Hard Currency Model

Flow of payments out of receipts

Do you know the sectoral balance charts?¹ They are popular in MMT. There are two jagged, or curved, lines going from left to right from one side of the x axis to the other. The x axis is time, months, years. One line is the public sector “deficit,” the other, the private sector surplus. The two lines are always the exact mirror of the other, less perhaps a third line thrown in for good measure, the foreign sector.

In the MMT group (a chat group of regular people), someone will sometimes say, “what about bank credit created money?” The answer always is that these charts are between sector charts. Though that is true, I don't think that is a satisfactory answer to the implied nuance that we are seeing the whole pie. But just looking at the affect of government spending and taxation in terms of effect on the private sector, the implication is clear, that we can no longer simply and easily call government budget deficits “deficits,” when clearly they are surpluses, for the private sector.²

But my, introductory, point here is that in MMT, money is seen as state issued, and that the whole time within the economy between “issuance” government spending) and national taxes, it operates the way your money as a household’s money operates, in other words as a hard balance between income and expenditure, what I call “hard currency.” But, that among regular people who follow MMT, the bank credit creation of money theory is also popular.

Banks’ balance of payments

Banks when they transmit funds do so, if not always using a formal payments facility, which are all clearinghouse tech. based, basically do so in the same way, either with mutual cross-cancelation of payments between two banks, or by acceptance of a payment for use as a payment, that itself is just such a payment. It all sounds very soft currency, which it is one sort of, but it has the hard currency aspect to it that all payments are strictly balanced against receipts. This is not to say that the money being transferred is not credit created, not to differentiate as to the original source of the funds, credit or non-credit, a non-bank is seeking to transfer from its bank account. That the money is in an account implies that the bank itself has been successfully paid for said new liability it has taken on. Such payment invariably takes place as to the direct action via clearinghouse procedures. That is not to deny the broader scope of interbank credit, funds intermediation (hard loans of receivables), nor a bank’s stock of funds, its “cash” account, which helps widen its effective balance of accounts receivable and payable payments window timeframe while still working within each batch window for actual payment.

But someone might point to this: each payment is balanced either directly against apposed counterparty payments across many non-bank clients between all participating banks, or by bringing across from the ends of the system hard loans, at the market rate, or from near at hand, the cash account, consisting either of a bank’s lines of credit with third party banks, or it's own “cash” accounts at those banks. Drawing on the cash account, which of course isn't physical cash, will force payment files to be entered on this bank’s account by third party banks. Note that no bank can hold internal funds³ because a bank is just a building, holding physical cash, it is true, but one hardly sends electric payment via high speed armored airplanes which hover between cities, first heading more one way, then another, as the balance of payments does the same.

So the, basic, payments model is the balance of accounts receivable against payable within a firm or bank, and then extending that model to flows of funds between banks, where the receivables come from and to where payments go.

How does this compare with the standard model, which also has a hard accounting aspect to it?

The Standard Model

The Fractional Reserve model, and similar models treat money as a kind if hard currency, not to dissimilar to how I was modeling, an aspect of, banks as hard balances of payments and receipts. The idea with the Fractional Reserve Theory is that loans, and in fact all payments, are made out of deposits, the money sitting in customer's accounts. The idea is that most of the money is most of the time sitting in one customer or another's account (at some bank or another, I might add, to spice it up), and not all being used all at once. So what a bank needs is to just keep enough in its own cash account (“vault cash”, of course, to feed daily ATM withdrawals, plus a “reserve” to cover variability therein, but of course, also hmm, what is it the theory thinks they are holding to make electronic payments out of. But the accounts must balance in this way: the (balance of, against receipts) payouts on checking accounts cannot be greater than the current amount deposited by all customers. But that amount includes savings accounts. And I would like to point out that across all banks, the payments aren't going anywhere, as each payout is a payment in to another bank’s customer’s account at another bank in the “system,” another bank in existence. So money in the big scheme of things doesn't vanish by payment. So the FR theory is reasonable to a point, this seems true.

The Fractional Reserve model: a stock (deposits) of money, out of which payments are made (and into which they are deposited). It relies on the fact that while payments are instantaneous, albeit floating around all day if with physical cash, the timeframe, and hence the overall quantity of actual payment or even cash circulation at a point in time is smaller, and more temporary, than what can sit in accounts: making room for the expansion of credit as a ratio to the amount ever at any one moment undergoing bank transfer. Funds intermediation between banks and between banks and the non-bank sector, whose payments to a bank will force the flow of funds from other banks, completes the picture, as in every theory, there is at essence the reality of imbalance in the very nature of payments and holdings. To summarize: payments are out of the stock of funds: checking deposits, savings deposits. And why not add in loan deposits that are waiting to be spent-out, which people I know will do.

Balance of a Flow of Payments model

My⁴ focus is on the flow of funds between banks, not on a stock of funds within a bank. What then within an individual bank? Instead of the stock of funds out if which payments are made model, we have the payments coming out of the receivables, in other words, the standard model (for non-banks) of a firm's accounts receivable and payable ledgers, the balance between them, which as to narrow timeframe work out to daily payments and receipts. How does the “cash account” and other stores of and sources of funds fit in? Instead of the main role, they play a subsidiary role.

Payments occur within a payments or timeframe window within which one receipts must match ones payments. Widening the window alleviates timing mismatch between receipt of receivables due and the payments one must use those receivables to pay with. So in my model, a stock of funds is the equivalent to widening the timeframe. Or else, more short term funding gambits.

One would view my model as a framework into which the various pieces of real world money and banking would just slot-in rather than a finished piece in itself.

Oh, I didn't proofread this, nor check if I actually finally said what I set out to say, whatever that was—but something like what I actually wrote today, it, at the moment, seems to me.

1. https://gimms.org.uk/fact-sheets/sectoral-balances/

2. Now of course people should jump in and define the private sector, broken down as to where within that, in-flows flow around and end up. Also, there's the a question I have about the MMT idea that all Treasury issuance is new issuance, but issuance of payments by localities are issued private sector-style, out of receipts, account balances and bond issuance, and that part of the reason is that we can consolidate a central bank balance sheet and a Treasury balance sheet as one government. The problem is the attitude towards the European set-up: markedly negative. In reality, its not so much the independence of the central bank, but their definition of the Euro in terms of G.D.P.: the Stability and Growth Pact. But the effect is this emphasis in discussions by the prominent MMT proponents on lost sovereignty, lack of sovereignty of the European states. Yet thet never talk that way about the U.S. states. This unconsolidated way of talking about Europe surely has, if more minor, implications in light of the doctrine of Fed political independence for the U.S. that the MMT founders as-yet still dismiss with a hand wave.

3. Proponents of a non-ledger Treasury-issued digital coin would produce just such a thing, and then the cash account could actually hold internal digital cash. Treasury bonds seem quite anonymous and anonymously traded, perhaps something like that is the idea there.

4. I came up with the model, but no doubt it must be pretty standard.