Functional Finance in open markets

Abstract

The conventional wisdom on public finances presupposes a similar performance between an individual or domestic economy and that of an economy at the macro level. By contrasts, the financial perspective according to its functionality with respect to the macroeconomic level shows both deficits and surplus are mechanisms to obtain other macroeconomic objectives and never an objective in itself. In terms of local currency, the State’s debt never turns into a bankrupt situation, as it happens with foreign currency debt. Consequently, the State’s indebtedness in local currencyisn’t a problem in spite of reaching fiscal deficit status. The only issues against development are obstructing currency coming from abroad and not local currency which is issued by the State(capitalism). Functional finances –understood as the public expenditure activity to obtain full-use of resources and, at the same time, at low inflation rates– are limited by external money-inflowfactors. In other words, the functional finance focus –originally developed by Abba Lerner to get, with expansionary management demand and fiscal policy, objectives to obtain high-employment numbers and “full employment” in developed countries– is modified by particular conditions in low and medium economies because it is required to create cushion conditions beforehand for external money-inflow for that “expansionary management demand.” Therefore, it means to reorient fiscal policy objectives in order to move the external constraints for development.