MMT and Hyperinflation

L. Randall Wray | August 24, 2011

(via EconoMonitor)

In last week’s post, I responded to Paul Krugman’s critique of Modern Money Theory (MMT), which argues that a sovereign government that issues its own floating exchange rate currency cannot face an affordability constraint—which means it cannot be forced into involuntary default on its own currency debt. His criticisms really boiled down to a misunderstanding over operational details—how banks work, how the Federal Government really spends, and the role played by the Fed in making all these operations work smoothly. I won’t rehash any of that here.

But what we were left with is the argument that if a government operates along MMT lines, then we are on the path to ruinous hyperinflation. Of course Austrians have long argued that all fiat money regimes are subject to these dangers—even ones that don’t follow MMT’s recommendations. MMTers are commonly accused of promoting policy that would recreate the experiences of Zimbabwe or Weimar Republic hyperinflations. These were supposedly caused by governments that resorted to “money printing” to finance burgeoning deficits—increasing the money supply at such a rapid pace that inflation accelerated to truly monumental rates.

It is very easy to titillate audiences with graphs such as the following, which displays rapid depreciation of the Weimar Republic’s paper money in terms of gold:

Or with a picture of a Zimbabwe note—which shares the all-time record for number of zeroes:

No one wants to defend high inflation, much less hyperinflation. In his classic 1956 paper Phillip Cagan defined hyperinflation as an inflation rate of 50% or more per month. Clearly the zeroes would add up quickly, and economic life would be significantly disrupted.  To read the rest, click here…


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