The Key Real Limitations on MMT
10 November 2016 | Pago Pago, American Samoa
The core notion behind modern monetary theory ("MMT") is to use budget deficits to achieve needed and proper government spending levels, when raising taxes on income and wealth are blocked politically, realizing that higher public debt, unlike budget restrained private debt, is not an economic problem in most circumstances for a nation with its own sovereign fiat currency for reasons I have explained earlier and elsewhere. However, there are limitations on MMT.
These principally include the following:
First, is the imminent prospect of inflation. One thought behind MMT is to use public debt -- when raising taxes on income and wealth are blocked politically -- to mobilize idle resources and promote economic development and growth. Strong use of MMT advised public debt is limited when problematic inflation looms, e.g. China and India. Inflation in China is over 4.7 % unofficially and about 6% in India or when there is seriously collapsing GDP.
Another is how well a country's public debt is managed and its credit rating, along with how it is held -- by the government itself in what percentage? and by who else?. China's public debt has a double A minus rating and India's is BBB- . They are not managed that well. How the economy is fairing matters, too.
A third is political instability and poor government, as when Ted Cruz tried to induce default on the public debt and a rating agency lowered its credit rating on the public debt of the US, citing poor government and political instability. This is willful sabotage of the process.
A fourth is disbelief in MMT and a desire to create trouble for the idea so as to block its use or implementation. This too is a limitation on it as well. Ignorance can be debilitating here, too. Fortunately, the US government departments use credit to make the purchases they do and often they go over budget guidelines thereby applying MMT notions sub rosa. Often it is because higher taxes on income and wealth are unreasonably blocked by an intransigent group or party in power, e.g., republicans.