Governments that issue their own currency are not constrained by borrowing

The argument

The starting point of this position is that a government which issues its own currency does not have to obtain that currency before it can spend. "When the government wants to spend, the Fed hits the 'print' key, but when it collects taxes it hits the 'delete' key. When the government taxes its citizens, it does not 'get' something it simply subtracts something from the economy," according to Stephanie Kelton, the leading proponent of Modern Monetary Theory (MMT). On that description taxation is not a funding operation at all but a withdrawal, which means the familiar picture — collect first, then spend — has the sequence the wrong way round. If that is right, then borrowing is a policy choice rather than a necessity. "Congress does not have to borrow—that's completely optional. Instead the government can let people hold cash. That way there would not be fights over the debt and debt ceiling." The disputes that dominate fiscal politics are, on this account, arguments about an instrument the government elected to use rather than about a constraint it actually faces. The obvious objection is inflation, and it is met rather than avoided. Critics of MMT often argue that such policies could lead to hyperinflation. But Kelton does not see that as a threat in the U.S. "Capacity utilization is at 75%, while the broader unemployment number is still pretty high and workers have no bargaining power. Inflation will not rise if wages continue to stagnate," said Kelton. The reasoning is that inflation arrives when spending meets a limit in real capacity, and idle capacity and slack in the labour market indicate that limit has not been reached. "Once inflation does begin to rise, the government can use its taxing power and the central bank can use its policy tool to control it while keeping unemployment at low levels."

Premises

Counter-arguments

Critics of MMT reply that "cannot be forced to default in its own currency" is true but beside the point: the binding constraint was never nominal solvency but real resources and inflation. Creating money to fund deficits bids for goods and labour that may not exist once the economy nears capacity, and the claim that inflation "can be controlled" by raising taxes assumes a political willingness to impose tax rises quickly — something legislatures rarely deliver in time. The sibling positions note that very high deficits have historically produced currency depreciation, rising risk premia and inflation even in economies that issue their own currency, so the absence of a hard default ceiling does not make deficits costless.

Rejecting the premises

[Rejecting P1] Creating money to spend and deleting it via tax describes accounting, not a free lunch: the money still competes for real goods and labour, which is where the true constraint lies. [Rejecting P2] "Cannot be forced to default" addresses only nominal solvency; a currency-issuer can still suffer inflation, depreciation and rising rates, so borrowing being "optional" does not make deficits harmless. [Rejecting P3] The claim that inflation can be reined in through taxation presumes timely, politically feasible tax rises — precisely what is hard to enact — so the inflation risk is understated. [Rejecting C] That a sovereign issuer cannot go nominally bust does not show deficits are not bad; the sibling position holds the real costs appear as inflation and instability well before any default.