Likewise, we need some government spending or else we’ll have societal instability and a lack of infrastructure. And if we’ve experienced a recession, then increased government spending is beneficial. But excessive government spending (and indebtedness) will lead to high inflation. As a result, inflation has dropped to its lowest level since 2011. The year-over-year change in the core personal consumption expenditures price index (an inflation gauge closely watched by the Fed) was just 1% in April. government spending (and indebtedness) will lead to high inflation. The pandemic has caused a huge demand shock – especially for crude oil. Clearly, that’s disinflationary. What remains to be seen is whether inflation picks up when the economy normalizes (or reverts to a “new normal”). MMT recommends that the fiscal stimulus continue until everyone is back to work. And the government may oblige. Welcome to a grand MMT experiment.
The yield on 10-year U.S. Treasury Notes is currently around 0.75%. That’s near a record low. Clearly, investors still have a healthy appetite for U.S. government debt. And investors aren’t worried about inflation.
THE TRUE CONSTRAINT ACCORDING TO MMT
This brings us to the crux of Mosler’s theory... Under MMT, inflation is the true constraint for government spending and debt issuance. Basically, a government that issues a fiat currency can borrow as much as it wants as long as some slack in the economy exists. Big budget deficits aren’t an issue until inflation rises, which signals that the government has reached its debt capacity. You’ve probably heard some form of this question from critics of MMT: If the government can conjure money out of thin air, then why doesn’t it print unlimited amounts and give it to us so that none of us have to work? That would clearly be inflationary. Think of government spending like iron... We need some iron in our diets or else we’ll develop iron deficiency anemia. And if we’ve experienced blood loss, then iron supplementation is beneficial. But excessive iron intake will cause iron poisoning. Likewise, we need some government spending or else we’ll have societal instability and a lack of infrastructure. And if we’ve experienced a recession, then increased government spending is beneficial. But excessive
American Consequences
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