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06/06/2020

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Hi Professor Wacziarg, thank you for sharing this critique and your thoughts on modern (or magical) monetary theory. I wanted to share my thoughts and ask for your guidance to amend them where they might be inaccurate. I've only taken a handful of economics courses, the most relevant of which is the global macroeconomy.

It's concerning that the U.S. and many countries around the world have turned to printing money in what seems to be an undisciplined way. I feel that few people are thinking about the long term effects of printing and having central banks carry balance sheets that are such a large percentage of GDP. At some point, there will be consequences, especially when everyone seems to be printing.

Currency exchange rates act as a control for printing money because any nation that prints too much of its own currency will devalue its currency relative to other currencies. But, how does this play out when all of the major countries in the world are engaging in unrestrained printing?

My view on is that developing countries cannot participate in the same large scale printing as fully developed countries, and will suffer as a result. Fully developed countries benefit from having currencies that are historically more stable, and because of COVID-19 there has been a flight to stable currencies. In the end, the effect of printing will be felt most in developing countries who will experience greater inequality and a longer road to catch up to other countries. In summary, I feel we are printing at the expense of others and one day we will all feel the consequences. I sincerely hope that I am wrong and that there's nothing here to worry about, but it's perhaps that exact sentiment that makes believing in MMT so dangerous.

Dear Anthony - thanks for your comments. I completely agree with you. Right now with zero interest rates we have the illusion that printing money and spending money is a free lunch. This gives lots of air time to theories like MMT, because it looks indeed as if the government just printing money and spending without limit is a costless proposition. But everything has limits, and when we start to really test the proposition that the government can just run up the debt and then monetize it endlessly, we might find that we get a combination of investors being more reluctant to buy endless supplies of Treasuries, as well as inflationary pressures. Of course, we are not there yet, but as you state that does not mean the day of reckoning will not come sometime. The issue of only when. This is why I included an entire module on debt and financial imbalances in Global Trends!
Regarding your point on what happens when everyone monetizes, I think you are right that the more vulnerable markets will be the first to feel the pain. Especially if the domestic borrowing goes hand in hand with international borrowing in a currency other than the country's currency. These imbalances are recipes for balance of payments crises. None of this, of course, is new. The scenario of a developing country with large government deficits that monetizes its public debt debt only to face an inability to attract foreign financing, has to default, suffer a devaluation, and the painful stabilization and adjustment that must come after, is an unfortunately very common occurrence. I think the main uncertainty these days is whether a scenario like this may also happen to advanced industrial countries, like Western European nations of even the US. We are a far cry from this for the US, of course, but if we continue to accumulate huge debts backed by printing money, we might one day discover that everything has its costs.

Thank you for your response Professor Wacziarg! Your comment that the imbalances between domestic and international borrowing are a recipe for balance of payments crises is really what worries me. Especially if this occurs to an advanced industrial country or many countries all at once. There will be surely be ripple effects felt all around the world. This is all the more reason to read the news regularly and read up on the economies of different countries, just as we would review how many COVID-19 countries currently have.

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