Modern Monetary Theory Part 2: inflationary experience


In Part 1 of my criticism of Modern Monetary Theory, I explained currency debasement was a fundamental part of it. In this Part 2, I will explain why the whataboutery that is used by the MMTers can be dismissed.

Whataboutery. A useful noun. It is frequently heard coming from MMTers when a critic of MMT says printing money will lead to inflation – but what about Japan? they say. Over the last 25 years, Japan’s money supply has more than doubled. Yet inflation has not broken out much at all. See?

The fact that a country with a large program of quantitative easing did not experience a currency crisis through persistent high inflation can not be taken as proof that MMT does not cause inflation. Prices are influenced by many factors. The money supply is only one factor. Others include demand and supply interactions, preferences, technology changes, government policy changes in other areas (energy prices, anyone?) and so on. It is entirely feasible that the combined effect of all those other factors outweighs the inflationary effect of money supply expansion for many years.

Measuring price inflation is not easy. The government statistical agencies measure it by pricing a so-called representative basket of goods. Define a hypothetical basket of goods that consumers typically buy, and keep track of the prices of that typical basket and from that you can infer the rate of price change. Except, of course, not everyone’s own purchases will match the basket of assumed purchases. Prices of some items have consistently fallen for decades, eg computing power. Others have risen sharply in recent years eg electricity. Each consumer experiences their own average inflation rate. So measurement of inflation is not an exact science. To try to then breakdown an inflation rate into its movement due to different underlying causes is simply not possible. To the question: what about Japan? the only answer is what about it? It proves nothing. Therefore, it disproves nothing. In particular, the clear and obvious reasoning that explains why MMT must lead to inflation is not disproved on the basis of what did not happen in Japan.

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