Wednesday, December 17, 2014

Some Notes on Discounting Acceptances


Believe it or not, the title of this posting is not gibberish — unless, of course, you are irrevocably stuck in the Currency Principle that underpins today’s three mainstream schools of economics, the Keynesian, the Monetarist/Chicago, and the Austrian.  In that case, none of this will make any sense at all to you.

The Old Silk Road, ancient trade route.
It’s all based on the fact that “money” is anything that can be accepting in settlement of a debt.  That being the case, whether a contract conveys an interest in past savings (a mortgage) or future savings (a bill of exchange), it is equally money and can be used to facilitate transfers of marketable goods and services in commerce — another definition of money being “all things transferred in commerce.”

When someone offers a bill of exchange and it is accepted in settlement of a debt (thereby creating a new debt, but that’s a different transaction), it is then called an acceptance (bankers, trade, or merchants).  The process is called discounting because the bill always passes as money at its present value, which is almost always a discount (if it’s at a premium, people tend to get suspicious, for one thing, since that means the contract is worth more today unfulfilled than in the future fulfilled). The first offer and acceptance is always called discounting.  Any subsequent offer and acceptance of the same bill is called rediscounting.

 
Old German States bill of exchange.
Throughout most of history the vast bulk of transactions have not involved currency (coin, banknotes), but contracts: bills of exchange, promissory notes, mortgages, letters of credit, drafts, and so on. Until the U.S. government began flooding the country with its bills of credit, until 2008 or so approximately 60% of GDP was transacted using bills of exchange in one form or another. A century ago it was around 80%. In ancient times before the invention of coined money, cir. 750 BC, it was 100%.  During most of the Middle Ages and until about 300-400 years ago, it was close to 95-99%.

By offering bills to a commercial bank, and having the commercial bank offer the bill to the central bank, new currency or new demand deposits can be issued, backed by the present value of the assets behind the bill of exchange. The new money would thus be asset-backed, as opposed to the current government debt-backed currency throughout most of the world run on Keynesian assumptions.

U.S. National Bank Note backed by government debt.
Asset-backed money allows people to buy more goods and services with fewer units of currency — but without decreasing the amount of currency relative to the goods and services.  It’s because the prices go down naturally rather than by inducing deflation by artificially reducing the amount of the currency.  In induced deflation prices go down, but that’s because there’s less currency. When the currency shifts from debt to asset backing, prices go down because the currency really is worth more, not because supply was reduced, increasing the price.

Inflationary "silver socialism" of the Great Commoner, W.J. Bryan
Thus, in classic manipulated deflation, a person would start with $100 that would buy $100 worth of goods, and end up with $50 that would buy $50 worth of goods.  If the currency appreciated as the result of a shift from debt to asset backing, a person would start with $100 that would buy $100 worth of goods, and end up with $100 dollars that would buy what was formerly $200 worth of goods — the money itself would be worth more.

The dollar would have more genuine value instead of a manipulated value, making U.S. products less expensive in terms of U.S. dollars everywhere, but more expensive in terms of foreign currencies. It would thus be more advantageous to manufacture goods domestically, getting more for less, than to buy overpriced foreign goods, especially if they maintain debt-backed currencies.  The standard artificial devaluation makes U.S. products less expensive overseas in terms of U.S. dollars, and foreign goods more expensive domestically.

At least, that’s how it was explained to us by a guy from the World Bank.  We’re still not sure why he thought shifting to an asset-backed currency was a bad thing, though.

#30#

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