Saturday, March 17, 2012
Money as a liability
Nick Rowe has posts here and here that explain why money is not a liability. This is related to his point that money is not a store-of-value.
I have several comments on each thread.
In short, I disagree with him. If you do the security analysis, central bank issued notes and deposits are unsecured senior perpetual liabilities with a limited floating conversion feature attached to them. Most people don't perceive them as such because in the normal course of life they only experience these liabilities as pure means-of-exchange. Only those individual's with a banker or investor's mentality treat central bank issued notes and deposits. Either way works - what is interesting is how these two mentalities weave together to create an integrated store-of-value and medium-of-exchange approach to understanding money.
Nick also tries to re-conceptualize central bank issued money as put options. This money can be "putted" for CPI. I like this idea. Because I see central bank issued notes and deposits as liabilities, I prefer the analogy to convertible bonds. Convertibility is really just an option feature added on to a liability like a bond, deposit, or note. How does this convertibility work? The Bank of Canada, for instance, will conduct sale and repurchase operations (SRAs) - selling bonds for cash - should the overnight fall below its target. Banks have the option in this case to convert their deposits into the underlying. This is a floating rate because over time the Bank will change the note-to-bond conversion price.