For a few days there, after finishing reading Stephanie Kelton’s book on Modern Monetary Theory, The Deficit Myth, I was starting to doubt my sanity. She sounded really convincing.
This is the problem with not have studied economics formally, but just having read a few textbooks to teach myself economics. There are always going to be gaps in my knowledge such that I cannot easily pick holes in what intuitively seem like quite bizarre theories.
Economics all comes down to how you interpret the simple concept of Supply and Demand. That might be quite simple, but Economics is a social science, so there is a lot of room for error, especially when you factor in the need to try and predict the behaviour of billions of people.
Intuitively, I know that money printing is going to result in inflation, lots and lots of it, and that this could manifest itself in high bread prices, or in high house prices (most likely the latter rather than the former). But I am not going to be able to explain exactly why because I am not a trained economist.
And when clever academics like Professor Kelton or L. Randall Wray write their books and tell me that MMT is NOT money printing (it is all keystrokes on a computer) and that it is not going to cause rampant inflation, I end up scratching my head and wondering how to rebut these assertions.
Thankfully, the answer was sitting in another book on my coffee table (a giant pile of unread books I am slowing getting around to reading), financial guru Jim Rickard’s most recent book, Aftermath. Rickard is one of those people who writes about doom and gloom and how you should stock up on gold for when the Financial Zombie Apocalypse finally hits.
In his chapter ‘Free Money’, Rickard demolishes MMT. He asserts that there are two related factors which the MMT acolytes do not take into account when blithely arguing that the US or Australian governments can create as much money as they like (and they should). Those are confidence, and velocity. When confidence in a currency drops, the velocity of money increases, ie people are going to change their money into other goods (eg gold coins, shotgun shells, tinned food, toilet paper etc) and will be doing so at a faster and faster speed, forcing the price of those goods to go up as confidence in the currency goes down. Ergo inflation, and possibly hyper-inflation.
Thank you Mr Rickard for providing me a sensible rebuttal of Money Monetary Theory and restoring my trust in my own sanity. Now I will resume stock piling toilet paper and packs of dry pasta for when the tough times really hit.