Modern Monetary Theory : Why It Can’t Provide Sustained Economic Growth and Low Inflation

Since March 2020, central banks in major economies have been monetising government deficits by purchasing a significant part of the new debt issued by the government. In the UK, this has resulted in the rate of growth of money broadly-defined (M4) reaching an extraordinary 14% in 2020. Advocates of Modern Monetary Theory (MMT) propose the systematic use of the state’s monopoly power to print money to pay for government deficits (a "partial MMT" programme) or even all government spending (a "full MMT" programme). The application of a "partial MMT" policy in 2021 in the UK would have led to even higher growth rates of money than in 2020. If a "full MMT" policy had been adopted, and all government spending were monetised by the Bank of England, the annual rate of growth of money would have been above 48% in 2020 and above 35% in 2021. These figures are incompatible with stable economic growth and low inflation over the medium and long term. In an MMT-dominated world, the central bank’s only role would be to accommodate the financial needs of the Treasury, determined by the government’s economic policies and political goals. Statistical evidence shows the correlation between excessive money growth and higher nominal income and inflation. When the amount of money in the economy is too large for too long, there will inevitably be inflationary pressures in the medium to the long term. This has already been the situation since March 2020 particularly in the USA, but also in the UK and the Eurozone. Central banks need to choose between either surrendering monetary stability and low inflation altogether and effectively moving towards the adoption of an MMT paradigm or taking the necessary measures to rein in inflation and take back control of the amount of money in circulation