Elon Musk’s explanation for inflation is unfortunately contradictory

PARIS, FRANCE – JUNE 16: SpaceX and Tesla CEO and Twitter owner Elon Musk … (+) attends the Viva Technology conference dedicated to innovation and startups at the Porte de Versailles exhibition center on June 16, 2023 in Paris, France. Elon Musk is in Paris for the VivaTech trade fair, where he is giving a conference to 4,000 technology enthusiasts. He also took the opportunity to meet with Bernard Arnaud, CEO of LVMH and President of France. Emmanuel Macron, who has already met Elon Musk twice in recent months, is hoping to convince him to set up a battery factory in France for Tesla, his pioneering electric car company. (Photo: Chesnot/Getty Images)

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The energetic, wonderful, and brilliant Elon Musk recently took to X (or Twitter) to explain what causes inflation. It seems that even Musk can sometimes be wrong. He stated with disappointment that inflation “is caused by the federal government spending more than it earns because they simply print more money to make up the difference.”

Sadly, but not surprisingly, neo-Austrian economists who have ever convinced us that the US is in a state of perpetual hyperinflation have happily embraced Musk’s strange explanation. And strange it is.

To understand why, consider how Musk’s extraordinary SpaceX enterprise earns some of its revenue: through federal spending to transport cargo into space. If some of the money were simply “printed,” as Musk claims, SpaceX would have little real value. Let’s not forget, SpaceX earns dollars and is valued in dollars, but if the dollars flowing to SpaceX were simply a function of the speed of the federal government’s printing press (something neo-Austrians like Peter St. Onge claim with authority), SpaceX would have little in the way of earnings and a dollar valuation that no one would trust.

Considering the broader federal debt, it now stands at $35 trillion? Musk claims that money printing has enabled this massive spending, which Musk, like the neo-Austrians who cheer him on by saying that Modern Monetary Theory (MMT) is true.

How else do you explain a viewpoint so popular among neo-Austrians that is so at odds with reality? And to be clear, that’s exactly what neo-Austrians like St. Onge believe. In response to Musk’s explanation of inflation, St. Onge wrote that “it fills me with joy that Hank Rearden in the real world completely understands inflation.” That’s St. Onge’s way of saying that MMT is not only real, but works really well. Fortunately, Market Signals makes fun of the parallel views of neo-Austrians and MMTers.

Consider the yield on the 10-year U.S. Treasury bond to see how out of step with market reality St. Onge and others are. In 2024, with $35 trillion in debt, the yield is 3.86%. In 1980, when the Treasury had $900 billion in total debt, the yield was over 11 percent. Which is just a gentle reminder to St. Onge and others that so-called “money printing” has failed to pay down the federal government’s debt for decades. Contrary to the neo-Austrians and MMTers, MMT is a fraud. $35 trillion in federal debt shows why.

That Treasuries, by far the most “owned” asset in the world, are yielding exponentially less than they did in 1980 is not a sign of the spread of neo-Austrian “money printing” twaddle combined with MMT illiteracy, but quite the opposite. It is a sign that Treasuries have been able to take on quite a lot of debt precisely because real markets do not share either Musk’s fairly simple definition of inflation or St. Onge’s.

Importantly, it’s not just Treasury yields that reveal the obvious. Perhaps even more instructive is the sad fact that the federal government doesn’t just see Musk as a client. As annual government spending and trillions in debt show, our federal government has many, many clients beyond Musk. That’s the sad truth. Government spending is a huge tax.

Of course, if the Treasury simply printed demand for goods, services, and labor from private-sector producers, it would logically have no customers. Just as SpaceX could not and would not exchange real goods and services for printed money, neither could anyone else. Producers do not simply accept “money,” they accept money exchanged for goods, services, and labor. In other words, the surest sign that the United States did not print dollars to create $35 trillion in debt is that it has $35 trillion in debt.

Hence, for Musk, St. Onge, and countless other neo-Austrian mystics, the assumption that inflationary money printing financed Treasury borrowing assumes not only market stupidity, but also massive amounts of it. Really, who would own the Treasury debt if the income streams were “printed”? Who would accept U.S. dollars if their issuer had to print them to pay off its debt?

The answer is that if the Treasury had to inflate, as Musk and others assume, to “make up the difference,” it would have no debt at all. That’s because, as the growth of Treasury debt over the decades clearly shows, government debt is much more likely to be correlated with no inflation. Contrary to St. Onge, markets are smart.