Stephanie Kelton has published this amazing, mis-titled article The Clock Runs Down on Mainstream Keynesianism.

I argued that deficits put downward pressure on interest rates. Krugman says I got that wrong. The standard line — Krugman’s line — is that deficits normally lead to rising interest rates. I argued that deficits actually put downward pressure on the interest rate and that policymakers have to fight against this natural gravitation by doing something to prevent the overnight rate from dropping toward zero. This is really just basic supply and demand.
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The government is coordinating its deficit spending with bond sales, thereby doing a reserve drain (selling bonds) along with a reserve add (deficit spending), so that the newly injected reserves are quickly transformed into newly added Treasuries. The bond sales are done to coordinate the impact so that the government’s fiscal operations don’t leave the banking system with a larger monetary base (and lower interest rates).

But this is fighting against the gravitational effects on the interest rate. Deficit spending pushes down on the overnight rate, and bond sales pull it back up. When bond sales are perfectly coordinated with deficit spending, the opposing forces cancel out, leaving the monetary base looking stable as Krugman’s graph shows.

To finish the thought experiment, consider what would happen if Congress decided to dispense with Treasury auctions and simply allow budget deficits to supply the system with base money instead of Treasuries. Clearly, that would drive the overnight rate to zero. If it wanted to, the Fed could still achieve a positive overnight rate, simply by paying “interest on reserve,” or IOR, balances. That, too, would be fighting against the natural tendency for rates to go to zero.

I find this amazing because I have been trying to explain this for years, but proponents of Modern Monetary Theory, including Stephanie Kelton, have been discouraging me from saying this. In her lectures she sometimes explains that Treasury bonds are just another form of money. I keep saying that bonds are not just another form of money in that you cannot go to the grocery store to buy a loaf of bread and pay for it with Treasury Bonds. You would first have to sell your bond to someone who would give you the money that the grocery store would accept.

Kelton mentions paying interest on reserves to counter the effects of the “Congress decided to dispense with Treasury auctions and simply allow budget deficits to supply the system with base money instead of Treasuries.” The implication here is that the selling of Treasury bonds counteracts the effect of “budget deficits to supply the system with base money”.

Before Stephanie Kelton married, she was Stephanie Bell, publishing this article in September 2000, “Do Taxes and Bonds Finance Government Spending?” So, she ws explaining all this to the academic world long before she was discouraging me from saying this.

I want to have this post at the ready for the next time someone tries to discourage me from explaining this. The trouble with both of these Kelton/Bell articles is that you have to pay to see them in their entirety.

Oh, by the way, here is the reason that I say that this article is miss titled. One of the biggest lessons I learned about Keynesianism is that, in a depression, you cannot stimulate private sector spending by putting more money into the private sector. The Government actually has to buy things that put people to work. This lesson is hidden inside what Stephanie Kelton has written in this miss titled article. If the government puts money into the private sector by buying stuff, and then takes the money back out by selling bonds, the impact of that money as a stimulus is pretty much negated.