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 Real Progressives 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 defaults). A bank loan default 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 created without *actual* debt attached, as if it was created like the federal gov’t, the sole monopoly issuer 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).
Although it is a 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 $$$, those ASSETS, are circulating in the economy).
If in the event, as Mr. Mosler described above, that borrowers default on any bank loan, then those newly-created $$$s are never destroyed (they will never ‘net-out’)—and 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 also working their long-term magic (they are the ‘smoking gun’ of good economies too), 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 grasp Nick’s ‘NDFA’ insight, the better they will see and understand the moving pieces involved in money creation. 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’ (a promise to pay back the money with interest). The creation of the federal gov’t bond, denominated in $$$ (which the gov’t is the issuer of and why it isn’t an actual ‘debt’), is the Net Financial Asset (NFA) getting added to the banking system; and the creation of the nonfederal gov’t ‘bond’ (which IS an actual debt because the nonfederal gov’t is not the issuer of $$$), is the Net Debt Financial Asset (‘NDFA’) being added to the banking system. 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—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.
“The Bank never ‘goes broke’. If the Bank runs out of money, the Banker may issue as much more as may be needed by writing on any ordinary paper.”—The Monopoly Game rules, written by Charles Darrow, 1933
Note however, that The Monopoly Game DOES NOT allow The Players to borrow money from each other. In other words, only NFAs are added to the game (to ‘the money supply’)—meaning that all Monopoly Money comes only from The Bank (the federal gov’t). MMTers today should not confuse this with the reality of the modern monetary system and know that in addition to $$$s (NFAs) being supplied by the federal gov’t, a lot more $$$s (‘NDFAs’) are also being supplied by the nonfederal gov’t as well.
July 4, 2019:
During a recent conversation with Mr. Mosler, he qualified his 2017 statement to make it clear that a bank-loan default is Net Financial Assets (that a bank can only create NFAs), “If the bank is insured, then the NFA goes back up [the original net addition of the creation is refunded]; so yes, that case of negative bank capital [restored by FDIC insurance] is NFA.”
For example, if you go into debt to buy a boat, that’s a creation (deficit spending / increase in NFA). If you default on your ‘bond’, then that’s the same as if the bank dipped into savings (shareholder equity), bought the boat and gave it to you, (surplus spending / no NFA). When the gov’t (FDIC) reimburses the bank, that reverts it back to deficit spending (the borrower’s debt is replaced by gov’t debt). Mr. Mosler disagreed with calling it ‘NDFA’. He says it’s NFA because that is a payment from the federal gov’t, or as he put it “loans that are written off are functionally state spending.” Fair enough, however, Mr. Mosler did say that “Your nonfederal gov’t deficit spending is also functionally state deficit spending [is also functionally NFA] as banks are functionally agents of the state.” In other words, Mr. Mosler is saying that he sees deficit spending (he sees new creations of $$$s) by households & businesses (by the nonfederal gov’t) as net additions of assets going into the banking system (as NFAs)—and so should you.
So what’s the difference between NFAs and ‘NDFAs’? One difference is the lifespan. Since the National ‘Debt’ has not been reduced since 1957, it is practically a given that federal-gov’t deficit spending (post-gold standard’s creations of NFAs) are not going to be ‘destroyed’ (are permanent NFAs). On the other hand, the creations of NDFAs, the nonfederal gov’t (household and business) deficit spending—because they ‘net-out’ with actual debt—DO get ‘destroyed’ routinely, so NDFAs have a much shorter time-frame than NFAs.
Another difference is that NDFAs are so-called pro-cyclical. Meaning that nonfederal-gov’t deficit spending (taking on household & business debt) usually rises and falls along with economic conditions; whereas NFAs, when best deployed, are ‘stabilizers’ that are designed to be counter-cyclical to smooth out economic bumps.
So exactly how much NFA and NDFA were created and entered into the banking system? By looking at the ‘debt clock’ (shown above), the amount of NFA is The National ‘Debt’. The amount of NDFA is all the household, business, state & local gov’t (the nonfederal gov’t) debt. Given that the total assets in the chart above is $150T, that means those NFA & NDFA $$$—to be expected—are working their magic and are now showing a nice capital gain.
“From a macroeconomic balance sheet perspective, the combination of a new bank loan and then a default on that loan is equivalent to the bank giving a ‘gift’ of currency to the rest of the economy.” —’Macroeconomic Balance Sheet Visualizer’ (Go to ‘Choose Operation’, select ‘Borrower defaults on bank Loan’ and then see the below ‘Explanation of selected operation’)
Agreed…That ‘gift’ is an addition of Net Financial Assets going into the banking system which—same as federal-gov’t deficit spending—is never expected to be paid back (never expected to ‘net-out’); however, banks are not in the business of giving gifts, so the bank next gets paid back by the federal gov’t (the bank gets reimbursed via a loan-default insurance claim). So a default on a bank loan (a private-sector deficit spend) is effectively an unintentional ‘synthetic’ federal-gov’t deficit spend adding NFA (or as we call it, ‘NDFA’ since it originates from the private sector).

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