Modern Monetary Disasters (Examples from Latin America)

Prof Sebastian Edwards of UCLA in this piece:

MMT, or some version of it, has been tried in several Latin American countries, including Chile, Argentina, Brazil, Ecuador, Nicaragua, Peru, and Venezuela. All had their own currency at the time. Moreover, their governments – almost all of which were populist – relied on arguments similar to those used by today’s MMT supporters to justify huge increases in public expenditure financed by the central bank. And all of these experiments led to runaway inflation, huge currency devaluations, and precipitous declines in real wages.

Four episodes in particular are instructive: Chile under President Salvador Allende’s socialist regime from 1970 to 1973; Peru during President Alan García’s first administration (1985-1990); Argentina under Presidents Néstor Kirchner and Cristina Fernández de Kirchner from 2003 to 2015; and Venezuela since 1999 under Presidents Hugo Chávez and Nicolás Maduro.

In all four cases, a similar pattern emerged. After the authorities created money to finance very large fiscal deficits, an economic boom immediately followed. Wages increased (helped by substantial minimum-wage hikes) and unemployment declined. Soon, however, bottlenecks appeared and prices skyrocketed, in some cases at hyperinflationary rates. Inflation reached 500% in Chile in 1973, some 7,000% in Peru in 1990, and is expected to be almost ten million percent in Venezuela this year. In Argentina, meanwhile, inflation was more subdued but still very high, averaging 40% in 2015.

The authorities responded by imposing price and wage controls and stiff protectionist policies. But the controls did not work, and output and employment eventually collapsed. Worse still, in three of these four countries, inflation-adjusted wages fell sharply during the MMT-type experiment. In the periods in question, real wages declined by 39% in Chile, 41% in Peru, and by more than 50% in Venezuela – hurting the poor and the middle class.

In each case, the central bank was controlled by politicians, with predictable results. In Chile, the money supply grew by 360% in 1973 alone, helping to finance a budget deficit equivalent to an astonishing 24% of GDP. In Peru in 1989, money growth was 7,000%, and the fiscal deficit exceeded 10% of GDP. In Argentina in 2015, the deficit was 6% of GDP, with the annual rate of money creation surpassing 40%. And Venezuela currently has a deficit of 32% of GDP, with the money supply estimated to be growing at an annual rate of more than 1,000%.

As inflation increased in these countries, people greatly reduced their holdings of domestic money. But because governments required taxes to be paid in local currency, it did not completely disappear. Instead, the speed at which money changed hands – what economists call “velocity of circulation” – increased dramatically. No one wanted to be holding paper money that lost 20% or more of its value every month.

When the demand for money collapses, the effects of money growth on inflation are amplified, and a vicious circle develops. One serious consequence is that the currency depreciates rapidly in international markets. MMT supporters conveniently ignore the simple fact that demand for local money declines drastically when its value tumbles. Yet this is perhaps one of the theory’s biggest weaknesses, and one that makes it extremely risky for any country to implement.

The experience of Latin America should serve as a clear warning for today’s MMT enthusiasts. In a variety of countries, and at very different times, fiscal expansions that were financed by printing money resulted in an uncontrollable loss of economic stability. Economic-policy ideas are often as dangerous in practice as they are flawed in theory. MMT may be a case in point.


One key thing which MMT bashers miss is the context. MMT is being suggested in countries such as  US where despite record deficit levels, interest rates on government bonds have been low. Another point is this whole governance bit. In Latin America kinds of cases lot of this money was used not for any economic gains but for politicians gains and was a very different political game. Third, it is unlikely US Dollar will depreciate as sharply as it did in these economies. Most of US borrowings are in their own currency and depreciation will not effect them as much as it affected all these Latam countries.

MMT has its limitations for sure. But so is it the case with mainstream macroeconomics. Infact, both have similar diagnosis. The mainstream macroeconomics guys also say despite record debt levels, interest rates remain low. Hence, fiscal policy can be expanded to take advantage of this situation with central banks playing a supporting role.  MMT folks say the same and bring central bank directly into the picture.


3 Responses to “Modern Monetary Disasters (Examples from Latin America)”

  1. ashok singhania Says:

    surprise by above comment and wrong understanding of mmt . mmt always speaks of inflation constraints . economic growth depends on net financial asset that is sum of cash in circulation reserve money fiscal defecit and net exports . unless sum total of this is mention critising mmt would be wrong it cleary states that if exports are positive then defecit must be reduce and not increased.defecit spending reduces intrest rate and doesnt increase intrest rate. anmol you need to study mmt in detail .about venunzula already michael hudson has given detail explation it is more of conspiracy against nation for its oil reserves.other countries you are mentioning about 24% OF GDP DEFECIT IN AYEAR WHAT YOU EXPECT THEN.

  2. Ashok Singhania Says:

    mmt and india vajapee increased fiscal defecit to 6.6% and took govt debt to 90% of gdp printed high value cash and spend entire saving of public sector units . result intrest rate came down banks booked treasury profits and npa also came down. even exports went up in last year. total govt money was 120% of gdp when vajapee left indian economy continue its dream run even after he left railway which was whiteelephant suddelnly become viable . what mmt states that govt debt must be 100% of gdp for proper and optimally function of economy which even vajapee era is demonstrating and giving proof of mmt it is indian economy which is best example for following mmt and i strongly condem above article which has been delibrately propogated by vested intrest because they want govt to sell asset at throw away prices under guise of reducing defecit. same asset will fetch fivetime price in defecit spending enviroment compare tofiscal prudence

  3. Ashok Singhania Says:

    what has happened during manmohan and modi era . intrest rate have went up npa has gone up and banks have recently booked treasury looses to tune of 30000crore as intrest rate went up sbi made looses for first time and indian finacial system is facing huge liquidity crisis. what has happened govt debt has fallen from 90% of gdp to 48% of gdp cash in circulation has fallen from 30% of gdp to 9% of gdp and economy has slowed down considerably. look at railways their average revenue growth is 2% inspite of investing whopping five lakh crore and railway is again on verge ofbecoming white elephant. our banking sector is third worst in the world . capicity utilization is 75%. a economy of 135 crore people cant create demand for 12lakh crorenpa asset is it not matter of shame . have we not got fundamentally wrong somewhere . mmt states that govt debt must equal private debt for proper functioning of system other wise system faces liquidity problems in india 48% govt debt is backing 92% private debt please note state govt debt is included inprivate debt as they are not currency issuers. mmt has cleary mention that govt debt was legalize as repo security in1933to solve liquidity problem of banking system. other two problems value of debt and one more which gold bugs shout at top of roof have no solution yet. mmt clearly states that loan is created first and deposist comes afterwards and how do our our mainstream economist model the economy they say saving or deposist comes first and loan after wards.look at china they issued whopping 50lakh crore loans in one sinle month of jan from where so much money cameunless loaN IS GENERATED FIRST.india issued 52lakh crores loan in five years from 2009 to 2014 from where did money come we has only18lakh crore loan in62 years of indepence. do you think so we suddenly become productive and funded so much loan amswer ids big no. even modi govt borrowed whopping 32lakh crore in last ffive years and in 67years it was 52lakh crore from where did so much came unless it is created first. india has huge monetary madness. it has implemented demo gst advance income tax prepaid phone bills disinvestment uday scheme fundining of bankds by converting cash deposist in banks to bonds and reinvestinng them in banks dis investment which are all wrong monetarly and that to when govt debt has fallen to all time low of 48% of gdp. fiscal forces nation to compulsury export and also make nation dependent on foreign capital for growth . our corporates have borrowed whopping 7lakh crore from abroad as intrest rate are high in india due to fiscal prudence policy. we were forced to apporve walmart flipkart deal for want of money. it is high time we must understand fiscal prudence is nothing but financial warfare against india. MMT IS NOTHING BUT SWADESHI FISCAL AND MONETARY POLICY.

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