How Misconceptions About Money, Deficits 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 finance • 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 Don’t Have!

Advice Like This Is Prudent
“Today, most of us are up to our
eyeballs in unnecessary debt and we can’t see an end to it. And our spending habits are getting worse. It is a simple fact that if you spend money that you don’t have today, your financial 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 fine 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 fiat 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 financially constrained like a household or a private business

• The relevant constraint on government is inflation

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 hyperinflation 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 deficits most of the time

How Does a Deficit 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
• Deficits 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
• Deficits matter, but not the way most people think • Unemployment is evidence of a deficit that is too small • We can have a much more prosperous economy • The government is not revenue constrained; it is inflation constrained

Let's Start with The Goal of Reducing the Deficit
• The president wanted to "Go big!" • Simpson-Bowles "and more" • At least $4 trillion in deficit 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 Deficit 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

We’re Adding Too Much Drag

3.4 Percent is Unsustainable!

Kelton's Chart!

What Almost Everyone is Missing
Private Surplus
We go "up"

Government Deficit

When government goes "down"

A Simple and Fundamental Accounting Truth
G >T




Their Deficit 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 someone’s 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): It’s 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 isn’t there — and, strikingly, what you don’t 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: it’s not caused by technocrats going mad or bad.

What Drives Inflation?

Especially Oil

“Printing Money” Doesn’t Do It

And, of course, private banks have a license to “print”and they do most of the “printing”

Our Fears Are Costing Us Dearly
• Fear of Hyperinflation • 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 it’s too late -- that the deficit is getting to small • Do the fiscally 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 financial 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 Deficits?

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: It’s 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, Deficits and Debt Really Work

Thank Y



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