In an episode of the first season of The West Wing, White House Deputy Communications Director Joshua Lyman, portrayed by Bradley Whitford, is asked a question by a reporter if the Administration had a plan to combat the inflation arising from the rapid drop in unemployment that was taking place. Josh, flustered by the questions, ends up saying that "the President has a secret plan to fight inflation," even when there was no such plan, prompting widespread ridicule. This scene was one of the funnier and memorable scenes of the series, and it raises a very pertinent question that today lies at the heart of Modern Monetary Theory: how can we tackle inflation?
First, we need to understand what Modern Monetary Theory (MMT) is. MMT is a highly contentious theory that advocates for stimulus-driven by increased government spending financed by the government by increasing the supply of currency, or in other words, by printing more money. The government can ask the Central Bank (CB) to print more money, and then purchase sovereign bonds using the cash that the CB has created. The government then uses this cash for development projects, while simultaneously increasing the debt it is taking on. The government hopes that development projects will lead to increased productivity, leading to greater tax revenues. Consequently putting the government in a position to control its debt. However, there is a chance that the increased liquidity might cause inflation, more specifically, demand-pull inflation. The increased liquidity in the system, and decreasing unemployment that accompany increased public spending, lead to an increase in aggregate demand at a rate greater than that of aggregate supply increase, causing goods and services to become more expensive leading to inflation. MMT posits that this inflation can be controlled by increasing taxes on corporations and individuals to curb unnecessary or extraneous spending, which controls demand and keeps inflation in check.
This complex theory, at least on the surface, seems to make sense, and the incumbent Biden Administration has officials who believe in this theory, like Treasury Secretary Janet Yellen, who recently had a public spat with former Democratic Treasury Secretary Larry Summers about the utility of this theory. And now, even Michael Burry has thrown his hat in the ring. Fox News' polarising anchor, Tucker Carlson, recently reported on Dr.Michael Burry's recent tweets on the MMT. Dr. Burry is one of the very few people who predicted the 2008 Global Financial Crisis (and was portrayed by Christian Bale in the 2011 film The Big Short). Dr. Burry claims that taxes, without seriously damaging productivity, would not be enough to arrest the rise in demand and the resultant inflation. He gives examples from the 1974 book, Dying of Money, which focused on the economic ruin of the erstwhile Weimar Republic. The German economy, just before it collapsed in the 1920s, had "taken on unmistakable characteristics. One was a great wealth at least of those favored by the boom. Many great fortunes sprang up overnight … Prices in Germany were steady and both businesses and the stock market was booming … Side by side with the wealth were pockets of great poverty, greater numbers of people remained on the outside of the easy money, looking in, but not able to enter … Speculation alone, while adding nothing to Germany's wealth, became one of its greatest activities. The fever to join in and turning a quick mark infected nearly all classes. Everyone from the elevator operator was playing the market." Like the German government at the time had resorted to printing more money to pay off war reparations, the US government today relies on similar measures to finance the stimulus packages it is unveiling to combat the losses suffered due to the pandemic. How this liquidity ended up in stock markets in 1920s Germany is eerily similar to the stock market boom that we are currently in the midst of. We are aware of the fate of the Weimar Republic: hyperinflation hit the country, and by 1923, a million Deutsch marks weren't enough to buy a loaf of bread.
It remains to be seen if the measures undertaken by the US will have a similar effect. But Dr. Burry is convinced of the bleak outcome. He tweeted, "People say I didn't warn last time [referring to his unheeded warnings about the 2008 financial crisis]. I did, but no one listened. So I warn you this time. And still, no one listens. But I will have proof I warned." And regardless of where you stand on the debate surrounding MMT, Dr. Burry's dire warnings definitely can't be ignored. We only hope that policymakers pay heed to this before it's too late.
(Written by Agnidh Ghosh & Edited by Aarushi Kataria)
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