Ellen further asks if MMTers agree with Milton Friedman: "'Inflation is always and everywhere a monetary phenomenon."
Again, not being an MMT intellectual forefront leader, what I can put in here is my own interpretation, as influenced by MMT. I think inflation is a phenomenon caused by more demand than supply for a certain or all goods. I believe nominal inflation can be greatly caused by the amount of money in the system because everything is bought with money. But for the most part, there should be increasing demand for the thing being bought over its supply.
A phenomenon caused by more demand than supply for a certain or all goods
What causes an increase in aggregate demand? Increase in aggregate income, which should come as a consequence of creating jobs that produce sellable goods. It is income which creates the demand for the goods being produced by the jobs created. So income should not come by itself as a handout. It should come as a byproduct of a labour force able to find jobs when they are truly looking. Neither should jobs being created provide insufficient income to the jobholder, otherwise, demand will not be sufficiently restored. Of course, each job created must also be productive to society, because income created without the commensurate increase in productivity only leads to a supply shock. A supply shock here is a sudden shortage of supply vi-a-vis demand. If demand increases while supply remains stagnant, the supply shock will lead to goods inflation.
Nominal inflation can be greatly caused by the amount of money in the system because everything is bought with money
I would take exception to the position that nobody notices when the government adds zeros to the currency. This cannot go unnoticed in a global world. For example, the Canadian dollar is at equal parity with the US dollar. Suddenly Bernanke decides to put an additional zero to the US price level. Now the US dollar will be worth 10 Canadian cents. People will notice, and Americans will strive to flee to the Canadian currency ahead of such a move.
But for such a price level move to be effective, if Bernanke were ever to be mad enough to do it, will have to be done by tweaking the exchange rate value of the currency. To do this, Bernanke will have to be ready to print as much as necessary to add the zero to the price level, not just say he's adding a few hundred million to bank reserves. Reserves have nothing to do with how much banks will lend, and does not determine whether and how much inflation can happen. Banks will lend when they want to lend, whether they already have the reserves beforehand, and even if they can’t get at any more new reserves, will securitize if they have to.
Central banks cannot fully control the money supply if they will only target a particular money supply level, because private loan demand and government spending is what primarily increases it. But if Bernanke will target the price of US dollar relative to other currencies, he can definitely increase inflation. The risk here, as I mentioned, could be a general loss of faith in a currency, and mass flights out of it. You cannot just arbitrarily change the value of your currency or people will not trust it enough to hold it.
For the most part, there should be increasing demand for the thing being bought over its supply
But if the challenge is increasing demand, as is the case in the US right now, you have to address several factors. A few things that put a limit on demand at the individual level are level of current income, level of current expenses, current level of indebtedness, capacity to service existing debt, capacity to borrow more-to financing more spending, confidence in stability of future income, expectations about future increases in fixed expenses, confidence in future value of purchasing power of current savings (if you have any), non-existence of any lender calling on your debt, confidence in future positive value of existing savings/investments/net worth, ease of liquidating current savings –to finance current spending, tax implications of using current income/net worth to spend now vs. later, confidence about over-all economy, and how it is being run… the current condition on many of these factors indicate there will be disinflation or deflation rather than inflation.
The conventional monetary theory is that if you increase the stock of money, this increases the price level, holding everything else constant (MV=PQ). Further, if you increase the money stock, this causes people to not want to hold on to money, passing it along like a ‘hot potato’ to the next spender by quickly spending it before it loses value (due to inflation). But the end result could just as well be a decrease in velocity. The resulting high prices could just be that the increasingly few transactions are clearing at the ever increasing price. If the money stock keeps increasing, this supports an increasing price level even though the velocity and the volumes may already be decreasing.
And the same stock of money flowing more quickly should not in itself lead to higher price levels unless people are bidding up the prices while getting rid of money. But people can only bid higher if they already have more money to pay with. This necessitates a growing money stock. But how do people get to more money? By earning it or by borrowing it. Whether you earn it or you have to borrow it, sufficient income prospect is the more important consideration than increasing nominal values. But higher nominal values will only happen AFTER people already have in their hands the higher money stock level to buy more dearly with, not when it's still in banks as newly-created reserves.
Inducing inflation via rising inflation expectations cuts both ways and may end up just a wash. If a lender is going to lend to a borrower to buy goods now, with rising expectations it's now going to lend him at the rate that incorporates the higher inflation expectations for next year. So the higher borrowing rate effectively offsets the value of buying today vs. tomorrow. And if sellers and owners know that inflation will be higher next year, they won't sell their wares and properties now. Or they will sell their wares at a price that reflects the higher inflation. Intentional buyers may end up not wanting to buy anymore.
I think it depends on the specific circumstance whether Friedman is correct or not. Perhaps when he said it, increasing the money supply easily increased inflation. I think he said that prior to the 1971 abandonment if the gold-dollar peg. It didn't take much printing to increase inflation. This was also a time when bank lending was still growing from a small starting baseline.
Now people are over-indebted, we are in balance sheet recession, and banks are already reluctant to lend. The dollar-gold standard has long been abandoned, and the Fed stands ready to lend banks all the reserves they need, and has in fact, already exchanged their treasury holdings for reserves. Nowadays, you can no longer easily say that increasing the money supply will increase inflation, at least if by money supply you mean reserves. The only way to increase inflation is to explicitly devalue the currency, a la Zimbabwe or Ghana. Now is this an experiment worth the consequences to prove Friedman was right?
P.S. Tom Hickey adds more points in comments