2---The one and only constraint government debt has is inflation, which is good

The Disappearing Fiscal Constraint Gerard took aim at some of Warren Mosler's comments about the fiscal constraint. Since I view MMT as part of a broader tradition, we need to look at what that tradition suggests, and not quotes from a particular popular book. In this case, the MMT tradition relies heavily on Functional Finance, going back to Abba Lerner. I will now restate my interpretation of what MMT says about the "financial constraint" for governments, using a fairly simple example. Imagine that I walk into a new shopping mall, with only a $20 bill in my pockets. I can buy whatever I want -- so long as it costs less than $20 (sales taxes included). (I assume that I do not know any of the people running the shops, so they will not extend me credit.) I have a hard $20 constraint on my ability to finance purchases; hence it makes sense that I have a hard financial constraint. A key point to note that this constraint is directly related to a dollar amount, a fact that I will return to. From a practical perspective, central governments face no such constraint -- the circular nature of governmental finance flows means that they can "finance" practically anything. (OK, under the current institutional framework, there are limitations; the U.S. Treasury could not just write a $100 quadrillion cheque to buy a fancy hotel on a Friday afternoon. I discuss such institutional details in ; What matters is that these limitations represent largely uninteresting "corner cases.") What stops the government from buying "everything"? Inflation. If the government issues an insane amount of liabilities ("money" and debt) relative to its tax base, the value of those liabilities goes down versus real goods and services. As a result, the constraint on government finances is best described: excessive government purchases and transfers can raise capacity utilisation in the economy beyond "normal" levels, (eventually) giving rise to inflationary pressures. Since the government is buying stuff with money, is this not financial? If you want "financial" to mean "anything to do with money," I guess you could say that. However, this is a fairly meaningless definition. The constraint has nothing to do with the government's ability to finance purchases, nor does it have anything to do with fixed dollar amounts. The second point (no relation to dollar amount) is critical, and why I think we need to drop the tag "financial." I am currently developing my stock-flow consistent (SFC) modelling framework, and I have discovered that it is fairly easy to generate endlessly growing governmental debt levels. All you need to do is to add a sector to the economy, give it a source of cash flow, and forget to add an outflow. It will hoard financial assets, and drive the economy to a state of capacity underutilisation. The automatic stabilisers associated with fiscal policy kick in, and the government runs deficits to counteract the demand drag. Eventually, the economy returns to a "normal" capacity utilisation level, but with higher governmental debt and deficit levels. In other words, we can have wildly different governmental debt levels corresponding to the exact same level of capacity utilisation. If we return to the real world, we do see sectors that emulate such hoarding behaviour. Pension funds are relentlessly accumulating financial assets to meet future outflows. Those pension funds will never purchase real goods and services (beyond their technology infrastructure), no matter the level of their financial asset holdings. Foreign central banks have been accumulating reserve assets, with no intention of ever buying real goods and services with those reserves -- they are to be used to purchase a particular financial asset (their domestic currency if it is under attack). Many corporations are mindlessly piling up cash hoards, reflecting the empire-building objectives of the C-suite. Increasing inequality is redistributing income flows to the parts of the household sector with a low propensity to consume, leading to the growth of the stock of financial assets held. If we include various intra-governmental debt holdings within the total, government debt outstanding could become arbitrarily large without any observable effect on economic behaviour. As a result, we cannot relate the dollar amounts of governmental debt or deficits to real world capacity utilisation. Anything that causes such hoarding behaviour to increase will increase government debt level while keeping "capacity utilisation" essentially the same. In summary, governments (that control their currency) can always "finance" spending (under plausible limits); and government spending is limited by an inflation constraint, and when that constraint is hit has no relationship to the dollar amounts involved. Under such circumstances, my view is that anyone who applies the term "financial" to this constraint is using the word "financial" in a manner that bears no resemblance how that word is normally used by speakers of the English language.