Monetary Mysticism

Normally, I’d give such things a pass. But there are monetary mysticists – the Neochartalists (“MMTers”) – who make a big issue of a few monetary things. In a post on banking, Eric Tymoigne such mystical things:

Throughout this blog I will not the use the words “loan” “lender” “borrower” “lending” “borrowing” when analyzing banks (private or Fed) and their operations. Banks don’t lend money, and customer don’t borrow money from banks. Words like “advance” “creditor” “debtor” are more appropriate words to describe what goes on in banking operations.

The word “lend” (and so “borrow”) is really a misnomer that has the potential of confusing—and actually does confuse—people about what banks do.

So banks do not make loans?

But that’s not the main point in my post. It is the other claim:

  • Point 2: The Fed does not earn any money in USD

When the Fed receives a net income in USD it is not receiving any money/cash flow, i.e. its asset side is not going up. What goes up is net worth.

[highlighting: mine]

Such things are also closely related to claims by the Neochartalists that “taxes don’t fund government expenditure” or “taxes don’t fund anything”. The claim “the Fed does not earn any money in USD” is quite silly.

If you were to ever do an honest-to-goodness calculations with such things, you’ll notice that items accounts receivable and accounts payable are important things. In the simplest example, the Federal Reserve holds government bonds as assets and has bank reserves or settlement balances of banks and currency notes on liabilities. So the Fed is accruing interest on bonds it holds and has payables on interest on banks’ settlement balances. The system of national accounts 2008, has a nice explanation on para 7.115:

The accrual basis of recording

Interest is recorded on an accrual basis, that is, interest is recorded as accruing continuously over time to the creditor on the amount of principal outstanding. The interest accruing is the amount receivable by the creditor and payable by the debtor. It may differ not only from the amount of interest actually paid during a given period but also the amount due to be paid within the period.

So the Federal Reserve’s assets can indeed go up along with net worth because of interest income. It will reflect in accounts receivable in assets. When an actual interest payment is received, it is a transaction in the financial account of the system of national accounts. Then, accounts receivable falls and so do liabilities but net worth doesn’t change. More generally, the Fed may also make advances to banks as the banking system as a whole can lose reserves for paying interest. There is absolute no need for the kind of mysticism that Neochartalists do.

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