Net Financial Assets v. ‘Net Debt Financial Assets’

Whenever MMTers (proponents of Modern Monetary Theory) say that the ‘gov’t deficit equals our non gov’t savings’, or ‘the gov’t red ink is our black ink’, the technical term for that ‘black ink’, those ‘savings’, is Net Financial Assets (NFA). Those that are uninitiated to MMT don’t use the term NFA—whenever the mainstream talks about the cumulative amount of all federal gov’t deficit spending-to-date, their technical term for it is ‘The National Debt’.
 
Net Financial Assets (NFA) are USUALLY created ONLY by the federal gov’t (‘exogenously’ / ‘vertically’) when deficit spending, and not by banks (‘endogenously’ / ‘horizontally’); BUT, there is an exception. In a 03/25/17 RP broadcast, Warren Mosler pointed out that banks CAN and DO, on many occasions, actually add Net Financial Assets (unintentionally) when they have negative capital (when a bank loan, +/or a bank itself, defaults). A bank loan default or an outright bank failure acts as ‘synthetic’ federal gov’t deficit spending adding NFA because monies were lent out endogenously and will NEVER be paid back. In other words, banks occasionally go out of their lane and bank money is (unintentionally) created without *actual* debt attached, as if it was created like the federal gov’t, the sole monopoly ‘supplier’ of money, creates money—with very little intention of ever being paid back.
 
The Bush economic ‘expansion’ was fueled by ‘synthetic federal gov’t deficit spending’ (questionable private sector subprime loans and financial derivatives that all defaulted).
 
The Clinton ‘boom’ was fueled by ‘synthetic federal gov’t deficit spending’ (private sector loans that defaulted because of the dot-com bust).
 
The Reagan ‘miracle’ was fueled by ‘synthetic federal gov’t deficit spending’ (almost a trillion dollars in defaulted private sector loans during the S&L debacle, THE ENTIRE SIZE OF THE TOTAL NATIONAL DEBT AT THAT TIME).
 
The ‘roaring’ twenties was fueled by ‘synthetic federal gov’t spending’ (private sector loans using leverage that financed stock speculation with minuscule margin requirements that all went bust).
 
Mr. Mosler muses that he “can’t think of a single boom year that WASN’T attributable to either out of control or outright fraudulent bank lending to the private sector that would never have been allowed with proper hindsight!”
 
In other words, instead of ‘synthetic’ federal gov’t deficit spending (additions of ‘synthetic’ NFAs into the banking system), “we could have had those economic booms legally, easily, and simply, by just increasing federal gov’t deficit spending with proper foresight,” Mr. Mosler added.
 
MMTers can go beyond the ‘NFAs can only be created by the federal government’ meme if MMTers can accept that synthetic NFAs like in the examples above are possible.
 
Nick “MineThis1” Hionas, a co-creator of Pure MMT for the 100% (along with co-contributor Charles “Kondy” Kondak), makes an interesting posit that synthetic NFAs, or as he calls them, ‘Net Debt Financial Assets’ (NDFA) are created in the non federal gov’t, by the rest of us, when we borrow dollars (when we deficit spend). The default instances mentioned above, since they were all horizontally created by the non federal gov’t (by the banks in the private sector), are all great examples of ‘NDFA’ (or, ‘permanent NDFA’) that, just like actual NFAs created vertically by the federal gov’t, are dollars permanently existing in the banking system today because they weren’t paid back (nor will they ever be paid back).
 
Just to make sure readers are following all that, let’s take a step back. If you want to buy anything, you must use dollars, but what must you use if you want to buy dollars?
 
Whenever the federal gov’t deficit spends, it’s a two-part creation of newly-created IOUs, aka Treasury bonds, (created and given to those that bought the bonds) AND newly-created $$$ (created and given to those who provisioned the gov’t). Note that it is the same entity that created both. In other words, in the post-gold standard, modern monetary system, it is not an actual debt for the federal gov’t because the IOU is denominated in fiat $$$ (and it is easy for the ‘issuer’ to get more $$$). Also note that the par amount of the bond is the exact amount of the addition of NFA (Net Financial Assets) going into the banking system—to the penny.
 
The same goes for the nonfederal gov’t. Whenever you deficit spend and need to get a loan from a bank, or any other financial institution (whether it is to get a jumbo mortgage to buy a home or just to pay for a quick lunch with a credit card), it’s a two-part creation—you are getting newly-created $$$ in exchange for your newly-created IOU. Your IOU (your guarantee) is a promise, in writing (your signature on a 50-page mortgage document or on a tiny credit card receipt) to pay the loan back, with interest, aka ‘your bond’. If you don’t have any dollars and you want some dollars (you want to ‘buy’ dollars), then you need to use, you need to ‘sell’, your ‘bond’ (to an entity that will ‘sell’ you dollars and ‘buy’ your ‘bond’). Your bond is the asset, the collateral, that you just newly created and handed over in exchange for the newly-created $$$. The borrower creates the IOU for the lender and the lender creates the $$$ for the borrower (to reconcile both sides of both counterparty’s balance sheets). In other words, also FOCUS ON THE BOND creation when thinking about any money creation by both the federal gov’t and the nonfederal gov’t that are net additions of $$$ into the banking system. Whether it’s the federal gov’t deficit spending (for a new Mars rover) or it’s the nonfederal gov’t deficit spending (for a fresh cup of Starbucks), both are creating a bond (an IOU that guarantees to pay the $$$ back with interest), and selling it, in exchange for money—aka ‘debt monetization’. Loans create deposits (creations of $$$), yes; however, don’t forget the part where YOUR creations of BONDS CREATE LOANS. When YOU (the nonfederal gov’t) create the IOU (the ‘bond’), that’s the creation (the financial institution, the mortgage bank, the Visa card company, etc, only facilitates YOUR creation of $$$). When you pay back the IOU, the creation is destroyed. So rather than only seeing it as money creation, remember to also see it as bond creation, or quite simply, as just another bond trade—except that this bond trade is settled with newly-created bonds & newly-created $$$ (that are net additions going into the banking system). Unlike when the federal gov’t creates the bond and the $$$, when the nonfederal gov’t creates the ‘bond’ and the $$$, it is NOT the same entity that creates both. The difference between federal gov’t (vertically-created) NFA and nonfederal gov’t (horizontally-created) NDFA is that attached debt, an actual debt, a real problem for the nonfederal gov’t households and businesses (because it isn’t as easy for a ‘user’ to get more $$$). Also note that the par amount of your ‘bond’, that is the exact amount of the addition of ‘NDFA’ (Net DEBT Financial Assets) going into the banking system—to the penny.
 
When we are talking about either NFA or NDFA, remember that we are talking about an addition of Net Financial ASSETS or Net Debt Financial ASSETS into the banking system (and not talking about an addition of CAPITAL). The newly-created bond does not add capital. Your net worth doesn’t go up when you create money in exchange for your newly-created bond because any newly-created bond ‘nets-out’ with the newly-created money (assets minus liabilities equal capital). Although it is fact that nonfederal gov’t borrowing has actual debt attached to the loans (that all nonfederal gov’t loans ‘net-out’), the MineThis1 insight here is that the moment bank loans create those dollars—as soon as those dollars go into circulation—they are ‘NDFA’. More specifically, the instant those nonfederal gov’t dollars are newly-created, they are ‘temporary’ NDFA; and as soon as the loan is paid off, they are not NDFA anymore, those dollars are newly-destroyed. The key takeaway here is that while NDFA technically ‘nets-out’, that could take awhile (and in the meantime, those newly-created $$$, those ASSETS, are circulating in the economy).
 
If in the event, as Mr. Mosler described above, that the borrower, or the lender, defaults (negative capital), then they are never destroyed, they become ‘permanent’ NDFA.
 
Keep in mind that similar to the nonperforming loan that defaults (becomes permanent NDFA), even the healthy loans that do not default (temporary NDFA) are usually not paid off for quite awhile. These assets are ‘pumping the economic prime’ for a very long time. Just like a consumer 30-year mortgage on Main Street in the hundreds of thousands of dollars, or an institutional debt obligation on Wall Street that is perpetually rolling over in the hundreds of millions of dollars, many healthy loans take many years to ‘net-out’.
 
In the meantime, along with NFAs created by the federal gov’t, these NDFAs created in the non federal gov’t are working their magic, which is helping the bottom line of US households, that at last count have over $100T in net worth.
 
Note that is a “T” as in TRILLION and that is a NET amount. That is the amount that US households have AFTER all their loans ‘net-out’ (which is a far greater amount than the current running total of NFAs created by the federal gov’t).
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P.S. The sooner folks get Nick’s ‘NDFA’ insight, the better they will see the moving pieces. Here’s another way of explaining ‘NDFA’: Unlike SURPLUS spending (where $$$ received are a wash with $$$ spent), when both the federal gov’t and the nonfederal gov’t DEFICIT spends, they are creating a bond AND creating money. The creation of the federal gov’t bond is the NFA added to the banking system and the creation of the nonfederal gov’t ‘bond’ is the ‘NDFA’ added to the banking system. The crucial difference is that when the federal gov’t creates the bond and the money, it’s the same entity doing both; when the nonfederal gov’t creates the bond and the money, it’s separate entities (the ‘seller’ of the bond is creating the bond and the ‘seller’ of the money is creating the money). Meaning that, since the federal gov’t (Monopoly Bank) issues both the bond and the fiat $$$ (Monopoly Money)—that the federal gov’t Treasury bond is denominated in—it’s not an actual ‘debt’; versus the nonfederal gov’t (Monopoly Players), who do NOT issue the money, so any nonfederal gov’t bond (IOU, mortgage, loan, credit card balance, etc) is an actual debt. That the federal gov’t (or any monetary sovereign spending their own fiat money) is never in actual ‘debt’ nor ever ‘goes broke’ is what MMTers know today (and what Charles Darrow knew in 1933 when he wrote the rules for his version of The Monopoly Game). For example, servicing debt is an actual problem for the nonfederal gov’t (the Monopoly Players). The Monopoly Game doesn’t end because The Monopoly Bank (the ‘issuer’) runs out of money, the Monopoly Game ends because The Monopoly Players (the ‘users’) run out of money.

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