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How Misconceptions About Money, Decits and Debt are Costing Us All

Stephanie Kelton, Ph.D. FPAGeorgia May 2013

Copyright 2013 by Stephanie Kelton

It's Easy to Get Confused

Most people don't really understand money, debt or government nance Don't understand where money comes from or how it works in the economy View all debt obligations the same way Treat the government budget like a giant household budget

It Seems to Make Sense

The Finances We Understand Best Are Our Own

We know we can only spend what we earn or can borrow We know too much debt can force a person or a businesses into bankruptcy We know it's important to save for the future

Stop Spending Money You Dont Have!

Advice Like This Is Prudent

Today, most of us are up to our
eyeballs in unnecessary debt and we cant see an end to it. And our spending habits are getting worse. It is a simple fact that if you spend money that you dont have today, your nancial picture will look even grimmer in the future.

Great Advice...
.....Unless Everyone in the economy tries to follow it Paradox of Thrift Paradox of Deleveraging

Capitalism Runs on Sales

Spending creates income Income creates sales Sales create jobs

Demand Leakages Rob Our Businesses of Customers

Keeping the Tub Full

Leakages Drain Text Injections Faucet





Government Spending





To Keep The Recovery Going

Businesses must have enough customers This requires spending from: 1. Domestic private sector 2. Foreign sector (i.e. rest of the world) 3. Our government

Customer Killers
Republicans say, "We have a spending problem!" Democrats say, "We have a revenue problem!"

We Hold These Truths to Be Self Evident

And WRONG! Government is constrained like a household or private business It can spend more than it takes in but only if it can borrow other people's money on reasonable terms There is a limited amount of money available to be loaned out

There is a ne line between solvency and insolvency Once the debt gets too high, creditors will grow weary They may downgrade your credit rating, and your borrowing costs may spike You could end up like Greece -- unable to pay your bills

This Picture Has No Economic Meaning

Take it From the Fed

"As the sole manufacturer of dollars,whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e. unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets."

The Issuer of the Currency Can Always Pay

[A] government cannot become insolvent with respect to obligations in its own currency. A at money system, like the ones we have today, can produce such claims without limit
~Alan Greenspan, 1997

Why Didn't Anyone Tell Us?

Flat Earth Economics

What passes for economics today is mainly based on gold standard thinking No idea how modern money works Costing us trillions in lost income, output, savings and wealth

Chief Economist at Citigroup

What's Wrong With Macro?

Money is not like a scarce commodity

The modern monetary system is very different from one based on gold Banks create money out of thin air when they make a loan They are capital constrained

Banks do not lend other people's money Banks are not reserve constrained The US government is not nancially constrained like a household or a private business

The relevant constraint on government is ination

We've Been Fooled

The gold standard world causes us to see threats and obstacles where none exist 1. We're run out of money 2. We've at the mercy of the Chinese and the ratings agencies 3. We could end up like Greece 4. We could get hyperination like Zimbabwe

The Truth is Hiding in Plain Sight

The world changed in 1971 The US$ works differently now Shows why the debt crisis was never real We can't end up like Greece We actually need the government to run decits most of the time

How Does a Decit Owl See It?

Enter the post-gold-standard world of Modern Money FT says it's like an autostereogram Flipping a switch Changes the way you perceive things

Please Listen Closely

What I will NOT Say
Decits don't matter The government should keep spending until we reach full employment We can print our way to prosperity There are no limits to government spending

What I WILL Say

Decits matter, but not the way most people think Unemployment is evidence of a decit that is too small We can have a much more prosperous economy The government is not revenue constrained; it is ination constrained

Let's Start with The Goal of Reducing the Decit

The president wanted to "Go big!" Simpson-Bowles "and more" At least $4 trillion in decit reduction over 10 years

"I'll wash Mitch McConnell's car. I'll walk John Boehner's dog." ~President Obama

Government Balance (%GDP)

Actual Projected


Which (If Any) of These Are Reasonable Goals?

Let's Put the Decit in Context

Government Balance (%GDP)

Actual Projected

Non-Government Balance (%GDP)

Actual Projected Government Balance (%GDP)

Fiscal Cliff Deal and Sequester Are Customer Killers

Tax increases leave people with less income to spend Spending cuts leave someone else with less income to spend Both add drag to the economy

Were Adding Too Much Drag

3.4 Percent is Unsustainable!

Kelton's Chart!

What Almost Everyone is Missing

Private Surplus
We go "up"

Government Decit

When government goes "down"

A Simple and Fundamental Accounting Truth

G >T




Their Decit is Our Surplus! or Their red ink is Our black ink!

There it is again!

How does a Currency Issuer Spend?

By directing its bank (usually the central bank) to

credit someones account

It's not "printing" money (gold standard term) In the modern era, government spending is
accomplished through electronic keystrokes (Bernanke)

Money is No Object

As Chairman Bernanke explained on 60 Minutes in 2009: (PELLEY): Is that tax money that the Fed is spending? (BERNANKE): Its not tax money. We simply use the computer to mark up the size of the account.

A Common Reaction
Understandable! Pervasive distrust of government Afraid of what might happen if they discover they have this power

Remember the Horror of #MintTheCoin?

The Greatest Fear

By looking down the list you can see what isnt there and, strikingly, what you dont see are any instances of central banks gone mad in otherwise-productive economies. As Cullen Roche says, hyperinflation is caused by many things, such as losing a war, or regime collapse, or a massive drop in domestic production. But one thing is clear: its not caused by technocrats going mad or bad.

What Drives Ination?

Especially Oil

Printing Money Doesnt Do It

And, of course, private banks have a license to printand they do most of the printing

Our Fears Are Costing Us Dearly

Fear of Hyperination Fear of China Fear of Ratings Agencies Fear of becoming Greece Fear of Debt

What Should We Be Doing?

Stop waiting for Quantitative Easing to work Recognize -- before its too late -- that the decit is getting to small Do the scally responsible thing: Cut taxes or increase spending NOW For whom? Start with payroll tax -- employee and employer On what?

We Have Useful Work For Them

Millions Who Want to Contribute

Plenty of Spare Capacity

"Companies are awash with cash. And what they've been missing are enough customers out there to prompt demand and justify them investing in more plant and equipment." ~President Obama

"We are out of money." ~President Obama

It's Time We Realized

The government is not like a household The US$ comes from the US Government Not revenue constrained (Greenspan and Bernanke) If the real resources are available, the nancial resources can be there There is no economic reason for spending cuts or tax increases


We're Not Like Them and Shouldn't Follow Their Lead

Italy Spain Greece

They Are Currency Users

Same debt levels were sustainable when they had sovereign currency

Prefer Smaller Decits?

Create Customers!

But Be Careful What You Wish For!

7 periods since 1776 where government ran surpluses and paid down debt. Coincided with 6 Depressions and eventually The Great Recession of 2007-2009

Debt: Its Only Half a Balance Sheet

The Economist, January 16, 2013

A More Prosperous Economy

Means more economic freedom Less dependency Greater opportunity for wealth creation Stronger currency More stable future

To Get There, We Need A Better Understanding of How Money, Decits and Debt Really Work

Thank Y