Modern Monetary Theorists. The Ghosts of Inflation Past?

Modern Monetary Theorists and Jacob Marley

Unlike Scrooge’s deceased business partner, Marley, we don’t believe that inflation has met the same fate.  It is subdued, but lives.  Despite the assertions of Modern Monetary Theorists (MMT), we disagree that the US can continue printing money without consequences.

Modern Monetary Theorists (MMT).  MMT adherents view the chart immediately below as proof positive of their postulates.  Because US money supply (measured by M2) has increased significantly without a commensurate surge in inflation, they contend that this state of affairs can continue indefinitely, particularly since the dollar is the global reserve currency.

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Source: M2 Money Stock 

Increases in Inflation. History, however, does not tell the same story.  One of our favorite economic books is The Great Wave by David Hackett Fischer, which examines price trends (and their causes) over the last millennium.  We commend it to your reading, but a takeaway is that increases in money supply correlate with increases in inflation – although they do not match perfectly in timing or causality.  But in every case, an out-of-control money supply contributes to higher inflation, whether or not the liquidity surge actually sparked the inflationary crisis.

The following chart provides more perspective by showing M2 as a percent of GDP, which has the effect of amplifying the 2020 stimulus.  It certainly begs the question as to what will happen next.


Source: M2 Money Stock/Gross Domestic Product

Excess of Money. An excess of money availability is fuel for the inflationary fire.  All you need is a spark to move the demand needle “enough”, and the psychological machinery of inflation will push prices higher in a relentless cycle.

What could create that spark?  Biden is essentially coming in as a wartime President.  We will be at war against inequality, racism, household debt, carbon and “bad” energy, the rise of China (maybe), terrorism and so forth.  This could be just as ambitious as the guns and butter agenda (the Viet Nam War and the Great Society) of the Johnson Administration, which kicked off the last major inflationary cycle.

Even a Republican Senate hawkish on inflation may not be able to prevent a major cycle.  We have already printed so much money that the genie may have escaped from the bottle, just waiting.

An inflationary environment would have a meaningful impact on financing and restructuring activities.  We will address these topics in future blogs.


Commentary by Gordian Group CEO Henry Owsley