"Let’s have a more or less concrete example.
Suppose that at some future date — a date at which private demand for funds has revived, so that there are lending opportunities —
the US government has committed itself to spending equal to 27 percent of GDP,
while the tax laws only lead to 17 percent of GDP in revenues.
consider what happens in that case under two scenarios.
In the first
, investors believe that the government will eventually raise revenue and/or cut spending,
and are willing to lend enough to cover the deficit.
In the second,
for whatever reason, investors refuse to buy US bonds.
The second case poses no problem, say the MMTers, or at least no worse problem than the first
: the US government can simply issue money, crediting it to banks, to pay its bills.
But what happens next?
We’re assuming that there are lending opportunities out there,
so the banks won’t leave their newly acquired reserves sitting idle;
they’ll convert them into currency, which they lend to individuals.
So the government indeed ends up financing itself by printing money,
getting the private sector to accept pieces of green paper in return for goods and services.
And I think the MMTers agree that this would lead to inflation;
I’m not clear on whether they realize that a deficit financed by money issue
is more inflationary than a deficit financed by bond issue.
For it is.
And in my hypothetical example, it would be quite likely that the money-financed deficit
would lead to hyperinflation.
The point is that there are limits to the amount of real resources that you can extract through seigniorage.
When people expect inflation, they become reluctant to hold cash,
which drive prices up and means that the government has to print more money to extract a given amount of real resources, which means higher inflation, etc..
Do the math, and it becomes clear that any attempt to extract too much from seigniorage
— more than a few percent of GDP, probably —
leads to an infinite upward spiral in inflation.
In effect, the currency is destroyed.
This would not happen, even with the same deficit, if the government can still sell bonds.
The point is that under normal, non-liquidity-trap conditions,
the direct effects of the deficit on aggregate demand are by no means the whole story
it matters whether the government can issue bonds or has to rely on the printing press.
And while it may literally be true that a government with its own currency
can’t go bankrupt, it can destroy that currency if it loses fiscal credibility.
Now, I am not predicting hyperinflation for the US
— I am not Peter Schiff!
Most of our current deficit is cyclical, and even in the long run a modest return of political rationality would make the budget issue eminently solvable.
But the MMT people are just wrong in believing that
the only question you need to ask about the budget deficit
is
whether it supplies the right amount of aggregate demand;
financeability matters too, even with fiat money.
