MMT says the debt doesn’t matter because we can always print money and buy it back?

Numerous journalists who have suddenly become experts on MMT since Occasion-Cortez semi-endorsed it have claimed that MMT consists essentially of the claim in the above title.

Well now the idea that government can borrow and spend without limit with the central bank then printing limitless amounts of money to buy back such debt is so obviously absurd that that’s just more evidence that the above journalists are clueless.

MMT does however have something to say on about the debt and money printing which is at odds with the conventional wisdom.

MMTers are a varied bunch of people who spend much of their time disagreeing with each other. But the difference between the conventional take on the debt and the MMT take is (I think) approximately as follows.

In the eyes of what might be called the “ultra conventional supporters of the conventional wisdom” (e.g. Kenneth Rogoff, Carmen Reinhart, Martin Feldstein, etc) the debt / GDP ratio is important.

MMT’s answer to that is that the size of the debt is irrelevant as long as interest on the debt is low. Reason is that low interest yielding debt comes to much the same thing as money (base money to be exact), as pointed out by Martin Wolf. In other words, if the private sector wants to hold a larger than normal amount of money, what of it? Where’s the problem?

Moreover, if government and/or central bank want to print money and buy back low interest yielding debt, or some of it, then again: where’s the problem? That’s exactly what several central banks have done, and big time, over the last five years or so under the guise of QE. As you may have noticed, the sky has not fallen in.

Several establishment economists claimed QE would cause hyperinflation. MMTers said it would not. MMTers were right.

In contrast to low interest yielding debt, there is high interest yielding debt, though of course the dividing line between the two is blurred. Printing money and buying high interest debt back is a different kettle of fish.

Given what a central banks sees as excess demand and inflation, CBs normally raise interest rates by mopping up excess amounts of base money in private hands by selling government debt, the effect of that being to raise interest rates. Plus the private sector is dissuaded from trying to spend away what it sees as an excess stock of base money by being offered a higher rate of interest on that money.

Thus if that process is reversed, i.e. money is printed and some of the debt is bought back, the private sector will than have what it sees as an excess stock of money. Demand and inflation may then become excessive.

However, MMTers tend to claim that interest on the debt should never be allowed to rise significantly above zero ever. E.g. the founder of MMT, Warren Mosler published a paper entitled “The Natural Rate of Interest is Zero”.  And my own attempt to argue the same point is in an article entitled “The Arguments for a Permanent Zero Interest Rate.”

One of the basic reasons for saying interest on the debt should never  rise much above zero was actually alluded to above. That is, there is clearly merit in supplying the private sector with whatever amount of base money induces it to spend at a rate that brings full employment. As for supplying MORE THAN the latter amount, with the result that government and CB then have to artificially raise interest rates so as to dissuade the private sector from trying to spend away its excess stock of money, that is clearly senseless. The effect is that everyone with a mortgage has to pay an artificially high rate of interest, while those with a desire to hoard money manage to earn an artificially high rate of interest on their money.

The benefits of the latter scenario are, to put it politely, not entirely clear. Or to put it more bluntly, the latter scenario is barmy.