What is money? Much more on that soon, it gets to the heart of what I am thinking about these days, and what I hope to write about on these pages. I think we're about to have something of a crisis with respect to the meaning of money, and that the resolution of this should not be old bromides like the gold standard, but something completely different.
In the meantime, on Brad Setser's wonderful blog of which I'm a breathless groupie, regular commenters HZ and DF touched upon the question. I wrote a long response, then decided it wasn't really appropriate to Brad's comments, as my response was long and has nothing to do with Brad's main post. So, I'll put my mini-essay here, as a teaser for the much more that is to come on the subject.
In the comments to this post, HZ asked of Dr. Setser...
Since total money is equal to consumer borrowing + government borrowing + corporate borrowing + foreign borrowing, I have two questions:
A. Do you see total money supply too high?
B. If not, and since we want consumer borrowing and government borrowing to go down, to avoid deflation which one do you want to see step up borrowing? Foreigners?
DF responded with...
In fact I don't agree with "total money is equal to consumer borrowing + government borrowing + corporate borrowing + foreign borrowing" Bills and coins are not related to any kind of borrowing.
...which kind of set me off. Here's my response, what I think about the relationship between debt and money, without getting into rather poor formalisms like M1, M2 and M3.
DF — Money is always debt. At a very fundamental level, that is what money means. To hold money, whether as numbers in a bank or bills in hand, means that somebody, somewhere owes you something. The genius of money is that rather than anyone in particular owing you something when you hold your 10 euro bill, you can think of it as simply being "owed" 10 euros worth of goods and services. But there is a counterparty even in holding the 10 euro bill. The ECB is in your debt, but it is in your debt under terms that are very unfavorable to you. You cannot force redemption for any normal good or service, and they won't pay any kind of interest. But they will guarantee the service of offsetting 10 euros worth of taxation by any euro member government in exchange for surrendering that bill. Fundamentally, fiat currency represents debt by a government or governments to offset some confiscation or compulsion they might otherwise subject you to. Even those not subject to taxation find state tender valuable, for the goods and services they can acquire from citizens who do require an offset to taxation. States proclaim this form of very advantageous (to them) debt to be the legal medium of exchange, and have for the moment succeeded quite well at making it so. I sound like some nutcase gold bug putting things into these terms — for the record I don't believe in a gold standard or anything similar — but in conceptual terms, and on the balance sheets of central banks and governments, those coins in your pocket are in fact debt.
HZ — All money may be debt, but not all debt is money. The line is blurry, but to be money in a money supply sense, debt has to have some likelihood of being used as a medium of exchange. A bank's debt to you in a checking account is close to money, because you ordinarily might make exchanges by giving that claim on your bank to someone else (with a debit card, or via the quick intermediation of ATMs or credit cards). But the bonds held by PBoC are very far from money. If PBoC were simply to "burn the certificates" on 100 billion USD of the Treasury's debt to it, there would be no meaningful effect on the supply of money that actually participates in exchange, so it would not be deflationary. Wanting debt to disappear is not necessarily the same as wanting money to disappear. If PBoC would simply forgive the US debt represented by its reserves, that would be a straightforward positive for the US economy. Heck, it'd be downright inflationary, as Americans would take it as license to take on more debt, of a more money-supply participating sort.
All that money PBoC is holding is potentially inflationary, if China were to go on a spending spree. But that is just another way of saying that the value of the dollar would tank if PBoC decided to divest itself of dollars, which everyone who's ever read Brad's stuff knows very, very well.
|Steve Randy Waldman — Friday March 3, 2006 at 1:05pm||permalink|