Why Modern Monetary Theory Will Always Lead to Inflation

Nope, sorry, baked into the very fabric of the nation it is

We should start with the observation that quantitative easing was, in fact, Modern Monetary Theory. We’re in the economic doldrums, we should just print money and spend it. Woo Hoo!

So, we did that. OK, we can argue a bit about how much the first burst was really MMT, in that by design the money wasn’t spent at large into the economy, rather it was hidden away in the banking system. But the second surge? Lockdown and so on? Pure MMT. Lots printed, lots sent to people, all spent.

We can also use the older phrasing for this, monetisation of fiscal policy but MMT types get pissed when we do. For monetisation of fiscal policy has bad connotations, see? Venezuela, Zimbabwe, tsk, don’t want our new and exciting and all encompassing theory associated with failures like that now, do we? This is like this year’s version of socialism - wholly different from everything tried before and this time, no, this, it will really work.

But, OK. MMT says when needed just print the damn money and spend it. We did. What next?

Well, MMT also says that when we get inflation - ah, no another step back here. MMT agrees that money isn’t actually the thing, real resources are. So, we can only print and spend as long as there are real resources unused. If we go beyond that, to where we’re just bidding up the prices of resources already in use then the result is inflation. And, by logic, if we see inflation as a result of our spending, monetisation, money printing, then we’ve gone too far.

The solution then is that we tax the created money back and so limit inflation. But “tax” isn’t quite the point. The action is “get” or “take” the newly created money back out of the economy. Tax is just one of the ways that can be used to do that. But, so, we print, spend, get inflation, tax rises in order to reduce the base money supply again.

The big - if you like only - difference between the standard MMT prescription and that second bout of QE is that QE actually keeps a record of what’s been done. By printing to buy the bonds (Treasuries, Gilts to English language variant) we’ve then that great big pile of bonds owned by the central bank. Which is our tally of how much we’ve printed to spend. And, that great big pile of money that we’ve got to tax back, or extract from the economy, when we see inflation.

So, in one sense, we can say MMT and QE are the same thing. Except QE keeps a record.

We can also run this another way, in that they are the same thing but QE gives us a way which is not tax of sucking that newly created cash back out of the economy. We sell the bonds into the market, collect the money and stuff that back into the central bank computers that created it. Sure, now that has the knock on effect of limiting the amount government can now borrow for its current spending, might mean that the deficit has to be reduced say, possibly that a budget surplus will be required. But then so does MMT insist much the same. The only way that newly created money can be sucked out of the economy is if there is a budget surplus. If taxation is greater than spending.

So, we get to much the same place anyway. Quantitative Tightening is just MMT doing the tax more thing to destroy the newly created money which is causing inflation.

OK. So, why will MMT always cause inflation? Because look what The Guardian is now saying. And, for Johnny Foreigners, The Guardian is the only serious left wing paper in Britain. And this is their Chief Leader Writer.

The most telling example? The silent havoc wrought by quantitative tightening (QT). While other G7 central banks tread cautiously, the Bank of England has embarked on the most aggressive QT programme in the developed world. To understand what’s going on, you have to go back to the 2010s. When the economy crashed, the Bank of England created money out of thin air to buy government debt. This was called quantitative easing (QE) – and the idea was to pump money into the financial system to keep the City running. It worked but it also meant the Bank ended up owning a huge pile of government bonds.

Now, the Bank is doing the reverse: QT. That means the Bank is selling those bonds or letting them mature without replacing them. The goal is to shrink its balance sheet to “undo” QE. The problem? It’s reversing course in a more dramatic way than any other major central bank.

Britain also has more of an inflation problem that other major economies. The inflation rate is a percentage point higher than the US or France, near two percentage points higher than Germany. We should be doing more QT. MMT says so. If we’ve got more inflation we should change the money supply so that we don’t have more inflation. We can do that by taxing more. Or spending less of course.

But Britain has government spending as a proportion of GDP up at 45% or so. Highest non-wartime levels or so. And running a 4 or 5% deficit to do so. That is, the left - or the MMT crowd, the monetisation of fiscal policy lot - took the increase in spending, banked it and continue to demand more. And, obviously, we’ve inflation as a result of that QE which MMT says we should reverse.

Except, as we can see, none of them are willing to reduce spending so as to save up the money to retire that newly invented money. And absolutely none of them are willing to increase tax rates to where that would lead to a balanced budget. Even all these idiot calls for a wealth tax are to fund more new spending, not sort out the last mess.

This means QT sees the Treasury handing over public money to cover bond losses and top up the profits of commercial banks. It’s a quiet and alarming transfer of wealth to the financial sector. The cost to the Treasury? About £40bn per year – money that could have paid for social care reform or scrapping the two-child benefit cap.

They’re refusing to get that QT is cleaning up after the last burst of spending. As MMT says should be done.

In which of course they’re very like the reaction to Keynesian deficit spending. They love the expansion of the spending but aren’t willing - as Keynes said, when the Sun is shining is the time to fix the roof - to deal with the contraction of it when the economy is booming.

Yet this insulation was always a fiction. The Treasury still indemnifies Bank losses. The government could pause QT, rework reserve interest payments or end the indemnity altogether. Other countries do. With a commanding Commons majority, ministers can easily force such a change. The Bank of England may be operationally independent, but ministers can take control of it in “extreme economic circumstances”. If £150bn of Treasury spending to needlessly cover central bank losses doesn’t qualify, what does?

Look at the squirming of having to do what MMT actually says. Sure, print and spend but when inflation arises you’ve got to have a budget surplus so as to pull the money back out of the economy. QT’s only major difference at this level is that it’s actually accounting for all that money printing - yet how do they whine.

QE/QT is MMT and money printing then tax it back. And the left won’t allow QT which is the system that holds feet to the fire about that collecting the money back. MMT pure, with just the money printing, will never be allowed to tax back that money - therefore it will inevitably lead to inflation.

We’ve tested MMT. It fails the political test - fails in that it cannot be performed inside a political system. So, the Hell with it then.