Zero-coupon perpetual bonds?

May and (details)


The British organisation Positive Money proposes to move money creation away from commercial banks, and instead make it the responsibility of the central bank (or a similar entity that completely or partially replaces the central bank).

The money that the central bank will be creating will of course need backing, will need a balancing asset. There is some unclarity about how Positive Money sees this, but eventually two schemes remain:

Relevance for the Dutch situation

In the Netherlands, the citizens’ initiative to put money creation by commercial banks on the agenda of Dutch parliament was successful: it received more than enough backing from the population. On 21 April 2015 the petition was presented to the chairwoman of the Parliament Commission that handles such initiatives, Ms Helma Neppérus.

Although the text of the petition doesn’t clearly state it, many of the ideas in it are in fact based on the British proposals put forward by Positive Money. That makes any criticism of those British proposals also relevant to the Dutch debate.

Details and references to PM’s documents

New money backed by consols


(Continued writing the text on 12 May 2015.)

On page 28 of the PDF that accompanies The Positive Money proposal in balance sheets, there is a note to the asset (upper left in the Bank of England’s balance sheet) that serves as the backing for the newly created money. I quote:

The balancing asset can be either 1. Consols (i.e. Overt Monetary Finance) 2. Negative Equity 3. PP of the Nation. Alternatively, money can be created as a token, and neither require a balancing asset or appear as a liability of the issuing organisation (this possibility is not represented here). See Jackson, Dyson and Hodgson (2012), “The Positive Money Proposal”, for more detail on how money can be created in these ways.

My comments to that:

I don’t know what “PP of the Nation” is, I didn’t manage to find an explanation of that.

I’m not certain exactly what 2012 publication they are referring to, but I did find a document dated 2 April 2013, by those three authors, entitled “The Positive Money Proposal”. In chapter 4 called “The reforms from an accounting point of view”, starting on page 22 and spanning 6 pages, the authors indeed treat this important issue: how money that the central bank created could and should have its backing at the left side of the balance sheet. Several alternatives are mentioned.

However, that 2 April 2013 document contains a warning at the start, in red print, saying:

This paper is now out of date and should not be quoted. Please see the current version at:

That address eventually leads to Creating a Sovereign Monetary System, in which chapter 4 (page 26 to 30) suddenly contains a largely different topic. Only on pages 31 and 32, “Accounting for Money Creation”, there is a brief remnant of what used to be chapter 4 of the proposal.

A longish quote from the new document, in which I applied boldface on some parts with which I very strongly disagree:

In accounting terms the electronic sovereign money would be a liability of the central bank’s Issue Department’s balance sheet, just as central bank reserves and banknotes are today. However, recording this money as a liability is merely an accounting convention, and does not imply that the central bank or government is ‘in debt’ to the holders of money. Bank notes are currently recorded as liabilities, but anyone returning a banknote to the central bank will only be given other banknotes of equivalent value. (Banknotes have not been redeemable for gold in the UK since 1931.) Therefore central bank does not ‘owe’ the holders of banknotes anything. In the same way, holders of electronic sovereign money will not be able to demand anything other than identical electronic money from the central bank.

The authors Ben Dyson, Andrew Jackson and Graham Hodgson then go on proposing ‘consols’, i.e. zero-coupon perpetual bonds, as the balancing assets. Again, I quote with extra emphasis (in bold) on parts with which I particularly strongly disagree:

However, this raises an accounting dilemma. If sovereign money is recorded as a liability of the central bank, then the creation of additional sovereign money involves an increase in their liabilities. Without an equal increase in assets, this could make them insolvent in a strict accountancy sense (although in practice, solvency constraints do not apply to central bank in the same way that it applies to other banks or businesses). So to get around this accounting problem and adhere to conventions, sovereign money would be balanced on the central bank’s balance sheet by government bonds that would be ‘zero-coupon’ (non-interest-bearing) and ‘perpetual’ with no maturity date). The government would issue these bonds specifically for the purposes of allowing the central bank to ‘balance’ its sovereign money liabilities. The zero-coupon perpetual bonds would not count as part of the national debt as they have no servicing cost (i.e. no interest) for the government, and no repayment obligation. This structure of accounting for money creation adheres to accounting conventions whilst also acknowledging the fact that money issued by a sovereign state is not a debt of that state, or an obligation to repay anything other than identical money. Instead, it is a token which individuals and businesses use to facilitate trade.

The nature of money

(Continued writing the text on 15 May 2015.)

Coins have some value of their own, albeit usually less than their nominal value. Any other kind money, be it banknotes or bank balances, in my view have value and are money because they are liabilities of the issuing entity (central bank or non-central bank respectively). Being a liability of the issuing entity means they are claims of the holder.

If such claim money is also divisible and transferrable, it can be used for payments and so it is money. That’s because payment means transferring part of the payer’s claim on a bank to the payee’s claim of the (or a) bank.

Reasoning away the liability/claim nature of money, as Positive Money is doing, takes away it value and turns it into non-money.

Do consols have value?

(Continued preparing text on 26 May 2015. Built decent sentences from that 6 June.)

Consols are a typically British, historic phenomenon. There is no certainty for the holder of consols when they will be redeemed, or even whether these bonds will ever be redeemed. So any money invested in them seems lost. However, consols can make sense because there is a yield, in the form of coupons: periodic interest payments.

Compare this with shares: there too, the issuing company has no obligation whatsoever to ever reimburse the capital that the original shareholders paid up. Listed companies do sometimes buy back their own stock, but they don’t have to. Yet, shares are a sensible investment, because of the likelihood of returns (dividend and increase in share price), and because there is a market for them, so they can always be exchanged for money at some price.

Zero-coupon bonds, with a redemption guarantee at the end of their maturity period, but no interest, may also make sense and be sought-after, in times of low interest rates and looming deflation. There is no yield, but there is the certainty, or at least the promise, that the same amount will be paid back after a predetermined period.

In summary:
Investments without a redemption obligation but with the prospect of yield make sense and have value.
Investments with a redemption obligation but without the prospect of yield make sense and have value.

But the combination of zero-coupon and perpetual does not make sense. Why would anyone be willing to buy such bonds? It means saying goodbye to your money for ever and getting nothing in return.

Even if in the course of money reform the government would issue such special bonds, and the central bank would be willing to buy them, as backing for new money the central bank wants to create, and even if it might never be necessary to sell those bonds to any third party; the fact that they cannot be sold, simply because nobody wants to buy them, makes zero-coupon perpetual bonds worthless and so unsuitable as backing for created money.

If zero-coupon perpetual bonds would ever be on the balance sheet of any legal entity, be it a central bank or any other legal entity, it should immediately be revalued to its realistic value, its market value, which unfortunately is zero. After that, the choices are: going bankrupt (negative equity), or recognising that the corresponding liability at the other side of the balance sheet is also worth zero.

Well, Positive Money already said their new sovereign money should not be seen as liability. A non-liability backed by a non-asset: that is not money. It’s fake.

One of your own cigars

Positive Money proposes that the central bank should create new money as needed, and make it available to the government so it can spend it on nice and useful thing in the interest of the tax payer. However, the backing, the source of that money, is a never-to-be-paid-back loan from the government (in essence: also the tax payer) to the central bank.

So in fact, the tax payer is borrowing money to himself to spend and enjoy it. That’s offering yourself one of your own cigars. It might be enjoyable, but it doesn’t solve any economic or political problem. For this reason too, the proposed solution is fake.

New money backed by bank loans

As this article is already long enough as it is, I’ll treat that issue in a separate issue.

History of the writing process:
writing on 3, 12 and 15 May, preparing text on 26 May, writing again on 6 June 2015.

Copyright © 2015 R. Harmsen. All rights reserved.