Does raging inflation prove or disprove Modern Monetary Theory?

Modern Monetary Theory is sometimes cartoonishly summarized as “government can borrow and print unlimited money without negative consequences so long as it issues debt in its own (printable) currency.” Based on this cartoon, what the U.S. government has been doing for the first 20 months of 14 Days to Flatten the Curve is exactly the right approach.

The Wikipedia summary of MMT is more nuanced. A government that issues its own fiat money

  1. Can pay for goods, services, and financial assets without a need to first collect money in the form of taxes or debt issuance in advance of such purchases;
  2. Cannot be forced to default on debt denominated in its own currency;
  3. Is limited in its money creation and purchases only by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;
  4. Recommends strengthening automatic stabilisers to control demand-pull inflation[10] rather than relying upon discretionary tax changes;
  5. Bond issues are a monetary policy device, not a funding device.

(Note that the government’s stated inflation rate, alarming as it might seem, grossly understates costs to buy a house (real estate prices are not included) and also is not adjusted for delivery time (see Is inflation already at 15-30 percent if we hold delivery time constant?).)

One of the policy implications, according to Wikipedia:

Achieving full employment can be administered via a centrally-funded job guarantee, which acts as an automatic stabilizer. When private sector jobs are plentiful, the government spending on guaranteed jobs is lower, and vice-versa.

What we’ve seen over the 20 months of 14 days is sort of like “guaranteed jobs” in that people get a paycheck, but they don’t actually work (the paycheck is called “$600/week unemployment check,” resulting in higher-than-median wages for those who don’t work). On the other hand, the government has put most of its effort into making existing government jobs more lucrative. Government workers have gotten paid for not working (teachers who didn’t teach, librarians at home while libraries were closed, park employees at home while parks were closed) and more government workers, already earning salaries far above those in the private sector, won’t have to repay their student loans (funded by higher taxes paid by those who never enjoyed the opportunity to go to college). On balance, it seems reasonable to consider the higher-than-median-wage unemployment payments as the “centrally-funded job guarantee” that MMT proposes. And, in fact, as any employer trying to hire can attest, full employment was achieved (i.e., everyone who wanted a job had one).

Do you buy or sell stocks and real estate when the government is printing money?

MMT economists also say quantitative easing is unlikely to have the effects that its advocates hope for.[66] Under MMT, QE – the purchasing of government debt by central banks – is simply an asset swap, exchanging interest-bearing dollars for non-interest-bearing dollars. The net result of this procedure is not to inject new investment into the real economy, but instead to drive up asset prices, shifting money from government bonds into other assets such as equities, which enhances economic inequality. The Bank of England’s analysis of QE confirms that it has disproportionately benefited the wealthiest.

Let’s see if the MMT folks were right:

Check and check!

The primary inflation control mechanism in MMT, again according to Wikipedia:

Driven by fiscal policy; government increases taxes to remove money from private sector. A job guarantee also provides a non-accelerating inflation buffer employment ratio, which acts as an inflation control mechanism.

What are the Democrats who control Congress working on right now, as the headlines are filled with reports of raging inflation? Tax increases!

First, is it fair to say that MMT is actually the mainstream economic philosophy in the U.S. and has been since at least March 2020? (In other words, the folks who run the U.S. economy profess belief in neoclassical economics, but their actions reveal a belief in MMT.) Second, have the events that unfolded since then proven that MMT is correct?


  • “Rising Rents Are Fueling Inflation, Posing Trouble for the Fed” (NYT): rest assured that inflation is temporary, except that you’ll pay 10 percent more for at least the full year of your one-year lease (“That’s a concern for the Fed, because housing prices tend to move slowly and once they go up, they tend to stay up for a while. Rent data also feed into what is called “owners’ equivalent rent” — which tries to put a price on how much owners would pay for housing if they hadn’t bought a home.”)
  • “As Inflation Rises, Beware of the Money Illusion. It May Cost You a Lot.” (WSJ) (average people unable to comprehend that selling a house at a profit in nominal dollars is not a success when inflation has been higher than the profit)

8 thoughts on “Does raging inflation prove or disprove Modern Monetary Theory?

  1. My opinion is that Alan Greenspan fueled two bubbles and the rich got away with it. See also:

    They got away with it so well that it is now the default. The private sector middle class is kept small and pays for all the fun.

    Trump was dangerous to the racket because he started asking uncomfortable questions, was beholden to no one and could not be controlled. The population is distracted from the issues with pronouns and race.

  2. The analysts have been predicting a 10% correction for a year now, after they told everyone not to buy during the 2020 crash. Those of us who invested too conservatively back at quantitative easing $6 trillion can weep together.

    It’s surprising how much the S&P has outperformed the other indexes, showing how index funds behave more like individual stonks as more people become heavily weighted in index funds. It’s no longer about buying the index, but which index.

  3. Disagree that the US financial system operates in accordance with the MMT postulates. The first and the most important one is not satisfied.

    Out of sheer ignorance people often claim that the US government “prints money” (the first MMT postulate). It does not (currently) in the Zimbabwean or Weimarian sense. In order to increase the base money supply, the Fed buys reliable securities(usually) and is/was constrained in what it could buy. Now, technically, if the security happen to be not so good/defaulted on, it can increase inflation negligibly. The Fed open market buy/sell operations are chiefly directed at controlling interbank exchange rate, and therefore other interest rates, not financing the government.

    The ECB(european central bank) operates the same way, by the way. As of several years ago, the ECB was less picky than the Fed in what securities it buys to increase money supply.

    The money currently being showered upon the worthy is sourced from taxes and borrowing.

  4. It may be a more technical question as to whether or not the USA is currently and has been practicing MMT since the pandemic began and of course intelligent and informed people like Ivan can always beg to differ in technical terms. However, for the Average American (many of whom have the approximate economic literacy of a sixth-grader, your examples are probably sufficient for someone who champions MMT to effectively persuade them: “See, it works! We’re using it! It’s getting us through the pandemic, and without it we would have had a much higher unemployment rate! Don’t look a gift horse in the mouth!”

    • It’s interesting because I’ve thought about this a little bit recently. Several months ago I took the opportunity to purchase some of Edward Tufte’s books ( ) and he devotes some beautiful expositions to things like cholera epidemics, the (first) Space Shuttle explosion, etc., etc. I realized right away that it’s not very hard to fool people even with high intelligence and advanced degrees. Most people who get their news about the economy through Facebook and other media outlets can be effectively convinced with very bad, incomplete and selective examples – about almost anything! It just has to come from an “authoritative source” that they cannot imagine themselves being qualified enough to contradict or challenge. Or they just don’t care, they’re too busy watching entire world being turned into “Jackass” stars on TikTok.

      Based on that, I’d say that anyone like AOC – or anyone in any political party today – could just get some talking heads to show some charts and graphs demonstrating how great MMT is and basically most people would go: “Yeah! I wonder why we never thought of THAT before! I’ve always thought that was GREAT idea if I could do it! Just print as much money as you need! Why not? Sounds like plan to me! Excuse me, now I have to get over to Palms and pick up some Justin Bieber Peaches!”

  5. I am no economist & don’t know anything about MMT, but it seems obvious to me that in this economic environment you should own things not dollar bills or obligations denominated in dollar bills. On the other hand the bond market is not predicting high inflation over the next decade. But as the financial economist John Cochran points out, runaway inflation is like a bank run — it is unpredictable because if it could be predicted it would have happened already. And he says that historically the bond market has not been a good predictor of inflation

    • My research leads me to the opinion that buying bonds these days is pretty much an exercise in futility…other than perhaps Series I Treasury Savings Bonds. But those are limited in their own right, and a somewhat different product.

      Unless you take some risk, via the stock market, it’s hard to keep up with inflation. In the past, a CD or High Yield Savings account would keep you current…but not any more.

  6. Whether MMT proves anything is debatable, but looks like its gearing up to be used as a tool for leftist policies under the guise of “net-zero climate change”. US climate envoy John Kerry was just given a $750B bill, as an initial ongoing payment, for climate damage to the “developing world”. How will this ongoing payment be funded? By printing enough new money to cause an extra 1-3% inflation (“manageable”), then giving it to the UN to distribute (what could go wrong?).

    Emerging World Hands Dems A “$750 Billion Bill” For Climate Change Ahead Of Glasgow Summit

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