Are There Spending Constraints on Governments Sovereign in their Currency?

Stephanie Kelton

Video of Dr. Kelton’s lecture at the 1st Fiscal Sustainability Teach-In and Counter-Conference, April 2010, courtesy of NetRootsMass.

For additional content, including audio, slideshow, and transcript click here.

8 responses to “Are There Spending Constraints on Governments Sovereign in their Currency?

  1. Gotta disagree. There are spending constraints. Don't think any nation will ever get near spending Graham's number of its currency – a number that was used in 1970s era big number technology. Or maybe it will, if a full employment for mathematicians act is passed. Aside from that, no, not really.

  2. Thanks for posting that. The link to transcript and power-point presentation is handy. I don't know if anybody is monitoring comments on this site, but I have a question, although not about anything Dr. Kelton said – it's about something Mr. Mosler said. He said, when talking about inflation in Italy, "So the problem with inflation is not that there’s any real economic problem, it’s a political problem." That's not true, is it? I've been reading some Leland Yeager and what I'm 'getting' is that there are lots of economic problems with inflation – it's not just a political problem. Perhaps I'm missing the point?

  3. @ Another Anonymous, the main point in this question is "in their own currency" so even if the number were infinite, producing it in it's own currency is limitless only by "self-imposed" constraints just as a parent writing out IOUs to his/her kids for chores are limitless if all they have to do is keep signing them. As credit, all the central bank has to do is add pluses or minuses. Limits are only "self-imposed" for accounting purposes.As an issuer of it's own currency just as the parent can issue as much as it wants, getting the people to accept this is where some policies come into play and hence the tax issue comes [email protected] Anonymous on the issue of inflation, the mainstream view of inflation as an increase in the general price level (P) and thus real money (M/P) will fall but if P decreases and nominal money (M) increases as well, the result will depend on which increases more so it is indeterminate. So inflation wouldn't really be an issue here.Also if we look the central bank independence issue (creating money and all), most neoclassicals believe that this will be important in fighting inflation otherwise politicians will use the central bank to pursue their political interests e.g. reducing unemployment during election periods. (Remember that they argue that the trade off is usually between employment and inflation in monetary policy). To most mainstream economists for a central bank to be viewed as credible and accountable, it has to give so much information to the people and that is where the inflation targeting comes to play. By focusing on this rather than real growth, the economy can suffer a low rate of growth in the long run (way after that politician has left the office). Also we have seen that there is a short run positive relationship between interest rate and inflation so the cost of reaching the inflation target is far to great for the economy. Like Mr Mosler said, Italy's economy was great in the 80s despite a double digit inflation!

  4. I am inclined to believe more in the theories of Richard Proenneke.

  5. Major deleterious effects on the real economy are seen only with 40% and above inflation, and bad effects are invisible with below 20% longterm inflation. The US hasn't seen anything like that since the Civil War. Saw Mosler say much the same and then noticed an academic ref for it somewhere. Will post if I find it again.

  6. Salewa Olawoye – I was not being serious. Look up Graham's number. It would be impossible for any state to ever inflate its currency to that level. When you get to defining numbers that big, comparing, adding or subtracting, doing accounting with them could be a problem.

  7. If you can list the economic problems with inflation rates below 50% please do, thanks!

  8. With the news full of reports of potential defaults of sovereign debt by Ireland and Greece – and potentially other EU members, many articles are being written asking the question of whether a similar fate may belong to the the future; particularly in light of its massive increases in the national debt over the last couple of years. I believe the answer is a resounding NO due to a basic fundamental difference between the U.S. and members of the EU. Let’s examine what factors are relevant to avoiding default. An obvious factor is avoiding going into debt. However, avoiding issuing debt is not a reasonable policy for most nations as debts must be incurred to fund investments and cover periodic deficit spending. What conditions bring a risk of default for the sovereign debt of some nations but not others? One major factor is mandatory currency convertibility. If a nation’s currency is convertible to gold, another nation’s currency, or practically anything else, the risk of default is introduced. We live in a dynamic world and the relative value of currencies and commodities fluctuate wildly. For nations with convertible currencies, it may be simply a matter time before they get caught in an unfavorable position where holders of their currency exercise their convertibility option at a level that exceeds their ability to covert. This is the situation faced by Russia in 1998 when the ruble was convertible to the U.S. dollar and holders of rubles demanded dollars at rates above the Russians ability to provide them. The Russians had pegged the value of the ruble to the U.S dollar within a relative range (referred to as a fixed exchange rate.) A fixed exchange rate for sovereign currency can lead to a default and it did for Russia in 1998. Neither Ireland, Greece, or the U.S. have a fixed exchange rate into other currencies, precious metals or anything else, so we must look to another factor to explain the difference. The key difference is that Ireland, Greece, and the EU members gave up their sovereign currency while still maintaining liability for national debts. They surrendered the ability to issue and maintain their own currencies to the EU through the ECB. Importantly, however, they maintained national responsibility for their own debts as these were not ported to the EU/ECB. The U.S. has maintained its sovereign currency and this distinction makes all the difference. The U.S. is not at risk of default because it can simply issue sufficient dollars to satisfy its obligations. Yes, the difference is this simple. Each member of the EU has forfeited this option to satisfy its debts and it can certainly lead to default. By entering the EU ceasing to operate a national currency, these countries introduced the risk of default and will always pay increased rates of interest to accommodate risk premiums demanded by lenders. So, the EU created an international competitive disadvantage in the debt markets as compared to sovereign nations who operate their own fiat currencies, even with the risk of default appears to be remote.The concept of insolvency for a nation who operates a fiat currency with a floating exchange rate, such as the U.S. is not viable as the nation can always supply sufficient levels of its currency to satisfy its obligations. This is not to say that a nation can take on additional debt with impunity. In an environment of floating exchange rates, the exchange rates will surely adjust. This adjustment will have implications for imports and exports as for the indebted nation, the price of imports will increase and the price of exports will decrease. Increased foreign investment in the indebted nation should be expected also as a result of the adjusted exchange rates. Another possible outcome is that other nation’s will demand incentives, such as higher rates of interest for transactions in the nation’s currency, or may even resort to demanding payment by means other than the nation’s currency; Chinese Yuan or gold, for example.