Modern Monetary Theory tells us that a government need never default. For it’s the government that prints money, all that’s needed is just to print some more and pay the interest on the debt. Easy enough, you’d think even governments could manage that.
So, how come Argentina is about to default of its debt for the ninth time in only that couple of centuries of independence? Well, because they borrowed too much and can’t pay it back is the obvious answer. Electing Peronists – sorta fascists-lite, statist, nationalist and verging on a petit bourgeois form of socialism, a weird mixture closest in Europe to perhaps Poujadism – don’t seem to help.
But, what about that MMT thing? The answer there being that MMT says you can only not run out of money if you borrow in your own currency, in the one that you can print. Argentina as borrowed in other peoples’ currency thus the problem. At which point, MMT is still right then, yes?
Ah, but notso fast:
Argentina is on course for a technical default on its government borrowing on Friday as the country continues to hold talks with international investors over plans to restructure its debts.
Financial investors said they expected the country to miss $500m (£410m) in interest payments on its borrowing, according to the Reuters news agency, as the government tries to renegotiate its borrowing before a 2 June deadline.
With the economy in recession even before the coronavirus outbreak and spiralling inflation, Argentina has about $65bn in debt owned by overseas investors, which both the state and its creditors believe is unsustainable.
The government has asked bondholders to accept significantly lower interest payments on its debts and to defer payments until 2024. Investors had thus far rejected the terms proposed by president Alberto Fernández’s centre-left government, which came to power late last year.
Argentina is sovereign, it does have its own currency, it does issue bonds – ie borrow – in that currency. So, why didn’t it just keep doing that? The answer being that the limitation on MMT, on the ability to just keep printing money to pay a debt and thus not default, comes a lot earlier than proponents of MMT generally tell us.
For yes, Argentina did borrow domestically. And people demanded, fairly enough, high interest rates for such borrowing. For the government was already doing the MMT thing, printing money in order to pay for current spending – thus triggering inflation. Politically the country wouldn’t pay the taxation to kill the inflation. Borrowing, not printing, allows the spending to continue without spiralling the inflation rate up into the stratosphere. Sure, borrowing is stimulatory and thus inflation causing, but less than money printing.
OK. But the government had already defaulted several times, everyone knew about the inflation rate, so the only way domestic investors would lend to the government was at an inflation linked interest rate. Which worked, great. Until the government started lying about the inflation rate and trying to jail economists who worked out the real one.
That is, the Argentinian government had already debauched its credit rating in the domestic currency. Thus the only place they could borrow – because the populace wouldn’t pay the taxes to fund spending, or kill inflation, and the value of the currency wouldn’t support more printing, leaving debt as the only possible financing method – was in other currencies. Which is what leads to today.
And this is the bit that MMT doesn’t say. That the limits on that print money to spend it are a lot, lot, closer than they might seem. Sure, in theory, a government can just keep printing. But that stops working real soon, as soon as people begin to wonder about the governments’ ability – or even willingness – to pay back the capital being borrowed. And inflating that debt away is a default in this sense, that investors will refuse to lend if they think that’ll happen. And as soon as that happens the borrowing has to be done in other currencies, which kills the MMT process.