Marcus Aurelius: Deficit Good, Default Better

Marcus Aurelius

Modern Monetary Theory, an unconventional take on economic strategy

By Dylan Matthews,
Washington Post, February 18

About 11 years ago, James K. “Jamie” Galbraith recalls, hundreds of his fellow economists laughed at him. To his face. In the White House.

It was April 2000, and Galbraith had been invited by President Bill Clinton to speak on a panel about the budget surplus. Galbraith was a logical choice. A public policy professor at the University of Texas and former head economist for the Joint Economic Committee, he wrote frequently for the press and testified before Congress.

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But MMT’s own relationship to real-world cases can be a little hit-or-miss. Mosler, the hedge fund manager, credits his role in the movement to an epiphany in the early 1990s, when markets grew concerned that Italy was about to default. Mosler figured that Italy, which at that time still issued its own currency, the lira, could not default as long as it had the ability to print more liras. He bet accordingly, and when Italy did not default, he made a tidy sum. “There was an enormous amount of money to be made if you could bring yourself around to the idea that they couldn’t default,” he says.

Later that decade, he learned there was also a lot of money to be lost. When similar fears surfaced about Russia, he again bet against default. Despite having its own currency, Russia defaulted, forcing Mosler to liquidate one of his funds and wiping out much of his $850 million in investments in the country. Mosler credits this to Russia’s fixed exchange rate policy of the time and insists that if it had only acted like a country with its own currency, default could have been avoided.

But the case could also prove what critics insist: Default, while technically always avoidable, is sometimes the best available option.

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Phi Beta Iota:  Russia defaulted and is better than ever.  Iceland defaulted and is taking the perpetrators to court while roaring ahead.  When you are in a rigged game, default is always better than a growing deficit.  Especially if you can jail or kill the crooked bankers.  We’re having a real hard time wondering why European leaders are so reluctant to play their strong suit — the public and the armed force of the sovereign nation — against the unsecured debt documents.  Could it be that the bankers are threatening to expose the corrupt politicians?  No problem.  Time for new politicians that can apply intelligence with integrity.  Now.