The nature of money

Published: Sat 16 July 2022
Updated: Tue 22 November 2022
By steve

In Markets.

Saturday 16, July 2022

Money is a government liability

In this article, Patrick McKenzie explains how bank liabilities come to function as money. The old idea about money as liabilities of a central bank, or a government treasury, is outdated. Many commentators point out that banks create enormously more money than governments (if you take a broad measaure such as M3). Although money you have in your bank account looks like a liability of your bank, it is actually a liability of the government’s. That is, unless you have an awful lot of money in the bank in which case you will have made some other arrangements to store your liquid asset, probably. The bank has taken advantage of the deposit guarantee insurance that the government has offered. There is a small premium to pay for this, but it still makes depositors by far the cheapest form of funding for banks.

Anyway, read the article. The series is amazing as a source of deep thinking about the plumbing that links together the extremely complex and diverse set of payments that allow the modern world to carry out pay for things. Just because few of us know anything about the fine detail of this plumbing does not mean that it is unimportant, or that broader lessons cannot be learned by studying it.

The Russian Oil Energy Cap

One intuitively feels that this is not going to work. It’s nice to read that someone who has studied the industry for forty years comes to the same conclusion. I guess the policy was always political theatre. The problem is that when the voters eventually realize how misguided this policy was, they will just lower their expectations of all politicians by another notch, causing further disaffection and distrust.

Trust and Fraud

I wrote this on GoodReads about Lying for Money by Dan Davies. I think maybe a new edition is due that covers Archegos, Three Arrows and the rest of the crypto-fraud crowd.

This is an excellent book. It explains how as society becomes more complex, we have to develop more and more complicated ways to substitute for the trust model of our ancestors: actually knowing who we are dealing with.

The division of labour that Adam Smith correctly identified as bringing huge benefits in terms of productivity also brings huge problems in terms of providing opportunites for economic actors to subvert the system by abusing trust.

I don’t think it’s a surprise that the single factor that has the biggest explanatory power for why some countries have faster growth than others is the number of lawyers per capita. We laugh at the degree to which the USA is infested with lawyers, but perhaps it’s not entirely a coincidence that the USA tends always to outpace the rest of the world in terms of growth per capita.

As the book explains, one can gain a deeper understanding of how the brain works by studying brains which have failed because of injury or disease. It’s the same with commerce. Financial institutions have come to be designed in the way they have largely because others that were less robust in the face of fraudulent behaviour by economic actors.

The book correctly points out that the optimum level of fraud in a society is not zero. It’s the same for crime. Few politicians understand this.

Comments !

links

social