![]() ![]() In fact, there are always economic constraints. This doesn’t mean, however, that there are no indirect constraints. ![]() It can always create money or debt to fund its spending needs without first needing to obtain the funding. What MMT really shows is that there are no direct spending constraints on a government that is monetarily sovereign. Many proponents of the theory have argued that MMT teaches that there are no spending constraints on a government that is monetarily sovereign (one that produces its own credible fiat currency) and that such a government can spend an unlimited amount without worrying about the consequences until there is a surge in inflation. Dispelling a Myth About Modern Monetary Theoryīefore going into the different consequences of debt, it is necessary to discuss briefly some of the confusion that has arisen in recent years from a naïve understanding of modern monetary theory (MMT). Moreover, even in countries that are seen as having too much debt, the adjustment costs can vary significantly. So when is debt a burden for the economy and why? Crucially, different kinds of rising debt can have very different effects on an economy. ![]() Because economists tend to assume that the extent of a country’s debt burden is measured by its national debt-to GDP ratio, they often fail to distinguish between types of debt, instead treating a rise in one country’s debt-to-GDP ratio as equivalent to the same rise in another country’s ratio, even though the two cases may have very different implications. That makes it hard to know what to worry about and why. Unfortunately, few economists have a clear understanding of why too much debt is a bad thing, let alone how much debt is too much. No wonder analysts increasingly worry about the possible adverse consequences of excessive debt levels. This extraordinarily high debt level represents a 30 percentage-point rise in the global debt-to-GDP ratio in the past five years. Global debt, according to a recent report by the Institute for International Finance, amounted to nearly $300 trillion in 2021, equal to 356 percent of global GDP. ![]()
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