Modern Monetary Magic At Work

Republican Everett Dirksen was the Senate Minority Leader during the 1960s. Cautioning that federal spending had a way of getting out of control, Dirksen reportedly observed, "A billion here, a billion there, and pretty soon you're talking real money." Proponents of Modern Monetary Theory (MMT) have been claiming in recent years that the US federal government can run large budget deficits to fund social welfare programs without any serious adverse economic or financial consequences.

MMT’s claim that a government that borrows in its own currency can finance its spending at will with more debt lost credibility as inflation soared in 2022 and 2023. But now it seems to be working. As much as we dislike MMT, we have to admit that tremendous fiscal stimulus by the current administration helped to offset the tightening of monetary policy, thus helping to avert a recession (along with other stimulative forces such as spending by retiring Baby Boomers). Nevertheless, while the y/y inflation rate has subsided, prices are much higher now than at the start of the pandemic (chart).