Modern Monetary Theory is On the March


New Economic Perspectives has the William K. Black article Modern Monetary Theory is On the March. Here is an excerpt Black quotes from a Wall Street Journal article.

In theory, high debt levels should cause interest rates to rise. That’s because investors will demand higher returns to compensate for the risk they take on when the government borrows at unsustainable levels or because they worry that so much debt could trigger inflation. The need to finance such high levels of debt also makes less money available for other investments.

In practice, investors are happy to keep lending to the U.S. in good times and bad, regardless of how much it borrows. In 2009, for instance, when the Obama administration’s stimulus efforts sent federal deficits rising to almost 10% of GDP, the highest since World War II, the interest on 10-year Treasury securities remained below where it had been before the recession.

Something that a colleague where I used to work would frequently say:

In theory, theory and practice are the same. In practice they are not.

He denies coining that aphorism, but I like it no matter who coined it. Some people have to learn that when theory does not match practice, they have to give up on the theory, not the practice.

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