tag:blogger.com,1999:blog-6704573462403312459.post4112359556263235183..comments2024-03-28T06:53:23.473-04:00Comments on Moneyness: Why is a one pound coin worth more than four pennies?JP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger45125tag:blogger.com,1999:blog-6704573462403312459.post-68625467631388430912017-09-19T12:31:44.019-04:002017-09-19T12:31:44.019-04:00Thanks! I'll check it out.Thanks! I'll check it out.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-68418580918033732532017-09-19T01:47:07.277-04:002017-09-19T01:47:07.277-04:00This also maybe of interest.
https://link.springer...This also maybe of interest.<br />https://link.springer.com/chapter/10.1057%2F9781137450968_5Eric Tymoignehttps://college.lclark.edu/live/profiles/51-eric-tymoignenoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-21154291423333040152017-09-19T01:44:16.163-04:002017-09-19T01:44:16.163-04:00I just got to read the post. This paper I recently...I just got to read the post. This paper I recently wrote will interest you because it develops your point. <br />http://www.levyinstitute.org/pubs/wp_890.pdf<br /><br />Redemption is indeed central. Eric Tymoignehttps://college.lclark.edu/live/profiles/51-eric-tymoignenoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-58038204761828049022017-08-26T22:54:54.868-04:002017-08-26T22:54:54.868-04:00Yep, start up a new subject, then I'll join in...Yep, start up a new subject, then I'll join in.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-7236777082249199822017-08-25T15:02:58.300-04:002017-08-25T15:02:58.300-04:00JP, sure, let's move there. Perhaps TOM≠IOU is...JP, sure, let's move there. Perhaps TOM≠IOU is the subject?<br /><br />I would really like to understand how you see this. I've arrived at TOM partly on my own, and I'm quite sure I differ from most of the others TOM advocates (if there's such a group; from real-billers I differ for sure) when it comes to the actual description of the system. I believe I've taken it to some kind of logical conclusion, having worked more or less three full years only on this stuff, trying to force myself to see the system with new eyes :)Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-3514214644398605902017-08-25T14:53:23.332-04:002017-08-25T14:53:23.332-04:00JP, are you talking about some mathematical models...JP, are you talking about some mathematical models now? Because in the real world, there's an anchor, and it's yesterday's prices. (Even in an inflationary environment it's an anchor, even if it's moving gradually; as if dragged on the bottom of the sea.)<br /><br />Central banks have a role in price level stabilization, I would never deny that. But it's symmetrical: they fight deflation too, and that is not because they owe debtors something (as in debtors holding CB IOUs). So why would they fight inflation because they owe $100 to a note-holder?<br /><br />No. They fight deflation and inflation because they believe it's best for the economy. Because they owe it to us all, as they are in a position to affect macro outcomes. We individuals can't really affect the price level, and that's why it cannot swing from one day to another -- even if it's us who usually set the prices. We do it based on yesterday's prices, sometimes adding a little to them to keep up with a longer trend. These trends have such an inertia that even the central bank is often unable to affect prices, unless it does something very drastic.<br /><br />I think the TOM perspective does a good job in explaining reality. As Oliver suggests, the problem might be that this perspective doesn't fit well with <i>other theories</i>. I don't know. Do you think there's a real world anchor which other theories do capture?Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-63761379724327075882017-08-25T14:25:14.611-04:002017-08-25T14:25:14.611-04:00Hmmm, we're getting pretty far off topic here ...Hmmm, we're getting pretty far off topic here from 1 pound coins.<br /><br />Maybe time to move it to the discussion board?<br /><br />http://moneyness.freeforums.net/JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-47425518640479466902017-08-25T04:42:37.042-04:002017-08-25T04:42:37.042-04:00I know. It's just that from a "TOM perspe...I know. It's just that from a "TOM perspective", bank credits (incl. Fed notes) are redeemed in goods (from "others", as there's no single debtor). From this perspective they are not IOUs, so the conventional meaning you are using isn't valid.Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-73763308844652924222017-08-24T08:54:23.542-04:002017-08-24T08:54:23.542-04:00Thanks for the link. The other links in the commen...Thanks for the link. The other links in the comments are interesting, too. <br />Mike Freimuth and Nick Edmonds believe that the (path of the) price level is determinate, once an original nominal standard is set. Although Nick Edmonds does write: <i>We are assuming that the bank decides how much to lend and therefore the nominal value of deposits in the economy.</i> <br /><br />In the basic model (Antti ? and) I have in mind, banks have no say in the volume of lending. It is purely a decision of potential borrowers and lenders with no constraints on the emount. Banks are passive. They are there to record transactions and all participants act in relation to past transactions (money as memory) as well as expectations about the future. In a 0 growth, 0 interest rate and otherwise 0 change environment, everything must remain the same. Thus, banks cannot be said to determine the price level. In fact, there cannot be a change in the price level. <br /><br />If I borrow a cow from my neighbour which I and my neighbour both believe to be worth 100 money units, I am now obliged to return 100 units worth of real goods to the economy in order to repay my loan to the bank. Assuming I'm rational, my self interest would make me try and undercut that deal by delivering less than one cow's equivalent in real goods in return. Any counterparty I encounter on the way to earning the 100 units, though would be driven by the opposite interest. The two cancle out. And if they don't, there is no transaction.<br /><br />In the real world, I can see how irrational exuberance would lead to overly optimistic projections by all participants about the path of, say the price of land or wages. Or, to put that in terms of the real bills doctrine: <i>although money should be issued in exchange for real bills of adequate value, the assumed value may turn out to be inadequate</i>. And I can see how a policy constraint such as an interest rate could influence the amount of lending into specific markets thus influencing the path of average prices. But that's already wandering into growth and business cycles and the like. And it's a far cry from claiming the price level could be 10 today, 1'000 tomorrow and 1 the day after. Output or preferences would have to behave extremely erratically to render such results.<br /><br />Or maybe I've misunderstood you? Because the way I have understood you, you're saying indeterminacy is present even in the most simple model. My (humble layman's) claim is that in such a hypothetical, stable environment, prices are 100% stable. That may be simplistic, in fact it most definitively is, but I can't see where or why it's wrong in theory.Oliver Daveyhttps://www.blogger.com/profile/09960924207469377279noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-23836247977464450832017-08-24T00:37:27.085-04:002017-08-24T00:37:27.085-04:00Oliver, here is Mike's blog as crawled by the ...Oliver, here is Mike's blog as crawled by the Way Back Machine:<br /><br />https://web.archive.org/web/20140317092421/http://realfreeradical.com<br /><br />With the TOM, their is nothing to anchor the price level. There is no reason why it shouldn't cost $1000 to buy the CPI basket in July, $100 in August, and $10,000 in September. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-75916254958684117512017-08-23T11:25:02.635-04:002017-08-23T11:25:02.635-04:00I remember chatting with Mike Freimuth on his blog...I remember chatting with Mike Freimuth on his blog (wich seems to be out of service) and finding myself very much in agreement with him. Real billers unite! <br /><br />I think what attracts me to your blog in particular is that you seem to inhabit an intellectual middle ground in the bullionist vs real bills debate. Something I'm certain cannot exist :-). <br /><br />My personal theory as to why the real bills doctrone has gone out of fashion is that it deies the efficacy of any sort of quantitative monetary policy. Which is annoying for a profession that likes calculating things.<br /><br />I'd be interested to know more about why you believe that a TOM by itself leaves 'the price level indeterminate', as you say.Olivernoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-18354050980255608402017-08-22T14:59:33.678-04:002017-08-22T14:59:33.678-04:00JP, thanks for the replies! I'll answer only s...JP, thanks for the replies! I'll answer only shortly now, more later.<br /><br />I felt the word you are after is actually 'responsibility'. That the CB is responsible for maintaining a stable price level. What bothers me with 'IOU' or 'liability' is that I can't figure out how that kind of responsibility would be a $100 liability, by the CB, to a $100 note-holder. You see what I mean? To me it sounds meaningless to use a price tag in this case, whereas it is clear that a $100 grocery coupon refers to goods priced at $100 by the grocer.<br /><br />I admit that where a $100 Fed note gets close to a grocery coupon is when the Fed decides to sell fixed assets to the public. Then one can really redeem something from the Fed with that note. But the initiative lies wholly with the Fed, so it is not to obliged to sell those fixed assets to the note-holder. Just like I'm not obliged to sell you anything for that $100 note. It's a TOM, not an IOU, and that's why the Fed or I will sell you something for it if we so choose -- but not if you so demand.Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-73982455535924940632017-08-22T12:57:42.501-04:002017-08-22T12:57:42.501-04:00Ok, going back through old posts I see I've to...Ok, going back through old posts I see I've touched on a version of the TOM theory. It's based in part on legal tender laws:<br /><br />https://jpkoning.blogspot.ca/2013/01/how-do-legal-tender-laws-affect.html<br /><br />(Again, Mike Freimuth shows up in the comments)JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-31682493691694435512017-08-22T12:50:27.014-04:002017-08-22T12:50:27.014-04:00"From an individual's perspective, Fed no..."From an individual's perspective, Fed notes are redeemed all of the time, every time we buy stuff using them."<br /><br />Well, using a particular definition of redeem, yes. I use redeem/redemption in the strictly capital markets perspective... when the issuer accepts it back and cancels it.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-41710319990980548662017-08-22T12:43:43.036-04:002017-08-22T12:43:43.036-04:00Antti, sorry for the delay. I've heard the arg...Antti, sorry for the delay. I've heard the argument that a banknote is a TOM (they owe me) before. (I believe in my conversations with <a href="http://jpkoning.blogspot.ca/2014/02/when-money-ceases-to-be-iou.html?showComment=1393456099342#c790754461762845123" rel="nofollow">Mike Friemuth</a>?) That may be true, but it leaves the price level undetermined. Put differently, the TOM nature of a banknote alone can't prevent the price level from rising (or falling) exponentially. The central bank has to make some sort of repurchase promise in order to pin down prices. And that promise is why banknotes are a sort of liability, or IOU, or whatever you want to call them. <br /><br />A grocery coupon that becomes monetized could also be characterized as a TOM, but in the end the feature that pins down its price is the original redemption promise, i.e. its nature as a grocery store IOU.<br /><br />"To me, what JP describes when he talks about a social compact is not an IOU."<br /><br />I'm not wedded to the word IOU or liability. Promise or obligation will do as well. The main target I have in mind when I make these arguments is economist who claim that banknotes are ponzi assets, mere "oblongs" of paper. Like <a href="http://jpkoning.blogspot.ca/2012/10/the-social-contrivance-of-money-bit.html" rel="nofollow">here</a> and <a href="http://jpkoning.blogspot.ca/2014/02/when-money-ceases-to-be-iou.html" rel="nofollow">here</a>.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-49375522421516492542017-08-21T12:13:36.987-04:002017-08-21T12:13:36.987-04:00Yes, Dinero. That sounds pretty much the way I vie...Yes, Dinero. That sounds pretty much the way I view the monetary system.Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-82983903932886893872017-08-20T04:27:24.197-04:002017-08-20T04:27:24.197-04:00Anti
Commercial bank deposits are backed with bor...Anti<br /><br />Commercial bank deposits are backed with borrowers obligations to supply goods and services to deposit holders. Consider the same with Central bank notes , either a government enterprise provides goods or services ,or someone who pays tax does the same to fund the Treasury bonds held by the Central bank.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-13619700286406657102017-08-16T15:37:48.152-04:002017-08-16T15:37:48.152-04:00Oliver and JP,
Seeing that Oliver is bringing in ...Oliver and JP,<br /><br />Seeing that Oliver is bringing in a perspective which I’m introducing in my own blog (the blog is all about this perspective), I feel I need to interfere :)<br /><br />'IOU' is a word I avoid, because both I and U are in singular, while the monetary system seems to be a record-keeping system for an economy where individuals hold claims against, or have obligations towards, <i>everyone else</i>. Thus, a bank note is a TOM (they owe me) and a mortgage is an IOT (I owe them).<br /><br />If a bank is not the one who owes or is owed to, and I argue it isn’t, then it makes sense to see its balance sheet as a mirror image of what we are used to: on the LHS there are liabilities (mortgages, bonds, etc; the IOTs) and on the RHS there are claims/assets (TOMs).<br /><br />How does one get rid of a mortgage? One gives, i.e. sells, goods of a certain nominal value to others. How does one redeem a claim against everyone else? One receives, i.e. buys, goods from them.<br /><br />By adopting this perspective (it might require some brain torture…), we get rid of endless arguments about central bank liabilities.<br /><br />People like Pesek & Saving, Friedman & Schwartz, Tony Yates(?) and Eric Lonergan (see <a href="https://www.philosophyofmoney.net/debt-free-money-a-brief-reply-to-randall-wray/" rel="nofollow">here</a>, are right when they say that a ten-dollar bill is not a debt. Yet, they are wrong when it comes to the big picture. The people who oppose them, and argue that a ten-dollar bill is a CB/government liability, are much closer to the truth (this latter group includes people like JP Koning and Randall Wray). This is because the former group thinks of fiat money as net wealth for the community. Yes, a credit in CB books is <i>an asset to its holder but no one’s liability</i> (to quote Nick Rowe). No, it’s not net wealth, because for every credit there always exists a debit (my only formal education is in accounting, by the way). That debit we find on the LHS of the CB balance sheet (literally, as those accounts have debit balances). It’s <i>a liability to its holder but no one’s asset</i>.<br /><br />To me, what JP describes when he talks about a social compact is not an IOU. An IOU is a record, often depicted as a piece of paper, of a clearly defined debt from its issuer to its holder. A responsibility to do one’s best to maintain price stability, on the other hand, is not something one can put a price tag on. (It’s very hard at times, and not up to central bankers alone; the chairperson might get fired because the CB does buy the notes, just as JP says it is obliged to do.) How could that responsibility be said to be of a certain nominal value to a credit-holder? “The CB owes me $10 because it has a responsibility to try to maintain a stable price level”?<br /><br />Everything becomes much simpler if we can admit that what we are used to call CB liabilities aren’t really CB liabilities. This doesn’t mean we need to agree with afore-mentioned people who are mostly ignorant about accounting. Quite the contrary. We might be finally able to prove that they are wrong.<br /><br />(I've used three years of my life, thinking about little else during those years, to form this perspective, so I appreciate any feedback/critique.)Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-58767899759358784612017-08-16T02:05:55.007-04:002017-08-16T02:05:55.007-04:00(It wasn't Tobin, at least not in the article ...(It wasn't Tobin, at least not in the article I mentioned.)Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-365261299857861162017-08-15T16:19:18.092-04:002017-08-15T16:19:18.092-04:00JP,
What I meant was that it would be weird if th...JP,<br /><br />What I meant was that it would be weird if the holder of my IOU could never force me to redeem it (as you say, there's nothing weird in my being able to call it before original maturity date). That's kind of the case with government, and I argued that it's OK because at least in a democratic country the people, the holders of the IOUs, choose the government and can affect its actions (I'm from Finland and live now in Norway, which no doubt affects my view on government). But I think I ventured too far. What I said would probably have more relevance if we were talking about the trillion dollar coin or zero coupon perpetuals in CB books. Those don't need to be redeemed, but the government might well decide at one point that it's in the best interest of the nation/economy to redeem them.<br /><br />I'm trying hard to find something I disagree with in what you say... I don't think you really meant it that way, but when you say "the Fed is forcing the public to redeem notes", then it sounds like the public has no other option. Yet, anyone buying securities on the open market does it from free will, and most likely doesn't even know he's buying from the Fed (or doesn't care).<br /><br />There's perhaps a wider point here to be made: From an individual's perspective, Fed notes are redeemed all of the time, every time we buy stuff using them. When the Fed actually redeems the notes, I'd say the counterparty is not actively/purposefully presenting the notes for redemption. Say, when someone makes a payment on a mortgage which happens to be part of an MBS the Fed holds.<br /><br />Somewhat related to this (or not), I've always wondered how can the public be holding too much money (I think Tobin, for instance, wrote about this in his "Commercial Banks As Creators of 'Money'"). How would this excess of money manifest itself at micro level? After all, I've never heard of anyone who, having decided to sell something, has ended up with too much money. The buyer, who took the loan, wanted the money. The seller wanted the money. If he doesn't want to keep it, he can always buy something from someone who wants the money.<br /><br />I think Tobin said that if people end up with too much money, they will pay back debt and this reduces the money stock. Having lived in Norway the past seven years, I can tell you that the wealthier people get, the more they take on debt, and the more the money stock grows. I haven't heard of any contemporary economy where people would have started to pay back debt because they in aggregate held too much money (while no individual felt he had too much money).Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-44889782941808513432017-08-15T06:52:05.902-04:002017-08-15T06:52:05.902-04:00Compare with stock markets, where demand and suppl...Compare with stock markets, where demand and supply determine the price but only in the short run. In the long run fundamentals are more important.<br /><br />Is this true for money as well? Or why it is different? Which one is more important: government's/central bank's ability or its commitment to buy back (mostly by collecting taxes) its liabilities?<br /><br />Great post btw.Jussinoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-4422484246029671342017-08-15T00:39:49.638-04:002017-08-15T00:39:49.638-04:00I think we need to be careful with the word IOU. A...I think we need to be careful with the word IOU. An IOU is a promise that can be enforced in a court. Or a social compact, say like a central bank's promise to target inflation, that if broken has some sort of consequences, say like the firing of the head of the central bank. If I have a banknote, I am under no obligation to a future seller. They cannot sue me for failing to get rid of my banknote. <br /><br />But in general I think I agree with the gist of your comment. When redemption is dropped, the granary's notes are still IOUs/promises since it has the obligation to buy/sell these notes in a manner that keeps them stable. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-36343827743034095412017-08-14T22:57:04.021-04:002017-08-14T22:57:04.021-04:00Roger: "Assuming cash is just a product, what...Roger: "Assuming cash is just a product, what gives money value? I suggest that value is maintained by keeping cash in short supply."<br /><br />So if private banks entered the banknote industry, the value of banknotes would collapse to zero?<br /><br />Antti: <br /><br />" So, as the rules of the game currently stand, it cannot itself issue what it redeems its liabilities in. (No matter what MMT folks might say, as they try to consolidate the government and the CB.)"<br /><br />Agreed.<br /><br />"I just wonder if we could talk about redeemability on demand of the holder and redeemability at will of the issuer?"<br /><br />I think you make a very useful distinction. <br /><br />"...it would be weird if I was able to decide when, if ever, to redeem my IOUs."<br /><br />I'm not sure what you mean by weird. Corporations often build a call feature into their debts. It allows a firm to force investors to redeem the debts that the firm has issued. (This "callability" is the opposite of puttability). In the case of monetary instruments, banknotes are callable by their issuer. Take India, for instance, which just called in all 500 and 1000 notes.<br /><br />"But in case of the government, it’s the holder vs. “everyone else” (the latter often includes the holder as a member of the public, too). This means that the holders as a group ARE pretty much the «everyone else». The holders decide together how and when the IOUs are to be redeemed."<br /><br />Not sure I get your point.<br /><br />"You said that Federal Reserve notes are not “puttable”... Every time the Fed decides to sell an asset, Federal Reserve notes can be redeemed."<br /><br />If I was a corporation and I wanted to reduce the quantity of IOUs I have outstanding, I would either exercise the call feature I've embedded into these IOUs, forcing investors to bring them back for redemption. Or I would wade into the open market and buy them back by selling a few assets. Both methods achieve the exact same goal. <br /><br />Likewise with the Fed. When the Fed does open market sales, it is following the second path to cancelling its IOUs--wading into the open market with buybacks. Strictly speaking, it isn't calling in notes. But given that the endpoint of these two techniques is the same, we can probably take a short cut and say that in doing open market sales, the Fed is forcing the public to redeem notes.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-80714640322650300262017-08-14T17:32:55.875-04:002017-08-14T17:32:55.875-04:00JP,
Well, the government represents "everyon...JP,<br /><br />Well, the government represents "everyone else", acts on their behalf, so I wouldn't separate it from "everyone else". If I've understood correctly, Tony views money as eternally circulating (old money being occasionally replaced by new money), and for him government is just a user of it once it has issued it.<br /><br />As you correctly point out, the US government is a user, and not an issuer, of Fed notes. And whatever liabilities the government/Treasury directly issues (bonds, gold certificates, U.S. Notes, etc… even coins), it mostly redeems them in Fed notes, or the electronic equivalent thereof (TGA). So, as the rules of the game currently stand, it cannot itself issue what it redeems its liabilities in. (No matter what MMT folks might say, as they try to consolidate the government and the CB.)<br /><br />I think you make a good point about redeemability/irredeemability. I just wonder if we could talk about redeemability <i>on demand</i> of the holder and redeemability at will of the issuer? I know many think the latter is a questionable concept, because they think of a private issuer of IOUs: it would be weird if I was able to decide when, if ever, to redeem my IOUs. But in case of the government, it’s the holder vs. “everyone else” (the latter often includes the holder as a member of the public, too). This means that the holders as a group ARE pretty much the «everyone else». The holders decide together how and when the IOUs are to be redeemed.<br /><br />What counts as a redemption? Does the government open a “redemption window” for U.S. Notes every time it decides to sell an asset, and every time it imposes taxes, duties or fines on someone? I would think so.<br /><br />You said that Federal Reserve notes are not “puttable”. But doesn’t what I said above regarding U.S. notes’ “redemption window” apply in part to Fed notes as well? Every time the Fed decides to sell an asset, Federal Reserve notes can be redeemed. Every time there are payments due on the MBSs the Fed holds, Fed notes can be redeemed (if early repayment is allowed, then the window is open all the time?).Antti Jokinenhttps://www.blogger.com/profile/04778440661520118404noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-11923552648025616992017-08-14T13:58:14.447-04:002017-08-14T13:58:14.447-04:00I am trying to think about cash logically . Coin...I am trying to think about cash <i> logically </i> . Coins are cash. <i> In this comment, I am thinking only of fiat money. </i><br /><br />Government has taken on the role of supplying money. To me, this means supplying cash or the deposit equivalent.<br /><br />I (also) agree with Tony's point about cash "because everyone else accepts it". Unquestioning acceptance allows governments to produce cash-as-a-product, without backing in the direct IOU sense. Instead, government produces cash on a "here it is" basis.<br /><br />Hence, we have the Federal Reserve producing green cash (or deposit equivalent) and Treasury issuing bonds promising to repay cash received. An obliging Federal Reserve never demands one-time repayment, so effectively Treasury never needs to pay down "loans of cash".<br /><br />Assuming cash is just a product, what gives money value? I suggest that value is maintained by keeping cash in short supply. Numerous nations have demonstrated that value of currency can be lost but the loss of value is never associated with lack of supply.<br /><br />With government as the only supplier of money, the first valuation occurs when payment is accepted for service to government. Secondary valuation occurs when <i> those who receive money direct from government </i> begin spending. <br /><br />If money is taxed at every transaction, eventually all originally issued money would be returned to government. Hence, taxation is a mechanism at acts to control the value of money. <br /><br />Still trying to think logically, why does government borrow money when it can print money at nearly no cost? Government can borrow from the Fed, and never repay in the complete loan-payoff sense. Why doesn't government just pay it's bills by forever borrowing and issuing money?<br /><br />I don't think the answer goes to the IOU properties of money. I think the answer relates to the potential value of money and it's use as a facilitator of trade. When money is unquestioningly accepted, it acts like a national gift certificate, good anyplace for anything. This acceptance <i> by itself </i> gives money nation-wide value. <i> Acceptance of money as payment is acceptance of a future money revaluation, no matter how far into the future that revaluation might occur. </i><br /><br />Following this logic, I don't see fiat money as an IOU. I see it as a simple product, worth only what the next seller-of-product will give me in exchange for <i> <b> my money </b></i> .<br /><br />Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.com