All Borrowing is Credit Creation (is an expansion denominated in dollars)

“While Non-banks grant credit, it would be misleading to speak of ‘credit creation’ by Non-banks.”—Richard Werner, German economist (Mr. Werner earned a BSc at the London School of Economics. Further studies at Oxford University were interrupted by a year studying at the University of Tokyo—Japan’s most prestigious university—after which his doctorate in economics was conferred by Oxford. In Tokyo, he was also a Visiting Researcher at the Institute for Monetary and Economic Studies at the Bank of Japan; plus he was a Visiting Scholar at the Institute for Monetary and Fiscal Studies at Japan’s Ministry of Finance. Mr. Werner coined the term ‘quantitative easing’. As chief economist of Jardine Fleming Securities Asia he used this expression during presentations to institutional clients in Tokyo in 1994).

He wrote that because when the Non-Bank (short for ‘non-formal bank’ like a shadow bank) is lending (which by UK law must always—only—lend with existing money), the Non-Bank gives up the same amount of their cash (-$100) in exchange for the same amount of the borrower’s IOU (+$100).

Thus, as this logic goes, since there is no change in the Non-Bank lender’s balance-sheet totals at the end of the day then that means there’s no credit creation.

(Speaking of being ‘misleading’, what about the borrower’s balance sheet that expanded—that went up from $0 to +$100)?

Perhaps, in Mr. Werner’s view, when the opposite happens, when formal banks that are lending with newly-created money, that is a different (read: lower) ‘hierarchy’ of borrowing. He calls newly-created bank deposits ‘fictitious’ and ‘imaginary’. That implies that he thinks only a loan using already-existing money is ‘sound’.

Which is an ‘unsound’ argument because it makes no difference whether any money that was lent out was newly-created or already-existing—because it mostly has to do with the ‘soundness’ of the person the money was lent to.

As per Mr. Werner, it is only when lending is done using newly-created money is it a ‘credit creation’. Apparently, if just lending with already-existing money, that’s totally different, that’s not extending credit, that’s not credit-creation, that’s ‘fronting’ someone money (or something like that).

Which completely ignores the fact that when someone gives you cash out of their pocket for you to borrow, not only do you the borrower receive an asset, so does the lender—and THAT’S the expansion, that’s the creation (of credit). The lender receives a NEWLY-CREATED IOU that goes in the lender’s pocket. Even if there is no actual IOU written out and handed over—if it is just ‘fictitious’ and ‘imaginary’—rest assured, that IOU is a real and potent thing because it’s a damsel named Faith (hooking up with a stud called Creditworthiness).

The only difference is that, unlike a credit creation using already-existing money, a credit creation using newly-created dollars involves a middleman (an underwriter). Whether funded by newly-created money or not, it is that promise to pay back the money with interest, it’s that newly-created IOU, that ‘bond’—that you conjured up out of thin air—that makes ALL borrowing a credit creation. The added account receivable, that asset, that credit creation, is always happening with any bond issuance, with any borrowing—with any extension of credit. When you pay the money back (when you put the bond in the ‘shredder’), that is the destruction. Those bonds being newly-created and newly-destroyed expand and contract the balance sheets. This leveraging v. deleveraging is the ‘beating heart’ and understanding that allows you to feel the ‘pulse’ of the economy.

Since the days of credit creation using tally sticks in medieval England, the lender’s faith in the borrower’s ability to pay back the money is a pillar of the economy. That’s why even to this day, a fiat dollar bill which is not backed by gold is still very valuable and why we say it’s backed by the full faith and credit—because it’s backed by the full faith and credit of the person who printed that piece of paper.

When it comes to borrowing in the private sector, it is WE who ‘print’ that bond, not the Bank and not the Non-Bank—they are only facilitating YOUR ‘printing’ of credit (represented by your newly-created bond). For example, VISA doesn’t contact you to let you know when they’re ready for you to go out to eat and pay on credit; and VISA doesn’t tell you whether to make the minimum monthly-balance payment, or tell you to pay the balance in full and destroy the credit creation—it’s the other way around. Anyone saying that credit creation is ‘only in the case of when borrowing newly-created money’ is missing the bigger picture. When someone borrows, it is a granting of purchasing power—no matter if it involves any actual newly-created money or not.

A bank loan being financed with existing money may not have the same monetary-inflationary bias or blow as many asset-price bubbles that a bank loan being financed with newly-created money would (a legitimate concern for anyone fearing that bank-created money isn’t ‘sound’); however, one should not confuse that with both not being a credit creation. Whether newly-created money is created or isn’t created, that is only a subset of the credit-creation process. As per Dr. Steve Keen in his 2017 book titled ‘Can We Avoid Another Financial Crisis?’, “credit” he writes, “is equivalent to the growth in private debt”. Every time someone borrows, they are increasing private-sector debt and they are expanding private-sector balance sheets.

“Is Minsky (1986) right and ‘everyone can issue money'”?—Richard Werner

That’s close. Everyone can extend (issue) credit and all borrowing is a credit creation (an expansion denominated in dollars). To believe otherwise is fictitious and imaginary.

Thanks for reading,

Pure MMT for the 100%


If you want to know how money works, it helps to know how money trades. Follow MineThis1 and his REAL MACRO instructors @

Source: ‘How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking?’



No, I do not agree with anyone that says that the Fed is a private cartel. The Fed is part of the federal gov’t. As the Fed puts it on their website, the Fed is “independent within the federal gov’t”.

To believe otherwise is fictitious and imaginary.



“Take the money out and look at it in terms of production.”—Mike Morris

BINGO…MMTers will see how the monetary system really works more clearly if they take the financial middlemen—if they take the ‘lookalike bank credit’, the ‘reserves’, the ‘Endo’, the ‘Exo’, the ‘M0’, all of that—OUT of the picture for a second. Take out the loans and just look at the newly-created bonds (the newly-created IOUs conjured up out of thin air by a counter party called Creditworthy) that create deposits (of newly-created IOUs into the pocket of another counter party named Faith )—which are net increases of assets going into the economy. Focus on that; and also focus on the PRODUCTIVITY of Faith (selling goats) & Creditworthy (selling goat cheese), which increases their net equity, which encourages more IOU creations, more exchanges of those bonds, more ‘atomization’ of productivity and even more expansions of balance sheets, which expands the economy—which organically rises all boats.
(see 77DIM #59 )

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