It's said that states that have suffered hyperinflation prove that modern monetary theory (MMT) is not true. However, the exact opposite is the case. They demonstrate that the conditions that MMT says must exist for a well-managed economy to function are correct.
This is the audio version of this video:
And this is the transcript:
Venezuala, Zimbabwe, the Weimar Republic. What do they all have in common? Hyperinflation.
We remember them because the examples of hyperinflation are so rare that they stand out in our memory. But every single time I mention modern monetary theory on this channel, and the explanation that it provides of the way in which money actually works in modern economies like those of the UK, the USA, and even most European countries, whether or not in the Eurozone, somebody pops up and says, uh, look at what happened in one of those three, and it ended in disaster.
Let's be clear: I'm not arguing that things did not end other than disastrously in the Weimar Republic, Zimbabwe, or Venezuela. Things really did not work out there, and I am not disputing that that was at least in part because all of those governments did, of course, print far too much money. But that wasn't the fundamental problem within those countries that gave rise to their economic disaster.
Let's look at what modern monetary theory says is necessary to have a properly functioning economy which runs its own currency because it's really important to understand those conditions because when they don't apply, of course modern monetary theory doesn't apply either.
And those conditions are that the government in question must be strong. In other words, it must have popular support.
It must be upheld by the rule of law.
It must be respected.
It must also have its own central bank or, in the case of the Eurozone, be an active participant in a currency zone where there is a strong central bank.
It must be able to operate an efficient tax system because if it doesn't have such a tax system, it can't recover the money from the economy that it has spent.
It must have a sufficiently large government sector that the government's demand to be paid, in the form of taxation, basically forces the currency that the government creates into use in that economy for everyday exchange. If there are parallel currencies operating in a country, it's very difficult to enforce any form of monetary policy.
The currency in question must also be acceptable for international trade. That's vital because if it isn't accepted for international trade, then the country is wholly dependent upon its ability to make export sales, to buy the currency that it requires, to pay for its imports, whereas if the currency is available and acceptable for international trade, then it can effectively trade internationally on credit. And that allows it to, therefore, ride out the inevitable troughs and highs that exist with regard to the economic fortunes of any country.
And perhaps finally, and very significantly, there must be no sanctions against trade with that country and no bars on the use of its currency, and it mustn't be the victim of war or some other deep political circumstance that means it's basically a pariah within the international community.
Let's now look at the situation of the Weimar Republic, and Zimbabwe, and Venezuela then.
Start with the Weimar Republic. Why did the Weimar Republic fail? Well, it didn't have a chance, did it? After the Treaty of Versailles, it was told it must make reparation payments to the countries that had beaten it in the First World War. But the reality was that Germany was already on its knees, just as those countries that had beaten it were. It didn't have the means to generate the foreign currency that it was required to make payment of as a reparation, let alone to meet its own need for imports. And that foreign currency was not under its control because it was all gold-backed, and therefore, Germany was in an impossible position, made worse when France, which had not got its reparation payments, then marched into the Ruhr, took over the main productive capacity of Germany for its own benefit, and denied it a chance to actually earn the foreign currency it was going to need to make the payments anyway.
The Weimar Republic failed because it was put in an absolute impossible position, where its own currency was never going to be acceptable, it had to make payments in foreign currency, and it was denied the chance to earn any of that currency.
The consequence was yes, it overproduced its own paper, its own money, and it collapsed in value because local people lost their faith in that currency just as the international community had. Unsurprisingly, there was hyperinflation.
Let's look at Zimbabwe. What happened in Zimbabwe? Go back to 1980 and Zimbabwe under Robert Mugabe declared UDI, a unilateral declaration of independence, which basically made it an independent country within Africa because it turned its back on the UK, which had been its governing power, and set itself up in contravention of what was then thought to be international law. Whether that was right or wrong doesn't matter. Sanctions were imposed upon the left-wing government that was put into place in Zimbabwe, and the world turned its back on the place.
At the same time, and probably unwisely, Robert Mugabe decided to throw the landowners off the land in his country and put in their place the people who previously worked for them as farm workers.
Unfortunately, the collapse of agriculture followed because there was simply a lack of organisation and managerial ability to make sure the production remained in place.
What was the consequence? Zimbabwe couldn't trade internationally. Its currency was not internationally acceptable. There were trade sanctions against it. It couldn't buy the resources it needed to make good the domestic shortfall, and its currency collapsed as a result.
Is anything like that happening in any country in Europe, or the USA, or any other developed place in the world right now? No. Therefore, that situation isn't replicated.
And what about Venezuela? In 2010, Venezuela began its really steep downward spiral with regard to its currency. And why was that? Well, firstly, because the USA hasn't been too keen on left-wing government in its backyard. It isn't the only country to have suffered sanctions as a consequence. Nicaragua has in its time as well. And the pressure was brought to bear right across the whole of the Latin American region.
But then the oil price also collapsed and Venezuela had totally geared itself to a high oil price. As a result of the collapsing oil price, the government ran an enormous deficit. It printed money to cover it, and it was unable to make good that deficit from sales of oil because that wasn't possible and sanctions denied it the chance.
And what happened? Well, its currency collapsed as a result and people with the opportunity to use the dollar instead did so.
Therefore, and I make the point very clearly, in all three of those cases, none of the conditions which suggest that modern monetary theory could apply did exist. To therefore say that they prove that modern monetary theory doesn't work is absurd.
In fact, in a very real sense, they prove that precisely because they failed, modern monetary theory is a good explanation of how systems can work well, and it sets out the conditions for them to do so. They don't disprove the case; they make the case.
Venezuela, Zimbabwe, and the Weimar Republic failed because the world turned against them, their people, their governments, and their currency, and the outcome was inevitable.
In a situation where the world doesn't turn against the country, its people, its currency, and does instead want to trade in it, which is true of most countries in the world most of the time, then the likelihood that such a situation can recur is low, which is precisely why, as I mentioned right at the start of this video, we remember those cases because they are so rare.
Modern monetary theory is in some ways deeply misnamed. It isn't even a theory; it's an explanation. It is what actually happens in a country which meets the criteria for its use: a strong government, a good tax system, a central bank, its own currency, which is acceptable for international trade, and which is borrowed in by the country in question.
Then, as a matter of fact, the world works as MMT says. It's a simple and straightforward explanation of the truth.
Countries don't adopt MMT. Their behaviour is explained by MMT. And just as the behaviour of successful countries is explained by modern monetary theory, so modern monetary theory explains very precisely why countries like Zimbabwe and the Weimar Republic, Venezuela, could never have succeeded and never had a chance because their currencies had no hope, because they didn't meet the criteria for success.
These places are, therefore, outliers in every sense. But they're outliers not just because they got hyperinflation but because they prove that MMT is true.
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I agree with the article. Question: the three states mentioned are negative examples.
How about a positive one? China – (putting to one side the human rights aspects (what human rights?))
industrially, China went from close to zero 1990 to the world’s indutrial power house now. Taking two examples: solar panels and electric vehicles; in the 2000s the polit-buro decided these were key industries, the central bank made low cost money available, the rest is history. I make furniture and have purchased some Chinese equipment – beautifully made, jewel-like precision – & low cost..
These realities have at their core, a central bank under the control of politicians. These are also realities that are NEVER discussed in the EU/Euro-zone or in the USA.
The silence from banksters is remarkable.
The US IRA – was a too-little-too-late attempt to do what the Chinese have been doing……..for decades. Meanwhile, assorted neolibtard imbeciles continue to put forward arguments (Zim, Weimar etc) that are trash – but which are swallowed by another set of imbeciles: EU/UK/US politicos.
I will muse on that
In support of Mike Parr (although he did not ask for it, and he may not approve).
As someone notes in the film ‘The Coming War with China’, the West changes it’s governments in the name of democracy – but does not really change policy.
We know this is happening right now – more barefacedly at anytime in my life anyway. Starmer hmm? Blair before him? What about Callaghan?
The Chinese have a perma-party in charge of their country instead of perma-politics but have changed the way it works. But at the centre of it all as Mike alludes, is the willingness of the Chinese government to intervene – it knows about bad behaviour in markets ( monopolies, price fixing) and also knows how the West works (read Isabella Weber – ‘How China Escaped Shock Therapy’, 2021).
If deceit is a crime against human rights and democracy then the UK and U.S. are guilty as charged. It is a form of abuse, a form of unfreedom. And what is their excuse?
China has opened up and stepped towards the West. But the big lesson is Russia, whose fall under the advice of Western economists and politicians has led us all the way to the Ukrainian war. Nice job. Top marks……………..
China’s excuse is Russia. China does simply not trust the Western way and will do what it needs to do to keep us at bay. And do you blame them? And this game has been going on for hundreds of years.
Even with the ‘advances’ that China has made, for many in the West it is never going to be enough until they get in there to seize their assets, as Western international markets have helped capital plunder wealth in the West and around the world that has lead to redistribution simply stopping leaving us with huge inequality – inequalities that a ‘modernised’ China is dealing with internally as it tries to use Western market ideas.
My view is simple. We are confronted with two models of governance that both in someway oppress people. Do I really need to go into detail here folks?
What do we spend a lot of time here talking about?
We continually hear people on this blog criticising voters for putting governments like David Cameron and Margaret Thatcher into power – and not to mention a certain bloke called Boris.
In China – for all we know, the Communist party is incarcerating the people in the name of ‘re-education’ who would vote in the Chinese versions of Thatcher, Cameron, Boris, Braverman – because of their naivety and vulnerability to Western capitalist forms of freedom which as we know is actually ‘unfreedom’. To the Chinese state, they are protecting their people from corrosive ideas that have been abused in the West for far too long and will lead to our demise.
That control of public information is a form of direct action by China – it is not based on some woolly Christian based hope of some sort of imagined voter epiphany as to what is really going on which resides even here and to me is a hiding to nothing.
And speaking of Christianity – another thing noted in ‘The Coming War with China’ is the evangelical side of Western Neo-liberalism – the constant need to ‘convert’ others, rather than understand and exist alongside. Complete surrender is always required. Ask the Africans and Red Indians and countless others. All that matters is that you believe – facts mean nothing.
What bothers China about the West is what bothers us here. So they have decided to do something about it that to our eyes looks extreme. But is it? Really?
Thanks. It has been a point I have been making for some time (since 2018 actually).
Oh & thanks PSR – convergent/complementary ideas are good.
On a related note – I am busy working on direct current networks (with respect to power systems) – one of my colleagues has been researching the tech “Mike, the chinese are miles ahead”. It is worth remembering that one of the “problems” with 18th & 19th century China was that it was little interested in what the West had to offer – hence the demand for silver as payment for tea (& hence the Brits search for an alternative – bingo – opium etc). This time around, the Chinese have been cute: buy machine tools to make stuff – then build better machines tools (to make better stuff – e.g. solar panels). They have pulled themselves up by their bootstraps – I respect that. One of our engineers (from SE Asia) went to China, learnt Chinese & then did a degree in electrical engineering in Chinese – very bright chap & Chinese elec eng degrees are 1st rate. I respect Chinese engineering capabilities – less so the gov – but as you note – they are not in-hoc to the ghastly neo-libtards and will have drawn lessons from Russia circa -1990s.
China under Xi also has an admirably brisk approach to uppity billionaires who seek to undermine it’s political system…
How does MMT work in less developed economies, say Kenya or Bangladesh?
Not too well
They borrow in the dollar
What it does say is they should not
So in that sense it works very well
What worries me: If, say, the UK adopted left wing principles of MMT wouldn’t the international monetry markets and banks who weild great power get pissed off. And ultimately mess thngs up, put obstacles in the way, or worse, a colour revolution, as US did to south American countries for trying to change their economy. That could lead to hyperinflation. It’s also likely no? And arguably in a sense isn’t that what happened with Corbyn for having wildly more progressive spending policy (though not sound MMT he may have wised to it sooner or later) . And Liz truss who did want to print money rather than austerity. All be it in misguided way, a tax bung. Was roundly shunned by international markets.
There is no left wing principle to MMT. It simply describes what happens.
And if you think full employment is left wing, how close are you to falling off the right hand edge?
You really have missed the point.
I do so agree that MMT is misnamed – not only because it’s not really a ‘theory’, but also because the ‘modern’ is unclear – does it mean ‘new’ or ‘post-gold-standard’? – and it has connotations of ‘fashionable now’ rather than ‘true’. Is it too late to change i?
I blame Bill Mitchell
He misnamed it
Isn’t a theory something that explains all the available evidence? Like Evolutionary Theory. Theory seems correct in this definition. Maybe the problem with MMT is that it doesn’t treat itself like a scientific theory of economies at all, but is immediately used as the basis for particular solutions like an employment guarantee etc.
Could someone should release a book and rename the theory? It worked for Stringer Bell when he got the idea from his economics class.
No it is a theory
The policies follow
The trouble us even the theoreticians confuse the two
That’s economics for you
People can read more here:
“The Myth of Weimar, Venezuela and Zimbabwe: Why commonly referenced instances of hyperinflation are not examples of the dangers of Modern Monetary Theory” (2021)
https://medium.com/pegs-institute/the-hyperinflation-myth-of-weimar-venezuela-and-zimbabwe-b953b13ddaee
Weimar Republic Hyperinflation through a Modern Monetary Theory Lens, by Phil Armstrong and Warren Mosler (2020)
https://moslereconomics.com/wp-content/uploads/2020/11/Weimar-Republic-Hyperinflation-through-a-Modern-Monetary-Theory-Lens.pdf
“Does Government Spending Cause Inflation?“, Forbes, Aug 25, 2022
https://www.forbes.com/sites/qai/2022/08/25/does-government-spending-cause-inflation/
“Government spending does not cause inflation”, Yash Moitra and Pooja Sharma, International Journal of Economics and Research, Volume 12 Issue September – October 2021, p.30-42
https://web.archive.org/web/20220120083755/http://ijeronline.com/Vol12%20issue5.php
Thanks
Everyone mentions Weimar Germany, Zimbabwe and Venezuela. But Wikipedia has a much longer list of hyperinflationary incidents than I had expected – from modern day Argentina and 1920s Austria, through revolutionary France and post-war Hungary, to 1980s Vietnam and post-Communist Yugoslavia.
Have you spotted the theme though Andrew?
The same things always apply
And the list makes clear hyperinflation does not exist in the types of state MMT describes. In that case what is your point? You are usually very clear.
Not disagreeing with what you’ve said. Just making the point that people fixate on these three examples of a phenomenon that has occurred many times. If I have to draw out themes, too much domestic money chasing too few assets denominated in another currency, often associated with or in the aftermath of conflict. The French Revolution is an interesting example because it shows it is not just a phenomenon of the 20th century or later.
I think Andrew’s observation is that the list of hyperflations is much greater than you’d think.
Moreover the list of countries which have had persistent high inflation is at least as long again – Italy, Greece, Israel all had persistently high inflation periods in the last 60 years. Even in the UK inflation was over 6% every year from 1969 to 1983.
It would be useful to know what are the policies to pull a country back from that.
If you think hyperinfaltion is 6% you are very seriouysly mistaken
I think you incorrectly referred to Zimbabwe declaring UDI? That was the Ian Smith regime in the sixties. Zimbabwe became independent after negotiations and the introduction of equal voting rights.
My mistake then – but it suffered almost immediate sanctions
Hello Richard.
No, the renamed Zimbabwe did not face immediate sanctions. It had both World Bank and IMF support and sanctions that had been levelled at Rhodesia after UDI (at British insistence) were lifted. For ar least a decade Zimbabwe was more accepted internationally than Rhodesia had been.
If you are to use history to support your arguments, you must get your history correct.
Regards
I have accepted the mistake
But it makes no significant difference to the analysis – as you need to acknowledge
Not quite true. When Rhodesian UDI ended (under Ian Smiths white regime) power transferred in 1980 to Mugabe and his ZANU supporters. There was a grim period when Mugage’s rival Nkomo’s ZAPU and many in Matabeleland were massacred and suppressed, aided by North Koreans.
https://en.m.wikipedia.org/wiki/Gukurahundi
However, by and large Zimbabwe did well during the 80s and early 90s and was talked of as an Africa ‘Tiger’ economy. It was a key supplier of grain to neighbouring African countries. It was then in the mid and late 90s when Mugabe turned on the white community, seizing land and businesses, much of it going to corrupt cronies and so called veterans. That was what caused the economy to collapse – both white and black professionals and others fled the country. Grain production dramatically fell, impacting neighbouring countries like Malawi which relied on Zimbabwean grain. South Africa still has significant numbers of Zimbabweans who have fled the country.
So yes, Mugabe resorted to printing money in a doomed attempt to keep his supporters happy and the economy going. To that extent an example of MMT abused. But the problems were overwhelmingly self inflicted. Mugabe blamed everyone else but he was primarily to blame.
I was travelling to Zambia for work in 79/80 and was there when the Commonwealth Summit was held as the Smith regime was replaced. Weird experience of being in the hotel where it was held and being a couple of feet away from Thatcher and Kaunda as they greeted the heads of state.
Then back in Zimbabwe in mid-late 90s as Mugabe started to lose the plot. Most of the company’s senior and middle management team were highly competent, experienced black Zimbabweans. It was not like South Africa with far better relations, if not perfect. Sadly I suspect they would all have left for better futures elsewhere.
Accepted: I got this timing wrong, but the net consequence was right
My note to self is, take more time. I am trying to create it.
On Youtube the people who try to dismiss you , always seem to blame government printing. But the private banking system lent recklessly causing the Global Financial Crisis. Of course they should have been better regulated but an ‘independent’ central bank can it wrong too.
One poster said ‘before Keynes budgets were balanced.’ We’ve had a national Debt for 330 years. I don’t think we’ve had a surplus very often during this time.
Hi Richard,
Steve Watts is right, but I agree with you that your analysis of what went wrong in Zimbabwe is broadly correct. But your history is wrong in other ways. You stated “At the same time, and probably unwisely, Robert Mugabe decided to throw the landowners off the land in his country and put in their place the people who previously worked for them as farm workers.
Unfortunately, the collapse of agriculture followed because there was simply a lack of organisation and managerial ability to make sure the production remained in place.”
This seems to be derived from fairly standard right-wing analysis which is far from the truth. The situation was far more complex and the African farmers were and are in fact significantly better than the displaced white landowners.
Nevertheless I have argued, just as you do, that Zimbabwe’s hyperinflation was NOT caused by MMT, but by the other factors you mention, especially an inadequate tax system and endemic corruption, with Mugabe’s cronies benefiting from the hyperinflation. Forgive me for correcting your history and analysis of Zimbabwe, but it is my field and I do know what I am talking about! References available if you want them, but it is late and I have to prepare for a meeting of the Review of African Political Economy (of which I am the Treasurer) tomorrow.
MMT causes nothing
MMT describes what happens
I clearly need to mash another video.
But thanks
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Richard your excellent video demonstrates both your talent and knowledge base!!!
Well done!!!
The clarifications by some of your regular followers, demonstrates what a capable audience you have!!!