Government Spending Limits vs Inflation Concerns Under Modern Monetary Theory or Public Central Banking
Executive Summary
- Deficit hawks often propose there is some limit to government spending.
- The reality is for a country that creates its own money, the government spending limits are not what is generally proposed.
Introduction
Under Modern Monetary Theory or even better under public central banking, where the government incurs no debt when creating money, a common concern is that the government bringing money into existence will cause inflation. This topic is covered in the following quotation.
“This is not to say that excess government spending won’t possibly cause prices to go up (which is inflation). But it is to say that the government can’t go broke and can’t be bankrupt. There is simply no such thing. So why does no one in government seem to get it? Why does the Ways and Means Committee in Congress worry about “how we are going to pay for it?” It could be that they believe the popular notion that the federal government, just like any household, must somehow first “get” money to be able to spend it. Yes, they have heard that it’s different for a government, but they don’t quite believe it, and there’s never a convincing explanation that makes sense to them.”
Source: Mosler Economics
Any government is not limited in creating money unless it has become part of a confederation like the EU and given up its money creation to another entity. Greece or Germany no longer have their own money but have given it up for the Euro. In terms of banking, all member countries are no longer countries but are now “states” as they are children in the EU central banking construct. Although Germany is so influential in the EU due to their economic size, they do not face the same loss of control as smaller countries.
The General Rule of Thumb on Government Spending
However, a country can be said to be constrained in how much it spends, as it can create inflation if it overspends. But it is not limited in what it can spend if it has and creates its own money. Similarly, a government that creates its own money cannot go “bankrupt from high debt” as it controls its own money.