Is Fiduciary money really money or cleverly disguised debt?

4/30/2012 Portland, Oregon – Pop in your mints…

As money managers are frantically rebalancing their portfolios in a vain effort to get out of the way of Apple’s 20 point decline and Spain’s central bank, whose reason for existing we cannot conjure at the moment, consults experts in toxic assets because it apparently cannot figure out how to perform the most basic of banking functions:  Writing down bad assets, we are waxing philosophical here at The Mint.

We will give the Spaniards the benefit of the doubt and assume that they know what should be done with the toxic assets, they just do not want to appear to have admitted that the vile sludge on the balance sheets of nearly all spanish banking institutions are worse than worthless without getting an expert opinion. 

The defunct Spanish Central Bank looking for unsophisticated Investors to clean their banking system's septic tank

These are smart people, no doubt, the money managers and central bankers involved in the debacle that is the western financial system, circa 2012.  It is for this reason that there should be great cause for concern when they appear completely uncapable of functioning when things do not go the way they planned.

For example, a properly functioning banking system would have no problem figuring out what to do with non-performing loans (the common name for the toxic assets that the central bankers so dread).  In fact, a properly functioning banking system, where real and not limitless fiduciary money was at stake, would have created an adequate quality control system to ensure that very few financial assets of the toxic variety live to see the light of day.  Those that did see the light of day would have beem properly discounted them to a point where all of their toxic side effects could be properly cleaned up should they spill over.

We must assume, then, that there is something dreadfully wrong with the banking system.  But what is it?

We began to ponder this question last week when we saw a post by an Ivy League trained economist.  The assertion that fiduciary money is money bothered us to the point where we were compelled to jump in to correct this unintentional error.

The Ivy league trained economist indulged us for a time and then, for reasons unknown, disabled commenting on the post.  We interpret this action as a concession of the point we are trying to make, either that or they just wanted to get rid of us, which, given our obvious charm, we can only assume is not the case.

What is important is that the post brought up a fallacy which we see it as part of our mission here at The Mint to debunk.

The fallacy, which is widely accepted as fact by money managers and Spanish central bankers alike, is that fiduciary money operates like money when in reality it is nothing more than a debt instrument in disguise. 

So which is it?  Is The Mint off its rocker or is there something to the error of this “debt is money” point of view, as in, it is causing otherwise intelligent people to act in more and more absurd ways as the inevitable consequences of using debt as money rear their ugly head?

Simply stated, is fiduciary money really money, as the name implies, or is it technically debt?  It is a fine point that, to be honest, does not matter to most people on the planet, for what is commonly known as fiduciary money tends to operate as money in a way that is imperceptable to the members of society…until it doesn’t.

The true essence of fiduciary money is not money at all, but debt.  Granted, it may be a highly liquid and highly transferable form of debt, but that does not change the fact that when it is created at the bank, be it a local or central bank, it represents a debt of that bank, regardless of the ability of said bank to redeem the fiduciary money for specie money, which is what we hold out as worthy of the term money for purposes of analysis.

As you can see from our presentation of the interaction below, we attempted, in good faith, to convince the Ivy League trained economist that Federal Reserve notes, as their name implies, are debt and not money.

I have redacted the amicable interaction to highlight the applicable text of our interaction as it pertains to the case in point, is fiduciary money really money?

Please read on and decide for yourself.

{Editor’s note:  Out of respect for the Ivy League trained economist, we have removed all references to their identity, for it is not our intent to shame, discredit, or launch any form of personal attack on them, but rather, the fallacy surrounding mainstream economics’ treatment of fiduciary money in its analysis}.

The Mint (in response to the intial post):

I would like to point out that fiduciary money is not money, but rather debt which carries in its value a monetary premium which the market has chosen to assign it.

Ivy League trained economist:

“Perhaps this helps you David Mint. I wrote this back on March 8th.

{Link to content further asserting that fiduciary money is money, removed to protect economist’s identity}

The Mint:

Thanks again, however, I still cannot concede your assertions that Federal Reserve notes are money, rather, they are a debt instrument, which is often referred to as fiduciary money.

The proof of this lies in that Federal Reserve notes pay interest and trade at an implied discount rate, whereas money simply trades against other goods in a varying relationship determined by the relative scarcity of resources.

Both circulate as currency in a normal economy, but the rigidity of debt makes it unsuitable for obligatory legal tender.

It is a fine point that is categorically overlooked, but the more one forces debt into the role of money, the greater the disconnect between the activities of men and the resources available to support those activities.

I would love to hear a convincing argument that debt is money if you have one in your archives.

Thanks again and all the best!

Ivy League trained economist:

“Decidedly David Mint, Federal Reserve notes do not pay interest. There isn’t anyone on earth paying interest to anyone else who is holding a $5 bill in his wallet.

Here, David, disabuse yourself. See my many shares on what money is:

{Link to content further asserting that fiduciary money is money, removed to protect economist’s identity}

You ought to spend good time reading this one:

{Link to content further asserting that fiduciary money is money, removed to protect economist’s identity}

The Mint

Quickly, on the fallacy of the $5 bill which is held, the implied interest and discount rate on Federal Reserve notes traded amongst commercial and central banks still affect the value of the bill as it is held up until the moment it is given in exchange for trade.  The coupon rate is 0%, but the normal operations of debt instruments hold true for them.

From what admittedly little I have read of your work, I agree with 99% of what you present.  It is this fine point, that Federal Reserve notes behave as debt, even when they are part of the M1 money supply, that I believe is the error which is spread throughout mainstream economics.  Of this, I have yet to be disabused by what you have presented.

Debt includes all fiduciary money.  The point is important because using debt as money works until it doesn’t, meaning the issuer of the debt defaults or is widely perceived to have defaulted, and their debts become worthless in trade.

Ivy League trained economist:

“That’s all fine, except Federal Reserve bank notes are not debt.  Decidedly, Federal Reserve bank notes are money owning to bearer negotiability and ability to extinguish contracts.

Yet, Federal Reserve notes are not credits, and thus are not debt.  Federal Reserve notes are not even evidences of ownership of contracts.

At most anyone can say is that Federal Reserve notes represent a call on future products to be made by anonymous, as yet, identified others who likely shall take them in exchange.”

The Mint

As a matter of accounting necessity, the Federal Reserve must book a liability when it issues a Federal Reserve Note which makes their notes debt by definition.  If this were not the case, why would they list it as a liability on their balance sheet?

On the contrary, the most that anyone can say about Federal Reserve notes is that they are the highest and most liquid form of debt which is traded in the US economy.  However, this does not change the fact that the essence of the Federal Reserve note is debt.

The Ivy League trained economist unexpectedly exits stage left.

Who cares?  Why is this important?  It is important because if what we believe about fiduciary money is true, most of the Western world, including the mysteriously influential Paul Krugman (who is not, by the way, the anonymous Ivy League trained economist above), somehow believes that fiduciary money is money that can be produced at will, and that the world will be better off if we simply produced more of it.

If the Krugman’s of the world get their way, labor and accumulated capital will be so poorly allocated that it could take three generations for humanity to adequately organize itself to make good use of the earth’s inexhaustible reasources.  Do you have that kind of time?

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint


Key Indicators for April 30, 2012

Copper Price per Lb: $3.86

Oil Price per Barrel:  $104.88

Corn Price per Bushel:  $6.60

10 Yr US Treasury Bond:  1.92%


Gold Price Per Ounce:  $1,664

MINT Perceived Target Rate*:  1.00% AWAY WE GO!

Unemployment Rate:  8.3%

Inflation Rate (CPI):  0.3%

Dow Jones Industrial Average: 13,214

M1 Monetary Base:  $2,210,700,000,000

M2 Monetary Base:  $9,970,100,000,000