Pragmatic Capitalism

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The Goverment IS running out of money but only if it believes so?

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Hi Cullen,

You’ve often stressed that a sovereign currency issuer cannot theoretically default on its debt. But can that really stop a motivated government that is dedicated to default on its debt to “plug the deficit once and for all” on purpose? Is it even practically possible>

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Posted by Incognito 7
Posted on 02/20/2017 9:09 AM
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I’m not Cullen, but it is pretty clear that (i) it is impossible for a sovereign currency issuer to literally run out of money and (ii) since money is actually a mental construct at its core, then of course it is impossible to stop people from thinking that the government is running out of money.

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Posted by JGF
Answered on 02/20/2017 12:01 PM
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    Yeah, JGF has this right. We can default on ourselves if we want. It just takes an act of Congress.

    But you have to keep this in the right perspective. There are degrees of sovereignty for different countries and the USA is usually a bad example because the USA has extreme sovereignty and currency flexibility. Other countries like Greece or the Philippines might not be so lucky. So there are not only degrees of sovereignty, but there are varying ways in which a sovereign currency issuer would experience their default.

    The MMT people kind of generalize about this stuff and it creates some confusion. The fact that a sovereign govt has a printing press is a powerful realization, but it does not preclude the govt from defaulting in other ways. The difference between a household and a govt is that a govt doesn’t declare itself bankrupt when someone refuses to hold its liabilities. But the market will default on it via currency adjustment and inflation. MMT uses a model that always assumes full productive capacity is achieved so they don’t even consider the potential scenario where govt spending or employment programs decimate private production and result in inflation. But this is the history of govt spending in South America, which, ironically, most resembles MMT style economies. There’s more nuance here than many generally discuss and you have to be careful using terms like “sovereign currency issuer” because all currency issuers are different and have differing types of constraints and causes and effects from spending….

    I wrote about this in more detail here:

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    Cullen Roche Posted by Cullen Roche
    Answered on 02/20/2017 12:51 PM
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