It seems to me that understanding that money is a debt owed by a bank to the holder makes everything pretty clear and intuitive:
1. Alchemy. Banks create money by writing an IOU. Its NW↓ and the holder's NW↑.
2. Hierarchy. Some banks' IOUs are trusted more than others, so more widely-accepted and more desirable to hold.
3. Hybridity. There are different banks, including central banks, issuing IOUs. See 2.
4. Instability. When confidence is lower, more people would rather have what the debtor promised than the promise itself, leading to deleveraging, which can itself decrease confidence.
A) Money is not fundamentally a debt owed by a bank. Money is fundamentally the standard settlement instrument. But money can be *constructed* out of debts owed by banks.
B) We need to be careful about the concept of net worth. When you net out the values of assets and liabilities, you lose important information. And it requires you to do some imperfect calculation of what those values are in the first place.
C) The hierarchy isn't about some banks' IOUs being "more trusted" than others, per se. It's about who's using whose liabilities as money.
D) In the money view, instability is less about what people want or confidence and more about the survival constraint. If you promised to make a payment, you're forced to do whatever it takes to make a payment. And if you fail to make a payment, it tightens the survival constraint of the counterparty who was expecting to receive the payment.
A) I agree that money doesn't have to be a debt owed by a bank, but almost all money in existence today is, and I was just saying that understanding this does make sense of the 4 features.
B) It's true that knowing everyone's net worth (or even raw net worth, where assets and liabilities retain their own disparate units, so there's no calculation or speculation about values) doesn't tell you everything you might want to know, particularly for prediction. What's more important is understanding how people's actions *affect* everyone's raw net worth. But in any case, my only purpose in introducing net worth in the comment above was just to show that there's no alchemy in money creation: it's simply a *transfer* of wealth (typically in exchange for a transfer in a different form in the opposite direction).
C) I'm not sure this is a disagreement. Trust is an important factor in determining whose liabilities a given party will use as money. Law is another factor (e.g. legal tender). Societal structures are another (e.g. clearing via a central bank). The point is that some types of money are more (or exclusively) useful for certain purposes, so something like a hierarchy is a natural outcome.
D) As I understand it, the money view has a liquidity focus. If a debtor fails to pay, the creditor's ability to meet their own survival constraint depends on their access to liquidity, which requires either drawing down their stock of liquid assets, the confidence of their own creditor to allow them to roll over the debt, or the confidence of a third-party lender. Liquidity is highly responsive to confidence in potential debtors.
I stand by my argument that understanding that money is (for the most part) a debt owed by a bank to the holder makes none of these 4 features surprising or difficult to grasp.
It seems to me that understanding that money is a debt owed by a bank to the holder makes everything pretty clear and intuitive:
1. Alchemy. Banks create money by writing an IOU. Its NW↓ and the holder's NW↑.
2. Hierarchy. Some banks' IOUs are trusted more than others, so more widely-accepted and more desirable to hold.
3. Hybridity. There are different banks, including central banks, issuing IOUs. See 2.
4. Instability. When confidence is lower, more people would rather have what the debtor promised than the promise itself, leading to deleveraging, which can itself decrease confidence.
Thanks for your thoughts. A few comments:
A) Money is not fundamentally a debt owed by a bank. Money is fundamentally the standard settlement instrument. But money can be *constructed* out of debts owed by banks.
B) We need to be careful about the concept of net worth. When you net out the values of assets and liabilities, you lose important information. And it requires you to do some imperfect calculation of what those values are in the first place.
C) The hierarchy isn't about some banks' IOUs being "more trusted" than others, per se. It's about who's using whose liabilities as money.
D) In the money view, instability is less about what people want or confidence and more about the survival constraint. If you promised to make a payment, you're forced to do whatever it takes to make a payment. And if you fail to make a payment, it tightens the survival constraint of the counterparty who was expecting to receive the payment.
Thanks for the reply. I'll just respond:
A) I agree that money doesn't have to be a debt owed by a bank, but almost all money in existence today is, and I was just saying that understanding this does make sense of the 4 features.
B) It's true that knowing everyone's net worth (or even raw net worth, where assets and liabilities retain their own disparate units, so there's no calculation or speculation about values) doesn't tell you everything you might want to know, particularly for prediction. What's more important is understanding how people's actions *affect* everyone's raw net worth. But in any case, my only purpose in introducing net worth in the comment above was just to show that there's no alchemy in money creation: it's simply a *transfer* of wealth (typically in exchange for a transfer in a different form in the opposite direction).
C) I'm not sure this is a disagreement. Trust is an important factor in determining whose liabilities a given party will use as money. Law is another factor (e.g. legal tender). Societal structures are another (e.g. clearing via a central bank). The point is that some types of money are more (or exclusively) useful for certain purposes, so something like a hierarchy is a natural outcome.
D) As I understand it, the money view has a liquidity focus. If a debtor fails to pay, the creditor's ability to meet their own survival constraint depends on their access to liquidity, which requires either drawing down their stock of liquid assets, the confidence of their own creditor to allow them to roll over the debt, or the confidence of a third-party lender. Liquidity is highly responsive to confidence in potential debtors.
I stand by my argument that understanding that money is (for the most part) a debt owed by a bank to the holder makes none of these 4 features surprising or difficult to grasp.