MMT/MMTers: mistake 1 - cause of inflation and hyperinflation

I am having a long running discussion on twitter with advocates of Modern Monetary Theory (MMT) and their followers (MMTers). I need to apologise at the outset for not distinguishing between the founders of MMT and the followers of MMT. I know that over the years a considerable chasm grew between Keynes and the Keynesians. This was recorded by T.W. Hutchinson in “Keynes v the Keynesians” where he distinguished between what Keynes said and what Keynesians say he should have, or would have, said.

From a twinkle in Warren Mosler`s eye MMT is evolving into a politically acceptable theory and one that is beginning to drive politicians who may one day be in power and therefore be able to act upon these ideas. MMT is a theory that is fundamentally flawed and this needs to be pointed out before its ideas are used to damage the economy it is trying to manage.

To understand why MMT is growing in popularity we need to look back at Keynesian theory and its similarities to MMT. There is a strong foundation of Keynesian theory that is used to explain why it should work and, for more than fifty years, ever growing evidence to show that it has not and cannot work in reality. The reason it has not worked is that it is built upon wrong assumptions that are explained in other articles on this blog.

·      Both MMT and Keynesians assume that output gaps can be closed by demand management. I have explained this fallacy elsewhere on my blog – “Are demand management policies the solution or a mass delusion?”

·      Both share the fallacy of cost push inflation which is refuted in the second of “The four fallacies of the coming economic apocalypse”

·      Both see a trade-off between inflation and employment represented in the Phillips Curve and refuted in “Professor A W Philips would turn in his grave if he knew how the Keynesians had corrupted his curve”

·      They also refer to the trade (business) cycle as a normal response to capitalism that needs to be managed away by government using countercyclical policy. This is refuted in “Fluctuations in economic activity: only one cause”

With all these errors why was Keynesian economics so popular as a tool of macroeconomic management for so long? The answer is that it was constructed in a language that only economists can understand and, in simple terms, it told politicians what they wanted to hear namely that they could spend more money as well as cut taxes. This is a win/win when it comes to attracting votes.

Now that Keynesian economics is more generally recognised as a failure politicians are looking for another theory that can support their profligacy and along came Modern Monetary Theory. In no particular order I have chosen some of their mistakes to analyse and start with mistake 1. The cause of inflation and hyperinflation.

At this point it is critical to grasp the difference between a rise in the average level of prices, which is inflation, and a change in relative prices which can occur without a change in the average as prices rise and fall against each other.

 Stephanie Kelton, a prominent advocate of MMT, stated that “all inflations for the last 100 years are cost push inflations” Both MMT and Keynesians require an explanation of inflation, for their theories to progress, that can explain how inflation occurs when there is deficient aggregate demand in the economy. As much as we want to believe that oil prices, energy prices, wage rises and falling currency values can cause inflation it is just not logical. By definition all inflations are defined by more units of money used in the same number of transactions. All of the above can change relative prices, but none of them can increase the number of units of money in the economy. There is therefore only one cause of inflation and that is the action of a Central Bank who, in a modern economy, manage the stock and flow of money in that economy.

The logic of this argument continues to explain hyperinflation of which there is only one cause. It is an acceleration in monetary demand not matched by a growth in real output. MMT however fail to focus on this and instead focus on the event that caused the printing presses to start rolling. This trigger event will vary from one hyperinflation to another depending on whether you are looking at the Weimar Republic, Argentina, Zimbabwe, Venezuela etc. The MMT statement is that there are many causes of a hyperinflation which usually start with a contraction of the real economy.

The critical point is that if this contraction of the economy took place and the printing presses did not roll then there could not be hyperinflation. All hyperinflations have the same printing press cause. There are no exceptions.

We now come to the correction. All inflations for the last 100 years have been caused by excessive monetary demand and all hyperinflations are caused by government and Central Bank printing presses.

John Hearn  8/7/19