The way we ascribe labels to things results in the creation of categories, and this in turn affects the construction of our mental landscapes—best to get the words and categories right from the start lest our thinking goes astray. In this post I quibble with some of the common words and categories we use to describe trade.
Walking out the front door last night, I told my wife that I was going to buy a few items at the grocery store. But as I trekked down the street, I asked myself why I hadn't chosen to tell her an alternate version: that I was going to the grocery store to sell my cash. The problem with this wording, I figured, was that if I was to be the one selling stuff in the upcoming transaction, then by process of elimination the grocery store could no longer be the seller in the deal but the buyer—of my cash. And that would be a weird way to view things.
Linguistic convention requires that there be a seller and a buyer in any trade. One side spends, the other receives. That separate terms are given to participants in an exchange implies that the two parties are irreconcilably different. By spending, buyers are doing something that stands in binary opposition to whatever it is that sellers are doing.
I don't think this dichotomization is a good way to characterize the intuition behind a transaction. All parties to any deal are essentially engaged in the same activity: trade. Escaping linguistic convention for a moment, let's put things this way: when I go to the grocery store I am a seller of coloured bits of paper, and the store is in turn spending its food to buy those bits. The binary opposition between buyers and sellers melts away since both myself and the store are simultaneously buyer and seller, spender and receiver. The exclusivity that previously characterized our positions no longer exists, rather, we are each engaged in mutual trade.
For the sake of simplification we should just drop all references to buyers, sellers, and spending. Instead, so-called buyers and sellers are best described as being equal counterparties to a swap. In last night's trip to the grocery store, the store and me were counterparties to a swap of paper notes for groceries.
It could be argued that the use of the terms 'buyer' and 'seller' are useful in that they capture the fact that one party to the trade is offering 'money' and the other asking for it. But the word 'money' is just as arbitrary. What is to fall into this category, what is to be excluded?
For instance, fan's of Arrested Development may remember the scene where Tobias and Lindsay walk into C.W. Swappigan's and trade a cocktail tray for mozzarella sticks. With neither item classified as money, is Lindsay the buyer or the seller? What is being spent: mozzarella sticks or a cocktail tray? We hem and haw when we try to describe this scene because we can't apply the language of buying/selling, spending/earning to situations involving the exchange of goods that are relatively illiquid. But these sorts of exchanges shouldn't be excluded from discussion just because we can't use regular language to describe them. Nor are they categorically different from exchanges that involve slightly more liquid goods. The language of swapping comes to the rescue: Lindsay and C.W. Swappigans are equal counterparties to a swap that involves two illiquid goods.
Classifying people as buyers or sellers is just as tricky when we start talking about exchanges of one currency for another. When you walk into a currency exchange shop to trade Canadian money for US money, are you the buyer or is the shopkeeper the buyer? Which one of you is spending? Again, the more universal language of swaps makes things easier: both you and the exchange shop are engaged in a swap of two highly-liquid items. Even if one item is slightly more liquid than the other (perhaps greenbacks are a shade more liquid than loonies), what separates the two of you in this trade isn't a Chinese wall of buyer vs seller, but simply a difference in the degree of liquidity (or not) of the items you are swapping.
And while I'm griping, why not exorcise the words borrower and lender? Like buyer and seller, the terms borrower and lender imply a stern barrier between two participants to a temporary trade when these participants are in fact undertaking the very same activity—trade. If we unbundle a transaction between a customer and a bank, what is happening? A consumer, the "borrower", is providing their personal IOU to the bank which in turn is offering its own IOU, a deposit, to the customer. While it is usually said that the customer borrows deposits from the lender bank, we might just as likely say that the customer is lending his or her IOU to the bank, and the bank is borrowing the customer's IOU.
So if we can boil a banking transaction down to a swap that reverses after a period of time, participants in this swap needn't be ring-fenced with their own unique noun. Rather, each can be simultaneously described with the same term: as counterparties.
But what about interest? Isn't the payment of interest a distinguishing enough feature that necessitates the terms debtor and lender? Interest emerges (in part) when parties agree to swap equally risky IOUs for a period of time, but one IOU is more liquid than the other. The counterparty that accepts the illiquid IOU while providing the liquid IOU, usually the bank, will ask for a fee, or a stream of interest payments, from the counterparty customer to compensate (the bank) for forgone liquidity. The other party to the trade, the customer, will be willing to pay an interest penalty as restitution for the superior liquidity return that the bank's IOU provides them. This doesn't change the fact that both bank and customer are engaged in a swap.
Things get tricky when a temporary swap involves exchanges of IOUs that are equally-liquid (and equally risky). Since no one forgoes liquidity over the course of this swap, interest doesn't arise. A good example of this is the repo market, where short term swaps of deposits for highly-liquid treasury bills occur at rates no different from 0%. The lender/borrower lexicon breaks down here since without interest we don't know which party is to earn which moniker. Is the bond owner the lender or the borrower? The deposit-taker?
Again, the clearer way to describe this situation is to default to more universal swap terminology. Both participants are counterparties to a swap of items of equal or varying liquidity profiles.
In sum, our language tries to find strict differences between participants in an exchange when there are none. There are no buyers nor sellers, no spenders, no lenders nor borrowers. Instead, we are all engaged in the same activity—trade. The things we own have varying degrees of liquidity and in endeavoring to swap them for things that are more, equally, or less liquid than that which we already own, we make efforts to grope towards a preferred final state of either greater or diminished liquidity.
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