One question, for clarification: are official "notes and coins" tangible assets (purple), debt assets (green), or "promises to pay"? They do have features suggesting they are tangible assets, but are perhaps better described as dishonest "promissory tokens", i.e. promises that will never be kept.
You don't have a category for such "promises", which differ fundamentally from IOUs (debts), in that they can actually discharge an IOU (debt) *without disappearing* in the process.
Here's the simple way to tell what sort of asset something is:
In the model, there are two types of asset: tangible and debt. If someone else has a corresponding liability, it's a debt asset, otherwise it's a "tangible" asset.
Banknotes are liabilities of the BoE (or of one of the Scottish or Northern Irish banks), so they are *debt* assets of the holder. I have to admit that I don't know the accounting status of coins, and I'm not sure where to look, although I believe it's a tiny fraction of the total money stock, so not very significant. My suspicion is that they are a pure fiat instrument: tangible assets (with no corresponding liability), but made of materials which are cheaper than the stated value.
The model doesn't distinguish between debts (creditor's debt asset + debtor's liability) and promises to pay. The baseline case is that debts will be paid (hence why the debt asset increases the creditor's RNW and the liability decreases the debtor's RNW), but it's not assumed.
I'm not sure what you mean by a promise discharging an IOU without disappearing. Can you give a specific concrete example?
I used " " for a reason: in that context, "promise" alluded to what I called the "... dishonest 'promissory tokens', i.e. promises that will never be kept", namely coins and BoE notes.
BoE notes and coins both remain in existence after they have discharged part of the debit balance in your loan account, for example, unlike a credit transfer, which "disappears" or "is destroyed" in the process.
I think that makes them both "tangible assets", even though BoE notes are indeed also "promissory notes of the BoE" and so, BoE liabilities. The fact that they cannot be "discharged" makes them tangible assets of any holder [other than the BoE!], and they remain such when handed to your bank. Your bank swaps part of its "loan asset" for an equal "cash asset".
I'm finding it a bit hard to understand what you're saying here. Let's take it one part at a time.
"BoE notes and coins both remain in existence after they have discharged part of the debit balance in your loan account"
BoE notes are liabilities of the BoE. Suppose you have £100 in cash i.e. the BoE owes you £100 (your debt asset, BoE's liability). Let's say you also owe your own bank £100 (your bank has a £100 debit balance in the loan account). Then you can pay your debt to your bank by transferring £100 in cash to it. This is a transaction with 2 actions:
1. Your bank writes off your £100 loan debt to it.
2. You transfer a £100 debt asset to your bank. The BoE now owes £100 to your bank, instead of to you.
The reason that the cash wasn't destroyed when you transferred it to your bank is that it wasn't your bank's liability. If it were, it would be destroyed.
Let's take the scenario one step further. Suppose your bank happens to owe £100 to the BoE. In that case, it can use the cash to settle this debt, which involves 2 actions:
1. BoE writes off your bank's £100 debt to BoE.
2. Your bank writes off BoE's £100 debt to your bank. That £100 cash no longer exists, because it was used to pay the debtor.
In general, if you pay a debtor with their own debt asset, the debt is destroyed. But if you pay someone with a debt asset which is the liability of a third party, the debt isn't destroyed: the debtor remains the same, but the creditor changes.
So if you owe £100 to your bank, and you pay using a *deposit* (which is the bank's debt to you), it *is* destroyed, because you're paying the debtor with it. You're paying by writing off the debt (green-to-pink arrow) instead of by transferring a debt asset (green arrow).
All £100 notes in circulation are indeed BoE liabilities, and returning a £100 note to the BoE reduces its total liability by £100. But a returned £100 note (in good condition) still exists, and can be reissued, so we agree almost completely, except for my quibble, that it’s not that the “£100 [note] no longer exists” when a bank returns it to pay down its liability at the BoE.
That returned £100 note has only been “removed from public circulation” and “disappearing from the accounts” is not the same as “destruction”. Physical destruction, e.g. of worn-out or damaged notes *can* occur, but is an operational issue rather than an accounting issue. That same returned £100 note (in good condition) could not be reissued if it “no longer exists”.
Commercial banks do treat a £100 note as a “tangible asset” [cash] in their books, rather than a “debt asset”. They may swap an existing “debt asset” to obtain it from the BoE but do not list the £100 note as a “debt owed to it by the BoE”. Like their bank, people will also regard cash as a tangible asset. It’s only the BoE that creates a single “exception”, and that seems to be a real case of an “exception that proves the rule”.
"But a returned £100 note (in good condition) still exists, and can be reissued"
Yes, it can be reissued. It's interesting, because the physical note doesn't seem to have changed at all when it's returned to the issuer.
But something profound *has* changed: it no longer documents the existence of a debt owed by the issuer to the holder. And if it's reissued, again something profound does change: it documents the existence of a *new* debt from the issuer to the holder. It's a new debt, even though it's a recycled note. It's no different from the BoE destroying the old note and printing a new one to issue.
If the BoE prints up a huge pile of £20 notes in the expectation of banks ordering some to fill their ATMs, this has next-to-no economic or accounting significance. What is significant is when banks withdraw their reserve account balances to obtain the notes.
"Commercial banks do treat a £100 note as a “tangible asset” [cash]"
From the perspective of someone who holds it, it's just *an asset*. It's only when we (as people studying macroeconomics) consider it from outside, and see whether someone else has a corresponding liability, that we can categorise it as either a tangible asset or a debt asset. In this case, since the BoE *does* have a corresponding liability, we know it's a debt asset.
I'm really looking forward to this series.
One question, for clarification: are official "notes and coins" tangible assets (purple), debt assets (green), or "promises to pay"? They do have features suggesting they are tangible assets, but are perhaps better described as dishonest "promissory tokens", i.e. promises that will never be kept.
You don't have a category for such "promises", which differ fundamentally from IOUs (debts), in that they can actually discharge an IOU (debt) *without disappearing* in the process.
Here's the simple way to tell what sort of asset something is:
In the model, there are two types of asset: tangible and debt. If someone else has a corresponding liability, it's a debt asset, otherwise it's a "tangible" asset.
Banknotes are liabilities of the BoE (or of one of the Scottish or Northern Irish banks), so they are *debt* assets of the holder. I have to admit that I don't know the accounting status of coins, and I'm not sure where to look, although I believe it's a tiny fraction of the total money stock, so not very significant. My suspicion is that they are a pure fiat instrument: tangible assets (with no corresponding liability), but made of materials which are cheaper than the stated value.
The model doesn't distinguish between debts (creditor's debt asset + debtor's liability) and promises to pay. The baseline case is that debts will be paid (hence why the debt asset increases the creditor's RNW and the liability decreases the debtor's RNW), but it's not assumed.
I'm not sure what you mean by a promise discharging an IOU without disappearing. Can you give a specific concrete example?
I used " " for a reason: in that context, "promise" alluded to what I called the "... dishonest 'promissory tokens', i.e. promises that will never be kept", namely coins and BoE notes.
BoE notes and coins both remain in existence after they have discharged part of the debit balance in your loan account, for example, unlike a credit transfer, which "disappears" or "is destroyed" in the process.
I think that makes them both "tangible assets", even though BoE notes are indeed also "promissory notes of the BoE" and so, BoE liabilities. The fact that they cannot be "discharged" makes them tangible assets of any holder [other than the BoE!], and they remain such when handed to your bank. Your bank swaps part of its "loan asset" for an equal "cash asset".
I'm finding it a bit hard to understand what you're saying here. Let's take it one part at a time.
"BoE notes and coins both remain in existence after they have discharged part of the debit balance in your loan account"
BoE notes are liabilities of the BoE. Suppose you have £100 in cash i.e. the BoE owes you £100 (your debt asset, BoE's liability). Let's say you also owe your own bank £100 (your bank has a £100 debit balance in the loan account). Then you can pay your debt to your bank by transferring £100 in cash to it. This is a transaction with 2 actions:
1. Your bank writes off your £100 loan debt to it.
2. You transfer a £100 debt asset to your bank. The BoE now owes £100 to your bank, instead of to you.
The reason that the cash wasn't destroyed when you transferred it to your bank is that it wasn't your bank's liability. If it were, it would be destroyed.
Let's take the scenario one step further. Suppose your bank happens to owe £100 to the BoE. In that case, it can use the cash to settle this debt, which involves 2 actions:
1. BoE writes off your bank's £100 debt to BoE.
2. Your bank writes off BoE's £100 debt to your bank. That £100 cash no longer exists, because it was used to pay the debtor.
In general, if you pay a debtor with their own debt asset, the debt is destroyed. But if you pay someone with a debt asset which is the liability of a third party, the debt isn't destroyed: the debtor remains the same, but the creditor changes.
So if you owe £100 to your bank, and you pay using a *deposit* (which is the bank's debt to you), it *is* destroyed, because you're paying the debtor with it. You're paying by writing off the debt (green-to-pink arrow) instead of by transferring a debt asset (green arrow).
All £100 notes in circulation are indeed BoE liabilities, and returning a £100 note to the BoE reduces its total liability by £100. But a returned £100 note (in good condition) still exists, and can be reissued, so we agree almost completely, except for my quibble, that it’s not that the “£100 [note] no longer exists” when a bank returns it to pay down its liability at the BoE.
That returned £100 note has only been “removed from public circulation” and “disappearing from the accounts” is not the same as “destruction”. Physical destruction, e.g. of worn-out or damaged notes *can* occur, but is an operational issue rather than an accounting issue. That same returned £100 note (in good condition) could not be reissued if it “no longer exists”.
Commercial banks do treat a £100 note as a “tangible asset” [cash] in their books, rather than a “debt asset”. They may swap an existing “debt asset” to obtain it from the BoE but do not list the £100 note as a “debt owed to it by the BoE”. Like their bank, people will also regard cash as a tangible asset. It’s only the BoE that creates a single “exception”, and that seems to be a real case of an “exception that proves the rule”.
"But a returned £100 note (in good condition) still exists, and can be reissued"
Yes, it can be reissued. It's interesting, because the physical note doesn't seem to have changed at all when it's returned to the issuer.
But something profound *has* changed: it no longer documents the existence of a debt owed by the issuer to the holder. And if it's reissued, again something profound does change: it documents the existence of a *new* debt from the issuer to the holder. It's a new debt, even though it's a recycled note. It's no different from the BoE destroying the old note and printing a new one to issue.
If the BoE prints up a huge pile of £20 notes in the expectation of banks ordering some to fill their ATMs, this has next-to-no economic or accounting significance. What is significant is when banks withdraw their reserve account balances to obtain the notes.
"Commercial banks do treat a £100 note as a “tangible asset” [cash]"
From the perspective of someone who holds it, it's just *an asset*. It's only when we (as people studying macroeconomics) consider it from outside, and see whether someone else has a corresponding liability, that we can categorise it as either a tangible asset or a debt asset. In this case, since the BoE *does* have a corresponding liability, we know it's a debt asset.
How the holder obtained it doesn't affect this.
Have you read the BTW study by the way?
I've downloaded and skimmed it only. I think your article will be easier to understand.