Tuesday, March 5, 2019

The MMT Big Lie

Stephanie Kelton
By Robert Wenzel

MMT economist Stephanie Kelton is out with her latest column at Bloomberg where she regularly promotes the confused economic approach known as Modern Monetary Theory.

At one point in the essay, she succinctly, in one paragraph, highlights the MMT Big Lie:

It helps to break the argument into a two-part thought experiment. First, think about what happens if the government is running huge budget deficits. As I 
explained, these deficits would result in a massive injection of reserves into the banking system. Unless something is done to prevent it, banks will scramble to offload the excess funds in the overnight market. But with massive supply and no demand for these balances, the overnight bid heads toward zero.
This is simply not true. There is no natural automatic mechanism by which deficits inject reserves into the system. It is true that the Federal Reserve can monetize debt which would inject new reserves into the system but that is not the starting point. The starting point is US Treasury issuance of debt securities, which can or can not result in injections of reserves based on Fed policy at the time regarding interest rates and general monetary policy.

From this tilted start, MMTers then go on to ignore the fact that when the Fed does monetize debt it distorts the economy in favor of the sectors that are first to get the newly created funds. This always occurs regardless of whether there is full employment or high unemployment. The MMTers either don't want to discuss this or are not aware this distortion is a fundamental part of Fed money manipulation.

Failure to address these points leaves Alice and Stephanie in a Wonderland that has nothing to do with the planet earth.

Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.com and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Bank and most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. More about Wenzel here.

1 comment:

  1. The Clock Runs Down on Mainstream Keynesianism
    Paul Krugman’s macro framework is leading him astray.

    By Stephanie Kelton


    The clock ran down on Keynesianism a long time ago. It's just my opinion, but the MMTers are just about the most openly Keynesian know-nothings I've ever encountered. They REALLY know nothing about the socialist calculation problem or that fiat funny money (and not the market) is the cause of the boom/bust cycle. They are openly central planners. I think that could be their weakest point.

    Then there's this:

    1. "First, economics is about policy." Wrong, you lying POS.

    2. "The problem foremost in the mind of MMT economists is unemployment. Their goal is to make sure that everyone who wants a job, has a job and MMT’s path to ensuring that goes through the public sector." But, of course, we all know that unemployment is caused by the boom/bust cycle that is caused by fiat funny money in the first place.