Another Point Of Failure In Modern Monetary Theory

Argentina is just coming up to its ninth default:

Argentina is teetering on the brink of its ninth debt default as its leftist government and creditors struggle to break the deadlock in crunch talks ahead of Friday’s deadline.

Martin Guzmán, the economy minister, said a counteroffer made by its bondholders to restructure $65bn (£52bn) of foreign currency debt was “not even close” to giving Argentina the breathing space to put it on a sustainable path.

Whether that’s the ninth in history or just in modern times I can’t be bothered to go and find out. The answer is in that book “This Time is Different for anyone who cares to look it up.

This rather neatly illustrates another of these problems with Modern Monetary Theory. For the claim is that a government can never default on its own debt – it can always just print more of the money of which it is the monopoly provider and so pay the creditors. This is clearly not true.

At which point MMT gives us the caveat – a government which prints its own money can never default on debt in its own currency. Argentina has foreign currency borrowings which is what it’s about to default upon. So, Yah, Boo! MMT is right.

Except, why is Argentina borrowing in foreign currency? A decade or two back it has a significant domestic currency debt – which showed that it could indeed borrow in its own currency and thereby, by MMT standards, was never going to run out of the ability to service its debt.

What then happened is that Argentina decided to try out this MMT idea. Government can – should – just keep borrowing, or true MMT, keep printing money for government to spend. So, it did. And people then refused to lend to it in the domestic currency. Because they knew that they’d get shafted by hte government just printing more money to pay them with.

This actually got the the point that the government tried to jail some economists. An interim stage in this debauchment of the currency was to issue bonds – given past behaviour at the Treasury – that were index linked. The interest rate was determined by the inflation rate. At which point they started under-recording the official inflation rate and tried to jail those economists calculating the true one.

So, you know, no one would lend to the government in the domestic currency. Which means they had to borrow in foreign currency and bang goes the MMT benefit of never running out of money.

That is, the constraint is much earlier than debauching the currency so much that it’s worth nothing. All you’ve got to do is piss investors off enough that they don’t want to lend to you in the domestic currency and you’re back in the same old trap.