…The narrative draws upon

‘The Three Gulf Wars of American Hegemony: tracking the decay of the unipolar moment’

by Seva Gunitsky, an associate professor of political science at the University of Toronto
https://hegemon.substack.com/p/the-three-gulf-wars-of-american-hegemony

…What follows James Meadway’s Gulf War tour is an excellent 4-minute segment setting out the parameters of government borrowing and along the way the limits of MMT, in a way that is easy to follow for an economics layperson like me.

Transcribed below (look, Ma, no LLMs used to do so!)…

…1/9
“One of the war’s immediate consequences is the rise in gov borrowing costs across much of the world and most definitely in the UK, which saw its gov borrowing costs rise to 5% and above.

The reason is the UK is highly exposed to the rest of the world.

We import 40% of our food, 50% of the natural gas we use, and about 60% of our fertiliser.

And our gov owes about a third of its debt to people and institutions in the rest of the world. An unusually high level for a ‘developed’ country…

…2/9

“That combination is deadly. The heavy reliance on imports of essentials means we need a valuable Pound to make sure we can buy those imports without having to exchange too much of what we produce here in return.

At the same time the large foreign ownership of UK government debt means people with no commitment to this country can choose to buy or sell that debt as and when they feel like, creating a big instability in government borrowing costs and potentially the value of the Pound…

…3/9

“If the people and institutions lending money fear that the government will end up with big expenses it can’t cover, like providing support for household energy bills, they will start to force up the cost of government borrowing.

Now there’s a story doing the rounds that this doesn’t matter. That since the UK can issue its own currency, the government can always repay any debt, and can always pay for anything it wants in that currency…

…4/9

“Some of you might recognise this as the sort of story associated with Modern Monetary Theory (MMT).

In a *very* limited sense it is correct. In principle the gov can issue money and offer it in payment for anything it wants. Its problem is that people might not want this money or, if they do, they might want a great deal of it.

And when the whole UK has to import so much of the essentials of life, the willingness of other people elsewhere in the world to accept the Pound really matters…

…5/9

“Their willingness to take Pounds and that demand for money helps set the exchange rate. If their demand drops away, the Pound will crash in value and suddenly we have to offer more and more Pounds to swap into Dollars or Euros or whatever to pay for those essentials.

We would see the impact of this back home as rapidly increasing prices of things we import, including essentials like natural gas and food…