The title of this post isn’t supposed to be taken seriously. It’s just a playful poke on Eric Lonergan’s post mentioned below.

On his blog, Sample Of One, Eric Lonergan has a post tiled Accounting as religion: Buffett, Derrida, and MMT. The post ends with the following line:

… but money is not a liability of the state.

Eric’s post is arguing with the Neochartalists but my post here has nothing to do with Neochartalism. I always find it amusing when people go “money is not the liability of the state, even though it’s technically a liability” and so on. I am going to take a different track here and make an argument like James Tobin’s brilliant 1963 paper Commerical Banks As Creators Of “Money” . I explained Tobin’s brilliant analysis in a post James Tobin, Banking And The Widow’s Cruse.

For this, I will go to a scenario in an open economy:

• £ is the local currency and $ is the foreign currency.
• Suppose foreigners hold £1bn in currency notes among other claims on residents. Of course in real life nobody holds £1bn in cash notes but I can always make my case more realistic.
• Suppose the exchange rate £/$ is falling and the foreign exchange market is nervous and runaway expectations are building up on the exchange rate.
• This forces the “£-central bank” to intervene.
• The central bank has less foreign reserves, i.e., $s and hence asks the government treasury to issue $-denominated debt equivalent £1bn. This is done to obtain proceeds to make a sale of $s in the fx markets, with the hope that it reverses the direction of expectations.
• The central bank sells $s worth £1bn in the foreign exchange market.
• Foreigners who held £1bn in currency notes are the counterparties.

So liabilities have been dollarized.

Now in this story, the net asset position of the £-nation hasn’t changed. The net international investment position is the same. Only the composition of liabilities. However people who claim that “currency is not really a liability” will agree that the government has a liability in $s. In their way of counting, there is an additional liability (after netting). But that doesn’t make sense. I just walked you through transactions of equal monetary exchanges. If you think

money is not a liability of the state.

do you not see a self-inconsistency here?

In other words, the potential for liability dollarization makes accounting items such as currency notes, reserve balances at the central bank etc. as a liability in a true sense.

Moral of the post: Always start with the open economy.