Tuesday, November 8, 2016

Comment on National Gift Certificates as a Money Analog

Antti Jokinen and I continued to exchange comments for a short time on Nick Rowe's blog. The comments resulted in what I thought were some good guidance for future development. I will re-post the comments here in an effort to consolidate the record.

The comments repeated here follow the original posting of my article "National-Gift-Certificates as an Analog to Money".

Antti begins:
Roger: First, thanks for all the acknowledgements! Very kind of you. I might be repeating myself, but here are some comments on your post:
From the point-of-view of the HOLDER of a NGC, the USBS metaphor works quite well. But from the point-of-view of the ISSUER, I can't make it work. To start with, you should define what kind of money you are talking about: only fiat money, or also "bank money"? Then, you must decide how a NGC can be redeemed: say, by buying goods for sale in any store in the US, or just by paying taxes (latter is what Randall Wray suggests, having in mind fiat money). "(private) Bank money", deposit, can disappear when you use it to buy something from any store in the US. Fiat money doesn't, so in that case you'd only trade the (fiat-money-as-a) NGC with a non-issuer (This begs a question: How can a commercial bank deposit disappear when you buy something from a non-issuer?).
If we only talk about fiat money, and by this we mean "central bank IOUs" (not my terminology), then we face a problem Wray/MMT seem to face, too: If fiat money is a "CB/government IOU", then why does it disappear when a private entity behind the MBSs on Fed's balance sheet makes a mortgage payment? Does the government not only allow its IOUs to be used in tax payments, but in mortgage payments too?
As you see, I see problems on the "issuer side" both when it comes to your NGC interpretation and when it comes to interpretation of money as an IOU. I think those problems are very, very hard to solve if we stay within those frameworks.
Antti (Nov. 3, 04:09 PM);
Thanks for reading my post and commenting.
You will be surprised when I say that all of these issues are easily incorporated into the analogy. The difficult part is to explain in a comprehensive way. I begin with a brief background:
Fiat money is nothing more than circulating paper printed by the government. Period. It is given legitimacy by taking care that a bond is issued at the same time circulating paper (or electronic equivalent in every case) is printed. Therefore, it is possible for the central bank to meet with the Treasure (two people from two departments) and exchange products: The CB delivers currency and the Treasure issues a promise to pay it back. Period.
The duration of this distributed paper will depend upon the tax rate charged. Assume that a tax is charged at each transaction (income tax, sales tax, VAT tax). After each tax, less currency remains in circulation.
If there is no tax on a transaction (such as on the expense side for income-tax-on-business-profits), there is no reduction in outstanding currency. This enables the duration of any issued paper to be VERY long.
Banks do not issue money. They only have the character of increasing the amount in measured circulation. Take gold as the example. If gold is the money in use, it is very difficult to increase the amount of gold in-hand. It is easy to write a gold certificate and lend it (as if it were gold in-hand) without telling the owner of the original gold. If this is done repeatedly, the amount of gold on deposit will remain unchanged but the amount of gold CLAIMED will increase. The role of central bank reserves comes into play here to control this process.
With this background complete (in a very sketchy fashion), we need to deal with each of your gaps from the issuers standpoint. We group concerns:
1. Money disappears that can be identified as originating with a bank. This occurs when a loan is paid away. Until the loan is paid, the money issued can circulate between users including government (both as a user and destroyer of money).
2. Money disappears that can be identified as originating with government. Taxes are the mechanism already described.
3. I don't understand the MBS mortgage question so I will skip that (perhaps to my peril).
4. It remains to tie fiat money to NGCs.
It is easy to see that government can allow everything-mentioned-so-far to occur. Not everyone will agree with me but I think everything described already occurs on a routine basis. The question then, is whether a private store that issued gift certificates could put in place each of these processes and procedures? I think this has happened already, visible and embodied in the form of company stores and company towns. The early development of America had several examples of small communities that were basically owned by one entity. In come cases, the community used company money which was the equivalent of paying bills with gift certificates.
This was not a good deal for the workers. The company had control of the interaction of company currency and the greater currency of the central government.
There is no question that private stores can issue gift certificates. It certainly seems possible for the private use of gift certificates to expand to include borrowing, banking and complete use in trade exchange. This expanded use of gift-certificates creates what I would like to call "A National Gift Certificate Economy", even if is limited in size to be no more than a company town.
I have attempted to tie fiat money to NGCs. Is the analogy making more sense now?
Antti: I should revise one line to introduce the actual issuance of fiat money. Issuance does not occur when the money is created (creation is all within the confines of government). Issuance occurs when government spends the newly created money.
The line "The duration of this distributed paper will depend upon the tax rate charged." would be much more informative if it read " After issuance (by government paying it's obligations), the duration of this newly distributed paper will depend upon the tax rate charged. "
About your definition of "fiat money": You talk only about paper, but we have to include bank reserves, right? All "high-powered money".
Antti (Nov. 4 10:52 AM): Antti writes "What bugs me is how to explain that you get something from the government for your NGC when you use it to pay taxes?".
I can't argue an explanation here. The best I can do is to suggest a philosophy. I would suggest that tax on land (we pay annual property taxes in America) and trying to get something from government in exchange for my NGC are the same. One rational philosophy is that both are a payment of "rent". Using land as the example, the American land owner is more-accurately sub-leasing the ground from the government who is the REAL OWNER. This basic philosophy underlays the entire NGC-USBS framework.
Following this philosophy, we could claim that a tax on each exchange of money is a payment of rent for the privilege of using money. Wild?!
Now I would like to change the focus to fiat money, banks, and government.
As I thought about my previous reply, particularly about the timing of issuance, I began to place more importance on this observation: both banks and government create money in a private fashion, which means "behind closed doors". Let me elaborate: Both banks and in the CB-Treasury-trade create money in a "back-room", low visibility, event where they prepare to issue money.
Using the NGC example, the issuing store prepares to sell a gift certificate by printing the certificate. Then the store has a choice: recognize the increase in inventory and expense of production immediately OR wait until actual sale and then recognize the event. The first choice makes sense if the intended use of the gift-certificates is to pay for goods and services; the second choice makes sense if the intended use is to sell the gift-certificate for money in the future.
In either case, the actual creation of money or NGC is not visible to the usual measuring tools available to the public. The actual issuance of new money is more visible but identical to using old money; issuance is just another exchange of goods and services for money/NGC.
Turning now to central bank reserves, I think this FED maintenance manual is helpful:
https://www.federalreserve.gov/monetarypolicy/reservereq-reserve-maintenance-manual.htm
I understand the manual to require a reserve deposit at the central bank that increases proportionately to the increase in bank deposits. In other words, it acts like a tax paid in positive money. What is positive money? I think it is money issued by the government but how do you separate it from bank issued money? Well, if positive money is taxed at each reissue/new-loan, the positive money will eventually all be back at the CB. This gives the CB a lot of control.
These comments, while they seem somewhat disjointed, contain some very important insight. Particularly important is the thought that the store issuing a gift-certificate has two choices of when to "book" the process. Which choice is picked would likely depend upon the purpose to which the gift-certificate placed.
Thanks to both Nick and Antti for their roles in advancing the theory of macroeconomics.

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