Is it good for the economy to print more money? Or is it bad? Basic economic theory would suggest the latter to be true as increased money supply is known to cause inflation, devalue the currency, and also has negative effects on investments. Nevertheless, an unconventional economic theory based on all the aforementioned factors, or perhaps risks, has seen a rise in popularity in recent times. It is called Modern Monetary Theory.
It put forth the idea that money can be spent ceaselessly by governments that control their own money whereby printing more of it can be used to pay off debts in their own currency. In other words, MMT proposes the idea that countries can increase money creation for spending. It can be a beneficial economic tool that does not necessarily lead to inflation, devaluation of fiat currency, or other economic disorder.
It argues that the need to “balance the books” forces governments to decrease their spending causing unemployment, lack of investments, and results in an underachieving economy. Rather the money can be created to counter all these problems. Statements passed by the US Federal Reserve about the ability to print money it requires without dire consequences only confirms the idea.
Similarly, Ben Bernanke is used as an example as he saved the banks during the financial crisis by creating $1 Trillion of assets without any inflation or devaluing the dollar further. It goes on to show that there are effective ways to print money out of thin air without adverse consequences being put to effect. He also relays that printing and borrowing money are comparable- only creating money is easier. This further reiterates the claim of MMT supporters that hyperinflation is rare while money creation is common.
Japan has employed many MMT policies and is now running a deficit in government debt of 240% but still has not been a victim of runaway inflation. In simple words, they have spent far more than their economy earns and have not been able to recover the amounts through tax revenue. Nonetheless, Japan’s inflation rate in 2020 was negative at -0.06%.
Similarly, the European Central Bank introduced €2.5 Trillion in the continent as “quantitive easing” which was simply new money hosed with a fancy name. Even then, inflation did not occur.
By contrast, Zimbabwe and post-war Germany have both suffered hyperinflation. In the economic collapse of Zimbabwe in the late 1990s and early 2000s, the regime printed money endlessly while their manufacturing and production capacity took a downturn. They were not able to balance the spending with output. The same happened in Germany after WWI when production and manufacturing reduced significantly yet and money was printed to pay its bills.
On this premise, MMT advocates argue that goods or production capacity is far more prominent a reason for inflation and hyperinflation. Therefore, Modern Monetary Theorists have been proven right on several occasions in saying that merely the act of creating money alone cannot be responsible for inflation. Other factors must be considered. Money can instead be created to solve unemployment, provide free education for the future workforce, etc.