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On to today's letter: no f*&^%ing way, Cary!
This woman isn't imagining her mother-in-law's nastiness and she'll probably never be able to get that woman to grow the ^%$# up and treat her the way she deserves to be treated. But she has something the mother-in-law wants -- actually, two things. Which means she has the ability to change the mother-in-law's behavior to one of kindness and respect, or at least terrified politeness.
So, my advice to the LW is short and simple and based on my own monster-in-law experience -- work on your husband and yourself, and forget your mother-in-law. Deny her access to your entire family unless she demonstrates a willingness to treat all of you with kindness and respect. And work on being strong enough yourself to take your baby and your husband and exit any situation where you are being abused. Now. Get your husband on board and do it.
(Incidentally, the mother-in-law in this case sounds like my stepmother-in-law. and i did try to ignore it, or to be magnanimous when she detroyed my relationships with others through lying about a variety of things. It doesn't work with sociopaths. They are simply made bolder by your seeming lack of resistance. The only thing they respect is denial of those things they value, or an awareness that you understand and won't tolerate their game.)