Rogue Economist — Net Financial Assets

The rogue economist provides a long and detailed exposition of the meaning of "net financial assets" based on my previous comments there.

"Net financial assets" is a key MMT concept, so it is definitely a worthwhile read. I'm bookmarking it, too, in order to refer others to it. It meets a lot of objections and corrects erroneous ideas now being bandied about.

Read the post at Rogue Economist Rants, What is net financial asset

Here is my comment there:

Thanks for providing a detailed explanation of net financial assets.

I must clarity that the term "net financial assets" is not my term. It is a key term of Modern Monetary Theory (MMT).

MMT emphasizes the distinction between vertical, "outside," or exogenous money creation by the government as currency issuer, and horizontal, "inside," or endogenous money creation by bank lending.

When banks lend, loans create deposits, which are withdrawn and spent into the economy. Loans are booked as bank assets and deposits as bank liabilities. The net is zero. No net financial assets are created when banks lend. What is created, however, is an interest obligation that exceeds the value of the loan, which must be repaid in addition to the principle.

Conversely, when government deficit spends it creates financial assets in the private sector. These financial assets have no liability in the private sector, so they are non-government net financial assets. The net financial assets injected by government come with no interest payable by the recipient.

This is the basis of the vertical-horizontal distinction that MMT draws, and it is why the government as household analogy is erroneous. Households, firms, and states in the US are currency users, while the federal government is the currency issuer. Missing this distinction is the reason for a lot of junk economics.

A government that is the monopoly provider of a non-convertible floating rate currency is not operationally constrained because it funds itself with currency issuance. Such a government does not tax to fund itself and it does not borrow to finance itself. A currency issuer does not need to get money elsewhere. It issues it.

Taxes withdraw net financial assets previously injected by deficit expenditure. Governments withdraw some of the NFA through taxation for two reasons. First, taxes create a need for the government's money, which Warren Mosler calls a tax credit. This gives value to otherwise worthless pieces of paper. Secondly, governments withdraw NFA from non-government to regulate inflation.

Government does not usually withdraw the total net financial assets it injects. Historically, the US government has generally run a deficit. Only once was the national debt paid down.

The residual of deficit spending is the "national debt." It should be obvious from the above that the "national debt" is actually savings of NFA held by non-government, accruing interest that is also created by currency issuance and adds NFA. All the brouhaha is complaining about growing national wealth in the hands of non-government. Does that complaining make sense?

IN the MMT macro view and policy recommendations based on it, fiscal policy — injection and withdrawal of non-government NFA — is used to adjust nominal aggregate demand to nominal aggregate supply at full employment with a view toward achieving full employment and price stability. In this regard, MMT holds that fiscal policy based on "functional finance" is superior to monetary policy, since it can be adjusted to changing non-government desire to save in order to ensure that the balances of the sectors — government, domestic private, and external — sum to zero at full employment.