Understanding The Non-Existence Of Financial Constraints

In mathematics, a constraint is a mathematical statement (loosely speaking, an equation) that is added to a model to help pin down a solution. That is, there can be an infinite number of potential solutions, but the addition of a constraint pins it down to a single solution. The grand-daddy of financial constraints — the inter-temporal governmental budget constraint — meets this technical definition.

Otherwise, we have non-mathematical definitions, e.g., the inflation constraint, as described by Modern Monetary Theory (MMT). Although constraint in this context is less clearly defined, I would argue that a key property is that it is always binding, and must hold.

The received wisdom among Canadian elites at present is that although it would be a mistake to tighten the Federal fiscal stance now, tightening should be done later (e.g., these comments). (This folk wisdom is probably showing up in other developed countries, but not as repetitively.) These elites might not refer to a “financial constraint” on the Federal government, but it is clear that they are not worried now about the alleged negative effects of issuance. That is, if a financial constraint did exist, it can be ignored in recessions, but it pops back into existence later. It is clear that this does not meet any reasonable definition of “constraint,” it is a non-biding guideline of some sort.

This is unlike a household or a sovereign that borrows in a foreign currency, that always has to keep in mind the restrictions placed on it by creditors. (Yes, a floating currency sovereign has to service debt, but we are discussing the ability to add new debt.)