The Modern Monetary Theory (MMT) Failure – When Printing Money Stops Working

Being extremely publicly correct about something and then abruptly and blatantly wrong about it can cause a certain type of intellectual humiliation. Modern Monetary Theory held an odd and self-assured place in economic discourse in the late 2010s. It was rejected by mainstream economists, praised by progressive politicians, and regarded by some academics as the long-suppressed truth that conventional wisdom had been too shy to recognize. The Deficit Myth, written by Stephanie Kelton, became a New York Times bestseller. MMT economists were consulted by Bernie Sanders. According to Alexandria Ocasio-Cortez, the theory is crucial to the national dialogue about government spending. It felt like a real intellectual moment. The grocery store receipts started to tell a different story after the pandemic struck and the spending began.

Without its more complex framework, the fundamental idea of MMT is fairly simple: a government in charge of its own fiat currency cannot actually run out of money since it can always produce more. According to this perspective, debt is not the existential threat that traditional economics maintains it is. When deficits are managed well, private savings are actually created.

Key Information: Modern Monetary Theory (MMT) — Overview & Outcomes

The availability of real resources, such as labor, supplies, and productive capacity, is what really limits government spending rather than the amount of national debt. Inflation sets in when those resources run out, and taxes are then used as a corrective measure to remove money from an overheated economy. There was internal logic to the theory. Additionally, as events would show, there was a big discrepancy between its elegance in theory and how it behaved in actual situations.

The federal debt of the United States was approximately $23.2 trillion at the beginning of 2020. The most concentrated government expenditure in American history ensued. The federal debt reached almost $30 trillion by the end of 2021 as a result of numerous rounds of stimulus, including direct payments to households, increased unemployment benefits, business subsidies, and federal programs of all kinds. Over the course of about two years, the economy moved about five trillion dollars. According to the theory, this was controllable as long as the demand could be met by actual resources. An economy where supply chains were broken, production was hampered by government-mandated shutdowns, and a massive influx of new money was chasing a drastically reduced supply of nearly everything was what the theory failed to adequately account for.

The outcome was not subtle. Measured by the Consumer Price Index, food prices increased by about 11%. The cost of energy increased by about 33%. Buyers who had been comfortably planning purchases just a year prior were no longer able to afford housing prices. Wages did increase because employers were forced to raise wages due to the need for workers as businesses attempted to reopen. However, the same inflation that the wage increases were meant to offset continued to overwhelm them. Employees made more money but made fewer purchases. The computation failed to close. During a lecture at Stony Brook, Kelton attempted to allay worries about inflation by pointing out that contemporary money creation entails altering bank account numbers rather than physically printing bills, as though the process of creation somehow changed the economic impact of more money pursuing fewer goods. It didn’t.

In hindsight, it is not particularly noteworthy that MMT was tested and yielded inconsistent outcomes. Real-world economic experiments invariably result in complications that theory fails to account for. It’s remarkable how fast the discussion vanished as soon as the issues became apparent. MMT received about 5,000 mentions in academic and news publications between 2019 and the end of 2021. That number had fallen to about seven hundred by 2022 as inflation increased and the term “transitory” subtly vanished from official terminology. The theory’s creators did not publicly address what had transpired in a sustained manner. In the same way that characterizing a flood as “a lot of water” is technically accurate, Kelton attributed the shortest recession in American history to MMT.

At this point, it’s difficult to ignore the historical context of MMT. Before the government fell, Chile under Salvador Allende in the early 1970s pursued monetary policies with the same fundamental logic: print to fund, tax to cool. This resulted in hyperinflation. For more than ten years, Maduro’s Venezuela has been experiencing a more severe form of the same failure. Brazil and Argentina have experienced repeated cycles of it. By pointing out that the US dollar has a special global reserve status that shields it from the pressures those economies faced, MMT proponents have typically rejected these comparisons. That might be partially accurate. However, the insulation is not limitless, and the inflation of 2021 and 2022 showed that even the dollar has limits, as was evident and costly at the checkout counter.

The theory has some usefulness as a descriptive framework. The observation that governments that issue currency have greater fiscal flexibility than household budget analogies imply is not inherently incorrect, and it does capture something genuine about how contemporary monetary systems actually operate. However, the gap between explaining how money functions and dictating how much of it should be created proved to be larger than its proponents realized. Those who saw it most immediately—at the gas pump, the grocery store, and the rent renewal—paid the price of that disparity.