Turn A that Frown Upside Down: Heartwarming Tale of Debt and Deficits

in the Modern Economy

Stephanie Kelton, Ph.D. Augustana College April 12, 2014
Copyright © 2014 by Stephanie Kelton

What Do Most of You Want?
• Graduate into a healthy economy • Become part of a strong middle-class • Inherit a sustainable planet • Enjoy a secure retirement • In short, you want to live in a Good Society

We Want a Balanced Economy that Works for All of Us

• Not too hot • Not too cold

Where Jobs Are Plentiful

And Income is Maximized

Here’s Our Problem
• Republicans say, "We have a spending problem!" • Democrats say, "We have a revenue problem!” • The both decry deficits • And both equate balanced budgets with fiscal responsibility

And It Seems to Make Sense
• 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!

“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

Spending Cannot be the Enemy

It’s About Calibrating Flows
Leakages Drain Text Injections Faucet





Government Spending




To Get to Full Employment
• Businesses must have more customers • Spending can come from: 1. Domestic private sector 2. Foreign sector (i.e. rest of the world) 3. Our government

But We’re Obsessed with Balancing the Budget

We Hold These Truths to Be Self Evident
• And WRONG! • Government is 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 affordable 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 (i.e. unable to pay your bills)

We Think This Can Literally Happen

We’ve Been Fooled

It’s Hard to UnFool People
• Most people don’t understand where money comes from or how it works in the economy • The see government deficits as a negative • They see our national debt as a major problem

What Do You See?

Flat Earth Economics
• In economics, we still see the earth as flat • We talk and write textbooks as if the dollar was still tied to gold • It’s a mistake that’s costing us trillions (CBO)

What Are We Missing?
"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.”
~STL Federal Reserve


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

We've Been Fooled
• The gold standard world causes us to see threats and obstacles where none exist 1. We've run out of money 2. We're at the mercy of the Chinese, the ratings agencies and the bond vigilantes 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

What Does the Owl Say?
• Enter the post-gold-standard world of Modern Money Theory • 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 path would you choose?

Think Like an Owl

Let's Put the Deficit in Context

Government Balance (%GDP)
Actual Projected

Non-Government Balance (%GDP)

Actual Projected Government Balance (%GDP)

A Simple and Indisputable Accounting Fact
G >T




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

Fiscally Responsible?
• FY2013 deficit is down to $680bn 4.1% of GDP 38% drop from 2012 48% drop from 2009

• •

How Big Does the Deficit Need to Be?

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

Government Deficit
When government goes "down"

Where Does the Money Come From?
• •
The Government is the Scorekeeper for the dollar 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.

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

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

Our Fears Are Costing Us Dearly
• Fear of Hyperinflation • Fear of China • Fear of Bond Vigilantes • Fear of becoming Greece • Fear of Debt and Deficits


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.… 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.
~Felix Salmon, Reuters


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”

• What if China won’t buy our bonds? • Net exporters to US • Results in checking account at Fed • Treasuries are savings accounts at the Fed • We benefit in real terms

The Bond Vigilantes
“The treasury can always raise money by issuing securities. The bond vigilantes really have it backwards. There is always more demand for treasuries than can be allocated from a limited supply of new issues in each auction; the winners in the auctions get to place their funds in the safest most liquid form of instrument there is for US dollars; the losers are stuck keeping some of their funds in banks, with bank risk.”
~Frank N. Newman, 2013


They Are Currency Users

Same debt levels were sustainable when they had sovereign currency

We’re Not Like Them
Italy Spain Greece

What Should We Be Doing?
• Stop waiting for the economy to fix itself • Recognize -- before it’s too late -- that the deficit is falling too fast and for the wrong reasons • Do the fiscally responsible thing: Cut taxes and/or increase spending now • Our focus should be on macro outcomes not budget outcomes

Nowhere Near Full Employment

Useful Projects

Plenty of Spare Capacity

And No Long-Run Inflation Problem

"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’re out of money.” ~President Obama

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

The Budget is a Tool
• The budget is a means to an end, not an end in itself • Focusing our energy on balancing the budget leads to bad economic outcomes and human suffering • The budget is a tool that should be used to achieve policy goals, like full employment and modest inflation

Balance the Economy

Not the Budget

To Get to a Balanced Economy, We Need A Better Understanding of How Money, Deficits and Debt Really Work

Thank You!


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