Modern Monetary Theory
Date Published: April 18, 2023
In conventional economic theory, it is accepted that the government pays for its expenses through the taxes that it collects. To pay for the rest of the expenses, it borrows money by issuing bonds. But government borrowing has an effect of increasing the cost of borrowing or the interest rate paid by individuals and businesses. MMT takes the opposing stance and states that countries that have the sovereign right to print their own currency can never run out of money and default. In order to default, it would have to mean that they do not have any more money to pay their creditors. But this can never be the case as long as countries are free to print as much money as they want.
With more than a decade having elapsed since the global financial crisis in 2008, it is obvious that central banks are quite clueless about the manner in which to stimulate growth further. Due to increasing criticism about the growing debt pile of various countries, public spending is being cut back, affecting growth further. This is a quandary that India too faces as the focus on fiscal prudence is leading to the government keeping its spending on a tight leash. But the MMT’s suggestions mean that the governments could continue to fund their expenditure by printing extra notes. The argument of MMT that government borrowing should not be equated with borrowing of individuals and businesses and that governments just cannot default, as long as they can print notes to service the loan goes against conventional belief; but this has been proved right in Japan, Italy and now in the US. The fear that excessive government borrowing could lead to inflation is also not borne out by current events as despite large government borrowings in developed countries over the past decade, inflation has been stubbornly low. The money issued by the government to various banks seems to have helped repair the banks’ balance sheets, rather than being brought out in to circulation in a large way.