Great Leap Forward


(Part 1): Does Sovereign Government Set Its Own Interest Rates?

Last week we began our series exploring where MMT parts company with “Keynesian” macroeconomics. This is a response to Ed Dolan’s useful post here:

Let me just very quickly recount our conclusions on the first two definitions of sustainability that Ed posed:

  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 agreed on that one. The second was:

  1. 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.

Drawing on Scott Fullwiler’s (related) series over at New Economic Perspectives, we went through all the dirty, boring math and concluded: what matters is the interest rate. If the interest rate is persistently above the growth rate of the economy, then we run into problems of math sustainability of federal government deficits and debts. 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. (I will address the potential for excessive inflation in another blog.)

There are three obvious candidates for interest rate theory:

a)      “Natural” forces set the “real” interest rate (whatever “natural” and “real” are supposed to mean is not clear nor is there anything approaching a consensus);

b)      “Market forces” (otherwise known as Bond Vigilantes) set the interest rate;

c)       Policy sets the interest rate.

Now, I have simplified matters a great deal here. There is no such thing as “the” interest rate—there are different rates on different maturities and across different risk classes. Indeed, in Keynes’s own theory there is an “own rate” (interest rate) on anything that can be held through time—so potentially there is a (different?) interest rate on anything that is durable, so there are thousands or hundreds of thousands of rates. And to be sure, most economic theory sweeps all this under the rug. Further there is the difference between a “real” rate and a “nominal” rate. Most orthodox theory addresses the real rate (without always making clear what that is); most Keynesian theory (but not all of it) addresses the nominal rate. So to simplify the following discussion, I will use the term “interest rate” only in the nominal sense—that is, the one that is actually quoted or calculated through a formula linking coupons to asset price. I will use the term “real interest rate” in a purely mechanical sense—the (nominal) interest rate less the inflation rate (usually measured by the CPI). (In the Fisher Effect, the real rate is supposed to be nominal rate less expected inflation, but that is subject to all the measurement problems associated with expectations.) I will also distinguish between the very short term rate (overnight reserves—fed funds in the US), the short term (30 day) Treasury bill rate, and a longer-term rate such as 10 year Treasuries or 30 year fixed rate mortgages.

(I’ve written wonky, academic critiques of the “natural” or “real” interest rate theory elsewhere. The theory is flawed—usually subject to the Cambridge critique—but in any case fails empirical tests if we can use the inflation-adjusted rate as a proxy because, quite simply, it is all over the place. So I’m not going to address it further here.)

Now let me begin with the MMT position on interest rate setting by the issuer of the sovereign currency. Note here it is important to recognize that MMTers distinguish floating exchange rate systems from managed and pegged systems, because floating the exchange rate increases domestic policy space. That is just an economist’s way of saying that the government will have more room to implement policy for the good of the country. By the same token, the government that chooses to peg or manage its exchange rate loses some degree of discretion over domestic policy. For example, it might have to focus on the exchange rate, rather than on fighting unemployment at home.

A country that pegs to a foreign currency (such as in a currency board arrangement) or to gold (the gold standard) must abandon its domestic policy agenda if that conflicts with the exchange rate peg. Usually what that means is that when there is pressure on the exchange rate, the government must impose austerity—slashing spending, raising unemployment, cutting wages—to increase exports and reduce imports. They will also set interest rates in a manner believed to enhance control over exchange rates. Sometimes countries go “whole hog” by adopting a foreign currency—that is essentially what Euroland did when nations adopted the “foreign” Euro.

It is important to recognize the difference between a sovereign, nonconvertible currency and a non-sovereign, convertible currency. A government that operates with a non-sovereign currency, using a foreign currency or a domestic currency convertible to foreign currency (or to precious metal at a fixed exchange rate), faces solvency risk. However, a government that spends using its own floating and nonconvertible currency cannot be forced into default. This is something that is recognized—at least partially—by markets and even by credit- raters. This is why a country like Japan can run government debt-to-GDP ratios that are more than twice as high as the “high debt” Euro nations (the “PIIGS”: Portugal, Ireland, Italy, Greece, and Span) while still enjoying extremely low interest rates on sovereign debt.

By contrast, US states, or nations like Argentina that operate currency boards (as it did in the late 1990s), and Euro nations face downgrades and rising interest rates with deficit ratios much below those of Japan or the US . This is because a nation operating with its own currency can always spend by crediting bank accounts, and that includes spending on interest. Thus there is no risk of involuntary default. However, a nation that pegs or operates a currency board can be forced to default—much as the US government abrogated its commitment to gold in 1933.

This is somewhat analogous to the situation of individual states in the US, which really do need to tax or borrow in order to spend. Similarly, because a nation like Greece is integrated into the Eurozone, if its government runs deficits then the central bank of Greece is likely to face a continual drain of reserves from its ECB account. This is replenished through sale of Greek government bonds in the rest of the Eurozone, reversing the flow of reserves in favor of the Greek central bank. The mechanics of this are somewhat different for US states (which, of course, do not operate with their own central banks) but the implications are similar: Euro national governments and U.S. states really do need to borrow and thus are subject to market interest rates. (As a result of the crisis, the ECB has had to lend massive quantities of reserves to peripheral nations, through Target 2. I’ve discussed that in the past and don’t need to do it here.)

By contrast, a sovereign nation like the US, Japan, or UK does not borrow its own currency. It spends by crediting bank accounts. When a country operates with sovereign currency, it doesn’t need to issue bonds to “finance” its spending. Issuing bonds is a voluntary operation that gives the public the opportunity to substitute their zero- or low- interest-earning government liabilities, currency and reserves at the central bank, into higher interest-earning government liabilities, treasury bills and bonds, which are credit balances in securities accounts at the same central bank.

If one understands that bond issues are a voluntary operation by a sovereign government, and that bonds are nothing more than alternative accounts at the same central bank operated by the same government it becomes irrelevant for matters of solvency and interest rates whether there are takers for government bonds and whether the bonds are owned by domestic citizens or foreigners.

Now, some might say this argument is a subterfuge because governments really are issuing bonds with a variety of maturities, and, further, current operating procedures require the US Treasury to sell bonds before it spends. Thus, the Vigilantes are standing ready to impose higher rates unless Washington gets its act together and cuts spending. And if Vigilantes push rates above the growth rate, then the debt becomes mathematically unsustainable. That is Ed’s worry. While he agrees with everything I’ve said above about “no solvency risk on sovereign debt so long as government floats the currency”, he does not agree that such a government can ignore the Vigilantes.

Further, Ed argues that interest rates really do tend to run higher than growth rates. As he put it:

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. For example, since 1980, the interest rate on U.S. government bonds has averaged about 1.3 percentage points higher than the rate of GDP growth. If that differential were to persist in the future, the federal budget would have to maintain a primary surplus of about 0.9 percent of GDP to stabilize the debt at its current level of approximately 70 percent of GDP. If the average inflation rate were to stay at the Fed’s target of 2 percent, interest payments would consume about 2.3 percent of GDP, so the overall balance, including interest payments, would show an average deficit of about 1.4 percent of GDP.”

So first, let us see if interest rates over the past few decades have indeed outstripped growth rates. In his series, Scott provided the following figure, which subtracts the GDP growth rate from the Treasury’s interest rate paid on 3 month and 10 month securities.

Note how critically Ed’s conclusion relied on his choice of the year 1980. Before that year, the rate paid by Treasury on its debt was virtually always below—indeed, way below—the growth rate. Even with the massive government debt run up during WWII (when the budget deficit was 25% of GDP), it is clear that the debt ratio was not only “sustainable” but indeed fell rapidly relative to GDP. (I’ll have more to say about that in a later segment of this series).

What happened after 1979, when it became more common for the Treasury’s interest paid to exceed GDP growth? Can anyone say “Paul Volcker”? The interest rate hike was a policy decision—a shift toward “practical monetarism” which sees inflation everywhere and always as the fault of loose monetary policy. It was only during the Clinton years when Alan Greenspan caught the High Tech Internet New Economy Bug (which caused him to believe we had entered a new era in which high growth and low inflation are complements) that the Fed finally relaxed policy and lowered rates. And so growth tended to run ahead of interest rates, again, until the Global Financial Collapse that killed growth (so that even though interest rates were lowered, growth fell even more–it actually went negative, and it is hard for interest rates to go negative).

Just to finish with the postwar history, I suppose most readers are aware that during WWII the Fed agreed to keep government’s interest rates extremely low so that its spending could be directed to the war effort. After the war, the Fed increasingly chaffed at its “lack of independence” and in 1951 it obtained its “freedom” to use interest rates as it saw fit to fight inflation. In point of fact, it really did not raise them much until the war against Viet Nam—when it feared inflation. Still, because we had Regulation Q (set maximum rates on deposits), when the Fed raised rates that really hit banks hard because depositors would look for alternative instruments to earn higher “market” rates. Gradually over the 1970s the Fed relaxed rules in a way that made it ever-easier to evade Reg Q. By the end of the 1970s, “Tall Paul” decided to raise overnight rates above 20%. It killed the thrifts—but that is another topic.

What matters is that one can fairly easily explain the empirical observations on US Treasury interest rates without reference to Bond Vigilantes—unless the argument is that they raise rates by controlling the Fed. In that case, the influence is not through “markets” but rather through policy makers.

So in answer to the question raised in the title of this post, does sovereign government set its own interest rates?, the answer is YES. (At least so far.)

However, from what I can tell, the Bond Vigilante story means to say something more than that—that even if the Fed wanted to keep rates low, the Vigilantes could attack US bond markets in the future and raise the rate that Treasury must pay.

For otherwise, all we need to do is to tweak monetary policy in order to keep rates permanently low so that Uncle Sam’s deficits would never be unsustainable.

Next time, we’ll examine why the Vigilantes really cannot control rates through market actions. The data do not look like they do. But the data alone are not a sufficient response.


Jim SextonJanuary 8th, 2013 at 12:29 pm

Very sound argument so long as you exclude the currency effect on real purchasing power of the citizens of the country. Your analysis should be conducted in purchasing power adjusted terms. I suspect you will find the argument breaks down because monetization ultimately undermines real wealth. Currently in the USA there is a huge unstated tax in the form of negative inflation adjusted rates. This tax is being paid by savers, including foreign creditors. As a saver, I am losing wealth at a steady drip, drip, drip every day my money is invested in short term debt.

L. Randall Wray L. Randall WrayJanuary 8th, 2013 at 1:24 pm

Inflation is extremely low, but I’ll bite. Explain why you have a right to rising purchasing power of your savings? Maybe you want to do a Troll Friday to justify why you should be rewarded for the anti-social behavior of removing aggregate demand from the economy.

Mark HillJanuary 8th, 2013 at 2:26 pm

I would say that while nobody has a "right" to a rising purchasing power of savings, it is an interesting consideration to ask whether anybody should have a "right" to maintain the purchasing power of their savings. I like to draw a line between "savings" and investment, whereby savings are amounts on which one is only trying to maintain real purchasing power, while investments are risk-taking activities in which an attempt is made to actually increase purchasing power. Do you think that is right for a government to discourage savings ? Is it not better for society as a whole to encourage citizens to "put away for a rainy day" ? What do you think happens to private investment in a country with sizeable negative real rates ? Should citizens have to take risks with their nest eggs simply to maintain real purchasing power ?

kevin RocheJanuary 8th, 2013 at 6:13 pm

I don't understand this at all. If your underlying premise is correct, that a government which controls its currency can just spend whatever it wants, then why do we tax people at all? Why not just have the government make money up out of thin air that it wants to spend? And why would there be any limit to what a government spent, it can just keep making up more money. If this is not the case, if there is some limit, then your underlying premise is clearly wrong and you need to explain what the limits are and why they exist. Economists need to get a little humility; we are engaged in a massive experiment which no one really understands the consequences of, no matter how smart they think they are, but which history suggests will end very badly.

jerryJanuary 8th, 2013 at 7:41 pm

So bond vigilantes can't really be an issue, Fed can always buy treasuries and create the excess reserves to drive down funds rate. What would be your ideal setup, set rates permanently at zero and have no bond issuance at all?

L. Randall Wray L. Randall WrayJanuary 8th, 2013 at 9:44 pm

Kevin we have explained this a thousand times or more. From inception you must create a demand for an otherwise worthless IOU. Why would you take my IOU and give me your nuts? (Sorry, this is not a vulgarity–it comes from the title of a paper on the history of monetary thought) Sure, I promise to take it back should you ever get in debt to me. But you think: that’s unlikely. But if I’m sovereign I impose a liability on you: You Owe Me. What? Tax, fee, fine, tithe–doesn’t matter. How can you pay? My IOU. Now you want it.

As for the scary massive experiment. Well, yes. Precisely. Been going on for 4000 years so far. Sort of working out, don’t you think? You’re not living in a cave and hunting Mastodons with clubs? Or, maybe…….

L. Randall Wray L. Randall WrayJanuary 8th, 2013 at 9:46 pm

Yes. Not as bad as locking and loading, I suppose. But here we are paying you and trusting you not to break the circle, but for selfish reasons you decide to stuff it under the mattress and cost the next poor bloke along the line his job.

olly100January 9th, 2013 at 2:39 pm


"By contrast, a sovereign nation like the US, Japan, or UK does not borrow its own currency. It spends by crediting bank accounts".

This is something which a lot of people simply do not understand. Could you possibly explain this clearly, including a description of the intra-governmental (central bank and treasury, liability/asset) accounting? That would be extremely helpful.

jerryJanuary 9th, 2013 at 2:46 pm

As far as there being " takers for government bonds", primary dealers are basically required to purchase tsy's at auction right? Can/would they ever refuse to do so?

L. Randall Wray L. Randall WrayJanuary 9th, 2013 at 3:38 pm

Olly: it is explained in the primer. But briefly: I borrow sugar from you and give you my IOU. Tomorrow I’m short sugar again for my morning coffee–I ask you if i can borrow my IOU in order to get more sugar. Makes no logical sense. You cannot borrow your own IOUs. Neither can govt.

L. Randall Wray L. Randall WrayJanuary 9th, 2013 at 3:42 pm

Jerry: that’s my understanding, too. I don’t know if they’d get stripped of their licenses to do business with govt if they acted like Vigilantes by refusing to buy. We need to get someone who knows more about this than me to answer. So for the sake of argument, I’ve pretended as if the Vigilantes might refuse to buy but as you suggest that actually might be impossible. My view is we can give in on this argument and show it still doesn’t matter.

olly100January 9th, 2013 at 6:25 pm

I get that, but lots of MMT critics don't.

They see money going into the Treasury's account and then being spent by the Treasury. The Treasury gets money (an asset) by collecting taxes or by issuing bonds, and then spends it. The Treasury can't spend without first getting that money with which it can then spend. See?

According to this view, the claim that payment to the government destroys money and government spending creates it, makes no sense. The Treasury doesn't destroy money, it uses it, or 'recycles' it.

olly100January 9th, 2013 at 6:25 pm

You look at the government as a whole. So a positive balance in the Treasury's account is both an asset and a liability of the government (as Fed liabilities are government liabilities), which nets to zero. Is that correct?

MMT critics don't see this, and the intra-governmental accounting isn't explicitly explained in your primer or anywhere else online as far as I can tell. A lot of people aren't even aware that Fed liabilities are US government obligations.

So some central MMT statements leave them perplexed. In fact 'MMR' is essentially based on this misunderstanding of MMT, as is Brett Fiebiger's critique.

Ed Dolan EdDolanJanuary 9th, 2013 at 6:58 pm

Thanks, I think this post moves the discussion along in a way that is helpful, but I ahve a couple of reservations.

1. You write “ ‘Market forces’ (otherwise known as Bond Vigilantes) set the interest rate”
I wish we could have this discussion without using the term “Bond Vigilantes.” I think the term’s pejorative and ironic connotations obscure rather than advance the discussion. I could write a whole post on this (maybe I will), but here, in brief, is my problem:

A person who is “vigilant” is just a person who is on the lookout for risks. When you are buying bonds with a fixed nominal coupon, there are two major risks to look out for. One is default risk. I think we are agreed that this is relevant for the Greek case but not the US case, so we’ll pass over that one. The other is inflation risk. Do we really want to use the ironic, pejorative term to describe someone who takes into account the risk of inflation over the life of a bond when deciding how much to pay for it? Or is that just plain vanilla rational investing?

In other words, what are you really trying to say when you write that “Vigilantes really cannot control rates through market actions.” Do you mean that the inflation expectations of market participants cannot affect bond prices? If that is what you mean, I think it would be better just to spell out your reasoning in plain English without the “V” word.

Also, when you write that “he [that is, me] does not agree that such a government can ignore the Vigilantes,” just what are you trying to say? Do you simply mean that I think that the government cannot ignore the possibility that the inflation expectations of market participants can affect the market prices bonds? If that is what you mean, then yes, you’ve got it, that’s what I think, and I will be interested to hear your explanation of why you think inflation expectations cannot affect market prices.

2. Stripping aside the terminology, I can see that one of the things we need to hash out is the relevance of inflation expectations to bond prices and interest rates. For example, I completely agree when you write “Note how critically Ed’s conclusion relied on his choice of the year 1980. Before that year, the rate paid by Treasury on its debt was virtually always below—indeed, way below—the growth rate.”

Yes, the 70s and 60s were a period of exceptional importance, and deserve a close examination. My working hypothesis would be that nominal interest rates were below nominal growth rates during that period because it was a period of accelerating inflation. If we assume that market expectations are formed adaptively, then it would not be surprising that expected inflation would have lagged behind realized inflation throughout the period, so that people were chronically disappointed that the ex-post, realized real interest rates on the bonds they bought at the prices they paid were less than their ex-ante expectations of real yields.

In other words, I see it as unsurprising that interest rates can be kept below the rate of growth during a period of accelerating inflation, provided the rate of acceleration is not fully anticipated. What I would really want to know is whether interest rates can be kept persistently below growth rates *without* risking accelerating inflation, or without some other undesirable side effect like asset bubbles (the Greenspan years) or repressed inflation and rationing (WWII).

This is too much for a comment box, but I’d like to see the rest of your argument before I post a full-scale reply.

L. Randall Wray L. Randall WrayJanuary 9th, 2013 at 7:17 pm

Ed thanks for the comment. I take your objection to the term “Vigilante” but I’m following Krugman and many others who summarize the fear that bond holders (including foreign like the Chinese government) can hold our government hostage through use of this term as a metaphor. So please understand that I’m not pinning this on you, but I like the term and will keep using it. Sustainability of sovereign government budget deficits depends on the interest rate so the critical question is whether policy could keep that low no matter what Vigilantes might want.

I also understand your point about bond holders want their return to cover inflation–a point made by several others. But for our general argument, it really doesn’t matter WHY the Vigilantes want higher rates. Maybe they believe there is default risk. The questions I want to answer are these: a) does it look like the empirical evidence from the past is consistent with Vigilantes setting the government’s interest rate, or policy setting the rate? and b) no matter what happened in the past, can Vigilantes in the future move rates away from the Fed’s policy rate?

My answer to a) is No. My answer to b) will be upcoming.

Ed Dolan EdDolanJanuary 9th, 2013 at 7:41 pm

"Does it look like the empirical evidence from the past is consistent with Vigilantes setting the government's interest rate, or policy setting the rate?" Hmm. To me that sounds like asking which blade of the scissors does the cutting. I thought investors aka Vigilantes were the demand element in bond pricing and the government was the supply element. Do we ask whether demand or supply sets the price of apples? I look forward to your fuller exposition.

L. Randall Wray L. Randall WrayJanuary 9th, 2013 at 9:29 pm

Ed: nice analogy. But I don’t accept supply and demand scissors analysis! My answer: Neither. (But I know you’ll want more…)

olly100January 9th, 2013 at 11:12 pm

"I thought investors aka Vigilantes were the demand element in bond pricing and the government was the supply element"

If the investors want higher interest rates and the central bank says no, the investors don't get higher interest rates. The currency might depreciate however, if enough investors get fed up and decide to sell.

CodyJanuary 11th, 2013 at 6:55 am


I don't mean to beat anything that is dead and if I seem naive, it's because I am.

It appears that the mathematical sustainability (over the long-term) of this theory presupposes that growth itself is sustainable indefinitely (or infinitely). But, if you accept that there are ecological limits to growth, how can you reconcile that problem?

Thank you,


L. Randall Wray L. Randall WrayJanuary 11th, 2013 at 3:24 pm

Growth of what? We are talking about growth of Nominal GDP. I presume you are assuming that means growth of resource throughput and pollution output.

I’m not.

In any case, again, your concern is not relevant to the math exercise. It is “math sustainability” that is at issue, not ecological sustainability. You cannot win the debate by saying: “oh don’t worry about the growing govt debt because the planet will be toast anyway”.

CodyJanuary 11th, 2013 at 5:34 pm

Randy — I'm also talking about the growth of nominal GDP. Yes, I'm assuming that growth of nominal GDP and natural resource depletion closely correlate. Why are you rejecting that assumption?

Perhaps I've not made myself clear. My position is that because infinite GDP growth is not ecologically sustainable (I think you agree with this), eventually we'll have to establish a no-growth economy. Therefore, while deficits and debt are not problematic in the short-term (because of growth), they will become problematic when we need to end growth to avoid ecological disaster.

Given these assumptions and conclusions, I would argue for short-term expansion of the deficit to spur growth. Following that, I would argue for long-term policies of debt reduction followed, ultimately, by a steady state economy.

I understand that this is a mathematical exercise, but since we're all interested in influencing actual economic policy, we ought to at least discuss the real world consequences of these models.

Now, having said that, I do not have a background in economics and my assumptions and conclusions are based on my own reading and experience. I've come here to genuinely ask questions about these ideas.

Thank you,


L. Randall Wray L. Randall WrayJanuary 11th, 2013 at 5:52 pm

OK, you have adopted the assumptions required to reach your conclusion! That’s exactly what economists do, so I guess you actually are an economist! -)

I don’t buy it. We will grow in nominal terms and in terms of standard of living. That requires less destruction of the environment. We will do it and we will survive.

jerryJanuary 11th, 2013 at 6:04 pm

I get the argument you're making, but I'm not sure why the depletion of fossil fuels or global warming or what have you need to necessarily limit GDP growth (other than destroying our planet completely of course). You can employ people to develop renewable technology, high speed rail systems, nuclear power, etc. just as easily as you can employ them to blow the tops off of mountains in West Virginia.

CodyJanuary 11th, 2013 at 6:06 pm

Randy — I appreciate the illustrious title. I remain, however, concerned about disagreeing with you over our assumptions. I hope my assumptions are not only those required to reach my conclusion, but rather the correct ones. After all, I did not arrive at my conclusion first.

Why will growth lead to less destruction of the environment? My limited knowledge doesn't acknowledge that idea as one I can surmise.

I suppose you could argue that if we raise standard of living for all humans (a tough thing to do), population will drop and result in a reduction of ecological destruction. That seems a tenuous theory given the unknown timeline of how much the planet can sustain. Further, we already know that the planet cannot sustain the present human population if all lived at an American (or much lower) standard of living.

Ultimately I'd like to know, why will growth lead to less destruction of the environment?

Please advise,


L. Randall Wray L. Randall WrayJanuary 11th, 2013 at 7:38 pm

Jerry partly answered.
much higher quality but more energy efficient Ipads connected to the internet with every keystroke adding another buck to GDP. that’s the growth of the future. No one drives anymore. all eat less. all are vegans. never actually have to go anywhere to meet anyone–all done via facebook. what few physical commodities that are consumed will be delivered on highly efficient electro-magnet rail-less trains or printed on 3-D home printers; most food grown on your own roof; watered via rainbarrels. and so on. almost all consumption value-wise will be via the internet–the sky’s the limit for GDP growth rates, with most of GDP just downloads.

If you have teenagers you’ve seen the future.

CodyJanuary 11th, 2013 at 9:44 pm

Jerry — We don't disagree about what you've said, but I'm arguing that infinite GDP growth must necessarily result in complete ecological destruction (unless we somehow re-imagine the very definition of GDP–we might even need a GDP that has no connection to the material world, which would be very difficult, if possible at all).

Please also note my response to Randy.

CodyJanuary 11th, 2013 at 9:45 pm

Randy — It's possible to conceive of the relationship between technological advancement and consumption as a mathematical limit, but I don't believe it will ultimately behave that way.

Let me object to the theory of technological salvation in two ways:

First, digital activity consumes natural resources (see: rare earth elements and/or Google data storage facilities). A completely digital economy, if possible, still isn't the solution.

But even if it was…

Second, think about the picture of human existence that you've painted here: "never actually have to go anywhere to meet anyone–all done via facebook." Even if this was practically feasible, do you honestly consider this form of human existence desirable?

Please note: I am supportive of many of the other things you mention, but do not subscribe to technological salvation both because I believe it will remain unrealized and because I do not think it desirable.

However, I do believe, strongly, that we should use technology to reduce our consumption of natural resources. Consumption below some level is sustainable and consumption above some level is unsustainable (because nature is both finite and regenerative).

However, GDP growth necessarily indicates increased consumption (by population growth or per capita increase) does it not? Do you not believe that the concepts of wealth are inextricably linked (though sometimes tenuously) to the material world?

Please also note my response to Jerry.

L. Randall Wray L. Randall WrayJanuary 11th, 2013 at 11:20 pm

Again, you are not focusing on what is relevant. The things you desire become MORE FEASIBLE if we understand government can AFFORD THEM. You are mixing up two or three different things
a) environ sustainability
b) math sustainability
c) what govt can afford

whatever is technologically possible is financially feasible

if you have sovereign govt

Tie hands of govt now, and you will pretty much ensure the doomsday scenario you assume to be inevitable

Don’t tie hands of govt and maybe we’ve got a chance

However, I do not buy your method of analysis, which presume that the past describes the future. We quite simply cannot imagine what things will be like 10 years from now, much less 50. (I do recall I doubted that in 1998. I learned.)

CodyJanuary 14th, 2013 at 1:45 am


I'm not sure what you're responding to in your most recent comment. Unless I'm mistaken, no part of my argument assumes the government is unable to afford an expenditure. Financial feasibility is not the limit to which I'm appealing.

Again, I understand that you're engaging in a mathematical exercise, but if we're interested in influencing actual policy, it's fair to evaluate your math against real-world limits (like environmental sustainability).

I think we're all cognizant of the fact that we don't know the future, but we nevertheless try to anticipate it and plan for it. If you've got a problem with my rejection of your technological salvation story on the basis of my assumptions about the future, I don't know what business you have predicting the future in every article you write for this blog (or believing in technological salvation in the first place).

I asked you several pointed questions at the end of my last comment. I'd like answers to them. You're asking us to believe in a theory that I'm ready and willing to celebrate… except for one concern. Can you account for the fact that, due to ecological limits, the economy will be unable to grow at some future point?

Perhaps the most disheartening part of this conversation is that you appear to have never considered the problem posed to infinite growth by ecological limits. I mean you no disrespect, but to label these concerns "irrelevant" is to render yourself a mere theorist. My questions are simply designed to evaluate whether or not you have an applicable idea.

L. Randall Wray L. Randall WrayJanuary 14th, 2013 at 5:35 pm

Not irrelevant to human survival, but irrelevant to the question at hand. And NO you cannot defeat the math sustainability argument against deficits by arguing we’ll all be dead anyway so who cares. Or by trying to change the debate to one about environ sustainability. THEY presume growth at some number.

Finally: you ASSUME nom GDP growth MEANS more resource use and more pollution. It is an assumption. Your results follow. I DO NOT ASSUME same.

CodyJanuary 14th, 2013 at 7:28 pm


I'm trying to move you beyond the simple math sustainability issue. Why would you want that to be the endpoint of your analysis? Do you care about implementation?

I'm not arguing that this debate doesn't matter because "we'll all be dead anyway." I'm not sure why you keep bringing this up. On the contrary, my point is that it DOES matter because many of us may be dead or impoverished when we begin to hit ecological limits.

I'm also not "changing the debate." I'm pointing out that your mathematical sustainability theory depends on an assumption not supported by evidence (in fact, it is undermined by the evidence).

Lastly, my "assumption" that nominal GDP growth is necessarily linked to (or indicates) increased resource use is supported by evidence. The system of our economy must necessarily draw energy/resources from outside itself. This is a rule of physics.

I cannot imagine why you don't join in this "assumption" (besides the fact that it seemingly undermines your entire theory). What evidence has demonstrated to you that nominal GDP growth is necessarily linked to additional resource consumption? I would be very relieved to know about it.

LRWrayJanuary 16th, 2013 at 2:30 pm

You don't understand what we are talking about. If you paid attention you would see that THE MATH SUSTAINABILITY ARGUMENT is not mine. I am arguing against it. YOU WANT TO ARGUE WITH IT, but from an irrelevant perspective. Probably many deficit warriors agree with you. So what. Beside the point. Even the deficit warriors who agree with you on the environment would tell you that you are off topic.

L. Randall Wray L. Randall WrayJanuary 16th, 2013 at 2:33 pm

Why should you think that I want to write on a topic just because it interests you? My colleague Mat Forstater adopts MMT and does do environmental econ. I’m sure he does not fully agree with you, however. We have a division of labor and of expertise. Even if I were interested, there are hundreds of topics on which I have an opinion but no particular expertise or desire to write up. Get over it. You are welcome to write an extended piece for my blog and I’ll post it this Friday.

CodyJanuary 16th, 2013 at 7:53 pm


I’ve emailed Professor Forstater.

I’m not asking you to write about a topic, I’m simply asking why you presume that infinite GDP growth is sustainable when the evidence seems to indicate it is not.

I also appreciate your offer of publication. I’m not sure my level of expertise (none) warrants such an offer. I’ll email you about that, but in the meantime, would it be possible to write for Friday, January 25, rather than the day after tomorrow? I’d want to do some additional research.

My understanding of the math sustainability argument is that you are arguing that deficits are mathematically sustainable as long as GDP growth exceeds the interest rate. Is that not correct? My position is that I’m agreeing with you, but then noting that GDP growth cannot continue forever.

Lastly (and most importantly), I made a grammatical error in my last post that rendered my question incoherent. Here is the correction:

What evidence has demonstrated to you that nominal GDP growth is NOT necessarily linked to additional resource consumption?