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

Wed Mar 2 05:36:57 CET 2011

I'm trying to understand what Chris Cook is saying below...

There are at least two meanings of credit in finance: credit as debt,
and credit as in debit/credit, left/right columns in accounting.

He seems to mean the former, except that he asserts that a credit
instrument is not debt, so apparently not.

If he means the second, accounting people always say that debit/credit
don't mean anything except left/right, which doesn't make sense in the
context below.

Would he mean some other thing then?

He seems to distinguish between the "interest-free currency" created by
the banks (meaning, I suppose, that the banks do not pay any interest
for this currency) and the debt created when this currency is loaned out
(for which the banks *earn* interest. At one point, he says banks "spend
these interest-free currentcy into existence". I could be wrong, but I
understand it differently:

Banks *cannot* spend the debt-money they create, as far as I know. The
currency they create has no independent existence *except* as a loan to
borrowers, and the banks can only spend the interest earnings from these
loans. So creation occurs *only* at the instant the interest-bearing
debt is created. As soon as the principal is paid, the currency created
from it is extinguished. Its interest earnings go to the bank; that's
what they can spend.

This makes debt-money different from the interest-free currency issued
by governments or their central banks, which have independent existence
outside a debt relationship.

At least that's how I understand it. I'd be glad to be clarified about this.

Roberto

Dante-Gabryell Monson wrote:
> 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 <mailto: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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