‘Verdict is in’ on modern monetary theory, strategist says – Yahoo Finance

Tick off a loss for the modern monetary theorists amid rising inflation, says InfraCap Founder and CEO Jay Hatfield.

Modern Monetary Theory (MMT) is a macroeconomic lens which prescribes that monetarily sovereign countries like the U.S. are unaffected by financial constraints as long as they control their currencies. With roots dating back to the early 20th century, MMT was first popularized in its modern form by Warren Mosler, an American investment fund manager.

Under 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, provided they can meet consumer demand.

The past few months have seen inflation skyrocket to 40-year highs, with the latest consumer price index report showing an annual price increase of almost 8%.

WASHINGTON DC, USA - MARCH 21: Jerome Powell, Chairman of the U.S. Federal Reserve, speaks during the National Association of Business Economics (NABE) economic policy conference in Washington, D.C, United States on March 21, 2022. (Photo by Yasin Ozturk/Anadolu Agency via Getty Images)

The Fed policy has been extraordinarily erratic, really dating 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 get away with, effectively, modern monetary theory. And now the verdict is in. You can't.

The money supply has risen consistently since the dawn of the 21st century, but growth was accelerated amid the $2.3 trillion and $1.9 trillion stimulus bills passed by President Trump and President Biden, respectively. The Fed increased the M2 monetary base from just over $9 trillion in April of 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 consists of money in circulation as well as short-term time deposits.

[Increasing the monetary base has created] almost double digit inflation, if you marked rents to market or housing to market, Hatfield added. And so they clearly have a problem. The only issue is how much patience [the Fed will] have. We're optimistic that they'll have that patience.

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Hatfield is part of a camp of economists and economic strategists that view the countrys ongoing struggles as partially caused by MMTs creep into mainstream Federal Reserve policy over the past couple of years. The backlash to the economic theory has long identified high inflation and burgeoning deficits as weights on economic well-being.

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

Even so, a growing number of economists support MMT and view the recent historical record as proof of its success.

In answering the question has MMT failed?, The answer is an unequivocal 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 frameworka lensthrough which to evaluate fiscal and monetary policy, she wrote on her website back in January. The specific policies taken by certain administrations were made under a framework which does not regard deficits with the same importance as was commonplace even a few years ago.

The point is, you cant blame MMT for stoking inflation any more than you can blame an optometrist if her patient runs off the road while driving without wearing their prescription lenses, she wrote. MMT doesnt tell us that the world is an open road, free of hazards or the need for caution. It doesnt reject fiscal responsibility, it redefines it so that our eyes stay focused on the real limits on spending.

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

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'Verdict is in' on modern monetary theory, strategist says - Yahoo Finance