Total Valuation = Total Savings = Unit Value * Saved Units
The truth is, you don’t have to understand how prices work, you don’t have understand sectoral balances you don’t have to understand foreign trade and all that.
All those things can be worked out if you start from the right starting point. That is the following question:
“What is the total value, of all financial assets, issued by the government in question, held by entities which aren’t that government?”
Because we are talking about macro economics, you have to look at the big picture, and that means assessing aggregates. The most important aggregate is the total value of outstanding financial assets which are issued by that entity.
The underlying reason, is that governments do not issue shares. Because there are no shareholders, and there is no real valuation for governments, it is impossible to assess solvency.
So practically, the currency becomes shares. I say the currency, but really that includes bonds, or any financial assets the entity has explicitly committed to.
But shares of what? They are not voting shares, clearly because you can’t buy votes. They are simply claims to future production, potentially enforced by taxation.
The biggest element of Modern Monetary Theory is how you relate different financial assets. Mainstream draws a line between assets based on liquidity. It calls these things M0, M1, M2, M3. These are really nebuluously defined, and hard to measure, because there is no recognition of who or where they are issued. Furthermore, there may be privacy concerns.
For many problems, this approach makes sense, but for the issue of inflation, it does not make sense. Because ultimately, inflation is about the trust in, and prospects of, the entity which issues a currency.
So instead of distinguishing assets by their liquidity, MMT distinguishes assets by who issues them. To do this, it relies on chartalist theory, which looks at complex legal and cultural traditions. Money is meaningful, in many cases, because it is legally recognized, for the settlement of legal obligations.
- Federal reserve notes (cash and coin)
- Treasury bonds
- Reserves at the Fed
As far as I know, those are the 3 important assets issued by the U.S. government. Now, there are also treasury issued coins, but as of now, that’s not important.
Now, if you want to assess the total valuation, the biggest of those 3 by far, is treasury bonds.
Stopping inflation is just a matter of defending a valuation of all circulating assets.
If you are double the number of units in circulation, and maintain the same total valuation, the value of each unit cuts in half. But sometimes, doubling the number of units, may cause trust in your financial assets to falter, so your total valuation could drop by much more than that.
But hyperinflation, only happens when you ignore the total valuation, and do not try to defend it.
The most important thing to note, that if you pay more interest on bonds, than the rate of inflation, you are not really helping yourself, but rather forcing yourself to try to defend a valuation that is too high.
Because cash simply circulates, some private party will hold it, unless the central bank buys it. Even if you buy treasury bonds, that money will be spent, so it is still circulating. The money is only removed from public circulation, if the central bank buys it.
So while we use money to invest in things, investing doesn’t change the total amount of money, only who holds it. This is why treasury bonds do not compete with the return of other investments. Treasury bonds only compete with cash. Someone can choose to hold liquid cash, and accept depreciation over the period they hold it, or they can buy a bond. Those are the only two impactful decisions. Buying another asset, merely shifts that decision to someone else.
So the notion, that bonds must pay more than inflation, is obviously false. When inflation is high, people value the cash, based on what they expect the price to be, when they want to spend it.
If inflation is 20%, then a 10% return on bonds splits the difference. It reduces the value of outstanding debt by 10% a year, while paying people who buy bonds 10% more than holding cash.
To fight inflation, a bond rate, half the inflation rate, is the most fair solution.
If you pay a bond rate above inflation, you are siphoning value away from currency holders to bond holders.
If you pay no bond rate, there is no incentive to hold a currency, and people will spend it as fast as they can.
Ultimately, if you face inflation, you may not be able to support a valuation as high as you had in the past. But inflation targets miss the big picture, while valuation targets are easy to understand.