I can understand this perspective and am pretty receptive to MMT in general, but one thing I've always wondered is what it says about the reaction from other countries (let's say China or any other large trading partner) when one country (let's say the US) decides to throw caution to the wind and rack up enormous amounts of debt, much more than what we have now? In an increasingly global/interconnected economy like we have today, is there reason to believe that a country like the US couldn't do this without some kind of repercussion from other countries? What are the implications for the currency market if such a thing happened? Or would a factor internal to that country act as a limiter before an external factor did?
China has a savings account with the US government's national bank. That just means China has deposited US dollars with us in exchange for a promise of repayment plus interest (in dollars). We don't have to let China, or anybody else, have a savings account, although it's probably not a good idea to refuse to pay what's already been promised (and this won't happen). China doesn't like increased US government spending because it weakens the dollar vis-a-vis other currencies. But there is a limit to this depreciation, because when a currency floats and weakens against other currencies, it makes the goods and services produced domestically more attractive for export, which acts as a kind of natural floor for depreciation as an economy strengthens due to rising exports. China might grumble when the dollar depreciates, but it's not going to go to war over it or anything. And, besides, unlike most countries with fiat currency, it pegs its own currency to other currencies rather than lets it float, so when a currency like the dollar depreciates, its own currency depreciates, which makes
its goods more attractive for export (but also the money in its savings account worth less). That China doesn't allow its currency to float is why the US accuses it of "currency manipulation." The US doesn't like that, because it can never gain much of a trade advantage with China as a result and can't reap the economic benefit of a depreciating dollar vis-a-vis China.
Perhaps more to the point, is there a reason the US government shouldn't introduce a huge amount of money into the economy over a short couple of years given our current debt situation?
Nope, no reason. The failure to spend and increase aggregate demand--and thereby spur greater economic activity--represents a real economic loss that can never be recouped. Every day that labor is idle and capital underutilized, society loses the wealth that could have been produced from it.
So it's true what they say about
you guys -
You arrive at the same destination as Keynesians, you just take the scenic route.
MMT is considered post-Keynesian and within the Keynesian camp. But there are real differences between a neo-Keynesian like Krugman and a post-Keynesian like Randall Wray or Bill Mitchell.
Somebody like Krugman thinks that deficits qua deficits matter, and that a government with fiat currency is subject to harassment from bond vigilantes and so can't afford to piss off bond purchasers too much. He favors spending in a recession, but thinks that at some point deficits have to be reined in for their own sake. MMTers think that the level at which the government spends should
always depend only upon its affect on the economy. So spending should be reined in only when necessary to make sure the economy does not get so hot that inflation results. This is called
functional finance and it comes from Abba Lerner.
There was a recent blog exchange between Krugman and MMTers. Relevant links here, if you have any interest:
http://heteconomist.com/?p=5047 (Krugman comes under fire a lot in his own comments section.)