Inflation equals the end of money printing

February 16, 2024

All this inflation does have a benefit: we don’t have to hear from certain academics about Modern Monetary Theory anymore. You’re probably thinking “I don’t really care about the PhD path of an economist, I care that my grocery bill is up 20%+ in two years.” Stay with me.

Modern Monetary Theory was/is a dream cooked up by certain economists that a nation that issues its own currency can do so without risk or remorse. Magically, debt does not even have to be issued! The market will absorb the currency increase, and the Federal Reserve can always issue more currency to pay the debt. There is the small caveat that they have to pull back at the correct time if resources such as labor get too tight to avoid inflation.

Except it’s not a small caveat. It probably should have like fifteen asterisks and pink highlighter all over it. Because, as anyone who walks down aisle 7 of a grocery store and looks at the pricing stickers knows, they have little ability to time the currency pullback. And that craters the main theory, which may, in certain contexts, have had some validity.

As the money supply soared and America began to buckle under inflation, the Federal Reserve acted too late in 2022, assigning blame to “supply chain issues.” Here is a graph the Wall Street Journal published last week, showing overall expectations on rate cuts versus reality:

Both of these examples show the Federal Reserve's ability to predict macroeconomic events, such as employment and inflation, is low at best. If you can’t predict it, you can’t react in time, and you end up with eggs doubling in price in a year. On the bright side, an aspiring economist somewhere got a PhD for his or her innovative theory.

There are lots of people on this list that run, manage, or work in businesses who would say “I would never issue that level of debt, that is too risky. What happens when it rolls over at a higher rate, and you have to deal with the interest payments?” First, keep in mind that in Modern Monetary Theory, they are issuing currency, not debt. Something a business can't do. Second, a lot of businesses did issue too much debt, in part because the incentives of managers, particularly in public companies, are tied to short-term results.

However, I don't think the line is as clean between currency and debt as many economists believe. It all gets rather addictive - whether you are printing currency or issuing debt, the short-term boost is fantastic. Your shareholders or voters think you're a genius. The fallout is less thrilling. As the Federal Reserve works to get that excess money supply out of the economy, with higher rates, the government is now facing this (note the interest expense line).

Graph source: WSJ 2/16/24

Theoretically this should lead to lower economic growth, lower asset returns, and a lower standard of living over time as interest expense consumes the nation's resources at a significantly higher rate.

Dan Cunningham

1. Modern Monetary Theory is fantastically complex. As such its implications are not well understood. Remember the One Day In July mantra: if it's not simple, it probably won't work. That which is simple is understandable.