Manhattan Project to prevent Hyper-Inflation


It’s ironic that, at this moment, when the truthfulness and utility of modern money theory (MMT) is being publicly realized—(and even potentially implemented!)—that its singular vulnerability must emerge as a real concern: hyper-inflation.

The most recent thing I’ve written—Paying Ourselves to Save the Planet­­—addresses the issue of hyper-inflation as follows:

“Hyper-inflation” is a rate of inflation that happens so rapidly there’s no opportunity for people and businesses to adjust. Prices are, suddenly, noticeably higher—and then still higher tomorrow—and higher yet the day after. The money in my bank account suddenly can’t buy half of what it could last week. In a rush to keep the economy from collapsing, the currency-issuing government issues more and more money to enable consumers to continue buying—and ultimately must begin adding more and more zeroes to its paper dollars. This leads to economic and social chaos at every level.

It appears that hyper-inflation is caused by the government issuing too much money—and it’s for this reason that MMT is often attacked, by standard theory advocates, as a precursor to economic disaster. The issuing of too much hyper-inflationary money, however, is a reflexive, emergency government response to another underlying problem that caused the hyper-inflation to get started in the first place. To say that “printing money” causes hyper-inflation is like saying “flames” cause a fire.

The underlying problem that has caused every historical (and contemporary) instance of hyper-inflation is the same: the significant and general collapse of a nation’s production of goods and services. This happened in post-World-War-I Germany when the Weimar Republic shut down its manufacturing heartland as a refusal to acquiesce to unfair war reparations imposed by the Allies. It happened in Zimbabwe when Robert Mugabe evicted white landowners from their farms—which were the agricultural-financial foundation of the economy—and gave the land to new black owners without preparing them to operate the farms. The ensuing collapse of the Zimbabwean agricultural economy quickly led to one of the most infamous hyper-inflations recorded. This same general collapse of production is happening in Venezuela today, with the hyper-inflation being fueled further by a collapse in national income from oil exports—which had been used to import most of the goods on Venezuelan store-shelves. Result: empty shelves, but lots of bolivars in people’s pockets.

The book goes on to observe that none of the actions contemplated to “save the planet” from the climate-crisis would have the effect of causing “a significant and general collapse of a nation’s production of goods and services.” Quite the opposite, in fact, would be expected: The not-profit-making, public enterprise efforts would employ millions of people to produce a broad spectrum of goods and services—and that new employment, in turn, would support a broad spectrum of profit-making, private enterprise ventures. All along the lines that MMT has been arguing for years.

This is not, however, what is happening now with the fight against the Coronavirus—and the desperate effort by governments to put money in the pockets of people who can’t work and businesses who can’t open their doors to customers. So, while we’re discovering first hand and in real-time that, yes, sovereign currency issuing governments can, in fact, just create money so they can spend it—without having to collect it back in taxes, either now or in the future—we are also laying the groundwork for causing the hyperinflations described above: “A significant and general collapse” of our business and employment framework is happening before our eyes, while our government feverishly dishes out cash.

Not that the cash shouldn’t be dished out. But it must be accompanied by an intelligent, comprehensive, and aggressive effort to shorten the “collapse” and restart production and consumption of goods and services—and the public must know this effort is being undertaken. Nothing short of a full-blown mobilization for a “Manhattan Project” to defeat the virus will get the job done. This must include, as a start, 100% testing and a centrally coordinated, federally mandated, production and manufacturing ramp-up of medical supplies, equipment, and emergency facilities.

MMT, from my perspective, has never been about giving people money—its about paying people to produce not-profit-making goods and services which benefit collective society. It would be a tragedy if the sovereign spending efforts now being envisioned and enacted accomplished only the first, and left the second undone—setting the stage for a hyper-inflation that might ruin the promise of modern money theory for a generation to come.

15 responses to “Manhattan Project to prevent Hyper-Inflation

  1. While the text of this article calls for a “full-blown mobilization for a “Manhattan Project” to defeat the virus,” the headline calls for a “Manhattan Project to prevent Hyper-Inflation.” The headline is dangerous, as it suggests that the main danger we face is hyperinflation.

    For decades, orthodox economists have inveighed against government deficit spending on the grounds that it will put us on the famed “slippery slope” to hyperinflation. The trifecta of “Weimar! Zimbabwe! Venezuela!” is routinely invoked — most recently by one economist interviewed on Public Radio’s “Marketplace” just last week. So heterodox economists need to be very careful of the political implications of raising the spectre of hyperinflation.

    The article states that we are experiencing “a significant and general collapse of a nation’s production of goods and services.” When I think of the “collapse” of a building, a dam or a bridge, I think of the *unsought* systemic failure of a structure — something whose causes and process of development can only be diagnosed after the fact. What we are now experiencing is better characterized as a significant *reduction* of the nation’s production of goods and services. This reduction is *sought* and we can form reasonable estimates of its duration. The risk of hyperinflation is low, especially given the relative stinginess of the fiscal stimulus being discussed in Washington today.

  2. Who could have dreamed that this new book would seem to be PRECISELY what we need to weather this raging storm and emerge from it into a healthier, happier, more humane world? Suddenly, fiat money is being recognized not only as a reality but as a necessity, and thus the pressing need to address the bugaboo of inflation, which has always pestered the “printing money” concept. No group of economists has more closely studied the historical manifestations of inflation than those who embrace MMT. The results of their research desperately need to be popularized for mass consumption, and this new book might be just the ticket. Certainly the sample looks promising, and I encourage everyone to pull up the book link and read it.

  3. Fabio Castellanos

    I am very happy to see this article being published at this time. I have been somewhat perplexed at the fact that, with the current coronavirus epidemic, very few commentaries , if any, are being made to counteract or confirm some of the postulates that MMT is espousing. I would have thought that many economists, like R. Wray, S. Kelton, etc would have been writing to bring some clarity about misconceptions coming from many fronts, including those of many respectable economists. Or comments about the job guarantee program.

    While I am not economist nor pretend to be one, like someone said: what are living very interesting and unsettling times where we are all being affected by what is happening to relegate these matters to economists.

    One article I did read that made a salient remark was about the BOE issuing a statement that it was intending to purchase, in the primary market, some treasury securities the government would be issuing without having to go around the bushes, giving out unnecessary fees and commissions to dealers / brokers with these securities being later bought in the secondary market by the BOE. It was a salient remark because it appears that until recently it was “anathema”. Too bad, the article stopped short and did not go the extra step of doing away with any issuance of securities and subsequent monetization by the BOE to simply have added that the government could have instructed the BOE to simply issue currency without the corporate welfare of paying interest on securities that need not needed to be issued in the first place.

    The grave danger that I see is how MMT is now being associated with just putting the printers to work, so to speak, and how that could lead to inflation. It is obvious that that is not what MMT is about. It is about using idle capacity in the economy where people can do work and get paid for it. If an economy is going to go through a major supply shock and too much money is issued, it is obvious that inflationary pressures will surface.

    It would seem timely that, as this crisis unfolds, MMT advocates bring their full arsenal to instruct people about what MMT is all about, demystify all of the economic BS that people want us to make us believe are “sacred principles” and reveal that the emperor has no clothes.

  4. Fabio Castellanos

    I like the creative euphemisms economists are using these days. I am reading an article in today’s daily in an emerging country, written by an economist and previous member of the Board of Governors of the nation’s central bank, recommending that the Central Bank lend money to the Central Government. !!!

  5. Fabio Castellanos

    I love the euphemisms traditional economists are using for recommending what they project as bold and audacious measures. In the emerging country I happen to live, an economist and former board director of the Central Bank, suggests that what needs to be done is for the Central Bank to “lend money” to Central Government as a policy tool to counteract the current and rapidly deteriorating situation besetting all of us. The only thing that was not mentioned was the rate of interest that would apply as if this were to matter!

    On the other hand, what does matter is the degree of manoeuver- policy space- emerging countries have when they have foreign borrowings. I wonder what sort of tipping point, viz. Foreign currency borrowings as a percentage of GDP or international reserves, triggers a loss of policy space!

  6. I would say that it is the right time to invoke some theory-of-money ideas.

    One theory is that government mandated slowdowns have reduced the velocity of money. In this theory, the amount of money available to each money owner remains the same, only the rate of transfer is drastically reduced.

    Along comes government with a plan to increase the rate of money movement by giving away money. Now the question is: will the money given away come from newly created money (from the Fed) or will the money given away come from existing supply simply borrowed from existing owners?

    The amount of inflation generated should be at least partly related to the proportional source division.

    That said, I think inflation is at least partly due to factors other than money supply. Certainly competition between suppliers has a role. Look immediately to oil for a current example.

  7. Some countries like Denmark, The Netherlands, Germany, the UK and maybe others I don’t know about are paying people a significant portion of their pay (70-80%) to stay home. That’s the “work” those governments are paying for and it’s a simple system that keeps the employees on the payroll (their companies pay them and are reimbursed by the government) until things get better (a vaccine arrives). Some parts of the economy can still function like agriculture, grocery stores, etc. Unfortunately my country chose otherwise because although one Senator advocated such a plan, it was felt by the majority that someone might cheat and cost the government money. The Danish person being interviewed about this plan said they realized that could happen, but they could care less. Keeping people home was the goal and if it cost a few extra $$$ so what!

  8. Michael Crews

    “…setting the stage for a hyper-inflation that might ruin the promise of modern money theory for a generation to come.”

    Ah, so you’re an optimist.

  9. I’m well versed in MMT and the faults in tradictional kneejerk hyperinflation arguments – so this perspective on potential real risk of hyperinflation, from an MMT view, is appreciated.

    However, I’m skeptical – the article lacks specifics, and due to many reasons is poor for that:
    1: There is a general collapse of productive capacity, but there is a collapse in demand as well.

    2: The issue of WHERE people will spend their money is not addressed, and what specific supply bottlenecks will be hit (food production? seems very limited in possibilities).

    3: Areas of critical resources/production (like the food supply) are going to be extremely elastic, able to ramp back up quickly, because of governments increasingly taking a wartime economy approach to this, and having a very large pool of reserve labour.

    4: Most of peoples spending is going to utilities, other consolidated industries, rents and debts, especeially while stuck at home – to classes of people who do not spend much, but who save – and with the average person likely to be saving more, too. I see traditional deflationary pressures during recessions, as being a bigger concern, due to a lot of this.

    A lot of these are just things off the top of my head. You need at least this level of detailed analysis in a future article. You need to be specific about where the supply constraints are going to be etc. – not speak generally about inflationary pressures etc..

  10. All the criticisms levied here seem legitimate and well-deserved, and I humbly accept them. Since I’m not a “heterodox economist,” but simply an architect who is trying to help lay-people understand how fiat money works, I don’t have the inclination or tools to do the things some commentators are now suggesting. No doubt they should be done.
    Having said that, I am still unhappy that what the public is seeing as the first “demonstration” of MMT involves cash injections and bailouts of global corporations—rather than a full mobilization of people and resources to actually defeat the pandemic. A full mobilization of people and resources (a “Manhattan Project”)—to undertake essential-but-not-profit-making ventures—is what will be required to confront the global climate challenge. In that light, it would be hoped that the best thing to result from the present coronavirus crisis will be the realization that sovereign governments can create money, as necessary, to pay people and businesses to do just that. And that we don’t have to wait for global warming to become a full-blown crisis before governments begin doing it. Right now, the first “demonstrations” of MMT are, unfortunately, “demonstrating” something else.

    • MMT absolutely has the money creation process correct and is just as correct in positing that the government could and should create much greater deficits. It also is correct that it would not lead to hyperinflation as that requires numerous disastrous circumstances and/or decisions to occur. However, it wouldn’t stop garden variety inflation as that is primarily caused by commercial decision makers who live in the present demand scarce reality and will look to increase their prices whenever they perceive more money/potential business revenues coming into the system. Conservatives and libertarians will scream of course when that occurs giving them fodder for more austerity delusion.

      The answer to this and many other present economic problems is a 50% discount/rebate price and monetary policy at the point of retail sale which would not only terminally end inflation but beneficially implement price and asset DE-flation into profit making economic systems. It would also immediately double everyone’s earned income purchasing power. Paired with a monthly universal dividend it would immediately end poverty, enable us to eliminate all transfer taxation for welfare, unemployment insurance and even for social security. That and the fact that these policies would simultaneously more than double the potential demand for every enterprise’s goods and services and become a beneficial “offer they could not refuse” makes it an incredibly integrative political issue that a mass socio-economic and political movement would herd pols on both sides to implement. There are many, many other “knock on” benefits to these policies and the realistic regulations that would attend them that you can see evolving here:

      Lets not lose the efficacious expose’ of direct fiscal and individual monetary stimulus brought on by the corona virus.

    • Just ordered your ‘Paying Ourselves’ book! I was asked to review it for a large climate science website; I told the admins about MMT and they grasped its importance right away. If I have questions I hope I may contact you, thanks!

  11. As investment opportunities dwindle, is there a chance that all that money pumped into the financial sector from years of QE start shifting to commodity markets? Not all commodities but specific necessities like food could skyrocket in price?

  12. Excellent and timely discussion and points by all.

  13. Kirk Seidenbecker

    In addition to this being an MMT moment, it is also a moment to reflect on the inflationary costs of public infrastructure over the past thirty years, namely, education, healthcare and housing, which have lead the U.S. into the destabilized, cash strapped-debt burdened situation it was in before even before the Covid-19 crisis. Simon Patten, the first economics professor at the Wharton School of the University of Pennsylvania and coined the term social work, argued that the fourth factor of production was public infrastructure, provided either free or at cost, so as to reduce the general public’s overhead costs. Along with a job guarantee, geared heavily towards renewable energy projects, a method of capturing economic rents would seem to be in order as well. As Keynes called for “…the euthanasia of the rentier…”