunate in that its value can only be expressed in terms of all the goods, services and assets that could be bought with it, even if that entails comparing red currants with orange futures. I’m also wondering whether the network value you talk about isn’t to be found in bank equity, as opposed to the money which banks emit on behalf of their customers.

  15. jh@rogers.com'

    I’ve read this:


    It’s excellent, particularly the inflation, reversibility, IOR framework. But I would transform it a bit as follows:

    On inflation:

    “This is an important question but, whatever the answer, it is not clear that this alters the issue of whether or not money created by governments should be treated as a debt.”

    Completely agree with the way you framed it.

    On reversibility:

    “In summary, the government may have a contingent liability associated with the reversal of QE, but there is no reason to believe it is one-for-one with the amount of debt that has been purchased; it is likely to be a great deal smaller because a significant amount of the increase in reserves is permanent.”

    Contingent liabilities include contingencies of quantity. Responsible monetary authorities never have certainty over the outcome of their current policies or the rationale for their future policies. I would view “may” as a redundant qualifier in this context.

    On IOR:

    “There is no obligation on the government to pay interest on reserves; after all, we don’t
    receive interest payments on notes and coins.”

    A central bank in QE mode that decides to set a non-zero policy rate has a contingent obligation to set IOR to be consistent with that policy rate objective –i.e., it becomes a floor rate for the policy trading range (minor technical exceptions notwithstanding). Otherwise, you’re into Mosler/Mitchell MMT territory with a permanent zero interest rate policy as a commitment.

    Again, my preference would be to show the base as a nominal liability on the balance sheet, with a footnote about contingencies, supported by referenced detailed analytical work. So I would recommend starting from the nominal presentation and then working to the analysis of the effective possibilities (i.e. referencing expectation and risk). Instead of centering the argument on the view that it’s not a liability, explore its unique nature, including various contingencies.

    • Eric Lonergan

      Thanks JKH – have been reading your blog posts – v interesting. My main regret in book is not discussing network externality – it’s implicit. I’m currently writing on it – will be interested in your thoughts.

      • jh@rogers.com'


        In all the analyses of QE (or PQE for that matter) that I’ve seen, I’ve never seen anybody directly contrast and differentiate between its expected effect on the behavior of banks as a result of the creation of additional excess reserves, and its expected effect on the behavior of bank customers as a result of their ownership of additional deposits (in exchange for bonds sold into QE). I mention this here because you’ve written pretty clearly about the natural effect of QE on the liability side of banking, and not many people get even that far. I haven’t yet taken the time to think this through in enough detail myself, but my instinct is that the motivations of non-banks who sell bonds into QE are far more active than the motivations of the banks who import new excess reserves as a result of QE, the banks being somewhat passive recipients of the new customer deposit money and resulting reserves that are created for the banking system. This is consistent with my general interpretation of QE going back to the start, which is that bank reserves are for the most part a by-product of QE. Of course, this is in great contrast and virtually opposite to the way a lot of economists think about it – particularly monetarists. Scott Sumner seemed bewildered when I suggested such a thing in the early days of his blog. PQE is interesting in the context of all of this, because the strategy is focused more directly on the non-bank customer side, notwithstanding the usual creation of excess bank reserves, as is the case with plain vanilla QE.

        This is also consistent with my general interpretation of the relationship between bank reserve management and bank capital management. I’ve written about this recently in comments at George Selgin’s blog under his 3 part series on excess reserves:


      • Eric Lonergan

        This is a very interesting point – I don’t think anyone has given nearly enough attention to the issue of the demand for deposits. Indeed, given the current fashion for “endogenous money”, this is a striking omission. To my knowledge, Tobin is the main economist who was troubled by the fact that if lending activity drives deposit creation, deposit holders appear passive. He then tries to construct an ‘equilibrium’ model of asset pricing and demand for assets – which I dont think is at all convincing. http://www.philosophyofmoney.net/tobin-the-end-of-banking/

        I think during QE there has plausibly been an increase in demand for deposits from the non-bank private sector, as a legacy of 08. But there is no doubt some truth in a ‘tobin’ perspective that the price of near substitutes has been bid up, which drives down yields and makes cash relatively attractive. My concern with the Tobin view is that I do not believe that people view all assets as substitutes at some level of expected return. As we see in Europe with negative nominal interest rates – this does not necessarily drive investors into equities, but it may cause them to divert resources into finding closer substitutes to cash, incurring unintended risks in the process.

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