Stay up to date on all things crypto and blockchain

In a 2013 article, the St. Louis Fed featured arguments that QE was not debt monetization because the Fed balance sheet would return to normal .... None of that happened. A decade later, the Fed’s holdings of Treasury securities and other assets, both in absolute terms and as a percentage of GDP, are far higher now than they were then, and are rising. So, it became clear that it was and is debt monetization.

There is no mystery here. FED paid interest rates on excess reserves de facto turning money banks held with FED into bonds. Compare it for instance with short term T-bills with maturity of four weeks. In fact I deem this as somewhat dirty play.

Nevertheless there is "easy" way for FED to return to normal. Just stop offering interest on reserves and just sell back to the market the collateral that FED took from primary dealers in exchange of the cash in the first place. In a sense it does not matter for broader economy if the asset that sits on the primary dealer balance sheet is "interest earning excess reserve" or "interest earning government bond".

Although there is some truth to it, the problem with that analysis is that proponents of that view are only looking at one side of the ledger, rather than both sides of the ledger. The other side of the ledger is that the government was able to spend money on the domestic economy via the fiscal spending side that it never extracted from any existing base of money; it instead extracted that funding from a newly-created pile of dollars from the Fed, and those Treasury securities are locked away on the Federal Reserve’s balance sheet from which it drew the new dollars from. The Treasury Department is the mechanism for the Federal Reserve’s QE to get to the public.

Exactly. Banks hold money and FED holds government bonds. If FED decides to sell the bonds back to the market then it sucks those excess reserves out. So as the author says it - there are two sides to the balance sheet.

Things like Medicare, Social Security, military spending, crisis stimulus checks, and so forth, would likely have to be reduced if the Treasury was limited to only borrowing from real lenders rather than borrowing from newly-created pools of dollars from the Federal Reserve. So, a portion of QE money does make it to Main Street (the portion that goes to buying Treasury securities); albeit in an indirect way based on government fiscal decisions.

Yes, they would be limited by public demanding increased interest rates for the capital to be poured into the system. But the fact is that the government already pays the interest rate on excess reserves for these not to go into economy generating inflation.

In other words, let’s say steel mills usually operate at 90% capacity, and in a given recession their capacity dips down to 50% of capacity, as demand decreases significantly while the existing supply of steel factories and trained steelworkers is unchanged. Well, MMT says that the government can go ahead and do a big infrastructure stimulus and print money to buy a bunch of steel at that point, and it won’t cause inflation because there is plenty of capacity to produce that steel. It just offsets deflation. It would only cause inflation if the steel mill was already running near 100% capacity and the government was trying to print money to buy more steel anyway.

Yeah, this could work in theory. Except the fact that it depends on the political process to manage inflation/deflation. It would be like saying that there is no need to have Military Procurement system that has some broader mandate and budget from congress to adhere to. Instead whenever army or navy or airforce or spaceforce needs something - they just ask congress and congress provides the things they need. This could work - except not really.

Modern Monetary Theory says, “Wait a second, the first two models are built on an antiquated system that involved hard money like gold, and the third model still goes through those same antiquated motions..."

There is nothing bad about using old - or as the author says "antiquated" - system if it achieves what is says it does. Look at the inflation in USA especially since around 1987 when Alan Greenspan became FED chair and the central bank adopted inflation targeting of around 2%. Amazing how they consistently did that for decades. Not 5% or 50% and not -5% or 99%. Central bank wants 2% inflation and then uses "antiquated" tools to achieve exactly that for decades without using any "Modern" monetary theories - at least not those that are part of MMT.

In fact it is MMT that is antiquated. The adherents are trying to revive discussion like fiscal theory of price level and utilizing functional finance - idea that was proposed by early 20th century economist Abba Lerner. Believe me, there is nothing "modern" behind MMT.

FYI for viewers:

MMT = Modern Monetary Theory

And the inflation here is price/cpi inflation, not monetary supply inflation. (commonly conflated)

A nice complement to the "looming bank collapse" thread :)

Great article, thanks for posting.

I think she sums it up perfectly. One other fatal assumption with mmt is it sounds a lot like central planning and we know from history does not work. Fdr used mmt in the 1930s and it worked ok for a while, but fdr was a bit of an idealist . And as soon as fdr cut spending in 1937 we fell back into the depression. Ussr used central planning and their exonomy eventually fell apart. The arguement that central planners are experts so they can make the best choices is rubbish. Mmt may work for a very short time when the choices are obvious. But over time you are faced with trade offs that only some one expert in their field knows how to account for. Not to mention that you have to trust the central planners to do what is right for all of society not just his own constituancy or to line his own pockets. Do politicians always do what is right for society?