Comment by zestyping | Hacker News Reader

Comment by zestyping | Hacker News Reader

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The name "double-entry" is a little bit misleading. The "double" part makes it sound like you are duplicating work, but that's not really what's happening.

If you were accounting with pen and paper, you would write the transaction amount twice — positive in one column and negative in another. This maintains the invariant that money cannot be created or destroyed.

In terms of an abstract data model, though, each transaction is best thought of as a flow, or a weighted arrow. It has one amount and two ends: a source and a destination. The "double" in "double-entry" really just means that the arrow has two ends. Obviously every arrow has to have a head and a tail — it doesn't make sense for there to be no source or no destination.

The credit vs. debit thing confuses people a lot, and in my opinion is a red herring. If I could wave a magic wand, I would delete the words "credit" and "debit" from accounting because they are hopelessly inconsistent.

All you have to do is think of the conservation of money like the conservation of mass — when it moves, it leaves one place and arrives at another. The moment I stopped using the words "credit" and "debit", my understanding of accounting went from "I have no idea what I'm doing" to "Everything is intuitively obvious."

Yeah I agree. I aced my MBA accounting class but it makes a hell of a lot more sense to conceptualize everything as “stocks and flows”.

Also, I would say transactions are actually “multi-arrows” since there can be multiple sources and/or multiple destinations. A Bitcoin transaction captures this structure more or less perfectly.

Yeah, I just treat credit and debit as opaque blobs. They're words, I don't really know what they mean, but I know one means "side A" and one means "side B" ;)

> This maintains the invariant that money cannot be created or destroyed.

And if you wonder, if money cannot be created or destroyed, how does a monetary system handle the population tripling over the past 50 years?

The answer is national debt. The US national debt is just an artifact of this double entry bookkeeping. In order for there to be +money in the economy for the ever-growing number of citizens to do commerce with, the treasury incurs on itself -money. That's national debt.

The corollary then, if the US ever pays back all of its national debt, the economy will crash because there just aren't cash available for people to do commerce with. A +90trillion on the government balance sheet equals a -90trillion on the private sector balance sheet.

Not really. Money is created but it is created by the fractional reserve baking model where banks borrow from people who are willing to lend for short periods of time (depositors) and lend to those who are looking to borrow in the long term. The fact that you tend to deposit in checking accounts is what creates the money.

The private banking system can only multiply off of the monetary base up to a certain multiplier, it cannot expand that base. Only the government treasury can expand that monetary base.

If the private banks have conjured up 100x the monetary base in 1970, then when the population doubles by 2020, the banks cannot multiply further up to 200x. The treasury has to expand the base while the banks keep their multiplier fairly constant.

> And if you wonder, if money cannot be created or destroyed, how does a monetary system handle the population tripling over the past 50 years?

There is ONE special actor (in the US) that can create money out of the thin air: the Federal Reserve.

It alone can "buy" securities by crediting banks with money created out of nothing. Banks simply see a transaction with a dollar amount on their accounts within the Federal Reserve, and that's it. The money just appears.

The invariant "money can't be created or destroyed" holds for everybody else, including individual banks.

> The answer is national debt.

That's completely incorrect. The Federal Reserve can arbitrarily create (or destroy) money even if the national debt goes away entirely.

Most of the Federal Reserve's balance sheet is Treasury securities. If the Treasury stops issuing those securities, then the Federal Reserve don't have anything to buy.

Saying that the Fed can arbitrarily create and destroy money misses the point, that they then have to buy SOMETHING with those money, and there are strict rules about what they can buy, and it just happens that the Treasury controls the supply of the primary asset class that the Fed is allowed to buy. Once you clear out all the dance and ceremony, you arrive at the conclusion that the Treasury issues new money by issuing new securities.

> Most of the Federal Reserve's balance sheet is Treasury securities.

That's true, simply because they're the most convenient way to manipulate the monetary supply. Not much else is readily available in the volumes needed.

But they are not _essential_.

> Saying that the Fed can arbitrarily create and destroy money misses the point, that they then have to buy SOMETHING with those money, and there are strict rules about what they can buy

Sure, the invariant: "money goes out, asset goes in" holds.

But they can buy quite a lot of different securities if needed. E.g. the Fed directly bought about $3T of MBS: https://www.newyorkfed.org/markets/programs-archive/large-sc...

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