Commentary on Political Economy

Saturday, 9 January 2021


Don't be fooled by MMT trickery

Wolfgang Kasper

The modern monetary theory that would unleash dangerous inflation is a form of fringe-dwelling populism that has escaped proper scrutiny by professional economists.

A spectre is haunting the world – Modern Monetary Theory. All the central banks of the world are now in alliance to finance public-sector deficits by conjuring more and more money out of thin air.

The roots of MMT lie in the 1990s when idle supply capacities, a wave of innovations and a fairly stable US price level allowed then US Federal Reserve governor Alan Greenspan to boost money supply as a means of accelerating real economic growth. Like Keynes in the 1930s, Greenspan hoped that artificially stimulated demand would raise prices, thus lowering real wages and boosting production and employment.

MMT advocate Stephanie Kelton is an example of how populist evangelists can gain quick popularity through blogs, tweets and talkfests. Roy VanDerVegt

However, workers and organised labour cannot be fooled for long by such surreptitious confidence tricks. In the wake of Keynesian stimulus, labour insists on wage indexation or even adjusts wage demands pre-emptively to protect real living standards (as they should).

Today, the supply potential of the economy is reduced by a coronavirus-induced coma, growing trade conflicts and populist trade policies that threaten a partial, productivity-destroying disintegration of the world economy. MMT expansionism therefore threatens inflation.

In the 2000s, a generation of inexperienced fringe dwellers in finance and academia began to advocate MMT, that is, issuing of central-bank money to bankroll public spending. One of them was an unknown US academic, Stephanie Kelton, who made a quick career from student to professor in a minor college to high-profile economic adviser of Bernie Sanders and now the incoming Biden-Harris administration.

This was an example of how populist evangelists can gain quick popularity through blogs, tweets and talkfests, but avoiding serious professional scrutiny through established journals and critical book reviews.

Unsurprisingly, the message that massive new spending programs – such as a "Green New Deal" – can be painlessly financed was immediately popular with all those casually educated politicians and bureaucrats.

The flywheel of inflation is likely to gain momentum and the economically weak, the ignorant, the young and the improvident will be impoverished.

Yet, the age-old wisdom that more money chasing an inevitably slow-growing supply of goods and services leads to painful inflation cannot be brushed aside so easily.

In the 1930s, Friedrich Hayek opposed Keynesian expansionism by public spending and easy money with the argument that it gradually destroys the critical allocational function of markets for money and capital.

Nowadays, as central banks push for super-low or negative interest rates, capital structures are becoming overladen with speculative investments in corrupt casinos, overpriced modernist art, oversized beachside mansions, unwanted school halls and zombie firms. Risky agricultural, mining and industrial enterprises lose out.

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