MMT: The “printing money causes inflation” myth

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One of the most common, but ill-informed criticisms of Modern Money Theory (MMT), is that if the government just prints money and spends as much as it can, then it will cause inflation. This is quite correct. Of course, MMT does not advocate that the government spends as much money as it can print, it is not a Magic Money Tree as some have described it. However:

  • Government spending is not inflationary if it can bring idle resources back into production (e.g. house-building, employment). (See “Seven Replies”, below)
  • All spending is inflationary if it drives the demand for goods above that which can be produced. Energy (gas, electricity and petrol) prices in 2022 are high because of reduced availability and more money will not make energy more available (except to the wealthy).

Evidence that government spending does not necessarily cause inflation

Peter L. Jørgensenet al write:

“this paper presents empirical evidence that prices do not increase in response to a positive government spending shock. Instead, the response of prices is flat or even negative” (Jørgensenet, 2022)

Forbes magazine notes:

“Does government spending cause inflation? [..] The answer, roughly, is yes – and in other cases, no. [..] Studies of the historical link between government spending and inflation find that the link is tenuous. [..] In particular, one study by the St. Louis Federal Reserve (see source below) found that government spending has little to no impact on inflation. In fact, a 10% increase in government spending may lead to a 0.08% decline in inflation. [..] Others have found that government spending around the world may have minimal impacts on inflation, often in the tenths of a percentage point.” (Forbes, 2022)

In their paper, Yash Moitra and Pooja Sharma conclude:

“The overarching conclusion remains that Government Spending does not cause Inflation.” (Moitram 2021)

The Gower Initiative (Gimms) recognises that:

“too much of any kind of spending can create inflation, [..] A little steady inflation is seen as ‘good’ and too much or little is seen as ‘bad’. When either the government or non-government sectors of the economy spend [..] it can cause inflation – but doesn’t necessarily. This can be illustrated by a brief look at the UK economy in the 20th century.” (Gimms 2019)

Mai Chi Dao et al wrote:

“especially the sharp movement in energy prices, played a dominant role in driving the international rise and fall in inflation since 2020” (Dao, 2024)

Here in the UK, inflation is at a 40 year high (Sept 2022) (ref). According to a Research Briefing published by the House of Commons Library (ref) the main reasons are consumer goods and energy prices. Although MMT proponents and the Bank of England (BoE) would not equate quantitative easing (QE) with government spending per se, even the BoE acknowledges that QE helps control inflation (ref).

But what about the hyperinflation in Germany’s Weimar Republic after World War I? As others have pointed out, inflation was caused by a war-devastated manufacturing and production system, and demands of the external debt coming from reparations and prewar debt (ref) (ref). Germany printed more money as a response. Printing money became an indicator of hyperinflation, it was not the cause.

A country with monetary sovereignty can and does print money, and can do so responsibly without causing inflation. In other words, money created for frivolous purposes may lead to inflation, but money created to enable production will be backed up by the purpose for which it is put (e.g. building houses).

Cause of inflation

Economist Abba P. Lerner wrote that the cause of inflation is as follows:

“The first financial responsibility of the government .. is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. [..]

The almost instinctive revulsion that we have to the idea of printing money, and the tendency to identify it with inflation, can be overcome if we calm ourselves and take note that this printing does not affect the amount of money spent” (Lerner, 1943)

See also

 

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