MMT entrenches the economy in sustained inflation.

The adoption of the MMT main policy proposals would result in a drastic change in the institutional framework used by governments to make policy decisions and how they define their budget constraint and their relation with the national central bank. In an MMT-dominated world, a central bank would cease to bear any resemblance to a financial institution. Instead, it would become an outpost of the treasury, its behaviour determined in particular by government decisions to spend more or less, thus determining whether to create more or less money. In such a scenario, the central bank would not retain any meaningful degree of independence regarding the decisions affecting the amount of money in the economy or the interest rate charged in its regular lending to commercial banks. The central bank’s only role would be to accommodate fully the financial needs of the treasury, determined by the government’s own economic policies and political goals. This is what economists traditionally refer to as a ‘fiscal dominance’ scenario (see Sargent and Wallace 1981). In the aftermath of the Global Financial Crisis, when reflecting on his experience with the US economy and high inflation back in the 1970s, the former President of the US Fed (1979- 1987), Paul Volker (2011) pointed out how difficult it was to return to more sound and sustainable monetary policies once fiscal dominance becomes entrenched. Adopting a fully-fledged fiscal dominance scenario would lead to a significant policy regime change, with enormous implications for longterm economic outcomes. As pointed out previously in this paper, if the financial constraint on the government were relaxed for too long, let alone eliminated as MMT would entail, there would be virtually no limit on money creation and rising inflation would rapidly become entrenched in the economy.

Currently, central banks are far from being in an ideal ‘monetary dominance’ scenario - in other words, one where an independent central bank determines its own targets following a clear policy rule and is not affected by government policies and decisions. From the outbreak of the Global Financial Crisis, the purchase by central banks of a significant amount of public debt has put them in a difficult position.17 This trend has accelerated since March 2020, when central banks all over the world have drastically increased their public debt holdings and at a faster pace. Effectively, this is making governments more reliant on their national central banks’ direct or indirect purchases of their debt to finance their enlarged spending programmes at affordable (indeed virtually zero) rates. To be clear, the central bank purchase of public debt under QE programmes is not per se tantamount to central bank dependence on the government. As recently explained by the Deputy Governor of the Bank of England, in times of severe crisis it is expected that both the fiscal and monetary policy makers use their respective policies to support spending (Broadbent 2020), one of their tools being asset purchase programmes or the reduction of policy rates. However, central bank independence will be tested in the next 1-2 years, when a likely increase in spending and in CPI inflation will put central banks in an extremely difficult policy position (Goodhart and Pradhan 2020). They will have to choose between pursuing their own targets, which will almost certainly mean tightening monetary policy to avoid future inflation (i.e. monetary dominance), or else keeping very low interest rates and loose monetary conditions for longer to support the government (i.e. fiscal dominance).18 At that point, central banks will need to choose between either surrendering monetary stability and low inflation altogether and effectively moving towards the adoption of an MMT paradigm, or taking the necessary measures to rein in inflation and take back control of the amount of money in circulation. If the former, both historical evidence and sound monetary theory point to an economy entrenched in enlarged government spending, much higher rates of growth in the amount of money, and therefore higher inflation.

MMT is not the right solution if we want to keep a sustainable rate of growth in the economy with low inflation over the medium to the long term.