(1) Net Financial Assets — Viewed as a Countercyclical Fiscal Policy Tool

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"Net Financial Assets" — another issue that I have to come to grips with before I shall finally go ahead with writing a comprehensive account of Modern Monetary Theory.

Bill Mitchell:

Clearly the credit creation process of banks creates new deposits. Loans create deposits. But nothing net is created. That is the crucial difference between the Government creating new net financial assets by crediting private bank accounts (that is, deficit spending) and the banks creating deposits (which are always offset by a matching liability.

Scott Fullwiler:

I think the last point is the key one . . . financial assets are always two sided in that the creation of a financial asset adds a liability to one entities balance sheet and adds an asset to another’s. For private credit creation, the asset and the liability remain in the private sector, netting to zero. On the other hand, if the government runs a deficit, the government keeps the liability and the private sector gets the asset only. So . . by definition, the government’s deficit creates net financial assets (net worth) for the non-government sector, while a government surplus by definition is the reduction of the private sector’s net financial worth. Private credit creation, also by definition, cannot add to the private sector’s net worth.

The source.

Tom Hickey:

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.

The source.