Modern Monetary Theory has gained traction in recent years by offering an alternative view of fiscal policy constraints. The basic takeaway is that the size of the deficit is not a problem in itself. It is the actual resource constraint that matters, and that too much money can collide with a shortage of supply and cause inflation if government spending becomes excessive or is used in an unproductive way. Another argument made by some MMT proponents is that the traditional way of fighting inflation (raising interest rates by the Federal Reserve) can actually cause inflation. This is because coupon payments from the government to bondholders constitute a form of government spending or fiscal expansion. In this Odd Lots podcast, we ask MMT intellectual godfather Warren Mosler to explain the mechanisms at work and assess the current macro environment. Perhaps surprisingly, Mosler is concerned by the combination of the government's high debt burden, high budget deficits (which he describes as drunken spending), and the orthodox approach adopted by the Federal Reserve to fight inflation. With debt so high, the annual interest payments from these rate hikes are rising substantially, creating what mainstream economists call a fiscal advantage. He explains that this environment is conducive to consistently high and sustained inflation over the next few years. This transcript has been lightly edited for clarity.
Key insights from the pod:
How QE and interest rates affect prices — 4:23
The problem of rising debt — 8:58
Consumption patterns and demand — 12:00
Spending money like a “drunken sailor” — 17:34
The Federal Reserve and the Bank of Japan — 30:27
What about rising credit costs? — 34:05
Warren Mosler and Race Car Driving — 37:10
Warren Mosler Tradition and Arthur Laffer — 40:46
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