As I explained in this blog – There is no financial crisis so deep that cannot be dealt with by public spending – still! – the statement that – “There is no financial crisis so deep that cannot be dealt with by public spending” – does not mean that fiscal policy can bail an economy out of any problem.
As an aside, the title of that blog was the title of a paper I published in 2009 – you can read the Working Paper version for free (fairly close to the final publication). It reflects a basic insight that is derived from MMT once you fully understand that school of thought – its scope and its limitations.
When I say (and the other leading MMT writers say) – “There is no financial crisis so deep that cannot be dealt with by public spending” I do not mean the following:
What the statement means is that a situation can always be improved from where it is as a result of the operations of a crisis in the private financial markets.
- That fiscal policy can overcome the real losses to a nation’s standard of living that are associated with a major fall in its currency when there is a significant dependency on real imported goods and services.
- That fiscal policy can ensure that debts denominated in foreign-currency (public or private) can be honoured at all times.
It doesn’t mean the state reached after the fiscal intervention will be perfect. It means things can always be made better.
A nation has to ultimately confront its real resource constraints. Fiscal policy in the short-term cannot ease those constraints although it can ensure that the real resources available are utilised more fully.
A nation with heavy import dependencies (that is, real resource shortages) is also likely to suffer if its exchange rate collapses or world export markets for its goods and services slow appreciably. Fiscal policy can help to attenuate the losses but cannot ‘create food out of thin air’ like it can public spending capacity (money).
So in appraising what the statement means we should avoid setting up red-herrings or straw persons.
The bottom line is that a sovereign government like Australia can never run out of money and never needs to issue public debt as a matter of necessity. The public debt issuance is entirely voluntary and such voluntary actions have a habit of being quickly changed if they present too many ‘political’ problems.…Bill Mitchell – billy blog
When journalists allow dangerous economic myths to pervadeBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia