How Quantitative Balancing would transform public sector accounting

Quantitative Balancing (QB) and its impacts on public sector accounting

Elaborating on the book QUANTITATIVE BALANCING - Beyond the Crisis: A New Architecture for Financial Stability

QB is a radical proposed reform to banking architecture, not yet implemented anywhere. It reengineers money creation, deposits, and seigniorage (the profit from creating money) to restore state sovereignty. While the text focuses on private banking flaws and QB principles (pages 1–29), the book's core thesis directly implicates public finances. Here's how QB would transform public sector accounting (e.g., under IPSAS, FASAB, or national standards like Italian/ EU GAAP):

1. Seigniorage Becomes Explicit Public Revenue (Major Fiscal Impact)

• Current Issue: Banks create ~95% of money via loans (ex nihilo), capturing seigniorage privately as interest profits. Public sector accounting (e.g., central bank statements) only captures physical currency seigniorage or central bank profits; bank-created money is off-balance for the state.
• QB Change: Deposits from loans are reclassified as bank liabilities to the State Treasury (not depositors). Banks pay periodic "seigniorage interest" on this debt to the state (Principle 3, p. 21).
• Accounting Effect:
  • State balance sheet: New asset (receivable from banks) + revenue line in income statement/statement of operations.
  • Under IPSAS 47 (Revenue): This fits as non-exchange revenue from "binding arrangements" with banks, recognized when obligations are met.
  • Public deficit/debt reduction: Trillions in annual seigniorage (global estimates) flow to treasury, funding services without taxes/debt.
  • Example: In Italy (noted on p. 6), this ends Bank of Italy's treasury management monopoly, making seigniorage a direct state inflow.

2. Consolidated Public Sector Balance Sheets (Whole-of-Government Accounting)

• Current: Banks' expanded balance sheets (assets: loans; liabilities: deposits) are separate from government. Money creation is "private," with risks socialized via bailouts (moral hazard, p. 12–13).
• QB Change: Banks as "custodians" (Principle 2, p. 20); created money = explicit state debt. In consolidated accounts (e.g., IPSAS 35 for controlled entities):
  • Offsets: Bank's liability to treasury mirrors state's asset → net neutral but transparent.
  • Risk isolation: Segregated client deposits (100% safe) remove bank-run exposure from public guarantees (e.g., deposit insurance funds).
  • Maturity mismatch fixed: No fractional reserves; lending funded solely by state-owed creation.
• Global Variations: Aligns with accrual IPSAS trends (vs. cash-based systems); contrasts FASAB SFFAS 56 (classified U.S. activities) by increasing transparency.

3. Enhanced Transparency and Disclosure Requirements

• QB "unseals the black box" (p. 9–10): Cash flow statements/rendiconti finanziari now show money creation explicitly (no misleading "investment/financing" flows).
• Public sector parallel:
  • IPSAS 47/48 (your prior query): QB mirrors "compliance obligations" but for monetary policy—state discloses seigniorage as binding public entitlement.
  • Disclosures: Significant judgments on money creation (like IFRS 15 adaptation); reduces opacity in public reports.
  • Risk reporting: Systemic risks (boom-bust cycles, p. 16–18) now quantifiable as state receivables, improving fiscal sustainability metrics.

4. Broader Public Sector Reforms and Implementation

• Sovereignty Restoration: QB assumes direct state treasury control (p. 6 critique of historical delegation). Public accounting shifts from passive (central bank profits) to active (direct seigniorage).
• Legal/Transition: Book outlines legislative path (Part IV, implied); retrospective application like IPSAS transitions, with practical expedients.
• Potential Challenges: Banks' P&L hit (seigniorage as cost, p. 21–22) → lower private profits, but public gain. Could require IFRS/US GAAP updates for banks, flowing to public consolidations.
• Counterfactuals (Part III): QB as "systemic vaccine" for crises (2008, Euro debt), stabilizing public accounts by preventing private profit privatization + public loss socialization.

Comparison: QB vs. Current Public Sector Frameworks

Aspect	Current (IPSAS/FASAB/GAAP)	Under QB Proposal
Money Creation	Private (banks); seigniorage implicit/private.	Public (state debt); seigniorage explicit revenue.
Deposits	Bank liability to clients; fractional reserves.	Segregated property; liability to treasury.
Public Revenue	Limited (central bank transfers).	Massive new stream; debt/tax relief.
Transparency	Opaque flows; risks off-balance.	Full visibility; Nash equilibrium incentives.
Risks	Moral hazard, bailouts.	Isolated; state sovereignty.

QB isn't just accounting tweak—it's a paradigm shift (p. 19–23) making money a "public good." It complements IPSAS 47/48 by extending binding arrangements to monetary sovereignty, fixing "secret books" concerns (your FASAB query) via radical openness. No global adoption yet, but it addresses MMT-like ideas with practical mechanics.

QB could integrate DLT for tokenized seigniorage (p. 29 hints at blockchain for securities). For full book details or specific pages:

QUANTITATIVE BALANCING - Beyond the Crisis: A New Architecture for Financial Stability

Money Creation in the Public Sector: Accounting Overview

Money creation in the public sector primarily occurs through central banks (via monetary policy tools like asset purchases or reserve creation) and, indirectly, through government fiscal activities (such as deficit spending financed by borrowing or central bank support). Unlike private banks, which create money through lending, public sector money creation is tied to policy objectives like economic stabilization or inflation control. It's not "printing money" in a literal sense but expanding the monetary base (M0), which includes currency and bank reserves. In accounting terms, this is reflected in public sector financial statements, often under accrual-based systems that recognize assets, liabilities, revenues, and expenses when economic events occur, rather than just cash flows.

General Accounting Treatment

In public sector accounting:

• : When a central bank creates money (e.g., through quantitative easing), it buys assets like government bonds from the private sector. This is accounted for as an increase in assets (e.g., securities held) on the central bank's balance sheet, matched by an increase in liabilities (e.g., reserves credited to commercial banks or currency in circulation). The profit from this process, known as seigniorage (the difference between the face value of money and its production cost), is typically transferred to the government as revenue and recorded in the public sector's income statement.
• : Public spending financed by deficits can indirectly create money if the central bank purchases government debt. This appears as increased liabilities (debt issuance) on the government's balance sheet, with corresponding expenses in the statement of operations. In consolidated public sector accounts (which may include central banks in some jurisdictions), this nets out as an expansion of net assets or equity. Under modern monetary theory (MMT) perspectives, government spending creates money by crediting bank accounts, but accounting still treats it as fiscal outlays with matching funding sources.
• Key Statements Involved:
  • Balance Sheet: Shows expanded assets (e.g., loans to banks) and liabilities (e.g., monetary base).
  • Income Statement: Captures seigniorage as revenue or interest income.
  • Cash Flow Statement: Tracks actual inflows/outflows, but accrual accounting focuses on economic substance over cash timing.
• Public sector entities often follow standards like International Public Sector Accounting Standards (IPSAS), which emphasize transparency and require disclosures on monetary policy impacts, such as contingent liabilities from money creation. However, money creation isn't a direct "line item" but emerges from transactions like open market operations.

This approach ensures accountability, as unchecked money creation could lead to inflation or fiscal imbalances, which must be disclosed.

Worldwide Differences

Yes, there are significant variations in how money creation is accounted for across countries, driven by differences in accounting bases (cash vs. accrual), standard-setting bodies, and integration of central banks into public sector reporting. Globally, there's a trend toward accrual accounting for better transparency, but adoption is uneven. Some countries treat central banks as independent entities with separate reporting, while others consolidate them into whole-of-government accounts.

The table below summarizes key differences based on common frameworks and regions:

Aspect	IPSAS-Adopters (e.g., Many Developing Countries, EU Influences)	US (FASAB)	Australia/New Zealand (Business-Style Reforms)	Cash-Based Systems (e.g., Some Low-Income Countries)
Accounting Basis	Accrual: Recognizes money creation impacts when transactions occur (e.g., asset purchases).	Accrual: Detailed balance sheet expansion for Fed activities, with seigniorage as federal revenue.	Accrual with "business-like" focus: Full consolidation of central bank in public accounts.	Cash: Focuses on actual inflows/outflows; money creation effects often understated or off-balance-sheet.
Central Bank Integration	Often consolidated in public sector-wide statements for transparency.	Separate Fed reporting, but seigniorage flows to Treasury.	Fully integrated, treating money creation as public equity changes.	Minimal integration; central bank autonomy leads to siloed accounting.
Seigniorage Treatment	Revenue in government statements; disclosures on monetary risks.	Transferred to Treasury as non-exchange revenue.	Accounted as public profit, reducing need for taxes.	Often not explicitly recognized, leading to less fiscal accountability.
Challenges/Trends	Push for reforms via World Bank programs like PULSAR for better reporting.	Security-related omissions possible (e.g., FASAB 56), but accrual enhances credibility.	Pioneered global shifts to accrual since 1990s.	Transitioning to accrual for IMF/World Bank compliance, but capacity issues persist.

These differences can affect fiscal credibility: Accrual systems provide a fuller picture of money creation's long-term impacts (e.g., inflation risks), while cash-based ones may obscure them. Organizations like the IMF and World Bank encourage convergence toward IPSAS to standardize practices, but national sovereignty and institutional habits create ongoing variations. If you're exploring this in the context of innovative finance like EquaCoin, note that public sector money creation could intersect with digital currencies, potentially requiring new accounting guidance under evolving standards.