The Risks and Failures of Modern Monetary Theory (MMT) in Fiscal and Monetary Policy

Modern Monetary Theory (MMT) has emerged as a provocative framework for rethinking fiscal policy, arguing that governments with sovereign currencies can spend without immediate concern for debt or inflation. While this approach promises bold investments in public goods and full employment, its dismissal of traditional economic constraints has proven to be a dangerous delusion for long-term investors. Historical case studies and recent empirical data reveal that MMT-inspired policies often trigger inflationary spirals, distort asset valuations, and erode purchasing power. For investors, the implications are clear: hedging against fiscal recklessness and central bank overreach is no longer optional-it is imperative.

Inflationary Spirals: The Cost of Ignoring Constraints

MMT posits that inflation is the only constraint on government spending, emerging when an economy reaches full capacity. However, history demonstrates that this theory often fails to account for the speed and severity of inflationary feedback loops. For instance, Chile under Salvador Allende (1970–1973) and Venezuela under Nicolás Maduro (2013–present) implemented policies resembling MMT, leading to hyperinflation and economic collapse according to historical analysis. In Venezuela's case, unchecked money creation to fund social programs and political patronage triggered a 100,000% annual inflation rate by 2018, devastating savings and eroding trust in the bolívar according to data.

The U.S. post-pandemic experience further underscores these risks. The CARES Act and American Rescue Plan Act (ARPA) injected $5 trillion into the economy, financed by deficit monetization and accommodative monetary policy. According to a report by the Center for Economic Policy Research, this surge in liquidity fueled demand-pull inflation, with services inflation persisting due to tight labor markets and supply chain bottlenecks. By March 2023, the Federal Reserve had raised interest rates by 525 basis points to combat inflation, yet core CPI remained stubbornly above 3% according to the same report. These examples highlight how MMT's dismissal of debt constraints can lead to aggressive policy corrections that destabilize markets.

Asset Valuation Distortions: Bubbles and Volatility

MMT's emphasis on fiscal expansion often creates conditions ripe for asset bubbles. When central banks monetize deficits, they inject liquidity into financial markets, driving up asset prices. A 2023 study notes that expansionary monetary policy disproportionately benefits asset holders, inflating real estate, equities, and cryptocurrencies while leaving wages lagging. For example, the Federal Reserve's quantitative easing (QE) program post-2020, which included purchases of mortgage-backed securities, directly fueled a housing boom. According to Brookings analysis, by 2022 U.S. home prices had surged 30% above pre-pandemic levels, contributing to 45% of the Consumer Price Index (CPI) and prolonging inflationary pressures.

However, this artificial inflation of asset values creates fragility. As inflation accelerates, investors shift toward inflation-protected assets, causing sharp volatility. During the 2021–2022 inflation surge, U.S. equities saw sharp corrections in sectors like technology, while Treasury Inflation-Protected Securities (TIPS) and commodities outperformed according to MDPI research. For long-term investors, such volatility erodes confidence in traditional asset allocation models and increases the risk of capital loss.

Purchasing Power Erosion: The Hidden Cost of Fiscal Expansion

Beyond asset distortions, MMT policies often erode real purchasing power. Inflation reduces the value of savings and fixed-income investments, disproportionately harming retirees and lower-income households. The U.S. experience post-2020 illustrates this: while fiscal stimulus boosted short-term consumption, it also led to a 7% decline in real median household income by 2023, as prices for essentials like food and energy surged according to CEPR analysis.

Historical precedents further underscore this risk. A 2025 analysis warns that even governments with strong fiscal credibility can face currency depreciation when resorting to deficit monetization. The study notes that Venice's episodes of money printing immediately weakened its currency's external value, a cautionary tale for modern economies reliant on dollar or euro dominance. For investors, the erosion of purchasing power signals a need to prioritize real assets and inflation-linked instruments.

Conclusion: Hedging Against Fiscal Recklessness

MMT's theoretical appeal-unfettered fiscal spending to achieve social and economic goals-collides harshly with the realities of inflation, asset volatility, and currency devaluation. For investors, the lesson is clear: portfolios must be diversified to withstand the unintended consequences of MMT-inspired policies. Strategies such as allocating to commodities, TIPS, and equities in inflation-resistant sectors (e.g., energy, agriculture) can mitigate risks. Additionally, hedging against currency depreciation through foreign exchange instruments or gold may become increasingly critical.

As governments continue to test the boundaries of fiscal and monetary policy, long-term investors must remain vigilant. The delusion that inflation and debt constraints can be ignored has already exacted a heavy toll on economies like Venezuela and the U.S. The next chapter of MMT experimentation may yet reveal further vulnerabilities-but for now, the evidence is unequivocal: fiscal recklessness is a perilous path.