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  • Showing only topics with the tag "economics". Back to normal view
    1. Is it money? It depends who's counting

      (This is basically me blogging. I have a blog but I haven't posted in a decade, so I figure I might as well write here.) We live in a weird times when people often question basic premises of...

      (This is basically me blogging. I have a blog but I haven't posted in a decade, so I figure I might as well write here.)

      We live in a weird times when people often question basic premises of economics. Some populists and/or scam artists promote cryptocurrencies, meme stocks, and other unorthodox investments. It's easy to make fun of. Meanwhile there has always been a populist distrust of banks (particularly in US history) and distrust has increased since the 2008 financial crisis.

      A lot of populist distrust isn't based on any deep knowledge of how finance works, but rather a deep-seated feeling that someone must be getting away with something. And yes, someone probably is getting away with something, but that doesn't mean you need to believe every crank theory that becomes popular on Reddit.

      That being said, I'd like to tell you about my slightly unorthodox way to think about money and banking. It comes to the same thing in the end (banks still work the same way) but it seems like a useful framework.

      I'm going to set up a hypothetical example. There is a casino where gamblers use plastic chips to gamble, and there a cashiers' window where they can buy chips to gamble with when they arrive and turn them in for cash when they leave. So here is the question: are these plastic chips money?

      From a gambler's point of view, when they want to know how much money they have, they count their chips. These chips behave as essentially as money for them, and I claim that they actually are a kind of money, at least within the casino. Though this is unlikely, you could even imagine a nearby store that accepts chips for purchases and goes later to the casino to cash them in. When the store counts its money, it would be reasonable to include any chips that it didn't turn in yet. You could think of it as "cash" or (in a more orthodox way) as a "cash equivalent" but this is a matter of accounting definitions; the chips serve the same purpose in the system.

      When the casino counts its money, it never counts its own chips as cash. If they ask "how much cash does the casino have" then that's just the cash that the teller has behind the window. If they ask about the casino's financial assets more generally, if the chip is held by the cashier, it doesn't get counted at all; it's just worthless. All the chips that they gave out to gamblers are subtracted because the casino will lose cash when the gambler turns in chips before they leave.

      So the status of a plastic chip depends on who's asking and how they're counting. The chip hasn't physically changed, but its status depends both on its location and your point of view. Weird, huh?

      If someone says "this plastic chip is money," what kind of statement is this? Is it subjective? There are reasons why gamblers might disagree on the value of a chip. Let's say that, while the casino is closed, one gambler trusts that the casino will always honor its debts, but another has come to believe that they're a scam and they're never going to reopen, and your chips are worthless.

      You might think of this as a prediction. Saying that "this chip is money" is a prediction that the teller will give you cash when you go to the window and other gamblers will treat it like it's worth money, and maybe the nearby store will too.

      Such a prediction can depend on time. For example, maybe the chips could have an expiration date where the teller won't accept chips after that. So, from a gambler's perspective, the chip is money before the expiration date and no longer money after that. Or, more subjectively, a gambler might think that the casino will open tomorrow but be gone by next week.

      So we see that statements about money aren't timeless, that they depend on your point of view, that they can be matters of opinion, but they are statements people will eventually be right or wrong about. In this way they are like promises and other predictions about the future. Nobody knows what the future will bring, but there are some promises we trust over others.

      Okay, now we can look at bank deposits. What does the number in your account in the bank's computer actually do? For you and almost everyone else, bank deposits are money. (For example, they are officially part of M1.) But to the bank, they are a liability, because you can withdraw money from your account. From a bank's point of view, a deposit in any other bank is money, but the deposits in their own bank are not.

      So a key point here is that banks create money, but only for other people. They can never create money for themselves, and they won't create money for other people for free, because they will pay later. How much later? Well, that's a prediction.

      For the same reason, the teller in the casino won't just give you a chip, and the casino will have strict security to make sure nobody steals the chips. Sure, the casino owner could take a chip to a nearby store and buy something, but this is a form of buying on credit. This turns a plastic chip that's valueless for them into money for the store owner, but the casino will pay for it later.

      6 votes