[P2P-F] "The currency is not the debt"

Sat Feb 26 18:38:47 CET 2011

This message from Chris Cook is interesting to me...

It initially makes me feel there are "different vectors",
used as tools,
which may have accounting equivalents,
and can spark confusion as to what is what ?

excerpt :

*" The currency is not the debt, but a credit instrument identical to those
issued by government. "*

plus ci dessous...

---------- Forwarded message ----------
From: Chris
Date: Sat, Feb 26, 2011 at 3:05 PM
Subject: [gang8] ....of Public Credit
To: gang8 at yahoogroups.com

Dear Gang

I made the following response to someone in a forum on 'Public Banking' who
was repeating the fallacy that money is debt.

It covers quite a bit of ground, actually, and I'd be interested to see if
the Gang can pick holes in it

Best Regards

Chris Cook

>>
I'm afraid you share a fundamental misconception in relation to the money
created by banks, which is in fact a credit instrument, not a debt
instrument.

When private banks create credit they create a virtual IOU as an accounting
object. This interest-free IOU is a 'look-alike' of the interest-free IOU
issued by Central Banks, and is routinely exchanged for such notes and coin
in private hands when they are 'deposited' in the banks. It is currency
created as an object or thing to which account owners have title.

When a private bank lends this currency into existence it is creating BOTH
the currency AND the interest-bearing loan relationship with the borrower
under a debt contract. The currency is not the debt, but a credit instrument
identical to those issued by government.

The debt is created in exchange for the use over time of the currency. When
a private bank spends currency into existence it creates virtual credit
instruments, and 'deposits' these into the accounts of suppliers, staff,
management or shareholders by crediting them with an entitlement to these
virtual assets.

These credit instruments/IOUs are accepted by governments in payment of
taxes, and that is what gives them their value. There is functionally no
difference between an invoice issued by a private business for private
services rendered, and a tax demand issued for government services rendered.

Likewise, the issue by government of an undated IOU redeemable against taxes
is functionally equivalent to the issue by a private business of an undated
IOU redeemable against goods and services. eg Air Miles, Store Loyalty
points, or the well known DeliDollars.

Government IOUs differ from private ones in that they are made universally
acceptable against debts by 'legal tender' laws aka by government fiat.

So in a nutshell, governments do not create debt when they 'print money' and
spend it. Government IOUs are in fact credit instruments analogous to a form
of undated non interest-bearing redeemable preference share.

Of course, these credit instruments must be issued and spent sensibly, and
not in relation to existing assets, where they will cause inflation as the
private banks demonstrated by creating the property bubble.

In my view public credit need not be inflationary if used to facilitate the
circulation of goods and services and the creation of new productive assets,
such as affordable housing; renewable energy and energy saving projects;
infrastructure such as transport, schools and hospitals, and of course on
training and education of the population to enable them to create these
assets.

Such public credit creation should be professionally managed by service
providers with a stake in the outcome, and accountably overseen by a
Monetary Authority (as in Hong Kong, where there is no Central Bank). Once
productive assets are created with public credit, they may then be
refinanced by private investment in long term credit based upon their
productive value (eg rental flows and energy flows).

In this way pension investment will enable the public credit used to create
new assets to be retired and recycled. Likewise, the newly productive
workforce will pay taxes, which again will retire and recycle the public
credit which made the workforce productive.

>>

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