Apologies for the use of Professor Richard J Murphy again but he does provide such useful straight lines:

….I can see no policy reason why quantitative tightening has been done.

Professor Murphy is indeed one of the UK’s leading Modern Monetary Theory advocates and theorists. He was much in evidence when Jeremy Corbyn started touting the Magic Money Tree for example.

OK, we know what that is, monetisation of fiscal policy and it’s in all the textbooks as such - along with the appropriate warnings about it.

MMT does say some true things. A government can just print money and spend it. This is entirely true - monetisation of fiscal policy. As long as there are unused real resources this could be beneficial to the economy too. We would argue, strongly, that it does matter which resources and what the money’s spent upon but leave that as a detail for now. We are, for example, unconvinced that massive such spending will make every dole bludger employed while it might soak up an amount of involuntary unemployment.

MMT also says that this policy faces a limitation. Excess money printing and spending will cause inflation. The arrival of the inflation can even be taken as an indication that the money supply is now excess.

OK.

So, when money supply is excess then that money supply needs to be reduced in order to reduce or get rid of the inflation. It’s usually proposed that higher taxation should be that method. The government taxes more, doesn’t spend the greater revenue but just cancels the money collected and inflation reduces.

A fun point that can be made at this point is that MMT is really very monetarist. The money supply is a major, if not the major, determinant of the inflation rate. Therefore the money supply needs to be managed with the inflation rate in mind. How very different the two ideas are, eh?

So, we had lots of that money printing, Quantitative Easing, during Covid, that money was spent into the economy, we got inflation. Therefore we need to reduce the money supply.

We could, obviously, try taxing that money back and government runs a surplus to destroy that money received. But that’s got a certain political difficulty to it. The BoE intends to QT perhaps £100 billion this year. That’s, umm, quite a lot actually. About the total revenue from Corporation Tax and it’s difficult to imagine anyone sentient deciding to double that for a year. Or, an alternative, putting VAT up to 32% (from the Worstall Caculator, Pencil, 1, Back of Envelope, 1). Or raising national insurance by 50% and so on. No, the rich do not have enough money that only taxing them will solve this problem.

Back to MMT - print the money and if there’s inflation then too much has been printed and some must be called back in. We need to do £100 billion, taxes can’t do that, so Quantitative Tightening is the other way of destroying that excess money. We don’t see this as a difficult explanation. We also don’t see - quite the opposite in fact, we’ve bent over to make it consistent with - the standard MMT description of how the economy works.

We need to destroy the excess money, tax can’t do it, therefore QT. Shrug.

Now all that’s left is to wonder why MMT enthusiasts, even experts, can’t grasp it.

Tim Worstall