Is Rising Public Debt Really Bad?

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Simon Brown is a finweek trader, investor, podcaster and columnist.

A five-decade-old economic theory is put forward to counter fears of inflation due to huge fiscal stimuli from the government.


Modern Monetary Theory (MMT) is not that modern. It was first discussed as a theory in the 1970s. But after the previous financial crisis, it answered many questions economists were asking. Now, during the pandemic, we have in many ways great experience with theory in the real world.

The core of MMT is that an economy that controls its own currency can, and should, print money as needed to support and ultimately grow the economy. There are, of course, many caveats that I will come back to shortly.

First of all, consider this. If a country prints say 100 units of currency to build a bridge, it now has a liability of 100 units but also an asset of 100 units in the form of a bridge. Thus, the impact is neutral. To go further, this bridge has a utility for the economy that certainly exceeds the 100 units that it costs to build, so the economy really benefits.

The risk of course is that governments print money for a lot of things that don’t add value but trigger higher inflation. However, as noted above, this inflation would only actually occur if the money printed was used for things that the economy does not need. An example is building ten bridges right next to each other when one bridge would have been sufficient or if the cost of the bridge is much greater than the value in use.

Inflation risks are fueled by excessive activity (even when it is of use) where money is added to the pockets of workers. Fortunately, MMT also has a solution for inflation.

Usually, when inflation starts to rise, the answer will be an increase in interest rates. But what if taxes, rather than interest rates, were raised in response to rising prices? Rather than earning interest on banks, taxes paid into state coffers can withdraw money from the stock of the economy. This will subsequently reduce inflation.

The 2008/2009 global financial crisis was MMT’s first experience with quantitative easing (QE) pushing hundreds of billions of dollars into the economic system. Everyone, including Ben Bernanke, then chairman of the US Federal Reserve, expected this to translate into higher inflation. Bernanke, however, pointed out that inflation was a much lighter concern than a total financial system collapse and that the Fed would face it when it arrived. It never happened, and over a decade later, the United States still hasn’t had significant inflation.

The response to the pandemic has also been to pump money into the system, this time in the trillions of dollars. Much of it landed directly in the pockets of consumers, raising inflation concerns again.

This time around we will likely see some inflation as the money is being spent in the real economy, while the 2008/2009 stimuli went to the banks which mainly hoarded it.

But any inflation we see will be modest and non-structural, so the Fed can manage it with modest interest rate hikes (the U.S. tax hike is a no-starter). However, current Fed Chairman Jerome Powell has said even that is unlikely if inflation remains low.

So while viewed as radical, MMT actually makes sense for an advanced economy with a strong currency. Locally, and for other emerging market economies, there are currency risks, as a weakening currency pushes up import costs, which can push up inflation without the benefit of this. bridge.

Ultimately, the concept is not for all economies, but it is happening in the United States and it will give economists a better understanding of not only MMT but also the drivers of inflation and growth.

If you want to dig deeper into this topic, read the excellent Myth of the deficit by Stephanie Kelton.

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This article was written exclusively for finweekApril 23 Newsletter. You can subscribe to the weekly newsletter here.
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