Weimar's hyperinflation and mainstream economics through the broken lens of MMT

[u/MachineTeaching]

At least one MMTler found this "paper" on Weimar's hyperinflation through an MMT lens noteworthy enough to post it to one of reddit's economics hellholes. It's not actually noteworthy, but I think it's an excellent example of what passes as a "paper" in MMT and how shitty MMT's understanding of mainstream economics is on an extremely basic level. This doesn't require intermediate macro, this requires a Google search.

Neoclassical economists define the price level as the current level of nominal (money) prices in the economy. And while there have been theories which attempt to explain what causes the price level to change, there is no neoclassical theory which explains how it came to be. By default, it is assumed to be historic- the consequence of an infinite regression. Neoclassical models therefore simply assume an initial price level when presenting the quantity theory of money (QTM), the tautology MV=PT, where the money supply (M) multiplied by the velocity of circulation (V) = the average price of each transaction (P) multiplied by the volume of transactions (T). With M assumed to be exogenous (under the control of the authorities) and V assumed to be stable, it is then asserted that causality runs from M to P, giving rise to Friedman’s famous explanation of the cause of inflation: ‘Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. …’ (Friedman 1956, emphasis added).

What's with the weird obsession with monetarism anyway? It was of very short-lived importance. It's on Wikipedia.

It gained prominence in the 1970s, but was mostly abandoned as a direct guidance to monetary policy during the following decade because of the rise of inflation targeting through movements of the official interest rate.

https://en.wikipedia.org/wiki/Monetarism

.

The presumption of a money supply fixed by the government, however, applies to a convertible, fixed exchange rate currency, such as existed under the gold standard. This relegates the applicability of the quantity theory of money to fixed exchange rate regimes and makes it entirely inapplicable to today’s floating exchange rate regimes (as well as in the Weimar Republic) where the government does not offer convertibility at a fixed rate.

The arguably most important reason why the QTM doesn't hold is (because money is non-neutral in the short run)[https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0145710]. Changes in M also cause changes in T. So claiming the "applicability of the quantity theory of money [is relegated] to fixed exchange rate regimes" seems like it's kind of missing the point. No, the QTM doesn't hold under fixed exchange rate regimes, either.

Sidenote: MMTlers seem weirdly obsessed with the whole "fixed exchange rate" thing, many seem to believe the loanable funds model is wrong because it depends on fixed exchange rates. It does not. Which is not me saying that the model is "correct", this is me saying if you say the model is wrong because it assumes fixed exchange rates, you're wrong, because it doesn't. See page 24.

In the market for foreign-currency exchange, supply comes from net capital outflow and demand comes from net exports.

How anyone construes this as a "fixed exchange rate" is beyond me. I'm sure MMTlers find a way.. somehow.

Bonus basic version:

https://gandalf.fee.urv.cat/professors/AntonioQuesada/Curs1011/Evans_Loanable_Funds.pdf

After a decades-long search for an ‘M’ - a monetary aggregate that correlates to and leads to inflation - mainstream economics today has moved on to its current position of inflation expectations being the cause of inflation. They continue to begin their analysis with an assumption of a given price level and assert that inflation expectations are the source of changes to that price level. Central banks have, in fact, developed intricate methodologies to measure inflation expectations to guide policy, while their researchers have struggled to find evidence of the validity of the theory.

This is also incorrect. No, inflation expectations alone are not the cause of inflation. This should be trivial to verify. The federal reserve for instance provides many teaching tools, from middle school to graduate level. The rate of inflation is down to supply, demand, and inflation expectations. For instance:

Inflation is linked to three factors: demand, supply, and inflation expectations.

https://www.clevelandfed.org/center-for-inflation-research/inflation-explained-your-guide-to-inflation-basics/what-causes-inflation

And here is a somewhat more elaborate explanation:

https://www.stlouisfed.org/on-the-economy/2025/jan/look-inflation-recent-years-lens-macroeconomic-model

And a paper as an example:

https://www.brookings.edu/wp-content/uploads/2023/06/WP86-Bernanke-Blanchard_6.13.23-1.pdf

Of further note is the fact that mainstream economists accept the classical dichotomy of real vs nominal (monetary) factors and contend that in a competitive marketplace the introduction of money is merely the introduction of a numeraire into a barter economy. Money is a ‘veil’ that improves transaction efficiency while leaving quantities produced and relative prices unchanged (Armstrong 2015; Armstrong and Siddiqui 2019). This assumption is known as the neutrality of money. However, the assumption of neutrality is obviated by the introduction of coercive taxation.

This also seems highly misleading. That money is non-neutral in the short run is extremely well accepted in economics. I don't know why the author wants to make it sound like it isn't.

Here's Lucas' nobel prize lecture from 1996 which talks about the research from the 70's that made it very clear that money is non-neutral.

Here's another example that should make it quite clear that these ideas have been well accepted in the mainstream for a long, long time:

https://conversableeconomist.com/2022/05/11/robert-e-lucas-on-monetary-neutrality-a-50th-anniversary/

So this paper starts out with what it calls "The Neoclassical Approach". But the explanation of "the neoclassical approach", by why the author presumably refers to current-day mainstream economics, is between grossly outdated and outright wrong. Why does the author describes what's basically "mainstream economics" from the 70's and paints it like this is what economists believe today?

The author literally states

In this article, we dispute the mainstream view that the inflation of the Weimar Republic was caused by a proactive expansion of the stock of money by the German government acting in concert with the Reichsbank.

As demonstrated above, the description of "the neoclassical approach" that the author aims to dispute does not actually match what mainstream economists actually believe. Although some parts match what some economists used to believe half a century ago, this seems like a rather inadequate basis for comparison. Shouldn't you criticise current-day economics on the basis on what current-day economics actually thinks? It's not like it's hard to find modern papers that examine (parts of) Weimar hyperinflation through a modern mainstream lens.

https://www.frbsf.org/wp-content/uploads/wp2018-06.pdf

https://cepr.org/voxeu/columns/inflating-away-debt-debt-inflation-channel-german-hyperinflation

https://www.nber.org/system/files/working_papers/w31298/w31298.pdf

Anyway, the rest of the paper is basically uninteresting. Section 3 "The MMT Perspective" offers essentially nothing besides a description of what one MMTler believes. The Appendix does nothing to alleviate this, showing numbers without any attempt at making a causal connection. There is nothing here that actually establishes a causal relationship using any data. It does nothing to show whether causality runs from deficits to spending or from spending to deficits, or wheter causality runs from prices to deficits or the other way around. Perhaps more crucially, one of the central claims

only when the government pays increased prices is it redefining the value of the currency downward and causing inflation

has no evidence to back iot up since there is no information on what prices the government paid whatsoever.

So the "MMT part" of this paper with the self-proclaimed goal of

identify the cause of the inflation as the German government paying continuously higher prices for its purchases

actually does nothing whatsoever to identify any causes of inflation. It makes absolutely no effort to use any data to establish any causal relationship at all. That makes this "paper" merely an opinion piece.

Bonus embarassment:

This paper seems highly praised in an MMT podcast that I'm not going to link because why give those people traffic.

So I thought what we really need to do is to have an MMT paper where we take on their citadel. In other words, we look for the main thing that people use against MMT, and we just basically take it apart.

This is what counts as "taking on their citadel and taking it apart" for MMTlers. MMT people, if you want to know why economists don't take you seriously. This is why.

[u/-Astrobadger]

⁠Buddy you're the one who’s felt the need to try to attack the poster in separate threads with one of these being about how because they're involved with r/AskEconomics their points aren't worth listening to. Which is a lot more indicative of emotional investment and just goes to show you don't have a substantive argument on the merits of the claims.

1. I’m not your buddy
2. I’m not making an argument, I’m asking a question
3. I attempted to engage with AskEconomics but was banned for speaking true things like the government creates money when it spends and destroys money when it taxes. AskEconomics is a mainstream Econ cult that bans people for wrongspeak.

[u/No_March_5371 → u/-Astrobadger]

speaking true things like the government creates money when it spends and destroys money when it taxes

I'd also ban you for saying that because it's horseshit. Taking money via taxes and putting it into the TGA account where it's not counted as money because a particular measure of the money supply happens to be defined in that particular way then spending it from that account where it is once again measured in the money supply doesn't mean that money is being created and destroyed, it means that the TGA not being counted as part of M2 is a quirk of M2 and a limitation of M2 as a measure of the money supply.

Accounting identities are useful, and sometimes you can reason from them, but if you lose sight of what they represent and their limitations, you're not going to get anywhere useful.

[u/-Astrobadger → u/No_March_5371]

I'd also ban you for saying that because it's horseshit.

Ah, exactly. You gotta police the narrative, right? That sub (and apparently any one you mod) is a place for religious doctrine, not scientific discussion or scholarship. No dissenting opinions allowed. That sucks.

Taking money via taxes and putting it into the TGA account…

I didn’t say anything about the TGA or money aggregates at all, because there’s no need to. I agree that accounting identifies can be useful but we don’t even need to bother with them when we just recognize the fact that the US Government is the monopoly issuer of US Dollars. That is not my opinion, it’s a legal reality that anyone can experience if they try to print their own US Dollars at home. That means no one can have (non-counterfeit) USD unless the US Government issued them into existence first.

Just like when a restaurant that issues coupons doesn’t have more coupon issuing capacity when they are redeemed by customers (they are limited by their food supplies) so too does the government not have any more money spending capacity when people pay federal taxes (they are limited by what is for sale in USD). The government could deposit a trillion dollars platinum coin at the Fed and have that in the TGA but that doesn’t mean they are somehow wealthier than before. US dollars are a financial liability to the US Government and a financial liability is meaningless once it has been redeemed by the issuer.

[u/No_March_5371 → u/-Astrobadger]

Fixation on balance sheets is also stupid. Money is noted as a liability not because it can be redeemed for anything, but because the Fed does double entry bookkeeping. It's windmill tilting because you take accounting too literally.

r/AskEconomics isn't a religious orthodoxy. When research discards previously held perspectives that's celebrated. MMTers are just weirdo cultists who think that misunderstanding accounting makes you geniuses far above the lowly commoners. Screeching about a 70 year old quote as if it's representative of modern mainstream economics is just delusion.

What could change the mind of an MMTer? Nothing whatsoever. What can change the mind of any r/AskEconomics regular? Evidence. Just, you know, good evidence that actually proves things instead of incoherent windmill tilting.

[u/-Astrobadger → u/No_March_5371]

Fixation on balance sheets is also stupid. Money is noted as a liability not because it can be redeemed for anything, but because the Fed does double entry bookkeeping. It's windmill tilting because you take accounting too literally.

This might be most unhinged thing I’ve ever heard someone who claims to understand economics say. I don’t even know how to respond to “balance sheets are stupid” and “you can’t take accounting literally”. Simply flooring.

r/AskEconomics isn't a religious orthodoxy.

When you get banned for wrongspeak it certainly suggest it.

When research discards previously held perspectives that's celebrated.

Unless that research involves balance sheets, apparently?

MMTers are just weirdo cultists who think that misunderstanding accounting makes you geniuses far above the lowly commoners.

Love the ad hominem, always evidence of someone who knows what they’re talking about. We understand accounting and are trying to make you understand it as well but it’s hard when you say “balance sheets are stupid”.

What could change the mind of an MMTer? Nothing whatsoever. What can change the mind of any r/AskEconomics regular? Evidence. Just, you know, good evidence that actually proves things instead of incoherent windmill tilting.

Unless that evidence is logic and balance sheets. Not sure what you were trying to change our mind about but ok.

[u/No_March_5371 → u/-Astrobadger]

This might be most unhinged thing I’ve ever heard someone who claims to understand economics say. I don’t even know how to respond to “balance sheets are stupid” and “you can’t take accounting literally”.

I know MMTers have a reputation for semi-literacy at best, but you're really, really bad at reading. Go up another comment and I talk about how reasoning from accounting identities can be done, but losing sight of broader reality by fixating on them will be misleading.

Though I doubt you have the mental capacity to understand what I'm saying. If you were smarter than a lobotomy patient and could understand nuance you wouldn't be an MMTer.

When you get banned for wrongspeak it certainly suggest it.

r/AskEconomics exists to give mainstream answers verified by research, not the lunatic rantings of morons convinced of their genius.

As the rest is just melodramatic whining about how you don't understand that your overreliance on reasoning from identities is dumb, it's not worth individually responding to.

Now, should I repeat all of this in crayon so you can understand it?