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MMT is clear as to why no inflation fear from money creation or deficits

http://www.nakedcapitalism.com/2010/08/guest-post-modern-monetary-theory-%E2%80%94-a-primer-on-the-operational-realities-of-the-monetary-system.htmlhttp://www.nakedcapitalism.com/2010/08/guest-post-modern-monetary-theory-%E2%80%94-a-primer-on-the-operational-realities-of-the-monetary-system.html

http://www.nakedcapitalism.com/2011/03/scott-fulwiler-paul-krugman%E2%80%94the-conscience-of-a-neo-liberal.html

Well I have been taken behind the woodshed and given a lesson in MMT by the above links (read the comments as they are more than half the lesson).

Seems MMT does not argue against the obvious – that if you change the quantity for a given demand function, you change the price, and this applies to money where price means inflation.  It just says we are not talking about “money” when we discuss the money supply as “M3″ or such – and that the money increase that causes inflation is defined as an increase in the money in the hands of those with a propensity to spend, and that what the Fed can change – money in the hands of banks –  is essentially interchangeable with money in the hands of the Fed or in the hands of the government, and is not equivalent or even related to the money that can cause inflation or indeed cause economic growth. Indeed the Fed’s positive interest rate target means that to increase the monetary base the Fed must pay interest , making reserves and t-bills essentially perfect substitutes.

The trust factor – large money supply increases will mean folks reject the system and go to barter as Fed loans replace private deposits – is not part of the analysis. But MMT says the power to tax means folks are forced to trust the currency and thus the banks.  A barter based tax avoiding economy of course makes things a bit more interesting.  BUT MMT’s main point – that financial instruments do not grow – or shrink – the economy – including loaned bank reserves – seems solid.

Well – at least now I understand why there is no fear of inflation via money creation or large deficits.

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