Now we see it, now we don’t

This statement was made by the governor of the Swedish Riksbank, Stefan Ingves, in April 2020 (Swedish Television 2020). It was but one in a series of statements made in response to the Covid-19 pandemic. Prior to this the Riksbank had announced a smorgasbord of measures to mitigate the financial impact of the pandemic, among them an injection of SEK 500 billion of interest-free loans into the banks. At the press conference, Ingves described the SEK 500 billion as follows: “This is basically free money and we expect the Swedish banks to pass it on to Swedish companies” (Reuters 2020).

From the MMT perspective outlined in this book, Ingves’ statements are interesting in at least two respects. First, Ingves is incorrect in claiming that banks lend on central bank reserves; they do not. In the Riksbank's (2020) press release this mistaken conception was reiterated several times: “The Riksbank is offering the banks up to SEK 500 billion against collateral for onward lending to non-financial companies operating in Sweden.” The statements derive from the inaccurate “money multiplier” theory. Similar to the “household analogy” and the “budget constraint”, the money multiplier makes up yet another error within orthodox economics that still holds sway among central bank and finance ministry officials, as well as in macroeconomic textbooks and the news media.1 Second, and more important for our purposes here, Ingves is right on the money when he speaks of “free money” and, especially, when clarifying that the Riksbank can provide as many Swedish kronor as it wants. In Chapter 3 I quoted Alan Greenspan saying something very similar about the federal government's money creation ability.