The Conditions of Economic Agency


MMTers often use the term “monetary sovereignty” to refer to the spectrum that describes which countries are most able to run fiscal and current account deficits persistently without severe price instability or financial instability. Understanding the characteristics, strengths, and limitations of each position along this spectrum is vital for discussing how a given policy will be more effective in some countries than in others. Because MMT is a theory of economics that aims to explain how macroeconomics works in all contexts, every student of MMT must understand this spectrum. This short article aims to explain why some countries are at one point on the spectrum and how they can move along it.

Before we begin, I must explain why the title of this article is “The Conditions of Economic Agency,” rather than “The Conditions of Monetary Sovereignty.” As Scott Ferguson has explained, the concept of sovereignty unintentionally invokes “absolute political independence & freedom, & a position above & outside law within specific borders” and implies that improving one’s position within this structure is impossible for “non-hegemonic” countries. In contrast, the concept which MMTers intend to invoke neither relies upon nor intends to reflect hegemonic dominance, either domestically or internationally. Domestically, the powers exercised by a government can be done with the consent of its people, and internationally, moving upwards along the spectrum does not necessitate some other country moving downwards along the spectrum. Hence, like Ferguson, I drop the term “sovereignty” in favor of the term “agency,” in an attempt to have this conversation on grounds that are neither tyrannical nor zero-sum.

Additionally, the term “monetary” tends to make people think that the analysis of the spectrum should begin and end with the predominant contemporary techniques of monetary analysis. We must reject this tendency, which causes people to unduly emphasize the study of interest rates–including their movements, yield curves, and spreads–to the near-total exclusion of other factors affecting the economy. Interest rates are relevant, but their impact is intermediated through structural factors–including fiscal policy, regulation, and government enterprises–that also affect all other aspects of the economy. For this reason, I replace the term “monetary” with the term “economic.” Thus, “Monetary Sovereignty,” becomes “Economic Agency.”

Next, I refer to the “Conditions” of Economic Agency rather than the “Stages” or “Levels” of Economic Agency because neither Condition guarantees any amount of Economic Agency and because there are several ways and orders that Conditions Two and Three can be obtained. Furthermore, to emphasize this nonlinear relationship and acknowledge the challenges to obtaining Economic Agency which are presented by international and domestic institutional and geographic forces, I use the neutral term “Conditions” to avoid placing any particular blame on a country’s lack of Economic Agency on its people or its leaders. Thus, I define the Conditions of Economic Agency as “those conditions which allow governments to run fiscal and current account deficits persistently without severe price instability or financial instability.” This framework applies most clearly to countries that are not a part of a supranational currency union, but for a brief commentary on Eurozone countries, see the Note below.

This framework matters because governments are the only entities responsible for and capable of ensuring inclusive and sustainable use of the markets that they shape. Governments uphold legal institutions that recognize and enforce certain types of property rights (including intellectual property rights), contracts, torts, and bankruptcy privileges but not others. This necessarily creates a balance of power that favors some people to the exclusion of others. Because governments create the conditions that lead to markets as we know them, governments have the responsibility to ensure that those markets benefit those who are excluded by those markets. Furthermore, because of the theoretical and empirical conflicts between those benefitted by those market structures and those left behind, governments are the only actors capable of ensuring desirable real outcomes, including access to basic needs for the poorest and most disadvantaged people and preservation of the environment. It is therefore imperative for anyone who wants to influence policy to understand the Conditions of Economic Agency.

Default State

Examples of Default State Countries: Panama, which only taxes and spends in the US Dollar, Saudi Arabia, which issues a currency pegged to the US Dollar, Kosovo, which only taxes and spends in the Euro, and Togo, which uses the West African CFA Franc, a currency pegged to the Euro.

The default state of Economic Agency is one in which a country taxes and spends in a foreign currency or a currency that it creates but pegs to a foreign currency, and it does not receive direct liquidity support from the central bank that issues the foreign currency. For these reasons, the government of a Default State Country must run a balanced budget over a politically and economically significant timeframe; it should probably attempt to maintain a balanced current account; and it must pay however much interest investors demand on its government debt.

The reasons for these recommendations are simple. If a Default State Country cannot create currency, then it has to get it from taxpayers or bond-buyers, which may crowd out private sector economic activity. However, if the government can create a pegged currency through its central bank, then private sector activity will not necessarily decrease when the government spends because it can create more money. But creating more money could make defending the peg more difficult, unless the Default State Country borrows foreign currency to defend its peg, but then it will need to collect currency to pay back the loan or suffer a default on its foreign debt. This extends the period over which such a country needs to balance its budget without eliminating the overall balanced budget requirement. Additionally, if a Default State Country runs a current account deficit, then there is less domestic currency for it to tax, which limits actions by the government and makes paying back foreign debt more difficult. Finally, a Default State Country cannot maintain zero interest rates on government debt because bondholders will not purchase bonds at zero interest from a government that cannot create the currency to pay the bond back because such a government has some default risk. Thus, a Default State Country should attempt to avoid fiscal deficits and current account deficits over a politically and economically significant timeframe (the exact length of which is determined by the amount of any such deficits and geopolitical factors).

Condition One - Some Local Private Sector Liabilities Denominated in Domestic Currency

Examples of Countries with Condition One: Turkey and Argentina.

A country fulfills Condition One of Economic Agency when there are at least some local private sector debts denominated in the domestic currency. The easiest way a government can make this happen is by demanding payment in the currency it issues by taxing and collecting fees in that currency. Individual people and businesses (hereafter, “agents”) in the private sector want to be able to pay their taxes and fees to the government, and also want to save more than the total amount of their tax/fee bill for precautionary and income-smoothing reasons. In addition to this primary savings desire, agents will also have a secondary savings desire because they will want to keep some domestic currency on hand to pay other agents who need the domestic currency to meet such other agents' own primary savings desire. These local primary and secondary desires to save the domestic currency allows the government to spend slightly more than it taxes or borrows without causing price instability (but, it must be noted, not indefinitely more). All things being equal, this affords the government some additional fiscal space over the Default State Country. Of course, as a country increases the number of local liabilities that are denominated in the domestic currency and increases the private sector’s primary and secondary desires to save that currency, it strengthens its Condition One.

Of course, the ability to issue units of the monetary base does not grant absolute power over the creation of assets and liabilities denominated in that currency. As pointed out by many critics of MMT, banks create financial assets and liabilities all the time. However, as I have explained previously in the MMT Banking Primer, the mere creation of any asset or liability denominated in a given currency is not particularly significant. Instead, what matters is a government’s ability to create the specific assets upon which its financial system relies on to clear payments and satisfy regulatory requirements, such as the capital adequacy ratio requirement and the liquidity coverage ratio requirement. Legally, banks are required to hold some of their wealth in certain government assets and will always accept them in payment from bank customers. Governments, through their fiscal, monetary, and regulatory powers, control the availability of these assets.

That being said, Condition One is not a panacea by itself. When foreign-denominated debt is high enough, it reduces the importance of local-denominated debt, essentially rendering Condition One meaningless. As I have argued previously, this is an important source of economic problems in Turkey and other developing nations. I chose Turkey and Argentina as the example countries for Condition One specifically to demonstrate the danger of meeting only Condition One. In the absence of the other Conditions discussed below, a country with only Condition One probably needs to run-at most- relatively small fiscal deficits for reasons related to monetary conditions and saving conditions.

With regards to monetary conditions, when a country runs large deficits, either one of two things will happen: either its central bank will refuse to accommodate the spending by allowing interest rates to rise, or its central bank will accommodate the government spending by keeping interest rates low. Domestic interest rates rising too high can cause some combination of interest-cost-channel effects, wealth inequality, risk taking, or economic stagnation, which is undesirable. Furthermore, high domestic interest rates incentivize the private sector to take on foreign-denominated debt.

On the other hand, if domestic interest rates are kept low, in the absence of strong banking regulation, destabilizing asset bubbles could occur, as Bill Mitchell has written about previously. Banks always have an incentive to issue risky and inequitable debt products, both in the domestic currency and in foreign currency. Low domestic interest rates remove the incentive for banks to issue debt in foreign currency, and strong banking and credit regulation remove the incentive to issue unsustainable debt products in the domestic currency. In the absence of strong regulation, financial institutions will issue debt products to fund speculative or fraudulent business ventures, which were major contributors to the Great Financial Crisis.

In addition to these monetary conditions that put pragmatic limits on the government’s fiscal activities, a government must also consider the private sector’s saving conditions. Simply put, if a government spends more of its currency than the private sector’s collective desire to save its currency, the private sector will spend the excess currency, potentially putting upward pressure on prices. Governments can offer financial assets which the private sector can hold instead of liquid currency balances, but depending on other structural factors, there is a limit to how much a government can rely on interest-paying bonds to relieve price pressure without causing other harmful effects. Thus, while a country with Condition One can run persistent deficits, it can only run deficits that are relatively small, perhaps equal to the annual percentage growth rate of GDP. A government may want to use the growth rate of GDP as a safe starting place for its budget because under such conditions, the amount of net financial assets it adds to the private sector is equal to the additional goods and services which those net financial assets can purchase. In other words, the private sector’s debt-free spending power would grow at the same rate as the domestic economy, assuming a balanced relationship with the foreign sector.

Condition Two - Lack of Local Private Sector Liabilities Denominated in Foreign Currency

Examples of Countries with Condition Two: South Africa and India.

A country fulfills Condition Two of Economic Agency when the fraction of local debts denominated in foreign currency is relatively small. The size of local foreign-denominated debts is influenced by financial conditions and real conditions. With regards to the financial conditions, as stated above, a country risks incurring private sector foreign denominated debt when interest rates on the domestic currency are high. Therefore, keeping interest rates low is critical to achieving Condition Two. However, as I mentioned earlier, there are risks to keeping interest rates low that must be addressed in order to maintain Condition Two sustainably and equitably. Governments can address these risks by maintaining strong banking regulation and providing a system for households and non-bank businesses to access subsidized credit. When these are achieved, a country can maintain persistent deficits of moderate size, larger than the rate of growth of its GDP. Strong banking regulations allow the government to keep interest rates low without financial destabilization, and subsidized credit diminishes the economic stagnation that occurs when banks are disincentivized from lending because interest rates are low. The ability to keep interest rates low without financial destabilization or economic stagnation allows the government to spend more than it taxes and without exacerbating wealth inequality by paying interest income to bondholders.

For a longer discussion of how banking regulation amidst low interest rates can prevent financial instability, please read my other article, How MMT Differs from Mainstream Macroeconomics: Steady-State Interest Rate Dynamics. In short, there is ample evidence that deregulation and fraud are more important factors contributing to financial crises than low interest rates, as evidenced by contrasting the Great Depression and the Great Recession to the 2010s and 2020s. For a specific example of how carefully crafted regulation amidst subsidized lending can prevent an unsustainable explosion of loan growth, we should examine South Africa’s Covid-19 Loan Guarantee Scheme. During the scheme, which ran in 2020 and 2021, the South African Treasury guaranteed loans issued by commercial banks to South African businesses at a fixed, subsidized rate of 7.75% (which was 2.5 percentage points lower than the 2019 market rate of 10.25%). The scheme was not designed for banks to profit, and the revenue from the loan payments were pooled to offset any losses from the loans. There were stringent requirements on which businesses could qualify for the loans and what sort of expenses they could use the money for. Notably, a qualifying business had to be up to date with its other loan payments, and the money from the loan could only be used for operational expenditures, not to pay dividends, make investments, pay bonuses, or pay off other loans. While running the scheme, South Africa did not experience an explosion of businesses taking out these loans. Rather than being ineffective, the borrowing requirements were perhaps too strict, with demand for the loans being significantly smaller than anticipated. The takeaway from this case study is that it is fairly straightforward for developing nations to provide credit at low interest rates without causing a dangerous explosion in borrowing if they are willing to regulate their financial sector.

In addition to keeping domestic currency borrowing interest rates low, which indirectly reduces the amount of foreign currency borrowed, some countries place direct restrictions on foreign borrowing. For example, India requires foreign loans to have a minimum maturity period of several years, and when it allows loans of shorter maturities, it caps the amount that can be borrowed. In contrast, some countries, like Sri Lanka, actually encourage the private sector to take out foreign denominated debt.

In addition to these financial conditions, real resource conditions are very important. A country will have fewer foreign liabilities if its domestic economy produces substantially enough necessities, such as food, energy, and medicine to avoid overreliance on imports. Currency crises caused by shortages are almost always due to shortages of such necessities, so a country which relies on trade to supply these goods because it cannot produce enough of them itself is highly vulnerable to a currency crisis.

Consider the experience of Sri Lanka between 2019 and 2022. Sri Lanka meets twenty-two percent of its caloric needs with imported food. Additionally, in 2019, according to Economist Impact’s Global Food Security Index, out of 112 countries, Sri Lanka ranked 104th in volatility of agricultural production and 72nd in food supply adequacy. This means that Sri Lanka needs to be able to import food to maintain normal consumption, which creates a massive vulnerability in the event that Sri Lanka’s foreign currency reserves ever run low or if factors outside of Sri Lanka’s control raise global food prices. Both of these things occurred leading up to its 2022 currency crisis. Tourism is Sri Lanka’s third largest source of foreign currency, and the country suffered a massive loss of tourism revenue following the Easter bombings. This lack of foreign currency led to Sri Lanka’s inability to purchase fertilizer and other agricultural inputs, leading to a 14% drop in rice production in the 2021-2022 harvesting season. The drop in rice production further exacerbated the need to import food for which the country lacked the foreign currency to pay. Additionally, the war in Russia and Ukraine made foreign food and fuel even more expensive. This confluence of factors meant that Sri Lankans had to sell Rupees to buy necessities, leading to a currency crisis.

If Sri Lanka had fulfilled the real resource aspect of Condition Two by investing in sustainable food security, this would not have happened. That being said, the time to have made those investments was years before the Easter Bombings. Fulfilling Condition Two must be part of a long-term strategy to prevent economic turmoil, not a quick means of fixing it.

Note that fulfilling the real resource aspect of Condition Two does not require that the country to be a net exporter of necessities. It only requires that it makes enough necessities so that if it were no longer able to export or import necessities, the resulting reduction in its standard of living would not be destabilizing. In the case of food, this is a matter of caloric needs, not of financial value. For example, consider a hypothetical country that imports all of its staple crops (rice, wheat, corn, potatoes, etc.) but is a net exporter of total food because it exports exotic fruits that have little caloric value but are very expensive. Such a country would not fulfill Condition Two and would be vulnerable because in the event of a shock (either to its income or to the supply of imported staple crops), it would not be able to rely on its domestic crops to feed its population.

Condition Three - Foreign Desire for the Domestic Currency

Examples of Countries with Condition Three: United States and Japan.

A country fulfills Condition Three of Economic Agency when it moves beyond exporting commodities (which are volatile in price) and easily replaceable service labor and produces complex goods and services, creating a desire for foreigners to save its currency. I explain how this works in more detail in my Cool Stuff Hypothesis article, but in short, this is another way of viewing Fadhel Kaboub’s concept of “high value added content.” If a country can only make things that every other country can easily make, then the currency used to buy the products it produces is not particularly valuable. However, when a country can make things not every other country can make, the currency used to purchase those products becomes much more valuable, and foreigners start to develop a desire to save the domestic currency. This includes purchasing private financial assets denominated in the domestic currency because it effectively means transferring the currency to members of the private sector who will save it. If foreigners desire to save the currency, a country can more easily run a current account deficit without experiencing an exchange rate depreciation leading to a destabilizing run on the currency. Note that this does not guarantee a lack of any depreciation, but it makes it very unlikely that such depreciation would lead to a currency crisis that shut down the economy. Thus, when a country fulfills Condition Three, it can maintain persistent, modest, current account deficits. There are few countries which fulfill Condition Three but not Condition Two, but Mexico, which has significant but not overwhelming private-sector foreign-denominated debt despite being the world's 21st most complex economy and generally runs moderate fiscal deficits and trade deficits without runaway inflation or currency crises, may be an example of such a country.

Recall that when a Country fulfills Condition Two, it can maintain low interest rates.; when it fulfills both Conditions Two and Three, it can maintain even lower interest rates because it does not need to rely on the interest income incentive to restrict bank lending or to entice foreigners to hold its currency. The United States and Japan are the most obvious examples of countries that fulfill both Condition Two and Condition Three.

In addition to complexity of production, geopolitical factors can strengthen Condition Three. For example, the United States, in addition to exporting its own Cool Stuff priced in dollars, uses its global influence to ensure that sales of oil mostly take place in dollars, and the reach of its financial system makes it convenient for many other key commodities to be priced in dollars. Furthermore, the intellectual property relating to many important scientific technologies are owned by actors in the US, licenses to use those technologies are sold in dollars. That being said, a country does not need to exert hegemonic influence over other countries to strengthen the political aspects of Condition Three. Notably, political stability and a lack of corruption makes saving its currency more attractive, in part because those factors influence economic stability and make investment more attractive.

Conditions of Economic Agency - Summary Chart

Condition(s) of Economic Agency

Economic Space

Steps to fulfill

Example Countries

Default State

  • Balanced budget

  • Market interest rates

  • Balanced current account


  • Panama

  • Saudia Arabia

  • Kosovo

  • Togo

Condition One

  • Deficit spending equal to or less than growth

  • Market interest rates

  • Balanced current account

1 - The government must create local desire to save the local currency by enforcing taxes and fees.

  • Turkey

  • Argentina

Conditions One and Two

  • Deficit spending greater than growth

  • Low interest rates

  • Balanced current account

1 - The government must create local desire to save the local currency by enforcing taxes and fees.

2 - The government must ensure a means to finance private enterprise through local currency lending and ensure financial stability through strong banking regulation. The government must foster the local production of necessities to avoid reliance on imports.

  • South Africa

  • India

Conditions One and Three

  • Deficit spending greater than growth

  • Market interest rates

  • Modest current account deficit

1 - The government must create local desire to save the local currency by enforcing taxes and fees.

3 - There must be a desire for foreigners to save the local currency because the output and complexity of the local economy has advanced beyond replaceable labor and volatile commodities.

  • Mexico (possibly)

Conditions One, Two, and Three

  • Deficit spending greater than growth

  • Very low interest rates

  • Modest current account deficit

1 - The government must create local desire to save the local currency by enforcing taxes and fees.

2 - The government must ensure a means to finance private enterprise through local currency lending and ensure financial stability through strong banking regulation. The government must foster the local production of necessities to avoid reliance on imports.

3 - There must be a desire for foreigners to save the local currency because the output and complexity of the local economy has advanced beyond replaceable labor and volatile commodities.

  • United States

  • Japan

Note on Eurozone Countries

Eurozone countries are all special cases within the Economic Agency framework. If it were viewed as one country, the Eurozone as a whole would have all three Conditions. It issues its own currency, has banking regulation and public lending systems that are strong enough to allow it to keep rates very low, and produces high-value-added, complex goods and services. Additionally, it holds several geopolitical advantages, including nearly unlimited liquidity support from the Federal Reserve and a neocolonial arrangement with the African countries which use the CFA Franc that ensures a need for the Euro outside the Eurozone. However, each individual Eurozone country might be said to have some combination of Conditions that depends on its political relationship with the countries that control the European Central Bank. Consider a hypothetical scenario in which the ECB is more likely to extend credit to Germany and France than it is to Greece or Italy. In such a situation, Germany and France might be considered to have all three Conditions individually, but Greece and Italy might not be considered to have any.