The experience of Latin America should serve as a clear warning for today’s Modern Monetary Theory enthusiasts. There, fiscal expansions that were financed by printing money spun catastrophically out of control

The experience of Latin America should serve as a clear warning for today’s Modern Monetary Theory enthusiasts. There, fiscal expansions that were financed by printing money spun catastrophically out of control

Modern Monetary Theory (MMT), a seemingly new approach to economic policy, has become a hot topic, gaining support from leading US progressives such as presidential candidate Bernie Sanders and Democratic Representative Alexandria Ocasio-Cortez. But MMT enthusiasts should heed lessons learned in Latin America, where policies based on similar ideas inevitably ended in economic catastrophe.

According to MMT’s supporters, the US Federal Reserve should print large amounts of money to finance massive public infrastructure projects, along with a “job guarantee” program aimed at ensuring full employment. A major increase in public-sector debt, MMT backers claim, does not represent a danger for a country that can borrow in its own currency, as the United States can.

This unconventional view has been criticized by Keynesians and monetarists alike. Many respected academic economists, including Paul Krugman, Kenneth Rogoff, and Larry Summers, say that MMT makes little sense.

In response, MMT supporters argue that the theory’s critics do not fully understand how a modern monetary economy works. According to influential MMT advocates such as Stephanie Kelton, governments in countries with their own national currency, such as the US, do not face hard budget constraints because they can simply print more money to finance higher expenditures.

Assessing the merits of MMT is difficult, for two reasons. For starters, its supporters have not provided a unified, detailed description of how the model is meant to work. As Krugman recently wrote, MMT backers “tend to be unclear about what exactly their differences with conventional views are, and also have a strong habit of dismissing out of hand any attempt to make sense of what they’re saying.” In addition, MMT supporters have offered hardly any inkling of how the policy might function in practice, especially in the medium and long term.

Yet the approach is not unprecedented. MMT, or some version of it, has been tried in several Latin American countries, including Chile, Argentina, Brazil, Ecuador, Nicaragua, Peru, and Venezuela. All had their own currency at the time. Moreover, their governments – almost all of which were populist – relied on arguments similar to those used by today’s MMT supporters to justify huge increases in public expenditure financed by the central bank. And all of these experiments led to runaway inflation, huge currency devaluations, and precipitous declines in real wages.

Four episodes in particular are instructive: Chile under President Salvador Allende’s socialist regime from 1970 to 1973; Peru during President Alan García’s first administration (1985-1990); Argentina under Presidents Néstor Kirchner and Cristina Fernández de Kirchner from 2003 to 2015; and Venezuela since 1999 under Presidents Hugo Chávez and Nicolás Maduro.

In all four cases, a similar pattern emerged. After the authorities created money to finance very large fiscal deficits, an economic boom immediately followed. Wages increased (helped by substantial minimum-wage hikes) and unemployment declined. Soon, however, bottlenecks appeared and prices skyrocketed, in some cases at hyperinflationary rates. Inflation reached 500% in Chile in 1973, some 7,000% in Peru in 1990, and is expected to be almost ten million percent in Venezuela this year. In Argentina, meanwhile, inflation was more subdued but still very high, averaging 40% in 2015.

The authorities responded by imposing price and wage controls and stiff protectionist policies. But the controls did not work, and output and employment eventually collapsed. Worse still, in three of these four countries, inflation-adjusted wages fell sharply during the MMT-type experiment. In the periods in question, real wages declined by 39% in Chile, 41% in Peru, and by more than 50% in Venezuela – hurting the poor and the middle class.

In each case, the central bank was controlled by politicians, with predictable results. In Chile, the money supply grew by 360% in 1973 alone, helping to finance a budget deficit equivalent to an astonishing 24% of GDP. In Peru in 1989, money growth was 7,000%, and the fiscal deficit exceeded 10% of GDP. In Argentina in 2015, the deficit was 6% of GDP, with the annual rate of money creation surpassing 40%. And Venezuela currently has a deficit of 32% of GDP, with the money supply estimated to be growing at an annual rate of more than 1,000%.

As inflation increased in these countries, people greatly reduced their holdings of domestic money. But because governments required taxes to be paid in local currency, it did not completely disappear. Instead, the speed at which money changed hands – what economists call “velocity of circulation” – increased dramatically. No one wanted to be holding paper money that lost 20% or more of its value every month.

When the demand for money collapses, the effects of money growth on inflation are amplified, and a vicious circle develops. One serious consequence is that the currency depreciates rapidly in international markets. MMT supporters conveniently ignore the simple fact that demand for local money declines drastically when its value tumbles. Yet this is perhaps one of the theory’s biggest weaknesses, and one that makes it extremely risky for any country to implement.

The experience of Latin America should serve as a clear warning for today’s MMT enthusiasts. In a variety of countries, and at very different times, fiscal expansions that were financed by printing money resulted in an uncontrollable loss of economic stability. Economic-policy ideas are often as dangerous in practice as they are flawed in theory. MMT may be a case in point.

Sebastián Edwards is Professor of International Economics at UCLA’s Anderson Graduate School of Management. His latest book is American Default: The Untold Story of FDR, the Supreme Court and the Battle Over Gold.   Copyright: Project Syndicate, 2019, and published here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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It's a pretty simple theory. Government overspending is financed by money creation. Like all central planning theories, it is elegant and seductive. There is no apparent reason why it should not work. The problem seems to be that once you start, it is hard to stop. We have already travelled part way down this dangerous path with the 2% inflation target. That is why a house now takes almost twice as many hours of work to actually buy as it did in 1992, when the RBNZ started it's current deluded regime.

Each new generation is seduced by the notion that the government can fix things by spending more. It's teenage thinking, a reaction to being in a powerless dependent relationship. Government can fix things by simplifying and improving the rules, but generally we just encourage them to SPEND MORE.

Absolutely correct Roger the problem is now so large its impossible to turn back without creating a financial disaster in the markets which will the spill into the real economy.

Actually, I think the economic issues are still fairly easy to remedy in New Zealand's case. We still have a functioning productive business model that earns good money from overseas, we do not need to goose this with inflationary new money or government overspending. A balanced budget and an inflation target of 0% would probably be enough. The problem is purely political, ie, there is no will to turn the ship around.

So, we will probably keep making assets less affordable for ourselves and squabble more. Wealth will accrue to a smaller group who are able to game the system best. Polarisation and violence will rise (eg Christchurch). The streets will have more litter and the cry for more socialism will increase. Strikes will become a regular problem, trains and buses will be unreliable, the internet will often be down. Young people with skills will head for Aussie, where they will earn twice as much.

I'm not sure how we turn this around, it probably just has to run its course. These ideas seem to be cyclical, they come and go over decades.

I agree with your comments about NZ we are still n a relatively good space other than housing and property values in general as we have maintained pretty orthodox sound economics however the impact of a major global market correction will be harsh due do to high debt levels but that said we could bounce back faster than most.

The irony of what you say is that it is actually printing a lot of money that would fix the overvaluation in New Zealand property.

Well that really depends how the money is put into the system, and how the incentives on landholdings are modified.

No way, printing money putting more into the economy, for the same amount of assets, means the assets go for more money. That's why the Govt & Elite love this inflationary system. They own most of the assets. And if bread/milk/insurance/rates cost more, that doesn't matter for them, it's a very small slice of their income to pay those. Not the case for everyone else, but why would they care, they're getting wildly rich.

Here's Steve Keen refuting pretty much every point made in this article

Here's Thomas Palley supporting pretty much every point in this article, plus highlighting many more issues with whatever 'MMT' refers to this year.

no bias there. eh?

self-reinforcing, but why the need? What skin do you have in needing the song to be kept on 'repeat'?

Bias? Because I quoted something that has actually been published on the topic I am biased?
I'm biased against MMT because the crappy ideas it encompasses form some pseudo theory that is even shittier in practice.

MMT, if you haven't realised, is essentially the 'song on repeat' in your eyes, except the record player has been turned up to about 333 rpm.

I meant the vested-interest of he whom you quote

Oh. But it's fine to quote the completely unbiased Steve Keen, right?
That self proclaimed "contrarian" economist is definitely not biased, eh.

No. The difference is very clear, as it is with you.

Keen thinks and questions.

Other defend that upon which they have hung their hats.

What irony.
Keen is possibly the worst for defending his entrenched position.
Elementary mistakes and blatant misrepresentations are just as endemic in his work as any other economist you despise.

Not as elementary as the foolish assumption that you can have infinite growth on a finite planet (said assertion being made even as mass extinction and temperature-forcing and oceanic plastic soups stare you in the face).

Try thinking. What did the E stand for in Einstein's equation? Does that tell you anything? Keen gets that. You clearly don't.

Get off it.
Like I've said, my challenge still stands - find one economic model (or economist) that assumes the planet isn't finite.
You clearly don't get what the 'e' stands for, either. It relates to the amount of energy contained in a given mass. It says nothing about the way in which that energy is utilised. It gives no indications of the upper or lower limits of efficiency of that energy. Simply the amount of energy, given a mass.
That's what you don't understand - that one unit of energy doesn't produce a homogenous output. One unit of energy doesn't produce one widget; it produces a number of widgets commensurate with the efficiency of which that energy can be converted (thus, also a function of technology and human capital). The argument is that we will never reach 100% efficiency (this is also your point) and that implicitly means that we will only ever asymptotically approach that hard limit of efficiency (growth rates are obviously not linear, and this reflects the very notion of wastage in thermodynamics). Mathematically this implies an infinite growth rate in energy efficiency, not necessarily energy use. As I have said to you many a time, you need to decouple your elementary perspective that one unit of energy can only produce one unit of output. Then things will become clearer.

Oh dear.

Thanks for explaining your position.

Great rebuttal.

Here's a 2017 paper that cites some of Keens work and captures the ideas of Wynne Godley and Hyman Minsky in a system dynamics simulation. 10.1093/cje/bex046 The conclusion is that fiscal "responsibility", prudence, Maastricht-type rules, or whatever (basically what the NZ government is doing with it's surplus obsession). Well that action destabilises the economy if the private sector is heavily indebted.

That doesn't support MMT directly. And no conclusions to that extent are made. The core proposition of this paper is that the macroeconomy is inherently unstable and not equilibrium stabilising as conventional models like to suggest. It didn't look at sectoral debt, just aggregate balances and nor did it contribute anything about how a government could manage borrowing, stimulus, and the pragmatics at the micro level - the key objection to MMT by most.
They suggest by systems dynamics modelling, the Godley–Minsky has less volatility than the Maastrict type approach under certain cycles. Not necessarily a monumental surprise when you are endogenising an exogenous type instrument.

In some respects MMT is the perfect umbrella term for a straw man argument. I think that’s one reason why Steve Keen distances himself from the MMT camp. It’s more productive to focus on specifics like questioning whether bank lending adds to aggregate demand? Or questioning whether governments should engage in counter-cyclical type deficit spending in response to private sector debt deleveraging? Your distinctions in the abovementioned paper are subtle (destabilizing vs not equilibrium stabilising). Anyway the paper is freely available for anyone to read.

The point the article makes is that every time anything resembling MMT was tried in practice it ended in tears , quick .
To refute that one would have to point to an example where it did not. Can you ?

The example is in the US - only they printed the money and transferred it to the FIRE economy, as opposed to the real economy (in the first instance).

So you think it is working well in the US ?

For some it is working gloriously well - beyond all expectations in fact. It's why the exceedingly wealthy have become exceedingly wealthier.


Indeed - this is one of the consequences o MMT -like approach as Roger explains so well above and elsewhere.

So - is it working well in the US in your opinion ? not sure if you are holding this up as a place that benefited from MMT ?
A bit confused .. but does not sound like it . .

Look, the author of the piece cites Larry Summers as one of the guys on his 'side' of the debate. Does that not tell you something?

It's why I call their implementation of QE, faux-Keynesianism. The foxes took what John Maynard theorized and played it for their own benefit. Now the foxes have no clothes and have reverted to orthodoxy. It's a do as I say, not as I do argument they are pitching at you.

As I said, it's working well for some in the US. The ones it didn't work out well for voted Trump in as President.

Ahh, Kate, pretty much every macro economist is on the author's 'side' of this argument...
Barring some really B-rate economists (and impressionable persons), everyone is generally in agreement that MMT is real pie in the sky stuff.
It just never ceases to amaze me that people can be so disenfranchised with a system (that lets face it, they don't actually understand) that they can advocate to replace the current system with one that is absent of a unifying theory.

I'm not arguing for MMT. I'm saying that's what we've got at the moment.

Wooooah there..
You may want to have a bit of a rethink about your position, if you posit we are already at MMT in the western world.
I dont think just calling a Keynesian stimulus 'faux' as a justification gets ya to where you wanna be.

Can you explain to me what you see as the difference between what the Dems are talking about and what the FED have already done?

Umm. I dunno. Maybe $50 trillion dollars?
To say QE is akin to the New Green Deal (as an example) is a gross oversimplification of the two things.
Sure QE is an unconventional monetary policy, but it is rather distinct to the underpinning ideas of MMT. Namely relating to the micro level foundations of the economy.

I'm not talking about the New Green Deal - I'm talking about monetary policy. Good we're on the same page.

You are saying MMT monetary policy is distinct from QE monetary policy at a micro level.

So, does that make MMT money printing for microeconomic distribution/purposes to individuals or individual companies, and QE money printing for macroeconomic distribution/purposes at a national level (to the banks to expand credit creation)?

If that's what you mean, I'm agreed.

Okay, well for one the FED and the government are separate entities. The government sets the agenda; the FED is under no obligation to buy these bonds. In doing so acts as a mechanism for suppressing market interest rates. This is based on a standard Keynesian multiplier rule. Not some 'faux' Keynesian rule. The effect (supposedly being) a reduction in the volatility of inflation - which is true in the case of NZ.
That's the fundamental difference at a macro policy level.

An MMT'er would propose that regardless of the real interest rate (inflation rate) mechanism, the government could issue these bonds without impunity. There is no guarantee that the central bank buy this - doing so obliterates the requirement for a central bank.

At aggregate level, governments may target employment. In most models that is endogenised as a function of the exogenous input of money supply through an interest rate mechanism. An MMT'er argues that the government should target this level exogenously through nominal deficit spending (that is not QE) and that it should, effectively, guarantee a job to anyone who wants it.
It ignores several things:
At the micro level, short of running a command economy, the government can not perfectly allocate its deficit spending to maximise employment.
The central bank doesn't have to buy your worthless notes - the cost (and volatility) of that money becomes significantly higher.

Lots of equivocation / waxing lyrical .. but no answer to my question - do YOU think it is working well for the US ?

MMT'ers are also great at the "but that's not real communism" type retort.

Nope. And to reverse the harm the Larry Summers' of this world caused, the prescription for starters is to understand the points made by Danielle Booth (ex-FED), and follow her prescription - but it doesn't sit well with those in the FIRE economy getting wealthier and wealthier by the hour;

I agree it is not working well there - so US is not the positive example you need to defend MMT - contrary to your bringing it up as one originally.

I'm not defending MMT - I'm saying it is what we've got and the folks that are agin' it are the ones who implemented it for their own benefit and the more they pretend and extend the more it works out well for them.

QE is an asset swap - bonds for reserves - no net financial benefit for private sector.
Fiscal deficits (funded either via overt monetary finance or bond issuance) is a net increase in financial assets for private sector and a direct stimulus to the real economy. Big difference between pure QE and fiscal stimulus on the real economy.
The Central Bank is a creature of the state. Its governing rules can easily be changed to encourage it to buy up government debt directly or in the secondary market. Japan's central bank owns a huge chunk of the JGBs. To what inflationary effect exactly???? None. Try the widowmaker trade if you don't believe me!
The US is deficit spending big time. No bond vigilantes have made their presence felt. No dollar armageddon and inflationary death spiral has occurred. Unfortunately they chose to give tax cuts to the top end of town rather than a job guarantee for the bottom end of town. Fiscal stimulus that helps those with the larger marginal propensity to consume will have more of a mulitiplier effect on aggregate spending. Hence the MMT preference to spend on the job guarantee by giving anyone who wants one a transitional job at the minimum wage. Still, the US is hardly depressed compared to the rest of the world. Look at the US compared to the austere EU and then ask yourself if deficits are such disasters. Japan and the US may decry MMT publicly but they're all at it behind the scenes. Meanwhile in NZ with the OCR at 1.5% what do you think is going to happen in the next recession - fiscal deficits and the RBNZ will buy up the bonds on the secondary market. Why not just buy them directly and cut out the corporate ticket clipping?

I just get the impression that the anti-MMT academic faculty in the US simply argue against MMT because they know that post-GFC the FED socialised those initial losses of the private financial sector - and in doing so, set off a QE (faux-Keynesian) crisis leading to yet more socialising of private sector losses, this time in the real economy.

Hence their arguments are mostly grounded in scaremongering by way of comparisons such as above, rather than focusing on the US as the US. It is a very different beast.

What MMT does is change government finances from tax(/borrow) and then spend to spend and then tax. Any taxation they get behind on eventually shows up as inflation. Goverments are already pretty good at printing as much as they can without causing significant inflation.

As far a full employment goes, MMT does not create jobs. This a just an example of how much spending you can get away with. Printing to pay people for jobs that generate no economic return or that we don't value enough to pay the taxes for devalues wages and is therefore inflationary. We could raise taxes to create meaningless jobs to do this now.

Actually the job guarantee is a transitional job offer at the minimum wage that keeps labour ready and conserved so that the private sector can pick up workers as things improve. It is a potentially delfationary mechanism on wages in that sense. Right now we have a large pool of unemployable people (legacy of the past 30 years of NAIRU) that don't provide competition in the labour market. If you have a glut of a product you can dump it or conserve it. In NZ we dump people the market doesn't want. The job guarantee conserves the glut of labour a recession or lack of aggregate demand causes. It gives people dignity and keeps them sane so that when a job paying a wee bit more opens up they aren't depressed and addicted and lost. Employers don't like hiring long term unemployed people. People with a consistent work history and good habits - well that's different.

A reasonable appraisal here:

The joke is that no financial system can fix the problems facing nations, jointly and/or severally.

They are all apportioning-systems (to various player's advantage) of resources within a bounded system.

That some have come to worship this or that financial system, is an interesting question as to the 'need to believe' and that discussion will almost certainly traverse the abandonment of traditional belief systems (like religions).

But this is an argument about relative deck-chair colour, aboard a sinking ship.

To the lifeboats, lets get off the ship.

The other major flaw in MMT or, indeed, in any theory that assumes Gubmints are actually Competent at whatever they decide to turn their hands to, is that they simply aren't Competent. Of the four core activities that underpin human societies - food, shelter, transport, security - Gubmints can really only be relied upon for Security, especially external, and then only partially or intermittently or some mixture of both.

"Four core activities..."

Sex surely has to be one of them, without sex the human race becomes extinct

Actually, it appears the governments have been successful in that in certain sectors, in an unintended consequence kind of way. And if that fails there's always immigration.

It seems to me that an increasing percentage of the population is getting well and truly rogered by government policy.

I have started my own Country and my Own Bank. My Own, will hold all the Reserves under the Sun, the Moon and the Stars. Our reserve currency will be Reservation, where any fool can hold it, as long as they pay their taxes to me in "Perfect Ourmoney' This is the perfect solution, for me as it is 100% of the Ourmoney Print goes to the non-workers of My Fair
If you have Qualms about it...that is my other new Currency, for tomorrows people., so Qualm down and sign up.
Me Too and Us Two are partners in this. My wife insists she shares in the Deal, as she has my vice in this Nut Jobbie....going forwards, no looking back, a Marriage of convenience, equally shared. The pot called the kettle a WC and a game of thrones, as I will be the New Ruler and my Wife, provides a measure of comfort, queen of all she Surveys.
No arguments here...Funny munny is well worth Mortgagee Sales, no Social Welfare, no need for Taxes, IRD, nor religious persuasion, Passing the hat around. No need for Donations, that version comes out at Christmas, just in time for Santa Claws back to revert to mean. As the money will grow on Christmas Trees, with Donald seated well at the Top, but as we all know.....that is because he has scored a Hole in One......and Airforce One......will give Fly Buys....
And Rudolf will drag it and him to World Premiership Status.......the way the USA Dollar is being printed like so much Toilet Paper.....or as we will know it soon...Cost Residual Averaged Perpetual....or c.r.a.p.......for short......but not for ....long....not if I way...and the Wifey, does not the divorce proceeding and preceding all else.....Print and be damned. I say...
But they seem to ignore me.....for some inexplicable...reason.....cos Labour is following suit.....and Santa is the big red outfit.......we all will wear this year......A new shade of Debt.....Made by 2008 and sold one and all.....but is it working...I ask my self.

Own Up....All Donations Gratefully Received. Orr not.

Savers, no longer welcome..please Note. ..Cache is king. MT yer pockets....

MMT is a description of macroeconomics in a country with monetary sovereignty, with no foreign-currency government debt. One of the resulting points is that the only constraint on government spending in such a country is the real-resource constraint, i.e. inflation. It's telling that the author doesn't mention "We're already doing it"-Japan, or reference any of the decades of MMT literature, and instead straw-mans a bunch of hyperinflation situations caused by supply-side shocks and foreign-currency debt. It seems that this academic hasn't done his homework.

Yes. But the author knows they already did it; don't know how to undo what they did; and that the initial doing only benefited the FIRE sector (with the help of academics on their payroll, such as Rogoff).

Yes you're right that MMT is a description of how the monetary system actually works, right now, in those countries like NZ, AUS, GB, US, Japan etc with their own sovereign currency that is floating. It is not really applicable to pegged currencies like Argentina or Venezuela, or to common currency nations like the EU. Fundamentally it observes that nations such as NZ do not fund their government spending with either taxes or bond sales. They spend via keystrokes at the RBNZ then tax some of it back to moderate inflation and create "spending space" for future spending. Without government spending there would be no money to pay tax! Government Bond sales are a liquidity tool so the RBNZ can mop up reserves and persuade banks not to lend to each other at rates that undermine the OCR. Bonds are bought and sold all the time by the RBNZ on the secondary market for this purpose independent of whether the government is running a surplus or deficit. MMT is politically agnostic and can be used by the "right" or "left". Nor does it advocate deficits over surpluses - it depends on the circumstances. What it does is force political parties to be more honest and transparent about their ideology and objectives without hiding behind the "we cant afford it" excuse that both National and Labour use. Many more things can be afforded than currently, including a Job Guarantee, its just the main parties since the 1980's choose not to

I wrote a 3 part blog on MMT as it relates to NZ if anyone is interested in an expansion of these ideas, starting here

Its most vocal advocate is Professor Bill Mitchell. He gave a speech here in Wellington a year or so ago that eloquently explains it in NZ context

I think... Modern Monetary Theory is what we have had since the GFC and Greenspans low interest era.

The Merits of MMT - a recent discussion by Martin North, and Steven Hall from University of Adelaide.

Well, very happy to see this site has finally posted an article on MMT - even if it isn't from one of the key MMT economists (Mitchell, Kelton, Wray). Please give them a voice as well - in the interests of balance.
MMT fully recognises that OMF (overt monetary financed) deficit spending beyond the REAL CAPACITY of the economy to respond will promote inflation. Spending is real resource constrained - not financially constrained. Excess spending by any sector - government, private domestic or foreign can cause inflation. MMT encourages spending "at the bottom" via the job guarantee at the minimum wage - not via spending in already inflating sectors.
Critics of MMT love to focus on latin American economies - which all have multiple other factors going on aside from money printing - like debt in foreign currency and severe political instability. But hesitate when it comes to ahem, big MMT-relevant economies like Japan and the US which are clearly struggling to reach inflation targets despite large deficit spending.
Anyway, while all mainstream economists are supposedly against MMT - come the next recession - they will all be for it. As monetary policy has run its (chequered) course and really fiscal policy is all there is. Sooner or later they'll all start trying to be on the right side of history.