Should Nosotros Help Well-Nigh Seigneurage?

I believe I cause got a ameliorate agreement of Eric Lonergan's arguments regarding whether fiat money is a liability of a solid soil amongst currency sovereignty. (This give-and-take does non apply to commodity money, or a solid soil using a money issued past times an entity non nether its straight control.) If I am correct, I would phrase his declaration as: the existing accounting handling of money is incorrect, since it does non describe of piece of work concern human relationship for seigneurage revenue. (Seigneurage has multiple English linguistic communication spellings; I was using the French spelling on Twitter -- seigneuriage.)

Aside: Should We Care About Governmental Accounting?

This give-and-take tin easily live on sidetracked past times philosophical debates regarding the usefulness of governmental fiscal accounting. To live on clear, I produce non recollect that it is real meaningful.

What is meaningful for a authorities are ii things:

1. How is the authorities utilising existent resources?
2. What is the purchasing powerfulness of its money? (Although the solid soil tin live on indifferent to inflation, the voting world is not. Furthermore, the somebody sector may supervene upon the government-issued currency amongst something else if its purchasing powerfulness is besides unreliable.)

Unfortunately, those are complicated questions to answer. Financial accounting offers us a shortcut, assuming the next things are true.

1. The multiplier on all spending (that generates income inwards the somebody sector) too taxes is the same.
2. There is a unmarried cost degree inwards the economy.
3. There is a monotonic relationship betwixt economical increment too the number on the cost level. (Simply, to a greater extent than increment agency a higher cost level.)

These are assumptions that are embraced past times most mainstream economists (which explains why they are happy looking at governmental fiscal accounting); inwards the heterodox view, about or all 3 of these points are incorrect.

However, the assumptions are non totally too completely wrong; nosotros tin job them to give directionally right views on what volition hap inwards extreme cases. For example, if the Canadian authorities handed out $1 1000000 inwards cash to every Canadian citizen, the purchasing powerfulness of the Canadian dollar would collapse. This outcome tin live on predicted using traditional fiscal analysis -- the authorities blew out its fiscal spending capacity. (Conversely, this would live on difficult to predict using fiscal analysis if the "cash" were non a liability.)

Seigneurage

The thought of seigneurage is that "money" (government liabilities that pay 0% interest) is a low-cost funding source in a footing where nosotros assume that involvement rates are positive. (Money is the high-cost funding source inwards a footing of negative involvement rates!) Note that this is the Definition of "money" I am using inwards this article; I produce non attention what other whack-job definitions other people tin come upwards up with. (Abolish it!)

There are ii well-known instruments that qualify every bit "money" using this definition. (Note that this listing is non exhaustive; whatever describe of piece of work concern human relationship payable amongst no associated involvement charge per unit of measurement would qualify.)

1. Currency inwards circulation -- notes too coins.
2. Required reserves held at the fundamental bank, that pay 0% interest.

Please notation that the Federal Reserve pays involvement inwards village balances held inwards excess of reserve requirement ("excess reserves"). Although they are share of the "monetary base," they non longer qualify every bit "money" past times this definition, which matters inwards the context of the give-and-take of seigneurage.

We tin so define the estimated one-year seigneurage revenue as the involvement saved over 1 twelvemonth past times replacing interest-paying authorities debt past times "money." (If yous insist on sticking excess reserves inwards your Definition of "money," yous so involve to describe of piece of work concern human relationship for the involvement yous pay on excess reserves, making the practise to a greater extent than complicated than what is shown here.) Since nosotros produce non know precisely what debt instruments would live on replaced past times "money," our best guess is the involvement charge per unit of measurement on Treasury bills over the year.

Note that the job of the news "revenue" is contentious; it's truly an chance cost saving. I am just using it every bit a technical term that follows existing usage, it is definitely non a regard well-nigh its proper accounting treatment.

I produce non desire to derail this article amongst a give-and-take of charge per unit of measurement expectations too the choice of discount rates. I cause got opinions on those areas, but they are distraction. We volition instead proceed everything elementary too assume that nosotros are inwards a province of affairs where all governmental involvement rates (and discount rates) are apartment at a strictly positive level. I volition job 1% for simplicity, but whatever involvement charge per unit of measurement higher upwards 0% gets the same terminal result.

In our 1% world, "money" saves the authorities 1% per twelvemonth versus governmental debt. We forecast this to occur for every twelvemonth going forwards ("to infinity"). Let's say nosotros desire to capitalise this current of one-year seigneurage revenue. What is it worth?

An musical instrument that pays 1% per twelvemonth perpetually is a consol with a 1% coupon. If its quoted yield is 1% (as past times assumption), its cost is $1 (for $1 confront value).

 In other words, inwards a footing of a perfectly apartment yield bend (with a strictly positive yield), the capitalised seigneurage value of the stock of money is equal to the confront value of the stock of money. If nosotros fighting that seigneurage revenue tin live on capitalised every bit an asset, it would live on an property on the residual sail of the fundamental depository fiscal establishment that matches the liability value of the "money" stock.

If 1 wanted to cancel out the ii entries, 1 mightiness fighting that the stock of money is no longer a cyberspace liability. However, this functioning is an endeavour to cancel out known liabilities amongst a definite confront value amongst a model gauge using highly uncertain input parameters, too so many accountants would scream bloody murder well-nigh that.

(Furthermore, at that spot is an additional fiscal saving associated amongst notes too coin: about of them larn destroyed. If nosotros could position these instruments, they should live on written off every bit liabilities. However, unless the authorities periodically redeems its currency outstanding, at that spot is no skilful way to mensurate this effect. Having currency used overseas -- which is well-known attribute of the U.S. dollar -- mightiness appear to brand the liability disappear. From a functional finance standpoint, it does: such currency should non crusade inflation inwards the the States inwards the curt term. However, nosotros tin easily imagine policy changes that would crusade such currency to provide the territory of the United States, too thus the liability is all the same hanging over the government.)

Does This Work?

In the abstract, attempting to value seigneurage revenue is non objectionable. Any detailed simulation of debt dynamics needs to cause got this describe of piece of work concern human relationship into effect. For example, whatever DSGE model that has non-zero money holdings has to add together a correction to the so-called inter-temporal governmental budget constraint to describe of piece of work concern human relationship for this. (The simpler DSGE models imply zip money holdings, so this number is zero.)

Attempts to produce real-world calculations of this number likely give smaller numbers than the idealised representative above. The explanation is that long-term discount rates cause got an upward bias relative to the truthful forecast of the path of curt rates: the term premium. Treasury nib provide underperformance of Treasury bonds is a known empirical regularity, too nosotros job Treasury bond yields for long-term discounting. (Yes, it's internally consistent.)

The larger practical problems involve the job of a highly debatable gauge on a residual sheet, too whether "saving interest" is truly a shape of revenue that tin live on capitalised. Influenza A virus subtype H5N1 depository fiscal establishment would non live on specially amused past times your endeavour to capitalise Boxing Day Sale shopping savings on your loan application.

Unfortunately, No Policy Implications

In whatever event, at that spot are effectively no policy implications associated amongst this analysis. Very simply, at that spot is no way to forcefulness the somebody sector to voluntarily concur instruments yielding 0%. Yes, yous tin forcefulness the banking organisation to concur excess reserves that pay 0% (which was historically the instance inwards the United States), but that just drives downward Treasury nib rates to 0% every bit well. In that case, the one-year seigneurage revenue is $0, too a perpetual current of $0 cash flows has a NPV of $0, regardless of involvement rates.

Yes, required reserves (that pay 0%) are way of getting this cost saving. However, required reserves are just a taxation on the formal banking sector, too yous destination upwards driving activity to the poorly regulated shadow banking organisation (that blows itself up, too needs to live on bailed out). This cyberspace acquaint value analysis is what depository fiscal establishment lobbyists would job to value the cost of this tax.

The fact that the somebody sector is willing to concur notes too money yielding 0% is a way to trim down involvement expense, but that willingness is non plenty to laid upwards a novel economical theory around.

(c) Brian Romanchuk 2017