In fact, the trend rate of inflation is determined by monetary policy, which can impact either the money supply (through open market operations) or money demand (through the payment of interest on bank reserves.) Short-term fluctuations in inflation are often correlated with changes in economic slack, but the underlying inflation process is caused by monetary policy, not economic overheating. Indeed, the unemployment rate will tend to return to its natural rate in the long run, regardless of any given trend rate of inflation. This is why, on average, countries with low inflation do not tend to have higher unemployment rates than countries with high inflation.

MMT proponents also overestimate the revenue that can be derived from money creation. They often talk about paying for new programs by printing money, but don’t seem to realize how little revenue can be earned in this way. Part of the confusion may result from recent innovations, such as “quantitative easing” (QE), which have given many pundits the impression that the government can create a lot of money without triggering inflation. But modern QE programs are nothing like the money-financed deficits that hard-pressed countries once relied upon to cover their bills.

Printing money is a source of revenue for the government if the new money does not earn interest. Thus, printing a $100 bill costs roughly 6 cents, yielding a profit of $99.94. This type of non- interest-bearing money is called “high-powered money,” which refers to the powerful effects resulting from the injection of more cash into the economy. When interest rates are positive, newly created non-interest-bearing currency is a sort of “hot potato,” which gets spent quickly, forcing up prices.

Until 2008, the entire monetary base (currency plus bank deposits at the Fed) was high-powered money. After 2008, however, the Fed began paying interest on bank deposits at the Fed, and thus most bank reserves are no longer high-powered money. QE programs that exchange interest-bearing reserves for interest-bearing government debt are very different from “printing money” in the classic sense, and do not provide a way of extinguishing public debt. The Fed’s purchase of Treasury bills reduces the government’s interest liabilities in one sense, but the new bank reserves are simply another form of government debt, which involve a roughly equal interest liability. It is true that the currency continues to pay no interest, and thus in theory the government could finance its activities by issuing new currency. But the amounts are far too small to make a meaningful difference. In the United States, the currency stock is just over 8 percent of GDP. If one assumes that nominal GDP rises at 4 percent a year on average and the currency ratio stays at roughly 8 percent of GDP, then revenue from money creation is only about 0.32 percent of GDP, a drop in the bucket compared to total federal spending, currently over 20 percent of GDP.