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.