The Venezuela Myth Keeping Us From Transforming Our Economy

Modern Monetary Theory (MMT) is getting significant media attention these days, after Alexandria Ocasio-Cortez said in an interview that it should “be a larger part of our conversation” when it comes to funding the Green New Deal. According to MMT, the government can spend what it needs without worrying about deficits. MMT expert and Bernie Sanders advisor Prof. Stephanie Kelton says the government actually creates money when it spends. The real limit on spending is not an artificially imposed debt ceiling but a lack of labor and materials to do the work, leading to generalized price inflation. Only when that real ceiling is hit does the money need to be taxed back, and then not to fund government spending but to shrink the money supply in an economy that has run out of resources to put the extra money to work.

Predictably, critics have been quick to rebut, calling the trend to endorse MMT “disturbing” and “a joke that’s not funny.” In a February 1st post on The Daily Reckoning, Brian Maher darkly envisioned Bernie Sanders getting elected in 2020 and implementing “Quantitative Easing for the People” based on MMT theories. To debunk the notion that governments can just “print the money” to solve their economic problems, he raise the specter of Venezuela, where “money” is everywhere but bare essentials are out of reach for many, the storefronts are empty, unemployment is at 33%, and inflation is predicted to hit 1,000,000% by the end of the year.

Blogger Arnold Kling also pointed to the Venezuelan hyperinflation. He described MMTas “the doctrine that because the government prints money, it can spend whatever it wants . . . until it can’t.” He said:

To me, the hyperinflation in Venezuela exemplifies what happens when a country reaches the “it can’t” point. The country is not at full employment. But the government can’t seem to spend its way out of difficulty. Somebody should ask these MMT rock stars about the Venezuela example.

I’m not an MMT rock star and won’t try to expound on its subtleties. (I would submit that under existing regulations, the government cannot actually create money when it spends, but that it should be able to. In fact, MMTers have acknowledged that problem, but it’s a subject for another article.) What I want to address here is the hyperinflation issue, and why Venezuelan hyperinflation and “QE for the People” are completely different animals.

What Is Different About Venezuela

Venezuela’s problems are not the result of the government issuing money and using it to hire people to build infrastructure, provide essential services and expand economic development. If it were, unemployment would not be at 33 percent and climbing. Venezuela has a problem that the US does not have and will never have: it owes massive debts in a currency it cannot print itself, namely US dollars. When oil (its principal resource) was booming, Venezuela was able to meet its repayment schedule. But when oil plummeted, the government was reduced to printing Venezuelan Bolivars and selling them for US dollars on international currency exchanges. As speculators drove up the price of dollars, more and more printing was required by the government, massively deflating the national currency.

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Gary Anderson 1 week ago Contributor's comment

I have mixed feelings about Venezuela. People are fleeing the nation. Things are bad. But Abrams is a very dark regime change figure.

As far as MMT, it would likely bring out bond vigilantes who want the bond market to behave. If MMT resulted in high interest rates, margin calls in the bond world would be staggering. Ocasio-Cortez, who has a point taxing the wealthy, has pretty much washed up on the rocks in wanting to ban airplanes and cars. Adding MMT to her anti economics thinking just makes her more irrelevant. aoc #aoc