Modern Monetary Theory (MMT) proposes that the government will never default on sovereign debts when it is the sole authority exercising control over its currency. It is viewed as contrary to the fact that printing loads of currency can cause hyperinflation, as happened in Germany post-World War. Does that mean the government does not need to issue bonds or impose taxes? To answer this, MMT-supportive economists, or MMTers, say that bonds are necessary. They argue that if the government spends without issuing bonds, the money spent will flow into banks. Central bank regulations require banks to maintain reserves on deposits in the form of cash or government securities. In the absence of bonds, these reserves will necessarily be in cash that earns low interest. So, the issue of bonds helps to maintain the interest rates in an economy. The main purpose of taxation is not to finance government expenses but to contain inflation, thereby replacing the use of central bank interest rates as tools for inflation control. MMTers argue that inflation is rarely a result of excess demand and is mostly caused by supply-side issues, such as an increase in the cost of production of the goods supplied or an increase in profit margins by suppliers. Therefore, the use of interest rates is inappropriate to address such cost-push inflation, as it works on the demand side and negatively impacts growth. MMTers’ argument that government bond issuances are necessary to maintain interest rates leads to the question of whether the borrowings by the government through bonds can lead to crowding-out, a phenomenon where private-sector borrowers are unable to obtain productive loans as the government competes with such private borrowers in the market for the loanable funds. MMTers refute the fact that the government competes for loans with private-sector borrowers. MMTers’ view may be true to the extent that banks hold bonds out of the funds reserved for compliance with the statutory liquidity ratio (SLR), as these funds are not eligible for being loaned out to the private sector. However, holding excess funds in G-securities may lead to crowding out unless the demand for loans by industry is subdued, as is the case when the economy is in the recessionary phase of the business cycle. Modern Monetary Theory finds its application in riding the economy out of the recession. It acts as a double-headed arrow that helps increase aggregate demand while exercising control on inflation and can address the economic situation of stagflation, where a shrink in demand is accompanied by supply-side inflation problems as seen during the Covid-19 pandemic. Firstly, the government can issue bonds and use the funds raised to provide subsidies on high raw material prices to cool down inflation, and the resultant lowering of prices supports demand. Secondly, raising government expenditure and investment in the productive sector to predetermined levels can boost aggregate demand while ensuring that the determined levels of increase do not spike inflation. The above-mentioned strategy is better as opposed to the practice of reducing central bank rates to support growth, which increases borrowings by consumers, who use the liquidity gained to bid up prices and cause inflation. The way fiscal policy can work better than monetary policy, as stated in MMT, can be illustrated by the Global Financial Crisis of 2008. The lowering of Fed rates from 2001 in response to the dot-com bubble burst enabled the sub-prime lenders to take the credit at low rates and use the leverage gained in high-yielding house mortgages. The Fed slashed interest rates to 1% in June 2003, the lowest in 45 years. Bankers made collateralized debt obligations (CDOs) out of these mortgage assets and sold them to investors. CDOs are a package of cash-flow-generating assets that have mortgages or bonds as underlying securities. Houses were appreciating assets at that time. When the interest rates were raised subsequently, borrowers could not afford to repay and started defaulting. The US homeownership had reached its peak and the house price started to fall. If the 2001 crisis was addressed by the use of fiscal policy (raising government expenditures or cutting taxes) in place of reducing Fed rates, the 2008 crisis wouldn’t have been the result, as government spending can be effectively managed to help the priority and productive sectors of the economy to avoid recession, unlike putting liquidity in the hands of the private sector that uses it for capitalistic motives, which can render situations such as the housing bubble. The 2008 crisis was dealt with by the government bailout. In the US, the National Economic Stabilization Act of 2008 was enacted, and around 700 billion USD was used to buy distressed assets. MMTers also propose that the government deficit should not be a problem as it implies that the private sector is in surplus. For every lender, there must be a borrower, thereby implying that surpluses and deficits always add up to zero in the financial system. MMTers opined that government surplus led to the 2001 recession. Therefore, balanced budgets are not the best for an economy. While considering MMT in relation to full employment, MMT economists propose that the government provide a job guarantee, the right to work at the minimum wage, and full employment irrespective of the policy used for inflation control. The inflation control measures slow down growth and cause worker layoffs, thereby creating a “buffer stock” of workers. These workers are then rolled onto job guarantee work and not on unemployment rolls, as is the case with mainstream economics. Job guarantee ensures the spending power of laid-off workers, preventing the recession. It also helps control inflation in tight labour markets because employers can hire workers from the pool at the low fixed wages offered under the job guarantee scheme instead of increasing the wages of existing workers, which would have otherwise spiked inflation. It can be concluded that the theory lays more focus on fiscal policy than monetary policy; the proposition highlights the main objectives of taxation as an inflation control measure and bond issuance as an interest rate stabilising tool and helps to look beyond what is merely considered as government financing routes. The obsession for a balanced budget thus may not be a fruitful choice. The phrase “government would never default on the sovereign debts” in no way propagates that the government can spend unwisely or in an imprudent manner or that it should stop levying taxes. It also suggests that job guarantees can stabilise wages in tight labour markets and also mitigate recession by putting money in the pockets of laid-off workers during times of distress. By Shray Gupta