Through my fabulous finance/economics news finder, I found this interesting piece on the value of money and the balance sheet of a central bank:
A Ponzi scheme is a financial institution with liabilities and no assets backing those liabilities. Paper money can operate just like a Ponzi scheme, but with one important difference. Mr Ponzi promised his clients high rates of interest and/or capital gains. They would not have held his liabilities unless they believed him. The Bank of Canada promises zero interest, zero nominal capital gains, and a minus 2% real rate of interest on people who hold its paper money. Mr Ponzi could not deliver on his promise, even if he hadn’t spent the assets. The Bank of Canada can deliver on its promise, even if it gave away all its assets, provided the (real) demand for its paper money does not fall over time more quickly than 2% per year. (If the real demand for money were falling at 2% per year, a constant nominal supply of money would yield 2% annual inflation).
I had never thought about money, in the currency sense, that way.
Accountants like double-entry bookkeeping and balance sheets and stuff so they can keep track of things. They like to record assets on one side, and liabilities on the other side, to make sure that everything adds up, to check that everything’s been properly recorded. So they like to list currency as a liability of central banks (even though it isn’t, because there’s no promise to redeem it, or pay interest on it), and assets on the other side. An accountant would freak out if he recorded currency as a liability and couldn’t find an equivalent value of assets. He would say that the central bank is a Ponzi scheme. Which of course it is. And it’s just not worth the hassle of trying to explain to accountants that some Ponzi schemes are sustainable, really.
