By Jason Lange
WASHINGTON (Reuters) – The head of the International Monetary Fund on Thursday panned an idea gaining currency in U.S. left-wing circles that Washington could borrow much more aggressively without harming the economy.
Prominent politicians including Senator Bernie Sanders, a self-described democratic socialist seeking the 2020 Democratic presidential nomination, and Democratic U.S. Representative Alexandria Ocasio-Cortez see the idea as a possible way to ramp up spending on social programmes.
The theory, known as modern monetary theory, has drawn rebukes from fiscal conservatives and many Democrats as well.
IMF Managing Director Christine Lagarde, whose institution is tasked with rescuing countries stricken by economic crises, appears to be aligned with critics who consider the theory naive.
“We do not think that the modern monetary theory is actually the panacea,” Lagarde said at a news conference during the spring meetings of the IMF and World Bank in Washington.
Lagarde said there might be a few situations in which vastly expanding debt would make sense, such as when a country gets stuck in a deflationary spiral.
“We do not think that any country is, you know, currently in a position where that theory could actually deliver good value in a sustainable way,” she said.
Conventional economists across America’s political spectrum argue the country is already on an unsustainable fiscal path with $22 trillion (£17 trillion) in outstanding federal debt and chronic deficits driven by social welfare programmes.
Proponents of modern monetary theory hold that the U.S. government’s monopoly over dollar issuance – the printing press – gives it the power to spend as much as needed to meet the full employment and inflation mandates currently tasked to the country’s central bank.
IMF chief economist Gita Gopinath said the U.S. dollar’s dominant role in global finance might make it possible for Washington to ramp up spending without immediately driving interest rates higher.
But she said America’s growing spending commitments could eventually cause credit problems and that printing gobs of money to finance deficits could be disastrous.
“Very large amounts of it tend to be inflationary and they typically land countries into a crisis situation,” Gopinath said in an interview with Reuters.
(Reporting by Jason Lange; Additional reporting by David Lawder; Editing by Paul Simao)