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Debunking MMT


No entity can be "self financing". It's actually a very stupid concept in the first place. No entity can create create infinite demand for their own assets. If that was true then inflation would never even happen because Central Banks would be able to target a 0% inflation rate.

In QE event, it's basically just asset swap. Therefore, the reserves do simply exist because there were already bonds which are backed by deposits. So far from MR view, reserves act as facilitator only which means it can't exist without being backed by deposits.

To underline the concept, is there any event which made reserves could exist independently without private deposits ? I think this is one of the core rationales why MMT people convince themselves that self-funding is possible.


A lot of people make this mistake by assuming that QE is some sort of govt funding operation. It's not. The govt's cost of funding is the rate of inflation. And QE doesn't help the govt set the rate of inflation. For instance, you could have a situation where inflation was 10% per year and the govt implements QE. The rate of inflation is set when consumers (mostly in the private sector) re-price money vs other goods and services. QE might impact this, but it's not the price setting tool some seem to think it is.

As for reserves existing without deposits - why would they? Think of it like this - if we had ONE bank in this country there would be no need for reserves because that one bank would serve the govt's deposit account AND all the private accounts. There would be no interbank transfers and no worry about that bank ever failing as it would truly be too big to fail. There would be no need for interbank transfers and that's the main role of the Fed and reserves.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Yes, agree. If there is only one bank in this world, reserves are meaningless. But in fact, the world has multitude networks of banks.

So, do you guarantee that in the operational reality, there is no any event (even tiny one) that will trigger any reserve creation independently out of private deposits in any sense ?

Your question isnt clear. Reserves are created because we have private banks that need interbank clearing. This has nothing to do with govt funding.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Is it possible to have reserves without underlying private deposits ? MMT people assert that the fed lends reserves to primary dealer upon buying newly created govt bonds. If this is true, then it is possible to have reserves out of nothing. In other words, because the fed creates reserves out of thin air and followed by dealer to buy govt bonds using those reserves and those reserves will be transferred as deposits to private sector for govt spending, logically speaking the govt is able to do "self-funding". Up to this point, I hope you are clear. But you said there is no such process in reality (it is through reverse repo market). I assume reverse repo market needs private deposits prior to the origin of reserves.

Essentially speaking, I am trying to grasp clear understanding which one comes first. Money multiplier in a sense argues that reserves come first which then trigger private deposit creation (1/RR formula). On the other hand, MR argues that private deposits come first through loan grant which trigger reserves (interbank clearing, etc).

This is the debate of chicken and egg problem. Which one comes first ? Is it chicken or egg or both of them ? I have debate with people who insist that money creation origins from reserves (precisely cash deposits) placed on the banks. The banks then "multiply" these reserves in the form of loans. So, they conclude the govt creates the reserves "out of thin air" which are then multiplied by private banks in the form of deposits.

To put it simply, I don't want to argue over govt funding. I just want to know whether it is possible to have reserves "out of thin air" in any situation. Full stop.

Anyone can create assets first. When I take out a bank loan the bank creates a deposit that I can then spend into someone else's account. I create money from thin air and spend it into existence. The govt does the same thing. It's just regular old endogenous balance sheet expansion....

The whole "spend first" narrative in MMT is just saying that financial assets are created endogenously. But all assets are spent first into existence when they're created. The govt isn't unique in this regard. They just have ultra high credit so those assets can be spent into existence without a high degree of having to worry about counterparties accepting them....

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Anyone can create assets from thin air. The difference with the government is that they can tax your ass so they have a very high level of credibility that other entities and households don't have. This doesn't mean they are "self funding" though. They still rely on demand for their assets. They can't create their own demand.

@LARS-SVENSEN, thanks for your answer.

Cullen, I try to connect the dots and get the big picture. Let me ask a few questions more. You said from MMT perspective, saying that reserves precede taxes is the logical equivalent of saying that reserve issuance IS govt spending, and this doesn't make sense at all. Furthermore, in above post you said all assets are spent first into existence when they're created.

To sum it up, are you saying that reserve issuance IS NOT govt spending because by the time reserves are created, they have to be spent into existence in which AT THE SAME TIME the govt needs to find willing counterparties to accept the reserves it created ? And as a matter of this fact, govt can't do this as long as they can't find any counterparties who are willing to accept its reserves.

The reserves don't matter, it just a legal requirement and a leftover anarchronism of the gold standard.

Many countries have no reserve requirements at all.

It's just the usual MMT-twist-yourself-into-a-pretzel-bation.

If a bank were to use Ripple to transfer value to a another bank, having reserves or not aren't even an issue.

MMTers are just so horribly confused.  They remind me exactly of Vegan zealots.