… for a hamburger yesterday.
Trade with Dave: It’s one thing to be such a Wimpy banker that you won’t lend money.
It’s something else when you make people prepay for the pleasure of
doing business with you, accessing your network and paying “member”
fees. Is it time to eat your spinach?
The Bank of England a bit low on stocks attempts to make the most out of flows even if they’re in reverse.
Did you make it to Wal-Mart this holiday season? If you did, then you may have noticed one of those cardboard displays near the checkout area promoting a new prepaid card from American Express called Bluebird. A bluebird kind of like Twitter, but only for money. Everyone knows there is rising interest in banking the unbanked or underbanked (sounds like funeral home or landscaping terminology) and that prepaid cards are on the rise. Companies such as Green Dot have been booming as folks either are running from high bank fees or the only folks in the community with jobs happen to be ones without passports or social security numbers. Either way business is booming for these non-bank entities.
You may not have noticed it, but over the past twenty-five years or so we’ve been on a steady move from a credit based model to a debit based model and finally to a prebit based model. (Prebit is Dave’s word for the prepaid industry. I’m claiming the word. If anyone has a problem with that, please let me know). Think about when you started using a debit card. I don’t really even remember. I used to only have credit cards, but somewhere along the way someone handed me a debit card. I guess it was really an ATM card and it kind of became a debit card. So, I went from using credit exclusively for electronic payments to a mixture of credit and debit. I guess that was about ten or fifteen years ago that my ATM card that I used for cash withdrawals became a debit card that I could use for purchases. I even remember when there were different fees for gasoline depending on if you paid with debit or credit – maybe there still is.
Watching the rise of new and innovative payment technologies from
non-bank entities such as Jack Dorsey’s Square (see Dave’s Coincinet),
Dwolla, recent start-up Balanced and even Bitcoin Dave started noticing a
pattern. Pattern recognition would pretty much describe what Dave
does. I think that may be my new job description when people ask me
what I do. In the hit 1970′s TV show, Banacek used to say “I’m in the
restoration business.” I think Dave is going to start saying “I’m in
the recognition business.” That ought to get me some recognition. https://www.youtube.com/watch?v=g0JFQDmlVME
What is the pattern that Dave is noticing? There’s a movement towards prepay or in Dave’s dictionary PREBIT. As I started thinking about the history of accounting, I couldn’t help but wonder how are the accountants planning to treat this new model. That’s when I noticed a pattern between the rise of prepay and the Triple Entry Accounting that Dave has been harping on so much for the past three or four months. If you’re not an accountant or your never took many finance classes, I’ll give you the two paragraph explanation.
In the old days, everyone operated on a cash basis. That “cash” may have been gold coins, or a barn filled with hay, or a pen filled with pigs. If you wanted something you had to buy it either through some form of coin or bill currency or tangible goods as a means of exchange unless the seller was willing to extend you some credit and exchange his goods for your signature on an invoice, bill or credit/due slip. It was only logical to introduce accrual basis accounting once sellers started extending credit. If a seller could not “accrue” the sale when the buyer took his goods, then he was without goods and without a sale. Imagine the seller’s lender or banker saying “What happened to your pigs?’ The seller’s response would be “I sold them.” Followed by the second banker’s question “Where’s the money?” You get the picture. So a seller starts extending credit, usually with the encouragement of his financial backers in an effort to grow sales and in exchange for the added risk of accepting signatures in lieu of cash the lenders allow the seller to accrue the sale and collect the payment later. You could think of this model as the money as debt model.
We’ve been operating on this accrual system as long as Dave has been around and Dave even remembers the days when a company he worked for had it’s own in-house consumer credit department that extended terms to retail consumers in the community. Today that would be unheard of even with a private labeled credit card such as Kohl’s or Home Depot as even in those instances the management of the credit card accounts is outsourced to a large network provider such as Chase Bank or Discover Card. Following the credit crisis of 2007-08 we witnessed a rapid de-leveraging of consumers and an increase in the use of debit cards either by choice or by the fact that consumers lost their access to credit or saw their credit limits significantly curtailed by the banks. Remember all those letters the banks sent out about three or four years ago. With evolution from consumer CREDIT to home equity based credit and then restructuring to instantaneous DEBIT payment systems and now the rise of the prepaid (PREBIT) model, once again we have a fundamental shift in how the system functions and where the risk and rewards are being realized.
I guess that was when it hit Dave. Credit was tendering money to be earned from the Future while Debit was tendering money earned from the Present and Prebit is tendering money earned from the Past. That sounded like something Dave had heard before, in particular from a fellow named Yuji Ijiri who could be considered the father of Triple Entry Accounting. Take a look at page 5 and 6 from this report out of Tribhuvan University out of all places, Nepal. In this paper, the authors refer to what Dave calls the prebit (as in prepay) as the trebit (as in triple).
http://tujournal.edu.np/index.php/TUJ/article/viewFile/201/199
That got Dave thinking about what might be cooking a little bit West of Nepal when it comes to accounting for this new third dimension of accounting. Dave knows, and you do too if you’re a regular reader, that the money (at least the gold money) is shifting from the West to the East. If you’re going to develop your Gangnam style you’re going to need plenty of money to do it and when it comes to levering up a fractional reserve, it would sure seem that gold is becoming of increasing interest as a bolster to fiat confidence even if it is with some sort of new and improved gold standard based on a Real Bills framework of the Antal Fekete orientation. So, I went looking around for accountants who might be trying to equate the future with the present and then the present with the past along the lines of the Chicago Plan and a global Zero Interest Rate Policy (ZIRP) environment. Look what I found.
His name is Martin Shubik and he hails from New Haven Connecticut and Yale University. What was the title of Martin’s 2011 paper? You guessed it: A Note on Accounting and Economic Theory: Past, Present, and Future. As Dave started into the paper, I thought to myself. It’s probably just a coincidence, the title and all. So, I’m reading through the paper and like that guy from Funky Finger Production on the TV show In Living Color who presents his business card and says “Bam!”, there it is.
There is no longer a viable separation between the understanding accounting and economics. Accounting theory is the necessary economic theory to handle dynamic reality and the two are coming together fulfilling Fisher’s original intent in understanding and blending the income statement and the capital account. In a way, the whole economic theory of the firm refers to such blending. Furthermore as pointed out by Ijiri whether it is triple entry bookkeeping or keeping momentum accounts the reconciliation of accounting and economic theory is in a fruitful stage of development.
Wait a minute? No separation between economics and accounting?
You’re kidding me right. Accounting is primarily and objective
exercise. Economics on the other hand is primarily a subjective
exercise as it heavily relies on politics, not to say that you can’t
offer a political science curriculum at Yale, you would hardly define a
politician as operating under the scientific method (i.e. Popper’s
falsifiability). However, if you’re an economist or a politician or
even a central banker operating out of Japan these days, you would agree
with Shubik’s claim that there is no longer a “viable separation” as
essentially the Japanese government has told the Central Bank if you
don’t stop acting independently you’ll lose your independence. Hmmm?
You could argue that here in the states what the Fed is doing is essentially having the same effect of a merger of accounting and economics by self-imposing an objective target unemployment level at 6.5% or inflation at 2.5% in support of the Fed’s “triple mandate” (known as the dual mandate circa 1977) of stable prices, maximum employment and moderate long-term interest rates. This issue is raging on the Hill today with Texas Representative Kevin Brady’s bill designed to focus the Fed solely on price sta-bil-i-tay with his “Sound Dollar Act.” The problem as Dave sees it is fairly simply. How can you foster stability and a “Sound Dollar” when the plan is to continue to extract the gold from the West and send it to the East in support of the developing world (Africa not withstanding)?
That’s when it hit me again. If there are not enough assets, sufficient leverage on those assets or a risk appetite (read Basel III reserve requirements ala Jamie Dimon) to have your developed world cake and bake your developing world cake while eating your gold supply up too, then simply prepay. Who cares if it throws you into a negative velocity deflationary spiral as long as the money gets moved to its new destination asap. Technically, we’re not “eating up” the gold supply, but we are vacuuming it up and shipping it East. How many “We Buy Gold” stores are there in your town? I have a theory that for every bank that took down their “Home Equity Loans Here!” banner off the side of their bank that at “We Buy Gold” sign went up somewhere else in the same town.
Here’s the complete paper from Yale’s Martin Shubik: http://econ.ucsd.edu/~mwilloug/UCSD/Econ4/Acctg%20and%20Econ.pdf
So who else is on the prepaid kick? That’s when I got an email from a Dave reader who alerted me to Andy Haldane’s latest activities as Executive Director for Financial Stability for the Bank of England (and member of the Basel Committee). In the PREBIT model that merges accounting with economics there are very providential outcomes for otherwise boxed-in central planner which you will see from the formulas included the papers linked in this article.
Traditional Accounting
assets = liabilities + capital
Triple Entry Accounting
future = past = present
budget = wealth = capital
Source
banzai7
Trade with Dave: It’s one thing to be such a Wimpy banker that you won’t lend money.
It’s something else when you make people prepay for the pleasure of
doing business with you, accessing your network and paying “member”
fees. Is it time to eat your spinach?The Bank of England a bit low on stocks attempts to make the most out of flows even if they’re in reverse.
Did you make it to Wal-Mart this holiday season? If you did, then you may have noticed one of those cardboard displays near the checkout area promoting a new prepaid card from American Express called Bluebird. A bluebird kind of like Twitter, but only for money. Everyone knows there is rising interest in banking the unbanked or underbanked (sounds like funeral home or landscaping terminology) and that prepaid cards are on the rise. Companies such as Green Dot have been booming as folks either are running from high bank fees or the only folks in the community with jobs happen to be ones without passports or social security numbers. Either way business is booming for these non-bank entities.
You may not have noticed it, but over the past twenty-five years or so we’ve been on a steady move from a credit based model to a debit based model and finally to a prebit based model. (Prebit is Dave’s word for the prepaid industry. I’m claiming the word. If anyone has a problem with that, please let me know). Think about when you started using a debit card. I don’t really even remember. I used to only have credit cards, but somewhere along the way someone handed me a debit card. I guess it was really an ATM card and it kind of became a debit card. So, I went from using credit exclusively for electronic payments to a mixture of credit and debit. I guess that was about ten or fifteen years ago that my ATM card that I used for cash withdrawals became a debit card that I could use for purchases. I even remember when there were different fees for gasoline depending on if you paid with debit or credit – maybe there still is.
What is the pattern that Dave is noticing? There’s a movement towards prepay or in Dave’s dictionary PREBIT. As I started thinking about the history of accounting, I couldn’t help but wonder how are the accountants planning to treat this new model. That’s when I noticed a pattern between the rise of prepay and the Triple Entry Accounting that Dave has been harping on so much for the past three or four months. If you’re not an accountant or your never took many finance classes, I’ll give you the two paragraph explanation.
In the old days, everyone operated on a cash basis. That “cash” may have been gold coins, or a barn filled with hay, or a pen filled with pigs. If you wanted something you had to buy it either through some form of coin or bill currency or tangible goods as a means of exchange unless the seller was willing to extend you some credit and exchange his goods for your signature on an invoice, bill or credit/due slip. It was only logical to introduce accrual basis accounting once sellers started extending credit. If a seller could not “accrue” the sale when the buyer took his goods, then he was without goods and without a sale. Imagine the seller’s lender or banker saying “What happened to your pigs?’ The seller’s response would be “I sold them.” Followed by the second banker’s question “Where’s the money?” You get the picture. So a seller starts extending credit, usually with the encouragement of his financial backers in an effort to grow sales and in exchange for the added risk of accepting signatures in lieu of cash the lenders allow the seller to accrue the sale and collect the payment later. You could think of this model as the money as debt model.
We’ve been operating on this accrual system as long as Dave has been around and Dave even remembers the days when a company he worked for had it’s own in-house consumer credit department that extended terms to retail consumers in the community. Today that would be unheard of even with a private labeled credit card such as Kohl’s or Home Depot as even in those instances the management of the credit card accounts is outsourced to a large network provider such as Chase Bank or Discover Card. Following the credit crisis of 2007-08 we witnessed a rapid de-leveraging of consumers and an increase in the use of debit cards either by choice or by the fact that consumers lost their access to credit or saw their credit limits significantly curtailed by the banks. Remember all those letters the banks sent out about three or four years ago. With evolution from consumer CREDIT to home equity based credit and then restructuring to instantaneous DEBIT payment systems and now the rise of the prepaid (PREBIT) model, once again we have a fundamental shift in how the system functions and where the risk and rewards are being realized.
I guess that was when it hit Dave. Credit was tendering money to be earned from the Future while Debit was tendering money earned from the Present and Prebit is tendering money earned from the Past. That sounded like something Dave had heard before, in particular from a fellow named Yuji Ijiri who could be considered the father of Triple Entry Accounting. Take a look at page 5 and 6 from this report out of Tribhuvan University out of all places, Nepal. In this paper, the authors refer to what Dave calls the prebit (as in prepay) as the trebit (as in triple).
http://tujournal.edu.np/index.php/TUJ/article/viewFile/201/199
That got Dave thinking about what might be cooking a little bit West of Nepal when it comes to accounting for this new third dimension of accounting. Dave knows, and you do too if you’re a regular reader, that the money (at least the gold money) is shifting from the West to the East. If you’re going to develop your Gangnam style you’re going to need plenty of money to do it and when it comes to levering up a fractional reserve, it would sure seem that gold is becoming of increasing interest as a bolster to fiat confidence even if it is with some sort of new and improved gold standard based on a Real Bills framework of the Antal Fekete orientation. So, I went looking around for accountants who might be trying to equate the future with the present and then the present with the past along the lines of the Chicago Plan and a global Zero Interest Rate Policy (ZIRP) environment. Look what I found.
His name is Martin Shubik and he hails from New Haven Connecticut and Yale University. What was the title of Martin’s 2011 paper? You guessed it: A Note on Accounting and Economic Theory: Past, Present, and Future. As Dave started into the paper, I thought to myself. It’s probably just a coincidence, the title and all. So, I’m reading through the paper and like that guy from Funky Finger Production on the TV show In Living Color who presents his business card and says “Bam!”, there it is.
There is no longer a viable separation between the understanding accounting and economics. Accounting theory is the necessary economic theory to handle dynamic reality and the two are coming together fulfilling Fisher’s original intent in understanding and blending the income statement and the capital account. In a way, the whole economic theory of the firm refers to such blending. Furthermore as pointed out by Ijiri whether it is triple entry bookkeeping or keeping momentum accounts the reconciliation of accounting and economic theory is in a fruitful stage of development.
You could argue that here in the states what the Fed is doing is essentially having the same effect of a merger of accounting and economics by self-imposing an objective target unemployment level at 6.5% or inflation at 2.5% in support of the Fed’s “triple mandate” (known as the dual mandate circa 1977) of stable prices, maximum employment and moderate long-term interest rates. This issue is raging on the Hill today with Texas Representative Kevin Brady’s bill designed to focus the Fed solely on price sta-bil-i-tay with his “Sound Dollar Act.” The problem as Dave sees it is fairly simply. How can you foster stability and a “Sound Dollar” when the plan is to continue to extract the gold from the West and send it to the East in support of the developing world (Africa not withstanding)?
That’s when it hit me again. If there are not enough assets, sufficient leverage on those assets or a risk appetite (read Basel III reserve requirements ala Jamie Dimon) to have your developed world cake and bake your developing world cake while eating your gold supply up too, then simply prepay. Who cares if it throws you into a negative velocity deflationary spiral as long as the money gets moved to its new destination asap. Technically, we’re not “eating up” the gold supply, but we are vacuuming it up and shipping it East. How many “We Buy Gold” stores are there in your town? I have a theory that for every bank that took down their “Home Equity Loans Here!” banner off the side of their bank that at “We Buy Gold” sign went up somewhere else in the same town.
Here’s the complete paper from Yale’s Martin Shubik: http://econ.ucsd.edu/~mwilloug/UCSD/Econ4/Acctg%20and%20Econ.pdf
So who else is on the prepaid kick? That’s when I got an email from a Dave reader who alerted me to Andy Haldane’s latest activities as Executive Director for Financial Stability for the Bank of England (and member of the Basel Committee). In the PREBIT model that merges accounting with economics there are very providential outcomes for otherwise boxed-in central planner which you will see from the formulas included the papers linked in this article.
Traditional Accounting
assets = liabilities + capital
Triple Entry Accounting
future = past = present
budget = wealth = capital
Source
banzai7
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