The verdict is in modern monetary theory, says strategist

Mark a loss for modern monetary theorists amid rising inflation, says InfraCap founder and CEO Jay Hatfield.

Modern monetary theory (MMT) is a macroeconomic lens that prescribes that monetarily sovereign countries like the US are not affected by financial constraints as long as they control their currencies. With estate Dating back to the early 20th century, MMT was first popularized in its modern form by Warren Mosler, an American hedge fund manager.

Under the MMT, the risk of inflation is considered minimal, as governments that fully control their fiat currencies are believed to be able to control price levels, as long as they can meet customer demand.

In recent months, inflation has spiked to 40-year highs, and the latest Consumer Price Index report shows an annual price increase of almost 8%.

WASHINGTON DC, USA - MARCH 21: US Federal Reserve Chairman Jerome Powell speaks at the National Association for Business Economics (NABE) economic policy conference in Washington, DC, USA on March 21, 2022. (Photo by Yasin Ozturk/Anadolu Agency via Getty Images)

WASHINGTON DC, USA – MARCH 21: US Federal Reserve Chairman Jerome Powell speaks at the National Association for Business Economics (NABE) economic policy conference in Washington, DC, USA on March 21, 2022. (Photo by Yasin Ozturk/Anadolu Agency via Getty Images)

“The Fed’s policy…has been extraordinarily erratic, really going back to when Powell took over and almost created a recession in 2018,” John Kicklighter, chief strategist at DailyFX, told Yahoo Finance Live. “But the 82% increase in the monetary base was an experiment to see if we could actually get away with modern monetary theory. And now the verdict is in. You can not”.

The money supply has risen steadily since the dawn of the 21st century, but growth accelerated amid the $2.3 trillion and $1.9 trillion stimulus bills passed by President Trump and President Biden, respectively. . The Federal Reserve increased the M2 monetary base from just over $9 trillion in April 2011, to over $15 trillion in February 2020, to over $21.8 trillion in February 2022, two years after the start of the coronavirus pandemic. The M2 base is made up of money in circulation and short-term time deposits.

“[Increasing the monetary base has created] Almost double-digit inflation, if it marked the rents to the market or the housing to the market”, added Hatfield. “And they clearly have a problem. The only problem is how much patience [the Fed will] have. We are optimistic that they will have that patience.”

Hatfield is part of a camp of economists and economic strategists who see the country’s ongoing struggles as caused in part by the advancement of MMT into mainstream Fed policy over the past two years. the reaction Economic theory has long identified high inflation and rising deficits as weights for economic well-being.

SAN FRANCISCO, CALIFORNIA - MARCH 31: Shoppers carry purchases as they walk through the Union Square shopping district on March 31, 2022 in San Francisco, California.  According to a Commerce Department report, inflation is taking its toll on the economy and consumer spending rose a weak 0.2 percent in February compared with a 2.7 percent jump in January.  (Photo by Justin Sullivan/Getty Images)

SAN FRANCISCO, CALIFORNIA – MARCH 31: Shoppers carry purchases as they walk through the Union Square shopping district on March 31, 2022 in San Francisco, California. According to a Commerce Department report, inflation is taking its toll on the economy and consumer spending rose a weak 0.2 percent in February compared with a 2.7 percent jump in January. (Photo by Justin Sullivan/Getty Images)

Still, a growing number of economists support MMT and view the recent all-time high as proof of your success.

When answering the question ‘Has MMT failed?’, “The answer is a resounding no,” according to Stephanie Kelton, professor of economics and public policy at Stony Brook University and one of the leading experts on modern monetary theory.

“MMT offers a descriptive framework, a lens, through which to assess fiscal and monetary policy,” he wrote. on your website back in January. The specific policies of certain administrations have been carried out within a framework that does not give deficits the same importance as was usual a few years ago.

“The point is that ‘MMT’ can no more be blamed for stoking inflation than an optometrist can be blamed if his patient runs off the road while driving without wearing his prescription glasses,” he wrote. “MMT does not tell us that the world is an open road, free from danger or the need for caution. It does not reject fiscal responsibility, it redefines it so that our gaze remains on the real limits of spending.”

Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.

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