This is a mathematical explanation of double entry book keeping:
http://www.mathblog.ellerman.org/2010/02/the-math-of-double-entry-bookkeeping-part-ii-vectors/
Good luck in understanding it!!!!!!!!!!!!!
Assets must equal liabilities plus something called net worth, which is the difference between assets and liabilities.
Something = Something plus the difference between the two somethings.
Equals (=) means something is the same as another thing when all the figuring is done. Each thing is expressed in a different way but the bottom line relationship is that they are the same when all the computation is done.
Reduced to the simplest terms double entry book keeping is really this:
Money total amount equals Money total amount. Asset or liability is merely a state characteristic of money. Money is Money. It is only one thing.
The following is from Wikipedia at this link:
http://en.wikipedia.org/wiki/Equality_%28mathematics%29
"An equation is simply an assertion that two expressions are related by equality (are equal)."
and:
"Equality is always defined such that things that are equal have all and
only the same properties. Some people define equality as congruence.
Often equality is just defined as identity."
Any (two or more) objects that have all and only the same properties are equal. They are the same object, there is nothing that makes them different except by assigning a different state to them.
This is the Object Oriented programming explanation of objects and their states:
http://docs.oracle.com/javase/tutorial/java/concepts/object.html
Money is Money.
Book keeping treats money as two different things; assets and liabilities, different objects based on their state even although money is a single object having two or more states. That might serve the view and purpose of the book keeper but it has also been the view imposed as a foundation for development of the monetary and financial conceptual systems.
More from the previous Wikipedia link:
"Software objects are conceptually similar to real-world objects: they
too consist of state and related behavior. An object stores its state in
fields (variables in some programming languages) and exposes its behavior through methods
(functions in some programming languages). Methods operate on an
object's internal state and serve as the primary mechanism for
object-to-object communication. Hiding internal state and requiring all
interaction to be performed through an object's methods is known as data encapsulation — a fundamental principle of object-oriented programming."
This guy, a programmer, seems to have some problem coming to grips with what double entry book keeping is and what it does in relationship to the object oriented approach of thinking of money as a single object:
http://tech.groups.yahoo.com/group/domaindrivendesign/message/1462
He says: "How can behavior be equivalent to identity? This does not make sense to me."
Absolutely. Behavior is not object identity. It is something a thing does. What a thing does is not its object identity.
That is the real problem with the current money system. What money does and the state that it is in as been the dominating cornerstone conceptual foundation of the system. The identity of money is determined by its behavior, what it does, not by what it is.
The programmer, Ralph, concludes:
Perhaps computerized bookkeeping systems are all wrong. But I doubt that
object-oriented programming has anything to do with it. If it is a problem,
it clearly predates object-oriented programming.
Does anybody else understand this? If so, I would appreciate an
explanation.
"It took all of my free time today to write this message, and I just don't
have time to do it. In fact, there were several things I should have done
instead. So, I probably won't post more on this subject, but I would
appreciate it if other people could follow up. You understand this as well
as I do. You can ask Dan questions as well as I can."
I feel your pain, Ralph!
Ralph's comments were in response to this post by Dan:
http://tech.groups.yahoo.com/group/domaindrivendesign/message/1460
This is the thread in which the posts appear:
http://tech.groups.yahoo.com/group/domaindrivendesign/message/1462
Ralph was the first of a long list of comments on Dan's post. This is the last line in Dan's post:
"The more that object oriented programming got into controlling business
transactions the more that these 600-year-old business patterns have
gotten obfuscated. The problem is worldwide. It cannot go on; it must be
corrected, the danger is immense."
It certainly is immense!
Object Oriented System Design and Implementation is the conceptual tool creating the Information Age. It does so objectively in accordance with principals of the Object Oriented model. It applies the same model to all conceptual structures. 600 years ago a system was designed to serve the special interests of those that designed it for a specific purpose. It is about time the system that has caused world wide problems be brought kicking and screaming into the Information Age technology of system design.
This paper discusses semantic modeling in accounting systems and double entry bookkeeping:
http://books.google.com/books?id=5sA0bjSIIRcC&pg=PA19&lpg=PA19&dq=double+entry+object+oriented&source=bl&ots=09zsf5IovM&sig=v3x6UIcP504iG9TTERRchGKKkgI&hl=en&sa=X&ei=3L6FUN-4Kom9iwLI3ICgDw&sqi=2&ved=0CDAQ6AEwAg#v=onepage&q=double%20entry%20object%20oriented&f=false
Picture yourself buying an ice cream cone from a stand. You are exchanging assets with a counter-party. Each person has an asset. The assets are swapped.
ReplyDeleteMoney itself is also assets and liabilities, simultaneously, true!
But the key point is these are opposite states to opposing counter-parties. When banks create loans, the bank and customer swaps assets and liabilities. The signed agreement is the bank's asset and the customer's liability. The deposit account inside the banking system which is the loan proceeds IS the bank's liability to the customer (unless it is converted to physical cash), a promise to pay customer (or designee) X dollars, whereas the same account is an asset (offset by the obligation, so not a "net" asset) of the customer.
For govt-issued money spent into existence, the asset holder is someone in the private sector, for whom the dollars are obviously assets.
Ergo, the Fed Gov *MUST* be issuing Liabilities ... aka "Debt". That's why "all state money is debt", as they say, BECAUSE IT'S AN ASSET OF THE COUNTER-PARTY.
This is a tautology, aka double-entry bookkeeping. What it's NOT is an existential govt crisis wrapped around the necks of "taxpayers".
What we call the actual "national debt" is nothing more than liquid reserves that have been temporarily converted into Treasury Bonds, via a purchase. That purchase amounts to a balance transfer between two accounts in the Fed.
Since Bonds are self-extinguishing in certain terms on a varying timetable, simply ending the issuing of NEW T-Bonds, and thereby forcing saver institutions to park their Dollars in Reserve accounts, as Warren Mosler has suggested in one of his Fed, Treasury reform policy suggestions, this would cause the "national debt" to vaporize and disappear.
The "money" would still exist, but it would no longer be called "debt". It would in fact be a liability of the Fed, because the Fed would continue to maintain accounts and "owe" the depositors their deposit just like normal banks. However, because those savings would no longer be linked to Treasury Bonds ... which we call "borrowing" ... and which we consider to be owed by "taxpayers" (falsely) ... these savings would be part of the Fed's holdings but not be called "national debt".
The overall system change would be more euphemistic than material or substantive, but the APPARENT change would be monumental, especially since the general public and Congress is in a state of apoplexy and FEAR over "how much we owe" to China and others, and FEAR of how "dependent" we are for China supposedly "financing" our govt via sales of these T-Bonds.
In fact Congress requires that Tsy offer these Bonds for sale, but the conceptual point is that these Bonds are not a SOURCE of funds for Govt Spending, EXCEPT the fact that they are due to this archaic edict maintained by Congress itself, which Congress could abolish and dissolve.
It's like if Congress were complaining there were "too many national holidays". Well, who declares such dates as holidays? Congress.
Book keeping treats money as two different things; assets and liabilities, different objects based on their state even although money is a single object having two or more states.
ReplyDelete------
To COUNTER-PARTIES on opposite sides of the deal. Remember that fact and it makes sense why money has "two states". One party's liability (sometimes "debt") is another party's asset, and vice versa.
When Bank loans occur, counter-parties swap assets/liabilities that the bank creates with the help of the customer's signature.
For a check from the Govt or a $20 bill to be an asset of the recipient or holder, it MUST be a liability of the Issuer. We just usually don't realize that the Govt cannot run out of Liabilities of the power to create and issue Liabilities, and doesn't need taxes to do so. The act is actually issuing "instructions" to pay someone, which amounts to "spending" or "issuing money".