Chartalist & Circuitist analyses of money - Page 3

Originally Posted by Nathan Tankus

when chartalists say that horizantal transactions do not produce net financial assets ie net money, we do not mean that money has not been created ( that would be silly of course money has been created), we mean that from an accounting prespective the entire private sector does not have on net more money (the liability created by the loan cancels out the money created by the loan). why is this important? it is important because if their is not enough government money (for simplicity's sake lets say that the government is running a balanced budget) the only way for the economy to grow is through increasing leverage. to any reader of steve keen's blog it is obvious that this is an unsustainable way to grow and will end in tears. a government budget deficit however does not create a corresponding liability in the private sector and thus does increase net financial assets ie net money. i agree with steve keen that aggregate demand is income + the increase in debt. vertical transactions increase aggregate demand by increasing income thus reducing the need for leverage in the economy. in short, we do believe you can buy bananas with credit created money

Originally Posted by Gamma

Nathan, you seem to have contradicted yourself in trying to clarify your point.

Not all financial assets are "money". It is one thing to say the banking sector does not create net financial assets, but another altogether to say that the banking sector cannot create money.

I think I understand what you are trying to say - that the money created by the banking sector has a corresponding offset, the loan.

But the loan (an asset to the bank, liability to the borrower) is not some kind of anti-money which cancels out the created money. The two are equivalent in value when the loan is created, but after that point, there is no longer any direct link between the money and the loan that created it.

The two financial asset/liabilities that now exist (money and the loan), have very different properties, and their values can diverge.

Originally Posted by Nathan Tankus

there expected value may change but the accounting does not. if i write a check to you for one hundred dollars, i get debited for one hundred dollars and you get credited one hundred dollars. you may have 100 more dollars but wouldn't you agree that on net the private sector does not have any more money? the same principal applies to private sector credit creation. if i take out a loan for one hundred dollars and write you a check with the money i was just credited with, i get debited for one hundred dollars and you get credited one hundred dollars. i now owe one hundred dollars to the bank and you have one hundred dollars. on net no financial assets have been created. what if i default on the debt? then the bank must cover the shortfall using its capital. no matter what one part of the private sector is 100 dollars richer and one part of the private sector is 100 dollars poorer.

Originally Posted by Gamma

I think we disagree on what constitutes "money".

In your example, the borrower who borrows owes $100 to the bank has an obligation to repay money (a loan). This loan is not actually money in itself - it cannot circulate throughout the economy. It is not highly liquid. It cannot be divided easily into smaller parts. The bank cannot easily sell this loan to another bank, let alone to the non-bank sector.

In contrast, the bank deposit that was created in exchange for the loan is actually money. It can pass from person to person. It provides immediate purchasing power through the electronic payments system, and it can be converted into physical currency at any time of day or night from ATMs.

If your analysis of the monetary system does not acknowledge the fundamental difference between loans and deposits, essentially lumping the entire private sector together (banks and non-banks) without distiction, it will be severely lacking.

Originally Posted by joebhed

nathan,
does the liability created by the loan really cancel the money created by the loan?
me thinks not.
the liability of the borrower in the loan document is principal plus interest. ($1000 loan, $500 interest = $1500)
The debt-service-payment stream.
The money created in the deposit of the loan is $1,000.
So, .....?

Originally Posted by joebhed

nathan,
does the liability created by the loan really cancel the money created by the loan?
me thinks not.
the liability of the borrower in the loan document is principal plus interest. ($1000 loan, $500 interest = $1500)
The debt-service-payment stream.
The money created in the deposit of the loan is $1,000.
So, .....?

Originally Posted by QuantitativeEasing

Good point, but before anyone concludes that "banks don't create the interest needed to repay their loans, resulting in a chronic shortage of money," I suggest you read what Steve says about the stock/flow confusion that has stymied analysis of the money circuit for twenty years. The liability is a stock that shows up on the balance sheet. The debt repayment is a flow that shows up on the cash flow statement. When you consider time delays and physical surplus, it is possible for such a system to be stable, although it is more likely that debts will outstrip income somewhere in the system.

Again, I'd like to emphasize that circuitists are looking at the cash flow accounting while chartalists are looking at the balance sheet accounting.