Saturday, November 26, 2011

What is a Bond?

Lotsa people write about the question "What is Money?". There's a collection edited by John Smithin under that title with some papers with some good & not-so-good answers. And of course there are Alfred Mitchell-Innes' papers. But a lot of people seem to be get confused by bonds, by what is usually called (government) debt. They get obsessed about interest - and forget about the principal.

A text for today's sermon by one fellow who was not confused (my emphasis) :

"Much has been said of late about Federal finances and inflation, the gold standard, etc. Let me make the facts very simple and my policy very clear. In the first place, government credit and government currency are really one and the same thing. Behind government bonds there is only a promise to pay. Behind government currency we have, in addition to the promise to pay, a reserve of gold and a small reserve of silver. .."


Currency and credit(debt/bonds) are really one and the same thing. All they are is promises. Go back to WiM for a moment. One way of thinking of things is that money, state money, currency, dollar bills, reserves IS the same thing as a government check. When one transfers this state money, one just endorses the check over to someone else. The good thing about this is that it very clearly shows that money here, as everywhere, is a credit/debt relationship between two economic actors.

OK, bonds: They usually have a principal & a coupon. In other words you buy them for (around X dollars) They pay off, (antichretically? ;-) word of the day) little baby coupons. And then you get the principal X dollars back.

But one can have zero coupon bonds or bills where you just get a fixed amount of dough at some specified time. Obviously, a regular bond can be chopped up into a bunch of zero-coupons representing the principal, and each coupon interest payment. And regular bond is just a bankroll of these zero coupon bonds put together.

So what is a (zero-coupon) (government) bond? Well, nothing but a post-dated government check. A government check with a date in the future. Or alternatively, a dollar bill with a date in the future printed on it. Again, a one year bond of 2011 is just a 2012 dollar bill. These dollar bills with a future date on them trade at a discount, not at par. That's what interest is. That's all. (There were a couple auctions in the depth of the depression in the 30s when the brilliant innovative superbondbull financiers of the day paid negative interest -hey its OPM - see Depression Decade by Broadus Mitchell)

But many people think that somehow bonds are different from currency. That a dollar bill is something other than an all grown-up, mature bond. Some tyro MMTers or fellow travelers think that while bonds are debt or liabilities, currency, fiat money is not. That it would be magically good if the government printed only current dollars, = bonds with a current date on them, that the Treasury having to sell future dollars = bonds for current dollars is a constraint on the Treasury & government spending. That the bonds are somehow the liability behind the asset of fiat money & this cockamamie procedure is done because of double entry bookkeeping. (Of course each bond, each dollar is already an asset/liability credit/debt pair.)

The (maximally confused) mainstream (and even some good economists are confused) think that somehow dollar bills with future dates printed on them "back" dollars with current dates, back current spending, that there is some government budget constraint - which amounts to the brilliant observation that government spending equals government bond issuance plus government currency issuance. In other words, if you have ones & fives in your wallet, your spending is the amount of evil rotten seignorage ones you spend, plus the good wholesome sterilizing fives you spend.

If you believe such things, the question which should always be on your mind when studying so much that is called "economics", and which is made clear by concrete examples like checks & dollar bills, is :

Are you insane?

Thursday, August 18, 2011

Econ in 3 words, short addendum

Beating this to death, the second, and not the last time. It's important, because many web-MMTers succumb to a kind of magical thinking, thinking of fiat money, government issued currency as something new, magical, separate, conferring powers on a governments that they do not have. I argued with one who insisted that having a floating fiat currency made any debt repayable, not just nominal debts in the domestic currency. Even if the debt was denominated in a foreign currency!! Others insist that fiat money is not debt, or that "MMT" does not say so.

Fiat money is just what money always was, without bells & whistles that usually impaired its economic function (& but oh-so-incidentally helped make the rich richer). Thinking of currency issuance as something unique to governments, a difference in kind, is a step toward the false misunderstanding of Chartalism as about "legal tender". (Somewhat due to Schumpeter's bad expositions, and to von Mises' complete incomprehension of what people like Knapp were saying.)

For most of the twentieth century, the understanding of money of ordinary blokes like Thomas Edison & Franklin D. Roosevelt - and the millions who listened to them - was far superior to that of modern mainstream economists, and the populations they have infected. As far advanced as a grade schooler who learnt about astronomy in modern grade school - is beyond the most learned medieval astrologer. Most people, particularly most "economists", since the "retrogression of economic knowledge since the 1970s" (Ingham) or the "dark age of macroeconomics" (Krugman) wrongly separate in their mind 3 things. (Krugman himself is somewhat in the dark ages, infected by the preposterous idea that printing currency-money-zero maturity bond debt is superinflationary compared to printing greater quantities of bond - timed maturity money -debt!)

The 3 things:

1) Debt, obligations - understood as "I owe that guy a favor" "I owe my parents something for taking care of me as a child". Obligations -Understood in the most intuitive, immediate, abstract way.

2) Money, particularly fiat money

3) Financial debt, like government bonds, like credit card debt.

These are all the same thing. The last two are instances of the first, the most general and most important. All they are - all money, bonds, financial assets are - is denominating, standardizing, linearizing, dating and measuring the first thing. Imagine a tribe of chimps that is keeping scores on who owes who which favors. And this system keeping track of favors owed is usually supervised by the #1 Chimp - the Great Chimp.

That's us. That's what a monetary system is. The Great Chimp is the government. Banks are his assistant chimps. The basic money is the favors owed to ordinary chimps by the Great Chimp.

Monday, July 04, 2011

Economics (aka MMT) in Three Words

Money is Debt

MMT "Modern Monetary Theory" is a three word theory, like General Relativity, but a lot easier. You can say it all in one three word sentence, like "Gravitation is Curvature". Once you really understand THE SENTENCE, you understand MMT. There is nothing else to understanding Economics in the real world = Monetary Economics = MMT.

If you don't try to understand the SENTENCE, Calgacus will whup you upside the head with a Grecian urn. Repeatedly. Until you get it.

"Money is debt" is true absolutely, metaphysically, transcendentally, eternally, wholly, utterly , subjectively and objectively. Like any subject, once you understand its (rarely spoken) trivialities, its philosophy, its (objective) logic, dare I say its metaphysics? -everything afterward is child's play, intuitive. In fact, much of the modern school of MMT & Circuitism etc just rediscovers once well-known ideas. Though of course it has gone beyond most of them. Some of the most interesting predecessors don't seem to have been redigested yet, though.

A couple preliminaries: Credit = Debt. These are two words for the same thing. It's as if we had two different words for an arrow, one if it is pointed to you, one if it is pointing away. So an alternative would be to say "Money is Credit". Synonyms that don't have this asymmetry are "favor" or "promise". So "Money is a favor" or "Money is a promise" mean much the same. But the other words don't have the punch-in-the stomach reality of "Debt" so now I prefer "Money is Debt". Or "Money is brownie points" if one wants the opposite connotations.

An extremely important thing about promises, favors, credits, debts: They are obviously relationships between two people. They are obviously not things, like rocks, or even a legal claim to a rock. Aside from the MMT/chartalist/creditary/state theory of money, the only other theory is the commodity/Austrian/neoclassical/metallist theory that money is a commodity, a thing. It is the worst scientific theory of all time.

"Debt" is not "money owed". Debt is the primary concept, left undefined, at least initially. "Debt" comes first. The concept of Money is defined in terms of the concept of Debt, not vice versa. Ethologists see the idea of debt even in chimps - if I do you a favor, you owe me one in return -in giving a banana, in helping one chimp beat up another chimp. Money is nothing but a vast system of Brownie Points regulating the movement of real goods and services.

An agreed-on money is a standardization of debt - it is a measure of debt. We use number systems - positive and negative numbers, rational or real (not really, we don't do infinite precision) to operate with this debt standardization. It is exact, because we make it exact. If we wanted to, we could just decree that 1 million could be the largest amount we use, so 1 million "+ "1 million = 1 million. We would just be using a different number system, and it would be exact with that alternate system.

The core, the confusing things, the obstacles that people have to learning MMT are things that WE ALL KNOW ALREADY. MMT can be understood by the Socratic method. Everyone knows MMT already. The ideas are implicit to human cognition. But "Was ist bekannt ist nicht erkannt".. .. .. (Wrote this, along with quite a few more posts, but knowing myself, think it better to "publish" it unfinished now to give me a kick in the pants.)

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Monday, June 06, 2011

Waiting for Godzilla

Well, it's been a loooong time since I created this blog for other purposes, which I hardly remember. But now it will mainly cover the economics I have recently taken a renewed interest in. Wrecking economies and calling it prosperity is what the world's elites have been practicing for many years. Wrote the following at Dean Baker's Beat the Press blog here a while ago, and promised myself (&Mrs. C) I would post it here, to finally get this blog started.

Dean was responding to this Washington Post story (see also here ) saying that Japan's high government debt made it less able to deal with the natural catastrophes it recently suffered. It quoted "economist" Carmen Reinhart: "When you have as much debt as the Japanese have, you're vulnerable to this kind of shock and can't do much about it." The article and this comment are some of the infinity of mainstream/orthodox economic views that are perfectly insane products of the farcical, embarassingly stupid theories which are nowadays called "economics".

So here (and yes, I know when the great Abba Lerner said something similar to Reinhart, and what he meant, and will explain to anyone interested):

Of course the Japanese just owe that dough to themselves. Macro-economically meaningless.

Of course half of it is just the Ministry of Finance - one pocket of the government owing it to the JCB - another pocket. Super-duper ridiculously meaningless.

But if anything, the high debt/gdp makes Japan more flexible. Government debt is money. [I will wax poetic on this, and its converse, in future posts].

Read Reinhart's statement correctly: "When you have as much money as the Japanese have, you’re vulnerable to this kind of shock and can’t do much about it" Sound right to you?

High debt/gdp means the Japanese private sector has a lot of cash it can dip into and immediately spend, perhaps more quickly and responsively than the government, to fix what needs fixing, what was destroyed. Sensible people will say, "If this isn't a rainy day, what is? What, are we waiting for Godzilla?"