Adapted from Steven Hail’s tweet thread where he goes into some misconceptions and misperceptions.
If you are a currency issuer, levying taxes in that currency, with a floating exchange rate and no significant foreign currency debt, then you are in a privileged position, which you should use wisely and responsibly. You are a monetary sovereign.
This means you face no purely financial constraints. This is a pure fact. It is not based on any theoretical assumptions. In your economy, there are real constraints, so if there is too much spending overall there will be inflationary pressure. But no purely financial constraints.
So when it is responsible to do so and not forecast to be inflationary, you can spend in support of people and the economy, as is appropriate, and you should have no simple and childish specific target for the fiscal balance. It is not an appropriate target, in itself.
The macroeconomic role of taxes is to sustain the demand for your currency and to limit inflationary pressures. This very much does not mean changing taxes has to be or should be the only or even the primary tool for inflation management.
It does mean the appropriate fiscal balance should be largely given endogenously, by the behaviour of the private and foreign sectors, and the state of the economy and by what is necessary to achieve and support the economy, and in normal times sustain full employment.
Given that the private sector will normally aim collectively to run financial surpluses over time, then in the absence of persistently large trade surpluses, the government will normally run fiscal deficits, whether it sets out to do so or not.
A fiscal surplus, absent a trade surplus, requires a private deficit, as a matter of accounting. Not theoretical – pure accounting. This is normally associated with a build-up of private debt, which leads to a more fragile monetary system.
Fiscal surpluses, absent trade surpluses, lead to rising private debt, a recession, or both. Fiscal surpluses, absent trade surpluses, are unsustainable. It is fiscal deficits which are sustainable, whenever they are not inflationary. They are normal.
A fiscal deficit is a deposit the monetary sovereign government has placed in the banking system. A government deficit is a non-government surplus. Essential if nominal GDP is to grow with healthy private balance sheets, in a way which is financially sustainable.
Governments, when they issue bonds, are simply offering investors transferable term deposits at the central bank, in exchange for transaction accounts. Pros and cons of issuance are complicated. But bond issuance is not compulsory. During QE, it is not really happening at all.
Not in net terms, in any case. Taxes do not literally ‘fund’ government spending. They limit inflation risk and maintain a demand for the currency. Bonds do not ‘fund’ government spending. They drain reserves from the banking system.
Spending by a monetary sovereign is not bound by a purely financial constraint. Every $1 spent is a new dollar. Taxes vacuum away some of those $s. Bond issuance changes their form. $s paid in interest are new dollars too.
Interest paid = policy variable. Bond issuance = a choice.
All the above is based on intrinsic truths about the monetary system; Based on balance sheets and flows of funds;. Based on fact; You can obscure it with formal or informal practices and self-imposed constraints. But you can’t change the facts.
Modern monetary theory is not something you need to introduce. It already exists. The only assumptions made above were that you are a monetary sovereign currency issuer. If you are not, MMT will provide a different analysis, and you will have less freedom of action.
Nothing to do with ‘printing money’. Not a recipe for spending without limit. Simply a technically correct description of how the monetary system functions. The above is as simple as I can make it. There is much more to learn, of course. But the above is correct.
So you either understand it, or you don’t. MMT is something you either understand, or you do not understand. It does not require you to believe in anything. It does not have to conform to your preconceptions, or your common sense, any more than gravity. Just a set of useful facts.