Modern Money and the Obsession Over Fiscal Consolidation

by Wire

Modern Money and the Obsession Over Fiscal Consolidation

…In an earlier article in The Wire, I had elaborated one of the most fundamental tenets of modern money theory (MMT): the state, unlike households and firms, does not face a budget constraint. Financially speaking, a state which issues its own fiat currency (like India, Japan or the US but not Greece or Spain) can run deficits in its own currency of 3%, 15% or even 150%. It does not face a solvency issue, although there will be other important economic repercussions. Nonetheless, as a first step, it is critical to dismiss the notion that setting a fiscal deficit target arises from concerns over solvency per se. If deficit targets are emanating from the other economic repercussions – specifically inflation and/or balance of payments deficits – then there is no necessity of a blanket rule on deficits or debt like 3% or 10% of GDP respectively. The deficit is a policy variable that must be contextualised. While a deficit of 1% could trigger inflation in one situation, a deficit of 10% may have little impact on the price level (as in the case of Japan over the last 25 years and the US more recently).

There has also been a situation in history – prior to 1971 – when “modern money” was actually administered for a few years in the UK during the First World War. Although war is an extreme event, it does illustrate some fundamental misconceptions about fiscal deficits and modern money which neoliberal macroeconomists continue to cling to. Issued just one day after Britain declared war on Germany, the Currency and Bank Act of 1914 “permitted the [UK] Government to print notes as legal tender in place of gold sovereigns and half-sovereigns.” The gold standard was de facto suspended. The notes or treasury currency were made legal tender so that obligations to the state (payment of taxes, duties, fees and fines) could be settled with these notes. But since printing of the currency would take time, the Act even allowed postal orders to “temporarily be current and legal tender in the United Kingdom in the same manner and to the same extent and as fully as current coins.”…


About Kristjan

Defitsiidi terrorismi vastase pataljoni eriüksuslane (finantsignorantsuse vastu võitlemise osakond). Treening: MMT, postkeinsism, Tartu Ülikool Majandusteadus
Rubriigid: English. Salvesta püsiviide oma järjehoidjasse.

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