Thread by @ContentionNews

Correct us if we’re wrong (really) but it seems like the UK fiscal debacle seriously undermines the case for #MMT -- a 🧵 1/19

#MMT has always had the problem of “what it says that’s true isn’t interesting, and what it says that’s interesting isn’t true.” Yes, it’s true that a government can’t default on debt denominated in a currency issued by that government. 2/19

The conclusion that #MMT jumps to -- that govts can spend whatever they want regardless of revenue -- is interesting, but precisely what the UK situation falsifies. Default is not the only negative consequence real-world govts face 3/19

First things first, #MMT has always had a blind spot when it comes to non-reserve currency countries, i.e. the Global South 4/19

When Zambia defaulted on external debt in 2020/2021 at least one MMT-er said that Zambia simply should not have borrowed money in a currency they don’t issue. Where they would find a market for Zambian kwacha-denominated debt didn’t occur to the theorist 5/19

The UK can, on the other hand, find plenty of customers for gilts -- its sovereign debt -- most notably pension funds that rely on them for two reasons 6/19

First, they have been considered (until now) to be very safe precisely for the uninteresting truth of #MMT -- they have a guaranteed income stream because the government can print money to pay them 7/19

Second, pension funds do something called “duration matching” where they buy securities with guaranteed future income streams (bonds and dividend stocks, etc.) that pay out at the same time the pension is on the hook for benefits to retirees 8/19

What #MMT doesn’t seem to anticipate -- again, we haven’t read all the books, so correct us if they have a good answer -- is that even if the government doesn’t default on the bonds, a market sell off has systemic consequences for that economy 9/19

There is certain class of politically-motivated bond investors known as “bond vigilantes” that are very much the Batman to the #MMT Jokers (or vice versa), ready to dump govt debt at the first sign of perceived profligacy 10/19 wolfstreet.com/2022/10/18/ret…

When UK PM and future trivia answer Liz Truss announced a massive unfunded tax cut and spending plan earlier this month, these and other bond marketeers anticipated a big load of new UK debt, flooding supply, dropping prices, so they sold 11/19

Suddenly pension balance sheets were way off, and their bankers and brokers demanded new collateral -- a margin call -- which the funds could only meet by selling off assets, creating a feedback loop that threatened to crash pensions altogether 12/19

By the laws of #MMT this shouldn’t have been a problem at all. It bears remembering that the theory’s roots aren’t with Bernie Sanders “socialists,” but anti-tax libertarians 13/19 jacobin.com/2019/02/modern…

And you will sometimes hear #MMT advocates say that governments could spend money without any revenue -- taxes or borrowing. They have the printer, right? No bonds, no bond market crash, no pensions on the brink 14/19

But if bond markets don’t like “reckless” borrowing, wait until you see currency markets react to a reserve currency issuer printing totally unbacked money: a total crash of all export markets and rapid capital flight 15/19

Maybe the US could get away with this -- they can just label any country that doesn’t want to convert dollars a “dictatorship” and unleash the color revolution, but the biggest story here is that markets are treating the UK a little closer to Zambia than the US now 16/19

Oh, and the one way out for #MMT might be a state support for the bond market -- precisely what we’ve had for years now + what the Bank of England did earlier this month 17/19

But we see the consequences of that -- a massive “everything bubble” that has plowed wealth into the pockets of capital while driving up housing costs and draining savings from working families 18/19

So yes, governments don’t have to default on their debts, but that’s not the only risk involved. #MMT is the classic tale of an economic theory that can’t survive its first encounter with reality 19/19