Money Equally Debt

The query of whether government-issued money is a debt has shown upward inwards 2 recent contexts. The get-go is an fundamental declaration well-nigh money, in addition to how to mean value well-nigh it. The minute is a to a greater extent than technical question: if the fundamental banking concern replaces authorities bonds with reserves (which are a cast of money), has the debt-to-GDP ratio gone down? To summarise my views: yes, (modern) money should hold upward defined equally a cast of debt. But since the fundamental authorities with a free-floating currency cannot hold upward forced to default, 1 tin forcefulness out query whether it makes feel to process fundamental authorities debt similar the debt of other issuers. In particular, the debt-to-GDP ratio of such governments is essentially a slice of trivia that tin forcefulness out hold upward safely ignored.

The Semantic Debate

There has been an online debate betwixt Randall Wray in addition to Eric Lonergan regarding money. I broadly concord with Randall Wray's position, although Lonergan rightfully objected to precisely about statements that I believe were non carefully worded. This debate so spilled over elsewhere.

• One of Lonergan's articles ("Debt-free money: Influenza A virus subtype H5N1 brief reply to Randall Wray"), which I volition refer to here.
• The link in addition to online debate at Mike Norman Economics.

The debate at the MNE ended upward all over the place, so I volition non endeavor to encompass all the threads. I volition instead focus on precisely about key statements past times Eric Lonergan,

Lonergan:

Debts receive got a dissimilar role in addition to beginning of value to physical cash. Debts are used to provided [sic] streams of cashflows to their holders, in addition to their value resides inwards the debtors might to run into payments. By contrast, money is used to pay for things [emphasis mine - BR], in addition to its value resides inwards a network externality – it has value to me because it is accepted past times others. 

Very simply, Lonergan has made his ain definitions of "money" in addition to "debt," in addition to argues that "money" is non "debt" past times his definition. As a mathematician, I receive got been trained to convey that people tin forcefulness out define damage equally they wish; the only constraint is that they are using them inwards a coherent fashion. That is, so long equally Lonergan uses his damage consistently, I cannot say that he is "wrong," in addition to inwards fact, in that location are precisely about reasons to receive got sympathy with his views.

Inconsistency In The Definition?

Unfortunately, his definition is somewhat loose. If nosotros define money equally "money is used to pay for things," there are a lot of instruments that are "money" past times that definition that are also undoubtedly forms of debt.

• Accounts receivable are routinely used to transact concern alongside firms.
• I routinely pay for goods in addition to services inwards stores using a credit or debit card. In both cases, in that location is a alter inwards a deposit or payable account.
• I tin forcefulness out pay for safety purchases inwards my retirement concern human relationship past times selling a Treasury bill.
• Institutional investors routinely finance securities positions with repurchase ("repo") transactions.

This shiftiness inwards the definition of "money" famously sank Monetarism; anyone inventing novel definitions of money should convey brain of lessons from an analytical fiasco that only happened well-nigh xxx years ago. He has a longer article discussing his definition of money: " delight consider the eReport for farther details. What matters for our introduce purposes is that this raises questions well-nigh authorities debt. The ground why debt is seen inwards a negative lite is because of default risk; if the authorities "cannot default", why worry well-nigh it?

As a result, I cannot object besides strenuously against the thought that fundamental governmental liabilities are quite dissimilar from mortal sector debt. And those liabilities include both bills in addition to bonds, equally good equally "money" (currency notes in addition to coins, fundamental banking concern village balances).

What About The Debt-To-GDP Ratio?

The debate so far has been exclusively semantic, in addition to hence does non actually receive got a "right" or "wrong" answer. However, in that location look to hold upward implications for the give-and-take of authorities debt, where in that location are presumably operational differences betwixt the 2 views.

If the monetary base of operations is non authorities debt, Quantitative Easing (the buy of authorities bonds past times the fundamental bank, known equally QE) reduces authorities internet debt outstanding. (Since the Treasury owns the fundamental bank, the bond holdings of the fundamental banking concern internet out, in addition to all nosotros are left with are the increased village balances at the fundamental bank.)

An article past times The instance of token money inwards the Canadian colonies.
And photographic bear witness of what Neil Wilson refers to inwards the comments department (in the other article).

(c) Brian Romanchuk 2015