Debate Desk
Can a Country That Prints Its Own Currency Never Go Broke?
A government that prints can always pay in nominal dollars, but the bill arrives as inflation, as 2022 showed; the limit is real resources.
The claim
Modern Monetary Theory holds that a government that issues its own currency can never run out of money, since it can always create more to pay its bills. Deficits, on this view, are not a problem until inflation appears, and the real limit is the economy's capacity, not a budget.
The answer in three points
- The claim is half right and the half that is wrong matters. A government can always create dollars, but it cannot create the goods and labor those dollars buy. When spending outruns capacity, prices rise.
- Inflation is the limit, and by the time it appears it is hard to reverse. It arrives as a tax on everyone who holds money, and it falls hardest on those on fixed incomes and those with little in assets.
- Confidence also matters. If lenders doubt that the government will manage its money prudently, they demand higher interest, and borrowing becomes costlier. A country that has relied on the printing press has often ended in a currency crisis.
The theory is useful in one respect: it reminds us that a government with its own currency does not face the same limits as a household. The mistake is to conclude that there are no limits. The history of currency collapses, from Weimar Germany to Zimbabwe, is a history of governments that believed they had found one.
The numbers
- The Bureau of Labor Statistics reported that consumer prices rose 9.1 percent over the twelve months to June 2022, the highest annual rate in about forty years.
- The Congressional Budget Office reported deficits above $2.7 trillion in both fiscal 2020 and fiscal 2021, funded in part by money creation at the Federal Reserve.
- The Federal Reserve raised its policy rate from near zero in early 2022 to above 5 percent by 2023, according to the Federal Open Market Committee's published decisions.
What they will say next
"Inflation came from supply shocks, not deficits." Supply shocks played a part, but demand supported by federal payments and low rates also drove prices. Honest analysis weighs both and rejects a single cause.
"We can tax away any excess." In theory, yes, but in practice the political limits on taxes arrive before the economic limits. Elected officials rarely raise taxes enough to cover what they spend.
"The government is not a household." Right, and the differences are real. But the principle that spending must be paid for out of real resources applies to every economy, including one with a central bank.
"Interest rates show no sign of a debt crisis." Markets can be calm for a long time and then turn quickly. The cost of waiting is that the adjustment, when it comes, is larger and less orderly than one made on a plan.
"Countries like Japan show high debt is sustainable." Japan's experience includes decades of slow growth and its own risks. Each country's situation differs, and prudence suggests caution.