Posted by: Dirk | February 8, 2019

Re: “MMT Sounds Great In Theory…But”

An article appeared this week which runs a critique of MMT. It is basically this (my highlighting):

MMT has a cost that we have yet to hear about from its proponents.

The value of the dollar, like any commodity, rises and falls as the supply of dollars change. <<< For instance if the government suddenly doubled the money supply, one dollar would still be worth one dollar but it would only buy half of what it would have bought prior to their action. >>>

This is the flaw MMT supporters do not address. MMT is not a free lunch. MMT is paid for by reducing the value of the dollar and ergo your purchasing power. MMT is a hidden tax that it is paid by everyone holding dollars. The problem as Michael Lebowitz outlined in Two Percent for the One Percent, inflation tends to harm the poor and middle class while benefiting the wealthy.

Our fear is that MMT, which promises “free college,” “healthcare for all,” “free childcare,” and “jobs for all” with no consequences, instead delivers inflation, generates further wealth/income inequality, and ultimately greater levels of social instability and populism. Just as has been seen in every other country which has run such programs of unbridled debts and deficits.

The claim that the government could suddenly double the money supply and that this would lead to a depreciation of 50% of the US dollar is theoretically unsound and empirically wrong. Let us have a look at the relationship of money supply (I use all aggregates that I can get) and real exchange rate (data from FRED):

Monetary base:

fredgraph-7

M1:

fredgraph-4

M2:

fredgraph-5

M3:

fredgraph-6

I think that you don’t have to be an economist or have done a PhD involving econometrics (economic statistics) to see that the claim “doubling the monetary supply decreases the dollar’s exchange rate by 50%” does not hold at all. While monetary supply goes up almost all of the time, the exchange rate swung back and forth. There does not seem to be any causal relationship at all. This is not a surprise: almost all scholars of economics point out that the trade-weighted exchange rate is influenced by interest rates and expectations of interest rates. Textbooks of international economics contain discussions of (uncovered) interest parity and other issues, but there is no textbook that I know of that claims that monetary supply drives “the” exchange rate. Given the empirical picture above it is quite reasonable.

The other “arguments” against MMT belong firmly into the territory of “monetary cranks”, so that I will stop here. MMT, right from the start with Warren Mosler’s 1997 paper “Full Employment and Price Stability” has addressed concerns of inflation. Also, MMT does not promise anything. It is that when people understand the way the monetary system works – and THAT is what MMT is about – then certain problems seem to have rather simple solutions.

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