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  • joseba

    All MMT advocates recognise constraints exist

    With reference to Gavyn Davies’s op-ed “What you need to know about modern monetary theory” (, April 28): initially, mainstream thinkers ignored MMT; second, they attempted trivialisation; now they attack it. Mr Davies’ assault fails. He merely shows his lack of understanding of both the monetary system and MMT.

    Mr Davies believes money printing and bond issuance to be alternative forms of financing a deficit, making the common error of considering that the government faces an ex ante budget constraint. MMT correctly conceptualises the state as a currency-issuer; as a matter of accounting logic the Treasury or central bank must spend or lend state money before the private sector can pay its taxes or buy bonds. Mr Davies fails to recognise the differing operational realities that exist under fixed exchange rates, when governments are reserve-constrained and interest rates need to be set at a level that deters conversion at a fixed parity, and floating rates when no such constraints exist and the central bank acts as a price-setter, able to determine the interest rate for risk-free loans of any duration.

    MMT cannot be “implemented” — it provides a lens through which to view monetary reality, informing the policy debate. Mr Davies makes a “doomsday” forecast: policies based on MMT’s insights would lead to a collapse in the exchange rate. I profoundly disagree. Forex traders are not ideologues and, ultimately, the successes of full employment policies are likely to raise the exchange rate, not lead to “collapse”.

    Mr Davies’s attempt to caricature MMT falls flat. No MMT advocate supports spending beyond full capacity. All MMT advocates recognise that constraints exist. Any suggestion that they don’t is purely misrepresentation.

    It is true that MMT is no panacea. It provides a description of how the monetary system works. It highlights policy opportunities but points to constraints; for countries with their own currencies these constraints are real and not, as Mr Davies and his mainstream colleagues incorrectly suggest, monetary.

    Phil Armstrong University of Southampton Solent and York College, UK

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