Great Leap Forward

Let’s Leap the Fiscal Cliff: Who’s Afraid of Deficits, Anyhow?

OK, did you leap last night? Aren’t you glad that the President and Congress bargained last night to increase your payroll taxes in order to take away 2% of your income for all of 2013? I guess that at least our “progressive” deficit doves are now happy that with higher payroll taxes, Social Security is on “firmer” ground. Yes, right. Just you wait–more bargains are coming. Spending will be cut next.

Oh, and what did we get in return for the bargain? Some breathing space? Wrong again. We’ve reached the debt limit so the Congress gets to start all over from square one. Remember–the Cliff was created by Congress in order to move foward on the debt limit. And here we are with deja vu all over again.

Anyway, lets take a deeper look in the next few posts at the issue of the US “running out of money”.

 Back in November, my fellow Economonitor blogger Ed Dolan wrote a nice piece on Modern Money Theory, laying out the areas of agreement and disagreement. Here:

Specifically, his piece dealt with the issue of sustainability of fiscal deficits. He examined three different definitions of “sustainability”, to find exactly where MMT parts ways with what we can call Keynesian Macroeconomic Theory—the sort of theory that was commonly accepted before academic macroeconomics went completely crazy with Rational Expectations, Real Business Cycle Theory and the Efficient Markets Hypothesis. There’s no point in examining disagreements with those latter folk because they live in LaLa land.

In any case, I agreed with most of Ed’s post and have been trying to find the time to respond. Several commentators encouraged me to engage with Ed in a discussion of the remaining points of disagreement, and I think this is a great idea. So this will be the first part of a series. Note also I’m going to include contributions by fellow MMTers—and in this piece I will draw heavily on a series that Scott Fullwiler has begun over at New Economic Perspectives.

Returning to Ed’s post, the first definition of sustainability he examined is this: Can a sovereign government become insolvent—that is, unable to make promised payments as they come due? MMTers say “NO”—a government that issues its own currency, say the Dollar, can always make promised payments by issuing dollars. In the modern economy, this is accomplished by keystrokes. Involuntary “default” (not making a promised payment) cannot be forced on the government.

(To be sure, government might be run by madmen who choose not to make payments. And you might refuse to pay your electricity bill even though you have the financial capacity to pay it. Treasury Secretary Geithner says we have now reached the legislated debt limit, and we might have enough crazies in Congress to prevent the Federal government from paying its bills this week. But that has nothing to do with insolvency.)

Ed prefers to call this “equitably insolvent”: “Strictly speaking, we should refer to the ability to meet financial obligations in full and on time as equitable solvency to distinguish it from balance-sheet solvency, which means negative net worth. No one ever seems to worry about governments’ net worth. Discussions of fiscal solvency always center on whether a government will be able to meet its financial obligations on a cash-flow basis, or will, instead, run short of cash and be forced to default.”

OK, I don’t have a problem with this.

So Ed frames the first question this way:

  1. Is MMT correct in its claim that a government can never become equitably insolvent? Yes, as long as the proposition is limited to governments that issue their own sovereign currencies and maintain floating exchange rates.

So we agree. MMT has always argued exactly along these lines: a sovereign government that issues its own currency and that floats its exchange rate cannot become insolvent. I’d only quibble a little bit on the floating part. A government can manage its exchange rate but only promise its own currency. The managed exchange rate is a self-imposed constraint (as is a debt limit) that can be abandoned as necessary. That is not technically a default, although it would disappoint markets and lead to repercussions. MMT prefers floating rates to enhance domestic policy space.

Ed goes on to talk about Greece and other countries that abandoned their own currencies to adopt the Euro, and countries that have their own currency but have issued debt in foreign currencies. He (rightly) says they are more constrained in their fiscal policy. I agree, although I have some quibbles with his exposition. But I’ll save those for later as they are small.

Let’s move to the second definition of sustainability. Here’s how Ed defines it:

“According to a second meaning, a fiscal policy is unsustainable if it causes the ratio of debt to GDP to grow without limit. The concern here is that a debt that grew without limit would eventually become unmanageable, leading to some unpleasant consequence like default, excessive inflation, or forced austerity. I will refer to this second meaning as mathematical sustainability.”

He goes on:

“In any given case, the conditions for mathematical sustainability depend on the starting debt-to-GDP ratio, the rate of interest on the debt, and the rate of growth of GDP.”

He notes that a lower starting debt ratio, a lower interest rate, or a higher rate of GDP growth all make mathematical sustainability easier.

For example: “Typically, the rate of interest tends to be higher than the rate of growth. In that case, a country that starts with any debt at all must hold its structural primary balance at a small surplus in order achieve mathematical sustainability.”

Finally, Ed argues: “The way I see it, mathematical sustainability is a useful benchmark for discussion of fiscal policy precisely because it causes us to focus on the changes that must take place if the current set of budget parameters implies an impossible outcome.”

Fortunately, Scott Fullwiler has provided an exposition on what Ed calls mathematical sustainability. So let us stop here and go through the exposition. Let’s see if Ed agrees with Scott’s results and then we can move forward to the other issues raised in Ed’s original piece.

Debt Service vs. the Debt Ratio

By Scott Fullwiler (reprinted by permission)

Of course, the US debt ratio is projected to rise, perhaps by a lot, which is the real concern of so many.  But why does the debt ratio matter?  Or does it?  Obviously, the debt ratio itself doesn’t do anything—debt service is what ultimately will bring inflation (as the government services unbounded growth in interest obligations given that a government can always “afford” to do so merely by crediting bank accounts in its own fiat currency) or default as a result of the desire to avoid inflation.  Both are obviously ruinous.  So, mathematically speaking, the sustainability of the government’s fiscal position is not about the government’s ability to spend by crediting bank accounts—though this is very important for understanding (a) why a government can always “afford” policy actions that enable a full employment economy and (b) why it can never be forced into involuntary default via an inability to pay or service its debts—as much as it is about the size of the debt service relative to the size of the economy.  In order to keep debt service from rising without bound relative to the productive capacity of the economy, mathematically one of two things need to happen.

The first is that the government’s primary budget balance (that is, the budget position before adding debt service) can be sufficiently in surplus such that the government is not issuing new debt to pay all of its interest.  How big the primary surplus must be depends on a number of things.  For instance, if we start at the current debt ratio of 60% [note, Scott excludes US Federal government debt held by the government itself, including bonds held at the Fed] and assume that the primary budget balance for 2013 will be about -5% (it was -5.5% in 2012), then assume on average the rate of nominal GDP growth will be 5% and the average interest rate on the national debt will be 6%, in that case the primary budget balance after 2013 that will be required for debt service to ultimately converge (i.e., stop growing) is a surplus of 0.62% of GDP on average.  This is shown in the first row of numbers in Table 1 below.  This enables the debt ratio to return and converge to the 65% level that it stands at in 2013 (by assumption given the primary deficit of 5% assumed for 2013).  As an aside, note that the total budget balance that is converged to is -3.1% of GDP—in other words, even in the neoclassical model—a permanent budget deficit is sustainable; while most economists (should) understand this already, the public generally does not, so it’s worth emphasizing.  The second row of numbers in Table 1 tells us that even a modest primary deficit of 1% of GDP leads to unbounded growth in the debt service, total budget deficit, and debt ratios.

Table 1 2012 Debt Ratio = 60%; 2013 Primary Budget Balance = -5%

Alternatively, the second thing that could happen is for the interest rate on the national debt to be low enough that a permanent primary deficit can be consistent with debt service that does not grow without bound relative to the capacity to produce goods and services.  The first row of numbers in Table 2 shows that to converge at the 2013 level, the primary budget balance can be -0.62% of GDP forever if the interest rate on the national debt averages 4% rather than 6%–that is, the rate on the national debt is smaller than the growth rate of GDP.  In this case, debt service is 2.48% of GDP and the primary budget balance is again -3.1% of GDP.  More importantly, given an interest rate lower than GDP growth, any primary budget deficit will eventually converge—so, the second row of numbers in Table 2 shows that a primary budget balance of -1% will converge at a debt ratio of 105% and debt service of 4%.

Table 2  2012 Debt Ratio = 60%; 2013 Primary Budget Balance = -5%


Table 3, taken from a paper I wrote in 2006, shows how different rates of interest—all less than the assumed growth rate of GDP—are consistent with convergence of debt service at a finite level of GDP for various primary deficits run into perpetuity, even fairly large ones relative to GDP.  (The table also incorporates the fact that bondholders will pay taxes on a portion of the debt service.)

Table 3 from Fullwiler (2006)

Of course it’s not necessarily the case that every one of these levels of debt service would not be inflationary—all of them could be, or none of them, depending on the state of the economy.  Regardless, in terms of convergence or unbounded growth of the debt ratio, as Jamie Galbraith put it, “it’s the interest rate, stupid!” since any level of primary deficit can converge if the interest rate is below the growth rate.

Nonetheless, while MMTers like to focus on the interest rate relative to the growth rate of the economy, neoclassicals focus on the size of the primary deficit.  The reason is that, as we hear every day, the bond vigilantes will attack if we don’t get our “house in order” and bring down projected primary deficits.  While interest rates are low now, they say, bond markets could rebel or China could sell its Treasuries and interest rates on the debt will skyrocket.  In that case, debt service will skyrocket, too, and so then—as explained above—the choice for the government will be between “printing money” to finance unbounded growth in debt service or default, which is essentially a choice between death by hanging or lethal injection.  And so—they claim–the fact that bond vigilantes can determine interest rates on US debt means the only point of focus should be on the primary deficit.

Further their actions to raise interest rates can be sudden, we are warned.  And here we see why the debt ratio and projected debt ratio matter to neoclassicals—they strongly influence investor confidence that itself strongly influences interest rates on government debt.  This is just like when credit ratings for private companies or state/local governments are driven partly by debt ratios, which then significantly affect interest rates charged to borrowers.  Mankiw and Ball (2005) summarize the feelings of the vast majority of economists, policymakers, and others—“We can only guess what level of debt will trigger a shift in investor confidence . . . If policymakers are prudent, they will not take the chance” of finding the precise tipping point that generates unbounded growth in debt service relative to the economy’s capacity.  So, we are told, it is in fact about the current and projected debt ratios, which will ultimately drive debt service through the rates set by private bond markets, and the only guarantee of both mathematical and actual sustainability is to set policy such that the future shows projected futures surpluses, not deficits.  In short, governments—even currency issuing ones—are at the mercy of market confidence.


OK we’ll stop here for today. To summarize what Scott has said: what matters is the interest rate. It isn’t really the debt ratio or the primary surplus (deficit); and permanent deficits are mathematically sustainable. It comes down to the theory of interest rates. Are these set by Bond Vigilantes?

A commentator called Calgacus had just added a comment to one of my blogs that is particularly appropriate. Indeed, I think it is the most clever comment I’ve ever got:

“Well, I think the poor old impotent bond vigilantes should have their hedge, or they might jump out from behind it and scare people. They have suffered enough. They should get behind a Treasury program to issue inflation hedges called “dollars”. These dollars should be tied to an asset which has a great record for appreciation in terms of just about anybody’s personalized basket of goods and services that they will want to buy in the future: human labor. The government should issue a fixed amount of dollars to anyone who wants to give the government their scarce labor. Maybe it should be called the AIG – Anti-Inflation Guarantee. Though some might not like that acronym. Maybe Vigilante’s Inflation-Abating & Growth Restoring Act is better. Wonder why nobody’s thought of it yet.”

28 Responses to “Let’s Leap the Fiscal Cliff: Who’s Afraid of Deficits, Anyhow?”

Ed Dolan EdDolanJanuary 1st, 2013 at 4:48 pm

I agree with Scott's exposition of mathematical sustainability. As far as I can see it is the same as the model I used to prepare the slideshow I attached to my original sustainability post ( see here:… ).

Your comments and Scott's together zero in on the key issue: Is it possible to hold the interest rate below the growth rate indefinitely? If they can, then we all agree that the debt is always mathematically sustainable regardless of the debt ratio. By the way, I think the same condition holds for other kinds of financial operations. For example, if Bernard Madoff (or his Russian predecessor, Sergei Mavrodi of MMM fame) had been able to keep the growth rate of deposits in their "investment" funds above their dividend rates, their Ponzi schemes would have been indefinitely sustainable. (I don't mean to say government finance is the same as a Ponzi scheme, because Madoff and Mavrodi didn't print their own money, but I think the math is the same.)

Scott discusses whether "bond vigilantes" could drive the interest rate up. He (and Paul Krugman, among others) think they couldn't. I agree at least to the extent that they cannot drive up US interest rates as easily as they drive up Greek or Spanish rates.

What I worry about is not bond vigilantes but another threat to low interest rates, namely, from inflation expectations. To deal with that concern, we would have to distinguish more carefully between real and nominal interest rates than Scott does.

Scott writes: "Of course it’s not necessarily the case that every one of these levels of debt service would not be inflationary—all of them could be, or none of them, depending on the state of the economy." Suppose we start with a situation in which, for the sake of discussion, nominal interest is 5%, nominal growth is 6%, inflation is 2%, and the economy is at or close to full employment. Suppose that something happens to increase aggregate demand, say, the government starts a war and finances it by issuing liabilities, not by increasing taxes. I gather that MMT considers this one of the "states of the economy" that could result in increased inflation. Increased inflation would raise both the nominal interest rate and the nominal growth rate. My question is this: How can we be sure that expectations-driven nominal interest rates would not rise by more than the nominal growth rate? Another way to put it would be to ask how can we be sure that the central bank could maintain a nominal interest rate target below the nominal growth rate without causing ever-accelerating inflation? I think for completeness that Scott's discussion should be expanded to deal with that question.

L. Randall Wray L. Randall WrayJanuary 1st, 2013 at 5:23 pm

Ed: Yep we are on the same page. And, indeed, that is the topic we’ll take up next. What determines nominal interest rates on sovereign government debt? Hint: neither Bond Vigilantes nor inflation expectations (via Fisher Effect). Is that what you are getting at?

Scott FullwilerJanuary 1st, 2013 at 5:23 pm

Hi Ed,

Thank you for the thoughtful comments.

Regarding this, "How can we be sure that expectations-driven nominal interest rates would not rise by more than the nominal growth rate? "

The way we can be sure is, as I pointed out, the nominal interest rate is a monetary policy variable under flexible fx. Krugman thankfully now understands this, too. As I also noted, even in the Eurozone, the ECB has taken it upon itself to do this–it has shown that it can set Greek rates wherever it wants to.

The overarching question, obviously, is whether or not this is inflationary to do this in the US, but note that the entire point of doing it is to avoid inflation in the first place from rising debt service. So, as I'll discuss in an upcoming part of the series, the "interest rates and AD are negatively related" that is the standard in the simple New Consensus model is obviously not necessarily correct even in the neoclassicals own model of mathematical sustainability.


Ed Dolan EdDolanJanuary 1st, 2013 at 7:49 pm

Randall and Scott: OK, I look forward to the details. Among other things I would like to see addressed:

1. Does the Fed retain the ability to set the nominal interest rate even when the target rate is below the rate of inflation and at the same time the economy is at full employment?

2. If I understand, holding the nominal rate low under conditions of inflation, full employment, and a budget deficit would require the central bank to issue ever increasing quantities of monetary liabilities. Who is willing to hold those under the stipulated conditions, and why?

3. The conditions preceding the Treasury-Fed Accord of 1951 are often cited as an example of why a central bank cannot maintain an arbitrarily low nominal interest rate target under conditions of inflation and full employment. (Here is a typical orthodox analysis of the episode from the Richmond Fed:… ). I would be interested to see an MMT explanation of what is wrong with the orthodox analysis of the Accord. As part of that, it would be interesting to see whether or in what respects the modern MMT analysis of the episode differs from the views of Truman and the Treasury at the time.

jerryJanuary 1st, 2013 at 8:22 pm

Randy (or whoever else feels inclined to answer),
This is off-topic but I've been trying to better understand monetary policy, reserve accounting and the like over the past couple weeks, and came back to your post regarding QE a little while back.

You had made this point: "On the other hand there could be some benefits to banks that manage to unload trashy MBSs by selling them to the Fed…. if the Chairman wants to play the role of dope, you’ll happily dupe him."

I nearly flunked accounting in college so this stuff is a bit of a struggle for me, but why would the banks want more reserves in exchange for the MBS? As you and others have pointed out, reserves exist within a closed system, the banks can't use them for anything. Even if the MBS was worth half of its original value, wouldn't the banks rather have that than more reserves they don't need and can't use?

Which I guess leads to a second point, what is the stated purpose of QE in regards to MBS in the first place? Does taking these bad assets off the books fulfill some kind of capital ratio test for the banks? As far as buying treasuries, I guess the goal there is to drive yields down as low as possible, but I'm not seeing what Bernanke's purpose is with buying the MBS.. or what he thinks that would accomplish.

ROBERT BAESEMANNJanuary 1st, 2013 at 9:12 pm

This might seem tedious, but I think it is important to be very precise when you tangle with people who believe in Bond vigilantes. I think you should always limit your discussion to governments that issue their own currency and incur debt or issue bonds DENOMINATED IN THEIR OWN CURRENCIES. To many people this seems obvious, but the folks who worry that the US might become another Greece love to terrorize people while ignoring this distinction between Greeceand the United States.

LRWrayJanuary 1st, 2013 at 11:26 pm

OK Jerry that one is easy. You are a bank. You've got some toxic waste trash that you paid $100 for and you are carrying it on your books–let us say you took a haircut and count it at $90 (altho you might not have done that). But you know it is really worth a tray of kitty litter. The Fed offers to buy it from you at $90 (or 80 or 50 or 30–whatever). You agree to Dupe the Dope and get the reserves. The reserves pay just 0.25% but they are 100% safe. Do you dupe the dope? Of course you do.

LRWrayJanuary 1st, 2013 at 11:32 pm

Thanks Ed for explicit questions. I'll aim to answer all of them in upcoming posts. If I don't, remind me!!! We've got the interest rate determination question; the inflation question; and the 1951 question (which is related to the inflation question). This will take at least 2 posts, altho I expect it will be more.

wh10January 2nd, 2013 at 4:00 am

Dr. Fullwiler and Dr. Wray,

As context for my comments – “The overarching question, obviously, is whether or not this is inflationary to do this in the US, but note that the entire point of doing it is to avoid inflation in the first place from rising debt service.”

I understand that the Fed can avoid inflation that would be due to ever-accelerating debt service by keeping nominal interest rates low. But could low interest rates trigger inflation through other, separate, real transmission mechanisms? I know you and Mosler have said that the competing effects of interest rates on AD make its net effect somewhat marginal or at least ambiguous and scenario-dependent. Qualitatively, this makes sense, but what does the empirical evidence say? Is there even good empirical research on this? I know Dudley had this to say ( While the stimulative effect of low interest rates today isn’t overwhelming (if it exists at all), what about when there is more room for interest rates to move?

Moreover, what about the natural rate :)? I need to relearn ISLM to better understand where the natural rate comes from in neoclassical theory. Can a natural rate still exist even if loanable funds is inapplicable and the nominal rate is a policy variable – i.e., reality in the U.S.? And if it does exist, are there scenarios in which suppressing the nominal interest rate below the natural rate could be net inflationary, despite limiting the inflationary impact from debt service?

I am also trying to figure out if Dr. Dolan is asking what I am asking, so that I can know if I am thinking about this issue the right way. Dr. Dolan asks – “How can we be sure that expectations-driven nominal interest rates would not rise by more than the nominal growth rate? Another way to put it would be to ask how can we be sure that the central bank could maintain a nominal interest rate target below the nominal growth rate without causing ever-accelerating inflation?”

These seem to be two separate questions to me. The first question Dr. Fullwiler answered – this is just a matter of recognizing that the nominal interest rate is a Fed policy variable in the U.S. If the Fed communicates the future path of the short rate, this is ultimately what should drive expectations of nominal interest rates. The second question seems to be different, but the crux of the matter – can the Fed suppress the interest rate without generating inflation from some source other than debt service? And I think this gets at my paragraph above.

I apologize if some of this is incoherent. I need to dive deep into the mainstream to better understand where they are coming from. I also realize the classroom may be necessary to address these issues…

mahaishJanuary 2nd, 2013 at 4:25 am

well it depends on the targeting mechanism .

if the support rate on bank reserves is equivilant to the target rate, then there is little need for liquidity management by the central bank. so you have rate targeting by decree then.

so the rate can be set independent of interbank money market liquidity positions, or independent of the reserve position of the banking system. there is little need for the central bank to either drain or add to liquidity, accept for other broader purposses to do with the balance sheet position of the banking system.

so under rate targeting by decree, if the bond traders ran for the hills, all we really have is a assett swap between bonds and reserves/deposits, and no change in the target rate.

so the target rate becomes the whim of a bunch of tea leaf readers sitting around a table, regardless of whether the bond traders drop their pants or not 😉

or am i still delusional from new years celebrations, where way to much vodka was drunk

CodyJanuary 2nd, 2013 at 7:19 am

I recently heard an interview with Stephanie Kelton and was delighted to learn of MMT. I've been frustrated with the current economic discussions taking place in political circles. MMT makes sense to me though I don't have a background in economics.

Anyway, I have a single reservation and have been unable to get a straight answer on it.

Given that economic growth causes increased consumption of finite resources, how can we assume that the economy can grow infinitely? This assumption seems to be built into all the theories discussed here.

Thank you

PhilJanuary 2nd, 2013 at 2:59 pm

To be frank, if we're going to engage in thought experiments we need some realism. For example, per your example:

"Suppose that something happens to increase aggregate demand, say, the government starts a war and finances it by issuing liabilities, not by increasing taxes."

We've actually seen this before. This is precisely what happened in WWII (also launched after a significant downturn). In such an extreme situation governments put wage-price controls in place and hold them steady (unlike, say, Nixon). They will also increase taxes very sharply and people will not object because of the war effort. We saw this in all the wartime inflationary booms. And it largely worked.

I think we have to be careful here. Thought experiments are nice, but we have to be realistic. If you posit an extreme scenario, you must be willing to accept that the response would likely be extreme as well. In order to get to your point you require an extreme scenario. But we need realism within the thought experiment itself. And we know what governments do when faced with such a problem.

RonTJanuary 2nd, 2013 at 3:48 pm

Yes, and later you may switch the reserves into bonds, or buy stocks with them from another bank or whatever. $90 worth of reserves is better than $0.01 worth of trash MBS.

LRWrayJanuary 2nd, 2013 at 4:06 pm

Wh: it is coherent but let's wait for the next couple of blogs to see if your questions get answered. On the empirical question: there's no good evidence to support the belief that spending is significantly responsive to interest rate changes.However, let me just provide the caveat that it is very hard to do such empirical work because, for example, the Fed usually raises rates in an economic boom, so spending is rising as rates go up. And the Fed's timing is also usually impeccable: it raises rates nearing the peak–so then the whole thing crashes and it is hard to know if the Fed caused the crash or if it would have crashed due to its own excesses.

LRWrayJanuary 2nd, 2013 at 7:03 pm

When Fed buys something it buys by crediting reserves. So Yes Fed buys stocks (if it does so) with reserves. Banks buy things from one another using their checking acct at the Fed = reserves. (Technically, net clearing.)

CodyJanuary 3rd, 2013 at 1:53 am

The models discussed here seem to be based on the assumption of infinite economic growth. While I'm a big fan of MMT if we accept that assumption, I'm concerned about the ecological limits to growth.

Given that economic growth consumes our finite resources, how can we assume infinite growth?

reve_etrangeJanuary 3rd, 2013 at 11:08 pm

Cody – I don't believe that's an underlying assumption. The model says, *given* continued productivity growth, you need to grow the money supply to maintain price stability. If / when Malthusian resource limits are met (i.e. absolute productivity plateau) then MMT says public deficits can be inflationary. The point is, the (growing) economy is inherently deflationary and we care about price stability, so we have to keep increasing the money supply. I don't see anyone claiming the same behavior would make sense for an economy already at the environmental limit.

CodyJanuary 5th, 2013 at 7:04 am


Thank you for your response. To my extremely untrained eye, it seems that Randy is arguing, not what you said, but rather that we needn't be concerned by deficit/debt because it will be mathematically sustainable as long as the interest rate remains below the growth rate. Ed highlights this issue in the second paragraph of his first comment.

While this makes sense to me if we assume growth has no ecological limits, I'm afraid it does.

The issue here is not that we're responding to growth, but rather that we're responding to something else and our solution depends on growth being indefinite.

Does that clarify my question?

Thanks again,


jd whiteJanuary 5th, 2013 at 2:58 pm

Isnt our biggest threat in this regard not some faceless bond vigilantes but Peoples Republic of China? If Beijing loses confidence in our ability to repay the US binds they hold, they will simply stop buying..they dont have to dump their currently held bonds bonds to bring this house of cards crashing down…so I certainly hope you are able to persuade the Chinese that 1) this process is not inflationary 2) US government will remain solvent say when we have a level of external debt that has never been able to be sustained historically by even a sovereign currency printing nation without substantial inflation, let alone economic collapse (see Rogart and Reinhoff)

L. Randall Wray L. Randall WrayJanuary 5th, 2013 at 7:06 pm

Fortunately the Chinese understand this perfectly well. Instead of treasuries they can hold dollar reserves at the Fed and earn lower interest. If they don’t want dollars, they’ll stop exporting to us. The good thing is that we’ll get jobs. The bad thing is that we’ll have to work harder. (–) They don’t want that, at least not yet.

L. Randall Wray L. Randall WrayJanuary 5th, 2013 at 7:09 pm

OK you are off on an eco-tangent. Different issue entirely. Is our current lifestyle sustainable? No. That is not the debate Washington is having about debt limits. It would be, I think, profoundly stupid to default on the debt with a goal of so disrupting the US economy that we become too poor to support ourselves in order to save the environment. That is (I think) crazy thinking.

CodyJanuary 7th, 2013 at 6:55 pm


Thank you for your response. I'm not suggesting that deficit reduction may be necessary in the short term and I'm certainly not advocating the sort of thinking you highlight in your last two sentences. I'd agree, that's crazy thinking.

But my understanding of your position is that you're not simply advocating increasing or maintaining the deficit over the short-term, but also over an indefinite (and potentially infinite) timeline. That is what I find troubling (given the ecological limits that you agree exist). While this is not the current debate in Washington, isn't that what's being discussed here?

Thank you,


SF12February 8th, 2013 at 3:00 pm

To EdDolan

It's a little late for my 2 cents to matter, but–

Your scenario is a lot like the Gov. just refusing to pay when it can with 'new' money, because the Gov. could raise taxes instead of spending/borrowing. It's still a Gov. choice.

SF12February 8th, 2013 at 3:30 pm

Cody, I had the same reservation.

Seems like MMT is a mechanism to ALLOW the consumption of all the world's resources by the US in the shorest time possible.

What the advocates need is a mechanism to avoid this. Either, just a policy goal to maximize deficit spending on research & development that is "green" or (much better) something built-in that forces that outcome. OR, in the US a Constitutional Amendment maybe.

PS I do wish that more people took pity on us normal people and said more often what QE, JG, and other such mean.