What's I've been on the edge of my seat about this week is Japan finally (finally! what all those people you mentioned were warning about) getting stuck between unaffordable government debt levels and currency devaluation. They should raise interest rates, but that would explode government payments on interest. Been following @Robin J Brooks who is doing a great job covering it.
You are conflating the operation of inflation targeting in unusual conditions with MMT. I'm not sure why, but probably because you (like the MMTers) are primarily concerned about government borrowing and so you're treating the Fed and the Treasury as if they were at least coordinating. But that's precisely the point of the way central banks have operated since Keynesianism was discredited - its better to set things up so the money supply is managed by an institution that's explicity disinterested in government spending and borrowing. This is what MMT aims to reverse, and so its only possible to describe recent monetary policy as MMT-like by pretending it is already reversed. But it isn't.
The last twenty years of Fed policy are simply a response to first a liquidity crisis, then an unprecedented real shock that was first deflationary and then inflationary that occurred when liquidity was still not at normal levels, within a regime of inflation targetting. You can argue for all three the extent to which the Fed might have caused the problem or initially made it worse, but the overall direction of policy was inevitable under and inflation targeting regime - they had to first find a way to expand the money supply faced with zero interest rates, and then they had to do it again, and then they had to rapidly reverse course. There wasn't really any other choice except to explicitly abandon their inflation target.
They did all of this in the face of a government that was borrowing more and more money, and so from an MMT point of view the giant black government box was "spending newly created money" but it wasn't doing that in anything like the way MMTers would advocate. The whole operation of QE is completely pointless from an MMT poiint of view. The MMT response to the financial crisis would have been something like a gigantic national jobs program, probably accompanied by direct real estate purchases, not the purchase of long term debt and mortgage securities.
MMT is dumb and dangerous. Its so dumb their explanations of their ideas are barely coherent which might have confused you, but what they're advocating for is really nothing like recent Fed policy. I spent a bunch of time researching this, basically because people being dumb on the internet annoys me, and the best model I could come up with is that MMTers think the IS curve is horizontal and so real growth is determined entirely by the money supply, or to put it another way the economy always behaves as if it is in a deep recession. Inevitably when monetary authorities response to an actual liquidity crisis they are doing to do things that are directionally similar to MMT proposals, but (thank god) they did not actually institutionalize any of MMTs policy recommendations.
First, your point that MMT proper advocates something different is accurate, and I could've made that distinction more cleanly. Kelton and Wray would have responded to 2008 and 2020 with something much closer to helicopter money than to QE, so if "MMT-like" means "the policy package MMT theorists actually advocate," then yes, recent Fed policy wasn't MMT-like.
The claim I was trying to make is something narrower, that QE operationalized a central MMT tenet, which is that government bond yields and demand for government debt are a policy choice rather than a market outcome. That's a different proposition than "the Fed adopted MMT's policy prescriptions" and it's what I argue is now visibly failing.
Empirically, Treasury issued long-dated debt at rates the market would never have accepted absent the Fed's standing presence as marginal buyer. Covid era QE absorbed nearly the entire net issuance and the supply-yield relationship (which under classical conditions would discipline issuance) broke for fifteen years. You can describe this institutionally as "the Fed and Treasury remained nominally separate" and that's true. But functionally, the apparatus produced exactly what MMT's operational claim said was possible, that yields decoupled from supply and debt expanded without the bond market disciplining it. And the binding constraints were hamstrung.
Where I'd push back hardest is on the "no choice under inflation targeting" framing. The Fed had choices at every step — QE2 and QE3 weren't crisis responses, the balance sheet kept expanding well after the immediate crises were resolved, and the covid era expansion was a discretionary policy decision, not a forced move.
I think you are confusing MMT as a descriptive theory, and MMT as a prescriptive theory.
MMT as a descriptive theory, is actually simple and coherent - that under fiat money, the GOV (Fed + Treasury) actually have infinite money. They can print as much as they want.
So why Tax, why issue debt, and so on?
Well, you have to control the money supply, and issuing bonds sucks in money money (while increasing it later) and Taxes also absorb money, which means it reduces inflation.
The GOV has no budgetary constraint, it has only inflation constraint.
That is it. That is the MMT descriptive theory, and it is pretty accurate!
The prescriptive theory is a bunch of garbage that assume the Government is benevolent and super efficient in a very communist manner.
I tend to ignore MMT as a descriptive theory because its not a very good one. Neo-Keynesianism had the IS-LM model and the new neoclassical/new keynesian synthesis has various tools including AS/AD models and VAR models that tell us how policy changes and external shocks affect the real economy, at least directionally. MMT doesn't have any such model. The best they can do is something like "sometimes when the government spends money it will create inflation and sometimes it won't". But even the IS-LM models tells us that this depends on the real supply and demand for savings. MMT says it depends on ... something. The only reason to prefer a model that makes no useful predictions is because you don't like the predictions, and of course MMT is the preferred "model" of people who want much more inflationary policy more or less regardless of the actual macroeconomic situation.
That isn't to say there are no useful insights in the MMT framework. The fact that under fiat money the central bank/treasury distinction is a policy choice, the fact that loans create deposits, these are useful insights. They're just not terribly consequential really and they come from older post-Keynesian heterodox economics that predated MMT.
I mostly agree with you. I think most of MMT insights are clarification of older insights.
However, 2 major disagreements :
1) Models are great, but there was no consensus - “Biden’s IRA would cause inflation” - that is because economic models are not like flying a plane. There are too many models with too many free parameters, and people can’t agree on “the right one”. So the predictions of models tend to be directional.
2) The clarification is important. For example, some people say ”US/Japan GOV can’t raise interest rates because of massive debts”. With MMT, we know GOV has infinite money so this is non-sense, the GOV can choose whatever interest rates it want, with the price being that higher interest rates now would mean higher increase in the money supply later, or budget cuts, due to the higher payouts. In todays world it would be the FED buying lots of T-bills.
The problem with the models they have too many parameters to actually calibrate, so there was no consensus on "this will cause inflation". In the end we are left with stories -more money cause more inflation. supply disruption cause inflation.
Informative article. Given what the fed did to keep rates low it makes sense why MMT advocates and pretty much every center-left commenter were upset Congress did not do more fiscal stimulus to generate demand in the early 2010s. A more robust housing refinance program could have helped, center-left and center-right economists produced multiple approaches. It’s interesting that your conclusion about higher taxes touches on another MMT tenet of using taxation to withdraw money from circulation to tame inflation. When inflation returned post-covid I did not see any MMT advocate propose that though. I think that speaks to the political constraint of operationalizing that tenet.
The MMT mistake was not noticing that sovereign money is different from household money.
That part is true.
The mistake was confusing temporary constraint suspension with constraint abolition.
QE made debt feel cheap, auctions feel guaranteed, and rates feel like policy variables rather than market signals. But once inflation returned, the execution layer reasserted itself: term premia, refinancing costs, Fed credibility, debt maturity, and political pressure.
Money is a legitimacy system built on a constraint stack.
Thanks for this writeup. I'm not an economist, so I don't have that much familiarity with MMT. I agree that you can't just set interest rates by fiat -- you still need buyers at the end of the day. I suppose the MMT theory amounts to the idea that having the government be a straw buyer could allow you to hack demand.
I know debt to GDP ratio is a bad look (and optics are a big part of this) but I suspect that at nitty-gritty fundamentals, the question at the end of the day for American holdings (including T-bills) is: what is safer?
The ultrarich (who may be growing in number) need to park their assets somewhere. I can see a growing case for Yuan. It's harder to make the case for the Euro.
To me, the question is, ten years from now, if you want to buy a bag of rice, a gallon of gas, or a bar of gold, which currency do you want in your bank account at that time? Find the country in the world where you can buy those things (or whatever you're looking for), and that's where you'll park your dough
Thanks for the comment and well put. My view is that China will have to open its capital markets and have reforms around property rights and investor protections before the yuan has the appeal to the global investor that the dollar does. Central bank independence, or at least the perception of it, is also paramount imo. That’s where the Euro edges out the yuan.
I find that this piece critiques fed decisions that may be adjacent to MMT, rather than MMT in the way it's actually argued by Kelton, Wray, or Mosler.
In particular, the analysis treats high interest rates and debt service costs as unavoidable constraints once QE stops, but that conclusion rests on assumptions MMT explicitly rejects. A core MMT claim is that Treasury bond issuance is a policy choice, not an operational necessity for a currency‑issuing government. If the state does not need to issue interest‑bearing debt to spend, then the interest‑rate channel that anchors much of this argument is itself optional. Rising debt service costs are a consequence of choosing to maintain an interest‑bearing bond market and a positive policy rate. Under MMT they are not an intrinsic fiscal constraint.
Relatedly, the piece frames MMT as relying on permanent QE and an “infinite buyer of last resort.” That’s not how MMT proposes managing inflation. MMT economists have long criticized QE as an ineffective and regressive tool, preferring fiscal instruments instead: taxation to withdraw purchasing power, targeted spending rather than blanket stimulus, and of course a Job Guarantee as an automatic stabilizer that anchors labor markets without relying on unemployment induced by rate hikes.
You also treat 2022 inflation as a falsification of MMT, but the policy response was almost entirely monetary. The Fed did exactly what MMT says not to do: rely on aggressive rate hikes that increase interest income, mechanically expand deficits, and destabilize debtors while leaving the underlying spending mix largely untouched. The fact that bond yields rose once the Fed chose to tighten directly demonstrate MMT’s claim that rates are a policy variable.
Finally, the “maturity wall” and refinancing risks described here are real, but they are problems created by issuing large volumes of interest‑bearing debt in the first place. From an MMT perspective, diagnosing instability caused by that choice without engaging the alternative (reducing or eliminating bond issuance altogether) sidesteps the framework’s central argument rather than answering it.
To be clear, this article is a very strong critique of QE-dependent fiscal expansion and monetary dominance (which is something MMT economists already critique). However, it is much less convincing as a rebuttal of MMT on its own terms, because it does not seriously engage MMT’s claims about optional interest rates, non‑debt financing, or fiscal inflation control.
This is a well-researched (and well-written) article, but it rests on the same mischaracterizations most MMT critiques do.
The first is the conflation of legal and economic realities. You're right that the TGA cannot go into overdraft. But as you note, this is a legal reality -- if a law were passed tomorrow saying the Fed no longer had to debit the TGA when executing fiscal payments, nothing would change economically about how the US government spends money.
This connects to your framing of MMT as arguing that deficits are "self-financing." What MMT actually argues is that deficits don't need to be financed at all. Even if the US issued no more bonds, that would in no way constrain how much the government can spend, because spending happens when the Fed credits commercial bank accounts. Bond sales shuffle reserves around, but they don't finance anything.
It's also odd to point to 2022 as somehow proving the failure of MMT. If MMT had really been 'operationalized,' why did we see rate hikes as the only response to inflation -- rather than tax increases, demand-cooling, and supply-side investment? MMT explicitly argues that the fiscal authority should have responsibility for inflation management to solve the exact tension you're describing.
Finally, bizarre to end on the idea that taxes are a key lever for controlling inflation in a piece arguing MMT is dumb. That's a key MMT insight! Thoughtful piece, but it's knocking down a caricature.
If the law changed around TGA going into overdraft I suspect there would be real economic consequences, namely diminished global demand for the dollar, which derives its value in part from the perception that there are legal guardrails around how it is created.
On the Fed crediting commercial banks, yes of course but ignoring bond issuance is like saying “technically the heart is just a pump” while ignoring the circulatory system it sits in.
If deficits expand without corresponding bond issuance, you get persistent excess reserves, that can push rates to zero unless the Fed intervenes, which effectively reintroduces a “bond-like” mechanism anyway. So the system recreates the function of bonds even if you tried to eliminate them.
Conflating Treasury and the Fed into a single entity erases internal constraints that actually shape policy, assumes political alignment between fiscal and monetary authorities, and, as I mentioned, undermines institutional credibility which is not a cycle I think we’d like to see play out.
Also, in 2022 rate hikes were far from the only response to inflation. The fed also tapered its balance sheet holdings to the tune of trillions... hence yields backing up across the curve....
Finally, the idea that taxes can be used to withdraw demand and thus help contain inflation is not uniquely MMT. And the conclusion I was reaching was that, given MMT has effectively been operationalized, yes it is an unfortunate reality that this lever is one of the only ones left for managing economic cycles.
Agreed that there are credibility/political considerations to changing statutory rules.
You are right that we also saw QT in 2022 -- I should have said monetary tools, not rate hikes, to be more precise.
I'll end by noting that the concern about excess reserves pushing rates to zero is outdated in the Fed's current framework, where interest is paid on reserve balances. This idea is reasonable in a reserve-scarce regime (pre-2008) where rates are targeted via supply & demand in the fed funds market -- but that doesn't apply today.
Not sure if you consider interest-bearing reserves to be *bond-like*, but if so, that's a clear case of yields being set by fiat rather than the market.
My naive take is that MMT proponents told me the only reason money has any value is to pay taxes to the issuing government, so inflation is properly controlled by raising taxes to increase the value of the money. Seems like it never was much of an infinite money glitch if that's the case.
agreed, QE isn't MMT, and the article doesn't claim it is. The argument is that QE operationalized MMT's central operational claim — that interest rates and demand for government debt are a policy choice rather than a market outcome — even as Bernanke would have rejected the MMT label.
On your question... the Fed didn't buy more short-term paper to push rates below zero. NIRP was on the table and got rejected, partly because the operational damage to money market funds and bank net interest margins was considered too costly, and partly because the empirical evidence from Europe and Japan suggested NIRP's marginal transmission was weak and possibly counterproductive. So the Fed went the other direction on the curve as it bought long-dated Treasuries and agency MBS, suppressing duration risk and pulling long yields down through the portfolio balance channel. The empirical literature is pretty conclusive on this, that the market's expectation that the Fed would keep showing up made long-dated Treasuries functionally safer than they would otherwise have been.
That mechanism is the entire post-GFC monetary regime. It is also what made MMT's operational claim look defensible for fifteen years, because if the Fed can suppress the long end through purchases, then the assertion that "rates are a policy choice" becomes empirically hard to refute.
But — and this is the piece's actual argument — the mechanism only works under two conditions 1) the Fed has to remain credible on inflation, and 2) inflation has to stay dormant. When inflation came back post-covid both conditions broke. The Fed couldn't keep buying long paper without abandoning its inflation mandate, and abandoning the mandate would have collapsed its credibility.
Which is why your question, asked today rather than in 2019, has a different answer than it would have had then. There is no version of "what does the Fed buy" that produces durable easing in an inflationary regime. It only works when inflation is gone, and the moment inflation comes back, the apparatus has to be dismantled.
Several nice clarifications! But I still think bringing in MMT is not helpful.
I agree with your reasoning about why the Fed did not go for negative ST interest rates and instituted IOR (but did it have to be so remunerative?)
But once you have inflation back up where you want it (or even by mistake above) you don’t need to do QE. What “apparatus” has to be dismantled? Is this all about IOR/vs skinny reserves? I agree with that, but its not central to managing inflation.
The threat to anchoring is not how the Fed responds to shocks; it’s the shocks the Fed responds to.
What's I've been on the edge of my seat about this week is Japan finally (finally! what all those people you mentioned were warning about) getting stuck between unaffordable government debt levels and currency devaluation. They should raise interest rates, but that would explode government payments on interest. Been following @Robin J Brooks who is doing a great job covering it.
Thanks very much! Appreciate the kind words.
You are conflating the operation of inflation targeting in unusual conditions with MMT. I'm not sure why, but probably because you (like the MMTers) are primarily concerned about government borrowing and so you're treating the Fed and the Treasury as if they were at least coordinating. But that's precisely the point of the way central banks have operated since Keynesianism was discredited - its better to set things up so the money supply is managed by an institution that's explicity disinterested in government spending and borrowing. This is what MMT aims to reverse, and so its only possible to describe recent monetary policy as MMT-like by pretending it is already reversed. But it isn't.
The last twenty years of Fed policy are simply a response to first a liquidity crisis, then an unprecedented real shock that was first deflationary and then inflationary that occurred when liquidity was still not at normal levels, within a regime of inflation targetting. You can argue for all three the extent to which the Fed might have caused the problem or initially made it worse, but the overall direction of policy was inevitable under and inflation targeting regime - they had to first find a way to expand the money supply faced with zero interest rates, and then they had to do it again, and then they had to rapidly reverse course. There wasn't really any other choice except to explicitly abandon their inflation target.
They did all of this in the face of a government that was borrowing more and more money, and so from an MMT point of view the giant black government box was "spending newly created money" but it wasn't doing that in anything like the way MMTers would advocate. The whole operation of QE is completely pointless from an MMT poiint of view. The MMT response to the financial crisis would have been something like a gigantic national jobs program, probably accompanied by direct real estate purchases, not the purchase of long term debt and mortgage securities.
MMT is dumb and dangerous. Its so dumb their explanations of their ideas are barely coherent which might have confused you, but what they're advocating for is really nothing like recent Fed policy. I spent a bunch of time researching this, basically because people being dumb on the internet annoys me, and the best model I could come up with is that MMTers think the IS curve is horizontal and so real growth is determined entirely by the money supply, or to put it another way the economy always behaves as if it is in a deep recession. Inevitably when monetary authorities response to an actual liquidity crisis they are doing to do things that are directionally similar to MMT proposals, but (thank god) they did not actually institutionalize any of MMTs policy recommendations.
This is a careful objection so thank you.
First, your point that MMT proper advocates something different is accurate, and I could've made that distinction more cleanly. Kelton and Wray would have responded to 2008 and 2020 with something much closer to helicopter money than to QE, so if "MMT-like" means "the policy package MMT theorists actually advocate," then yes, recent Fed policy wasn't MMT-like.
The claim I was trying to make is something narrower, that QE operationalized a central MMT tenet, which is that government bond yields and demand for government debt are a policy choice rather than a market outcome. That's a different proposition than "the Fed adopted MMT's policy prescriptions" and it's what I argue is now visibly failing.
Empirically, Treasury issued long-dated debt at rates the market would never have accepted absent the Fed's standing presence as marginal buyer. Covid era QE absorbed nearly the entire net issuance and the supply-yield relationship (which under classical conditions would discipline issuance) broke for fifteen years. You can describe this institutionally as "the Fed and Treasury remained nominally separate" and that's true. But functionally, the apparatus produced exactly what MMT's operational claim said was possible, that yields decoupled from supply and debt expanded without the bond market disciplining it. And the binding constraints were hamstrung.
Where I'd push back hardest is on the "no choice under inflation targeting" framing. The Fed had choices at every step — QE2 and QE3 weren't crisis responses, the balance sheet kept expanding well after the immediate crises were resolved, and the covid era expansion was a discretionary policy decision, not a forced move.
I think you are confusing MMT as a descriptive theory, and MMT as a prescriptive theory.
MMT as a descriptive theory, is actually simple and coherent - that under fiat money, the GOV (Fed + Treasury) actually have infinite money. They can print as much as they want.
So why Tax, why issue debt, and so on?
Well, you have to control the money supply, and issuing bonds sucks in money money (while increasing it later) and Taxes also absorb money, which means it reduces inflation.
The GOV has no budgetary constraint, it has only inflation constraint.
That is it. That is the MMT descriptive theory, and it is pretty accurate!
The prescriptive theory is a bunch of garbage that assume the Government is benevolent and super efficient in a very communist manner.
I tend to ignore MMT as a descriptive theory because its not a very good one. Neo-Keynesianism had the IS-LM model and the new neoclassical/new keynesian synthesis has various tools including AS/AD models and VAR models that tell us how policy changes and external shocks affect the real economy, at least directionally. MMT doesn't have any such model. The best they can do is something like "sometimes when the government spends money it will create inflation and sometimes it won't". But even the IS-LM models tells us that this depends on the real supply and demand for savings. MMT says it depends on ... something. The only reason to prefer a model that makes no useful predictions is because you don't like the predictions, and of course MMT is the preferred "model" of people who want much more inflationary policy more or less regardless of the actual macroeconomic situation.
That isn't to say there are no useful insights in the MMT framework. The fact that under fiat money the central bank/treasury distinction is a policy choice, the fact that loans create deposits, these are useful insights. They're just not terribly consequential really and they come from older post-Keynesian heterodox economics that predated MMT.
I mostly agree with you. I think most of MMT insights are clarification of older insights.
However, 2 major disagreements :
1) Models are great, but there was no consensus - “Biden’s IRA would cause inflation” - that is because economic models are not like flying a plane. There are too many models with too many free parameters, and people can’t agree on “the right one”. So the predictions of models tend to be directional.
2) The clarification is important. For example, some people say ”US/Japan GOV can’t raise interest rates because of massive debts”. With MMT, we know GOV has infinite money so this is non-sense, the GOV can choose whatever interest rates it want, with the price being that higher interest rates now would mean higher increase in the money supply later, or budget cuts, due to the higher payouts. In todays world it would be the FED buying lots of T-bills.
The problem with the models they have too many parameters to actually calibrate, so there was no consensus on "this will cause inflation". In the end we are left with stories -more money cause more inflation. supply disruption cause inflation.
Informative article. Given what the fed did to keep rates low it makes sense why MMT advocates and pretty much every center-left commenter were upset Congress did not do more fiscal stimulus to generate demand in the early 2010s. A more robust housing refinance program could have helped, center-left and center-right economists produced multiple approaches. It’s interesting that your conclusion about higher taxes touches on another MMT tenet of using taxation to withdraw money from circulation to tame inflation. When inflation returned post-covid I did not see any MMT advocate propose that though. I think that speaks to the political constraint of operationalizing that tenet.
The MMT mistake was not noticing that sovereign money is different from household money.
That part is true.
The mistake was confusing temporary constraint suspension with constraint abolition.
QE made debt feel cheap, auctions feel guaranteed, and rates feel like policy variables rather than market signals. But once inflation returned, the execution layer reasserted itself: term premia, refinancing costs, Fed credibility, debt maturity, and political pressure.
Money is a legitimacy system built on a constraint stack.
You can suppress the constraint for a while.
You cannot repeal it.
Thanks for this writeup. I'm not an economist, so I don't have that much familiarity with MMT. I agree that you can't just set interest rates by fiat -- you still need buyers at the end of the day. I suppose the MMT theory amounts to the idea that having the government be a straw buyer could allow you to hack demand.
I know debt to GDP ratio is a bad look (and optics are a big part of this) but I suspect that at nitty-gritty fundamentals, the question at the end of the day for American holdings (including T-bills) is: what is safer?
The ultrarich (who may be growing in number) need to park their assets somewhere. I can see a growing case for Yuan. It's harder to make the case for the Euro.
To me, the question is, ten years from now, if you want to buy a bag of rice, a gallon of gas, or a bar of gold, which currency do you want in your bank account at that time? Find the country in the world where you can buy those things (or whatever you're looking for), and that's where you'll park your dough
Thanks for the comment and well put. My view is that China will have to open its capital markets and have reforms around property rights and investor protections before the yuan has the appeal to the global investor that the dollar does. Central bank independence, or at least the perception of it, is also paramount imo. That’s where the Euro edges out the yuan.
I find that this piece critiques fed decisions that may be adjacent to MMT, rather than MMT in the way it's actually argued by Kelton, Wray, or Mosler.
In particular, the analysis treats high interest rates and debt service costs as unavoidable constraints once QE stops, but that conclusion rests on assumptions MMT explicitly rejects. A core MMT claim is that Treasury bond issuance is a policy choice, not an operational necessity for a currency‑issuing government. If the state does not need to issue interest‑bearing debt to spend, then the interest‑rate channel that anchors much of this argument is itself optional. Rising debt service costs are a consequence of choosing to maintain an interest‑bearing bond market and a positive policy rate. Under MMT they are not an intrinsic fiscal constraint.
Relatedly, the piece frames MMT as relying on permanent QE and an “infinite buyer of last resort.” That’s not how MMT proposes managing inflation. MMT economists have long criticized QE as an ineffective and regressive tool, preferring fiscal instruments instead: taxation to withdraw purchasing power, targeted spending rather than blanket stimulus, and of course a Job Guarantee as an automatic stabilizer that anchors labor markets without relying on unemployment induced by rate hikes.
You also treat 2022 inflation as a falsification of MMT, but the policy response was almost entirely monetary. The Fed did exactly what MMT says not to do: rely on aggressive rate hikes that increase interest income, mechanically expand deficits, and destabilize debtors while leaving the underlying spending mix largely untouched. The fact that bond yields rose once the Fed chose to tighten directly demonstrate MMT’s claim that rates are a policy variable.
Finally, the “maturity wall” and refinancing risks described here are real, but they are problems created by issuing large volumes of interest‑bearing debt in the first place. From an MMT perspective, diagnosing instability caused by that choice without engaging the alternative (reducing or eliminating bond issuance altogether) sidesteps the framework’s central argument rather than answering it.
To be clear, this article is a very strong critique of QE-dependent fiscal expansion and monetary dominance (which is something MMT economists already critique). However, it is much less convincing as a rebuttal of MMT on its own terms, because it does not seriously engage MMT’s claims about optional interest rates, non‑debt financing, or fiscal inflation control.
Glad to see someone pointing these out
This is a well-researched (and well-written) article, but it rests on the same mischaracterizations most MMT critiques do.
The first is the conflation of legal and economic realities. You're right that the TGA cannot go into overdraft. But as you note, this is a legal reality -- if a law were passed tomorrow saying the Fed no longer had to debit the TGA when executing fiscal payments, nothing would change economically about how the US government spends money.
This connects to your framing of MMT as arguing that deficits are "self-financing." What MMT actually argues is that deficits don't need to be financed at all. Even if the US issued no more bonds, that would in no way constrain how much the government can spend, because spending happens when the Fed credits commercial bank accounts. Bond sales shuffle reserves around, but they don't finance anything.
It's also odd to point to 2022 as somehow proving the failure of MMT. If MMT had really been 'operationalized,' why did we see rate hikes as the only response to inflation -- rather than tax increases, demand-cooling, and supply-side investment? MMT explicitly argues that the fiscal authority should have responsibility for inflation management to solve the exact tension you're describing.
Finally, bizarre to end on the idea that taxes are a key lever for controlling inflation in a piece arguing MMT is dumb. That's a key MMT insight! Thoughtful piece, but it's knocking down a caricature.
Thanks for the thoughts Brian,
If the law changed around TGA going into overdraft I suspect there would be real economic consequences, namely diminished global demand for the dollar, which derives its value in part from the perception that there are legal guardrails around how it is created.
On the Fed crediting commercial banks, yes of course but ignoring bond issuance is like saying “technically the heart is just a pump” while ignoring the circulatory system it sits in.
If deficits expand without corresponding bond issuance, you get persistent excess reserves, that can push rates to zero unless the Fed intervenes, which effectively reintroduces a “bond-like” mechanism anyway. So the system recreates the function of bonds even if you tried to eliminate them.
Conflating Treasury and the Fed into a single entity erases internal constraints that actually shape policy, assumes political alignment between fiscal and monetary authorities, and, as I mentioned, undermines institutional credibility which is not a cycle I think we’d like to see play out.
Also, in 2022 rate hikes were far from the only response to inflation. The fed also tapered its balance sheet holdings to the tune of trillions... hence yields backing up across the curve....
Finally, the idea that taxes can be used to withdraw demand and thus help contain inflation is not uniquely MMT. And the conclusion I was reaching was that, given MMT has effectively been operationalized, yes it is an unfortunate reality that this lever is one of the only ones left for managing economic cycles.
Thanks for the substantive reply.
Agreed that there are credibility/political considerations to changing statutory rules.
You are right that we also saw QT in 2022 -- I should have said monetary tools, not rate hikes, to be more precise.
I'll end by noting that the concern about excess reserves pushing rates to zero is outdated in the Fed's current framework, where interest is paid on reserve balances. This idea is reasonable in a reserve-scarce regime (pre-2008) where rates are targeted via supply & demand in the fed funds market -- but that doesn't apply today.
Not sure if you consider interest-bearing reserves to be *bond-like*, but if so, that's a clear case of yields being set by fiat rather than the market.
My naive take is that MMT proponents told me the only reason money has any value is to pay taxes to the issuing government, so inflation is properly controlled by raising taxes to increase the value of the money. Seems like it never was much of an infinite money glitch if that's the case.
Sorry, Bill, but QE is not MMT.
And I'll repete the quesiton: What does the FEd buy when it needs to inflate and ST are alredy near zero? More ST to force rates below zero?
agreed, QE isn't MMT, and the article doesn't claim it is. The argument is that QE operationalized MMT's central operational claim — that interest rates and demand for government debt are a policy choice rather than a market outcome — even as Bernanke would have rejected the MMT label.
On your question... the Fed didn't buy more short-term paper to push rates below zero. NIRP was on the table and got rejected, partly because the operational damage to money market funds and bank net interest margins was considered too costly, and partly because the empirical evidence from Europe and Japan suggested NIRP's marginal transmission was weak and possibly counterproductive. So the Fed went the other direction on the curve as it bought long-dated Treasuries and agency MBS, suppressing duration risk and pulling long yields down through the portfolio balance channel. The empirical literature is pretty conclusive on this, that the market's expectation that the Fed would keep showing up made long-dated Treasuries functionally safer than they would otherwise have been.
That mechanism is the entire post-GFC monetary regime. It is also what made MMT's operational claim look defensible for fifteen years, because if the Fed can suppress the long end through purchases, then the assertion that "rates are a policy choice" becomes empirically hard to refute.
But — and this is the piece's actual argument — the mechanism only works under two conditions 1) the Fed has to remain credible on inflation, and 2) inflation has to stay dormant. When inflation came back post-covid both conditions broke. The Fed couldn't keep buying long paper without abandoning its inflation mandate, and abandoning the mandate would have collapsed its credibility.
Which is why your question, asked today rather than in 2019, has a different answer than it would have had then. There is no version of "what does the Fed buy" that produces durable easing in an inflationary regime. It only works when inflation is gone, and the moment inflation comes back, the apparatus has to be dismantled.
Several nice clarifications! But I still think bringing in MMT is not helpful.
I agree with your reasoning about why the Fed did not go for negative ST interest rates and instituted IOR (but did it have to be so remunerative?)
But once you have inflation back up where you want it (or even by mistake above) you don’t need to do QE. What “apparatus” has to be dismantled? Is this all about IOR/vs skinny reserves? I agree with that, but its not central to managing inflation.
The threat to anchoring is not how the Fed responds to shocks; it’s the shocks the Fed responds to.