The Myth of High Powered Money

What is G-T?

When the Government spends (credits money in a non-Govt bank account) but doesn't tax it all bank (debiting money in that non-Govt bank account) what do you call the residual left in the non-Govt sector? On the Government side this is called the deficit (flow) or the national debt (stock). But what do you call it on the non-Government side?

I refer to it as "Net Financial Assets (equity)" because 1) we're talking about a financial asset here, not a real asset, and 2) the associated liability is out of sector. Therefore, unlike financial assets created in sector, the liability portion is booked as equity, not non-equity liability.

You cannot right call this savings (or net savings) because this causes all kinds of confusion as documented in the S=I debates rocketing around the internet these days. It does get close to the lay person's intuition about what "savings" are, or even what "nominal savings" are, but I don't think that term has been generally helpful.

You cannot really call it the nominal equity base that the private sector then leverages via the horizontal channel (gross financial assets) because all kinds of other things make up the equity value in non-Govt balance sheets.

You cannot call it "high powered money" or M0 because that actually refers to reserves, and reserves are a reactive function in that G-T generates a bank deposit, which generates a reserve by double entry book keeping. That reserve then either needs to be drained or it doesn't. But the causality is clear: NFA(e) creation causes reserve creation, but reserve creation does not necessarily lead to NFA(e) creation. NFA(e) is the private sector's nominal nest egg.

(Note: I'm ignoring exports etc. as I'm including foreign sectors as "non-Govt", because by Govt I mean the entity that is the currency monopolist).

Is a newly minted coin money?

In comments, someone asked if a newly minted coin was a financial asset or not.

Here is my response -- it is not a financial asset, it is a real asset. A financial asset is an asset that has a corresponding non-equity liability. A real asset has no corresponding non-equity liability, and therefore get some nominal value associated with it and booked as equity. The details of how the nominal value get assigned can be important, but not in the context of this discussion (financial vs real assets).

A newly minted coin has no liability associated with it, and is therefore not a financial asset. If the coin belongs to the Mint that produced it, then it's nominal value would be booked as equity to that Government entity. The difference between its production cost and its nominal value would be true seignorage.

If the coin left the Mint and went into general circulation, it may not be counted as Government spending depending on how exactly the transfer happened. When the coin was deposited at a bank, then it would enter (for the first time) the reserve system as it would be booked as a deposit in the creditors account (credit bank liability), which would credit the banks reserve account (asset), which in turn would credit the reserve account (liability) held at the Fed, which would debit its (negative) equity entry. At this point, the coin has become a financial asset.

A far deeper discussion of this is at Mosler's.