Tag Archives: randall wray

Ed Dolan Asks: What Does it Mean for Fiscal Policy to be “Sustainable”? MMT and Other Perspectives

Summary:  As we approach the fiscal cliff, economists of different schools offer radically different advice.  Austrians and Chicago-ians warn about the consequences of anything other than a fast austerity. Keynesian economists suggest continued deficits until the economic growth (and especially unemployment) return to acceptable levels.  And advocates of modern monetary theory (MMT) tell us not to worry; there are fiscal limits — but they’re of no immediate concern. Today guest author Ed Dolan puts the pleasing MMT perspective under the microscope.

This is the fourth in a series about modern monetary theory. Other posts are:

(1) America’s strength is an illusion created by foolish borrowing, 10 October 2012
(2) Prof Black blasts back at yesterday’s post about the US debt, 11 October 2012
(3) Ed Dolan talks to us about modern monetary theory. Can it save us?, 12 October 2012


  1. Introduction
  2. Sustainability as solvency
  3. Mathematical sustainability
  4. Functional sustainability
  5. What can MMT and the rest of us agree on?
  6. About the author
  7. For More Information about Modern Monetary Theory
  8. Other posts about our fiscal deficits

This was originally posted at Roubini’s Economonitor; posted here with his generous permission

(1)  Introduction

As negotiations over fiscal policy heat up, one thing nearly everyone agrees on is that U.S. fiscal policy should be sustainable. The trouble is, there are sharp disagreements about just what sustainability means. This post explores three different meanings of fiscal policy sustainability and explores their significance for current budget debates.

(2)  Sustainability as solvency

The first, and simplest, meaning of sustainability makes it a synonym for solvency. The proposition that we do not have to worry about debts and deficits because the government can never “run out of money” has become a mantra among followers of Modern Monetary Theory (MMT). As L. Randall Wray puts it in his book Modern MoneyTheory, “When we say that [perpetual government sector deficits] are ‘sustainable’ we merely mean in the sense that sovereign government can continue to make all payments as they come due—including interest payments—no matter how big those payments become.”

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The periphery of Europe – a flashpoint to the global economy

Introduction:  This is the fourth in a series of dashed off speculative opinions.  Normal procedure on the FM website for these topics would be 3 thousand word posts, supported by dozens of links.  I dont’ have the time to finish them, and too many of these outlines have accumulated in my drafts file.  Perhaps these will spark useful debate and research among this site’s readers. 

In this third year of recession of the worst recession since the 1930s, reserves are depleted around the world.  Cash reserves of households, businesses, and governments.  This increases our susceptibility to a shock.  A poor bio-metaphor to this is the poor health of the world’s peoples in 1918.   The global economy remains unstable, as it was in 1929.  Many links in the world’s economic machinery have broken.  Although the global economy might be in recovery, the stress remains great.  Another link might snap at any moment, increasing the stress on the remaining links — some of which might in turn also snap.  Since the data is conflicting (as usual during times of large change), we don’t know how close they (or us) are to the edge.  Central Bankers know this, which is why they keep the petal to the metal while talking about exit strategies.

 One of the most dangerous flashpoints is Europe’s periphery (the USA is another).  Iceland, Ireland, Portugal, Spain, Italy, Greece, Eastern Europe up to the Baltics.   The european economy is highly integrated, and collapse in even a peripheral nation might ripple though the region with unpleasant consequences.  So rescue efforts are under weigh by the EU and IMF.  But the people of one of more of the crippled nations will certainly reject the prescribed austerity measures.  Greece is first in line, and general strikes are already being planned.  Red emphasis added.

George Magnus, a senior economist at UBS, comments on these developments in “The Return of Political Economy”, 3 February 2010 — A terrifying analysis expressed in mild words.  Excerpt:

In the Euro Area, the politics are complex. Politically, the chances of some of the sovereign invalids being able to implement required fiscal restraints are small. In others, the changes of doing so over a protracted period without social unrest are questionable. However, politically, nothing short of the integrity of the Euro and the Euro Area are at stake. For this very reason, the issue will probably not come to had in the immediate future, or for some time, because all Euro Area countries have strong vested interests in foreign a path back to stability as quickly as possible, and all the more so since contagion has spread to Portugal and Spain. But what will this need?

Austerity packages never work in a vacuum. One of more of 4 crucial ingredients have to comprise the setting.  These are…

  • currency debasement,
  • a sharp fall in interest rates,
  • monetization of debt, and
  • a bail-out financing package.

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