Inflation report shows Milton Friedman was right, Modern Monetary Theory wrong: rising prices follow federal government spending spree.
Chalk up another hit for the late Nobel Prize winning monetary economist Milton Friedman. And send the Modern Monetary Theorists back to the bench. Better yet, cut them from the roster.
The latest inflation report from the Bureau of Labor Statistics (BLS) has some good news: The inflation rate is slowing. According to BLS, “The all items index increased 4.0 percent for the 12 months ending May; this was the smallest 12-month increase since the period ending March 2021.”
The decline was predictable. In fact, it was predicted months ago by economist and investment analyst Don Luskin.
Don began his discussions by citing Milton Friedman on inflation: “It is always and everywhere, a monetary phenomenon. It’s always and everywhere, a result of too much money, of a more rapid increase in the quantity of money than an output.”
At the outset of the pandemic, Congress and the president, first Donald Trump then Joe Biden, began passing multi-trillion dollar spending bills, flooding the country and economy with money.
Given the states were shutting down their economies, a reasonable case can be made for the first stimulus bill in March 2020, and perhaps the second bill. But there wasn’t much of an economic case for the later bills, especially Biden’s American Rescue Plan, which passed in February 2021.
As can be seen in the St. Louis Federal Reserve Bank’s (FRED) graph, Washington poured money into the economy at a much faster rate than ever before, peaking in March 2022. Since then, the money supply has been declining at a much faster rate than ever before.
Inflation followed the money supply, though the biggest impact is usually delayed by several months. As you can see from the second FRED graph, inflation ticked up at the beginning of the pandemic, but really cranked up in early 2021 with the passage of Biden’s American Rescue Plan. The rate of increase began slowing in April of this year—about a year after the money supply peaked.
The concern now is the economy may fall into recession because of the sharp decrease in the money supply.
Let it be noted that the Modern Monetary Theorists, who generally support more government spending and increased money supply—and are widely embraced by progressives and, in practice, President Biden—predicted none of these developments.
They’ve been very quiet for the past year or so. But if you want to read more about their theory, you should be able to find their books—in the bargain basket at your local book store.
Originally published by the Institute for Policy Innovation. Republished with permission.
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