“Deficits Do Matter, But Not the Way You Think”

Daniel Akst | July 21, 2010

That’s the headline for a defense of Modern Money Theory by Levy senior scholar L. Randall Wray, who complains that “even deficit doves like Paul Krugman, who favor more stimulus now, are fretting about “structural deficits” in the future.” Wray goes on to say:

There is an alternative view propounded by economists following what has been called “Modern Money Theory”, which emphasizes the difference between a currency-issuing sovereign government and currency users (households, firms, and nonsovereign governments) (See here and here). They insist that the notion of “fiscal sustainability” or “solvency” is not applicable to a sovereign government — which cannot be forced into involuntary default on debts denominated in its own currency. Such a government spends by crediting bank accounts or issuing paper currency. It can never run out of the “keystrokes” it uses to credit bank accounts, and so long as it can find paper and ink, it can issue paper currency. These, we believe, are simple statements that should be completely noncontroversial. And this is not a policy proposal — it is an accurate description of the spending process used by all currency-issuing sovereign governments.

Regular readers of this blog will recall the earlier debate on these issues between Krugman and Levy senior scholar James K. Galbraith.


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