August 10, 2022

Public debt has soared since the 2008 financial crisis, and especially during the Covid-19 pandemic. According to the International Monetary Fund, the ratio of public debt to GDP in advanced economies increased from around 70 percent in 2007 to 124 percent in 2020. But the fear that rising public debt will fuel future financial crises has been subdued, partly because government bond yields have been so low for so long.

Although yields started falling much earlier, in the 1990s, they were kept low by quantitative easing (QE) after the 2008 and 2020 recessions. Few doubt that massive fiscal expenditures were warranted to alleviate suffering during those episodes. But advocates of Modern Monetary Theory take this logic a few steps further.

Advocates of MMT contend that as long as debt is denominated in a country’s own currency, there is no reason to fear a fiscal crisis because a default cannot happen. Any withdrawal of fiscal stimulus therefore should be gradual. And in the meantime, new issues of public debt can be used to fund infrastructure investments, income-support programmes, and other items on progressives’ agenda, provided that the inflation rate remains below the central bank’s target (generally around 2 percent).

MMT’s boosters cite Japan as proof of concept. Even though Japan’s debt-to-GDP ratio (including both central and local government) is above 250 percent, compared to 160 percent in the United States, its 10-year government bond yield has remained…

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