6 ms·

To me reads like the first premise is already wrong: "In a closed economic system, money is conserved." The opposite is true. Debt and the loan asset (if that'

To me reads like the first premise is already wrong: "In a closed economic system, money is conserved." The opposite is true. Debt and the loan asset (if that's correct English usage) are created from nothing, for the debtor and the creditor respectively; the loan is converted to money intermittently by the central bank. On maturity of the loan contract both liability and asset side disappear when the loan is being repaid.* The central bank creates the money in the instant it interacts with the creditor, and when the contract ends, the money is erased. Do I missread this in some way? * If you disregard the interest, which is extremely simplifying obviously; still taking it into account wouldn't make the first statement more true

oarabbus_ 8y ago
I recently watched Ray Dalio's video on the Economic Machine: https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0 he describes the monetary/credit/debit system in the same way, and I do agree the first premise is suspect depending on how you define "closed system". However, I assume the authors' rebuttal would be that real-world economic systems are not closed system. Not that it makes their claims any more applicable to the real world.
- febeling 8y ago
  I think you're right. The "closed system" is supposed to mean "without regard for the monetary aspects." Those are where all the interesting stuff happens (like growth, crisis), though ;) But that way the statement makes sense.
phreeza 8y ago
I think the trick is that banks can issue loans for higher amounts than they have assets, but if you sum up all the assets and liabilities, the sum should stay constant. So the conservation works more like an electrical potential, where you can always go lower locally, rather than a number of atoms, which has a fixed minimum at 0.
WalterBright 8y ago
Finally, someone gets it! I.e. the creator creates an asset. The asset is then used as collateral for a loan. The loan is simply a notation in a ledger. Money is created when the loan is spent. Money is destroyed when the loan is paid off.
- RobertoG 8y ago
  The grandparent gets it but not totally. He says: "All money is in the books of the central bank,[..]" In the case of lending, it's the commercial banks where the money is created and destroyed. If enough reserves exist already in the system the central bank don't need to act.
  - febeling 8y ago
    That's true depending on the definition of money you use. Commercial banks can't create central bank money (M0). But they can create credit, and convert it to central bank money at will. And credit counts into M1+, one of the common money supply indicators. I'd say "money" in common usage is only M0 (central bank lines) and MB (notes and coin), and the others are only technical indicators used by economists. But that's debatable.
    - em500 8y ago
      People exchange real labour, houses and cars mostly using those "technical indicators". (Few people buy a house or car with notes and coins or with their central bank line.)
- mywittyname 8y ago
  The money isn't destroyed though -- it's converted into wealth as an asset. A bank provides a loan to Andy for $100 to build a house. Andy builds the house worth $100. Once the house is paid off, the bank gets $100+interest, and Andy has a house worth some amount relative to that $100. The $100 never disappears as a result of the loan. Whether or not the bank then chooses to destroy the money once the loan is repaid is not really a material to the discussion. Replace "bank" with "parents" and it's clear that no money is destroyed as a result of the loan. What you're talking about is really just a side-effect of our accounting practices and/or asserting that all lending originates from the Central Bank.
captainmuon 8y ago
I would still say money is conserved, in the same sense that charge is conserved in physics. Sure, you can create electrons by pair production, but you always create positrons with them. See also the Dirac Sea. With money, you always create debt and loan together. And yes, both can "move around" like a currency, just like electrons and holes (missing electrons) can move around in a solid, or electrons and positrons can move around in free space. "Primary" money - I don't know if there is an economic term - is strictly conserved. It's almost sacrosanct in our society, nobody would ever just create money. Even when they talk about printing money, it's always through loans (ultimately from the central banks), and never by actually throwing on the press. Also, destruction of money is extremely rare - mostly it is devaluation of assets, but rarely somebody burning cash etc..
- febeling 8y ago
  Not sure what you mean by "primary" money, but I can't think of a definition that would make that statement ("is strictly conserved") true. All money is in the books of the central bank, and it all has counterpart assets to it, and is all based on contracts with a maturity of less than a year. So if no-one renews there is no money, regardless of definition, in circulation after that time. Edit. Coin would be the only exception, but that's a negligibly small item in the balance.
- zwaps 8y ago
  First, there are all sorts of different "moneys". There's official definitions of M0 to M3, but those are just categories. Manner of payment is achieved in different ways, and all these things have different societal, economic and judical relationships to each other. But speaking of the official classifications, money is not conserved or constant, can be destroyed or created and change its relationship to other categories. Ex: https://3.bp.blogspot.com/-Dd1sW5ny2F0/Tb1e6oteMuI/AAAAAAAABx8/TjjrYFWEvBY/s1600/M1M2Change.png https://3.bp.blogspot.com/-Dd1sW5ny2F0/Tb1e6oteMuI/AAAAAAAAB... Where M0 is cash, and M1 are funds directly available for payment and so forth.
  - zwaps 8y ago
    And while M0 is usually the most stable, not only DOES cash get created and destroyed, this is even independent of loan/debit creation (which is another measure entirely). Central banks may call in and destroy, convert, or give out cash to banks with and without changing loans/debits and so forth, for all sorts of considerations. It's really not that simple.
boomboomsubban 8y ago
>Do I missread this in some way? You describe an economic system that is not closed, as you describe money being created. The simulations were run assuming a closed economic system, with debt either ignored or handled in some atypical ways.
- febeling 8y ago
  That's the way that it's meant, I agree. They might have worded that a bit differently, like saying "We assume a simplified economic system that has constant money". Because "closed economic systems" with this meaning don't exist in real life.
  - boomboomsubban 8y ago
    The first sentence of the abstract which you quoted defines what a closed system would be in economics. Closed systems are a common concept, and expecting someone to read more than one sentence to find out their methodology is reasonable.
  - Const-me 8y ago
    Closed systems don't exist in reality either. You can try to shield from radiation including cosmic microwave background but you can't from gravity. Research on closed systems is often directly applicable and therefore interesting. In some cases the externalities are sufficiently small, in others they're fast and the systems is essentially closed between them happening.
atomack 8y ago
In this context, closed system is term used in statistical mechanics that says that there are quantities (energy and particles) that may not enter or leave the system. So I would read this is 'if we assume that money plays the role of energy in statistical mechanics, what happens'. I was a theoretical physicist when this paper came out. I remember talking to some econphysicists at the time, though neither of these two. While as a premise, it probably doesn't stand up to much scrutiny, I think the spirit is that even if one makes such a drastic assumption, can one still observe any observable features of actual economic systems.

oarabbus_ 8y ago

I recently watched Ray Dalio's video on the Economic Machine: https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0 he describes the monetary/credit/debit system in the same way, and I do agree the first premise is suspect depending on how you define "closed system". However, I assume the authors' rebuttal would be that real-world economic systems are not closed system. Not that it makes their claims any more applicable to the real world.

febeling 8y ago
I think you're right. The "closed system" is supposed to mean "without regard for the monetary aspects." Those are where all the interesting stuff happens (like growth, crisis), though ;) But that way the statement makes sense.

phreeza 8y ago

I think the trick is that banks can issue loans for higher amounts than they have assets, but if you sum up all the assets and liabilities, the sum should stay constant. So the conservation works more like an electrical potential, where you can always go lower locally, rather than a number of atoms, which has a fixed minimum at 0.

WalterBright 8y ago

Finally, someone gets it! I.e. the creator creates an asset. The asset is then used as collateral for a loan. The loan is simply a notation in a ledger. Money is created when the loan is spent. Money is destroyed when the loan is paid off.

RobertoG 8y ago
The grandparent gets it but not totally. He says: "All money is in the books of the central bank,[..]" In the case of lending, it's the commercial banks where the money is created and destroyed. If enough reserves exist already in the system the central bank don't need to act.
- febeling 8y ago
  That's true depending on the definition of money you use. Commercial banks can't create central bank money (M0). But they can create credit, and convert it to central bank money at will. And credit counts into M1+, one of the common money supply indicators. I'd say "money" in common usage is only M0 (central bank lines) and MB (notes and coin), and the others are only technical indicators used by economists. But that's debatable.
  - em500 8y ago
    People exchange real labour, houses and cars mostly using those "technical indicators". (Few people buy a house or car with notes and coins or with their central bank line.)
mywittyname 8y ago
The money isn't destroyed though -- it's converted into wealth as an asset. A bank provides a loan to Andy for $100 to build a house. Andy builds the house worth $100. Once the house is paid off, the bank gets $100+interest, and Andy has a house worth some amount relative to that $100. The $100 never disappears as a result of the loan. Whether or not the bank then chooses to destroy the money once the loan is repaid is not really a material to the discussion. Replace "bank" with "parents" and it's clear that no money is destroyed as a result of the loan. What you're talking about is really just a side-effect of our accounting practices and/or asserting that all lending originates from the Central Bank.

captainmuon 8y ago

I would still say money is conserved, in the same sense that charge is conserved in physics. Sure, you can create electrons by pair production, but you always create positrons with them. See also the Dirac Sea. With money, you always create debt and loan together. And yes, both can "move around" like a currency, just like electrons and holes (missing electrons) can move around in a solid, or electrons and positrons can move around in free space. "Primary" money - I don't know if there is an economic term - is strictly conserved. It's almost sacrosanct in our society, nobody would ever just create money. Even when they talk about printing money, it's always through loans (ultimately from the central banks), and never by actually throwing on the press. Also, destruction of money is extremely rare - mostly it is devaluation of assets, but rarely somebody burning cash etc..

febeling 8y ago
Not sure what you mean by "primary" money, but I can't think of a definition that would make that statement ("is strictly conserved") true. All money is in the books of the central bank, and it all has counterpart assets to it, and is all based on contracts with a maturity of less than a year. So if no-one renews there is no money, regardless of definition, in circulation after that time. Edit. Coin would be the only exception, but that's a negligibly small item in the balance.
zwaps 8y ago
First, there are all sorts of different "moneys". There's official definitions of M0 to M3, but those are just categories. Manner of payment is achieved in different ways, and all these things have different societal, economic and judical relationships to each other. But speaking of the official classifications, money is not conserved or constant, can be destroyed or created and change its relationship to other categories. Ex: https://3.bp.blogspot.com/-Dd1sW5ny2F0/Tb1e6oteMuI/AAAAAAAABx8/TjjrYFWEvBY/s1600/M1M2Change.png https://3.bp.blogspot.com/-Dd1sW5ny2F0/Tb1e6oteMuI/AAAAAAAAB... Where M0 is cash, and M1 are funds directly available for payment and so forth.
- zwaps 8y ago
  And while M0 is usually the most stable, not only DOES cash get created and destroyed, this is even independent of loan/debit creation (which is another measure entirely). Central banks may call in and destroy, convert, or give out cash to banks with and without changing loans/debits and so forth, for all sorts of considerations. It's really not that simple.

boomboomsubban 8y ago

>Do I missread this in some way? You describe an economic system that is not closed, as you describe money being created. The simulations were run assuming a closed economic system, with debt either ignored or handled in some atypical ways.

febeling 8y ago
That's the way that it's meant, I agree. They might have worded that a bit differently, like saying "We assume a simplified economic system that has constant money". Because "closed economic systems" with this meaning don't exist in real life.
- boomboomsubban 8y ago
  The first sentence of the abstract which you quoted defines what a closed system would be in economics. Closed systems are a common concept, and expecting someone to read more than one sentence to find out their methodology is reasonable.
- Const-me 8y ago
  Closed systems don't exist in reality either. You can try to shield from radiation including cosmic microwave background but you can't from gravity. Research on closed systems is often directly applicable and therefore interesting. In some cases the externalities are sufficiently small, in others they're fast and the systems is essentially closed between them happening.

atomack 8y ago

In this context, closed system is term used in statistical mechanics that says that there are quantities (energy and particles) that may not enter or leave the system. So I would read this is 'if we assume that money plays the role of energy in statistical mechanics, what happens'. I was a theoretical physicist when this paper came out. I remember talking to some econphysicists at the time, though neither of these two. While as a premise, it probably doesn't stand up to much scrutiny, I think the spirit is that even if one makes such a drastic assumption, can one still observe any observable features of actual economic systems.