Most economists claim that inflations are caused by “excessive” federal deficit spending.

I suspect the notion is that pumping dollars into the economy puts more dollars into consumers’ pockets, and having more dollars causes consumers to buy more, and these increased purchases cause inflation.

It’s the “too many dollars chasing too few products” mantra.

In her excellent book, The Deficit Myth, Professor Stephanie Kelton wrote:

“The economists behind MMT (Modern Monetary Theory) recognize that there are real limits to spending, and that attempting to push beyond those limits can manifest in excessive inflation.” (p.59)

Professor Kelton devoted an entire chapter to inflation (Chapter 2, “Think of Inflation”) in which she repeatedly claimed that ‘Excessive’ federal spending causes inflation.

Here is a graph showing federal deficits:

Federal Surplus or Deficit — Percentage Change From a Year Ago

Looking at the above graph, one might assume we had “excessive inflations” in 1948, 1953, 1959, 1971, 1975, and perhaps a blip in 2009.

Here is a graph showing inflations in the U.S.:

Consumer Price Index for All Urban Consumers — Percentage Change From a Year Ago.

For comparison, we put the two graphs together and we see this:

Inflations (blue line). Deficits (red line).

If MMT and the rest of the economics community were correct, we should see a correlation between the peaks and valleys of federal deficit spending and inflation.

But we don’t. We don’t see any relationship at all. It sometimes is up and down together; it sometimes is the reverse. It’s completely random.

Deficits don’t cause inflation.

Here’s another graph. It compares changes in the overall money supply (Domestic Nonfinancial Sectors, Debt securities and Loans, Liability Level) to changes in inflation.

Orange = Domestic Nonfinancial Sectors, Debt securities and Loans, Liability Level. Blue = inflation.

Again, no predictable correspondence.  Sometimes they move together; sometimes they move in opposite directions. The peaks and valleys sometimes match; sometimes they don’t.

An increased money supply doesn’t cause inflation.

And now finally look at this graph:

Blue is inflation. Green is oil prices

While inflations don’t seem to match federal deficit spending, when it comes to oil prices and inflations, the peaks as valleys line up rather nicely.

Oil shortages cause oil prices to rise, which causes inflation.

The philosophy in the blog you’re reading is called Monetary Sovereignty (MS).

MS is in substantial agreement with MMT regarding the federal government’s unlimited ability to spend dollars, the economic need for federal deficit spending, and the fact that the federal “debt” is not a burden on anyone — not on the public, not on future generations, not on lenders or borrowers, and not on the federal government.

Professor Kelton MMT makes quite a point about not believing standard, old economic theories. In fact, she even quotes Mark Twain, “What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.”,

Ironically, MMT falls into the standard, old “deficits cause inflation” trap.

Not only do federal deficits not cause inflation, but federal deficit spending, properly directed, actually is the best cure for inflations.

Case in point: The infamous Zimbabwe hyperinflation began when the government took land from white farmers and gave it to black non-farmers.

Because the non-farmers didn’t know how to grow food, Zimbabwe suffered from food scarcities, which made the prices of foods rise spectacularly. That leads to the completely obvious truism:

Scarcity makes prices rise.

Had the Zimbabwe government deficit spent to train and otherwise aid the non-farmers to be better farmers, and/or had the government bought food from other countries, and distributed the food to the populace, the scarcity of food would have been eliminated.

There would have been no inflation.

Instead, the government of Zimbabwe’s response to inflation was merely to print more currency, with higher denominations, thus guaranteeing that prices would continue to rise.

Unfortunately, MMT has not been able to completely divorce itself from economic orthodoxy. Most MMT adherents were taught by economists who learned, and then taught, the common dogma about federal deficit spending and inflation.

The myths were passed down the chain.

Sadly, the fear of “excessive” deficit spending has stood in the way of what deficits really do: Federal deficits grow the economy. They grow a healthy economy and cure a sick one.

Warren Mosler, one of the creators of MMT, created “Mosler’s law” which that states, “There is no financial crisis so deep that a sufficiently large fiscal adjustment (federal deficit spending) cannot deal with it.

That said, I try my utmost to keep an open mind. Though I have looked very hard, I’ve not found an instance of an inflation that was caused by government deficits. Every deficit I’ve researched has been caused by a shortage of some sort, usually a shortage of energy or food.

If you know of any caused by deficit spending, please let me know.

Until then, encourage federal deficit spending to implement programs like the Ten Steps to Prosperity (below).

Rodger Malcolm Mitchell

Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..


The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone

3. Social Security for all or a reverse income tax

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10.Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.