How to Talk About Debt and Deficits: Don’t Think of an Elephant*

By Stephanie Kelton

Many economists (perhaps even those who agree with us) refuse to talk about the national debt and government deficits the way we do on this blog. Instead of boldly challenging the assertion that the U.S. faces a long-run debt (or deficit) problem, headline progressives typically do what Jared Bernstein did in his column today — i.e. they pay “obligatory” tribute to the Balanced Budget Gods, thereby reinforcing the case for austerity at some point in the not-so-distant future when we will be forced to to deal with this very bad thing called the government deficit. Followers of my work here and on Twitter know that I refuse to pay homage to the Balanced Budget Gods. Instead, I prefer to shift the burden of proof onto those who contend that the U.S. faces a long-term debt or deficit problem. The first step is to establish that solvency can never be an issue for a government that spends, taxes and borrows in its own (non-convertible) currency. The following quote from the St. Louis Federal Reserve usually does the trick, but this great confession from Alan Greenspan also helps.

Greenspan’s response to Congressman Paul Ryan sets up the correct debate. Our challenge is not whether we can “afford” to make the payments we have promised to seniors, veterans, the disabled, government contractors, healthcare providers, bondholders, etc. (today, tomorrow and into the indefinite future) but whether we will be a productive enough nation to allow the government to make good on those promises without causing an inflation problem. That is the debate we should be having.

Of course, there are many other points that can be made about the role of the government deficit in our economy:

* it’s an important source of private sector profits

* it’s the source of net financial assets to the non-government sector

* it is equal to the non-government surplus, to the penny

* in its absence, a country that runs large, persistent trade deficits, would leave its private sector with large, unsustainable deficits

And so on.  I make all of these arguments when I give public talks on this subject, and the response is always the same: Why didn’t anyone tell us this before?

The lesson? It’s okay to deviate from the progressive talking points. In fact, it’s better than okay. People will thank you.  Want proof?  Here’s a typical response I received just hours ago.

* Don’t Think of An Elephant is, of course, the title of George Lakoff’s brilliant book about messaging progressive values.

57 responses to “How to Talk About Debt and Deficits: Don’t Think of an Elephant*

  1. And then there is Bill Mitchell’s observation that borrowing by the monetary sovereign is “corporate welfare.” But welfare should be limited to those who need it, not to those with the most fiat to hoard.

    He who oppresses the poor to make more for himself or who gives to the rich, will only come to poverty. Proverbs 22:16

    • Nice biblical quote; I’ve not yet come across it. One of my favorites concerns usury, Ezekiel 18:16-17… The bible really does say a lot about profiting from loans and interest, especially at the sake of the poor.

      • The Bible makes a very interesting distinction between “profit”, which is good, with “profit taking”, which is bad. Common stock as private money allows profit WITHOUT profit taking since profits can be distributed as stock splits without touching the assets as would be the case if usury were paid in another money supply.

        So common stock as private money is Biblical too!

  2. It’s a brilliant point; while I’m a (Nixon) Republican, I find the lack of knowledge from “Obamacrats” (as this site has termed them before) more astonishing and frustrating than the Reaganites who’ve decimated my party in the last thirty years. Reaganites are at least ideologically preferenced towards austrianism; you’d think those who demand large entitlements and brag about their intelligence and open-mindedness wouldn’t resort back to the “we can’t afford this” to prioritize their interests.

    On a side note, Philip Harvey’s speech on Job’s Guarantee was notable precisely because it addressed the issue of practicality outside of sovereign currencies; there’s no reason states can’t afford JG and a public option, which would allow much greater effeciency in spending allocations by the federal government.

  3. Stephanie,

    Can you explain the next two paragraphs written by the St Louis Fed then?

    Of course, as we have already seen with health care, the government does not have the ability to systematically increase spending without any regard for funding it. And government borrowing can be extremely costly. The cost of government borrowing is the “crowding out effect”: Investment funds mobilized by the government cannot be used in the private sector. It is in this framework, though, that classical economic theory argues the government should neither borrow nor lend, not because it has a moral obligation to run balanced budgets, but because it must consider the cost of diverting investment funds away from potentially more-productive uses.

    In an economic environment like today’s, where real interest rates are practically zero, if not negative, and the unemployment rate remains high, the opportunity cost to society of the government’s mobilizing capital and labor is unprecedentedly low: The private sector is not fully utilizing these resources; so, no opportunities are lost if the government uses them. Assuming investment projects with a positive net expected return exist, as they surely do, there has hardly been a less costly time to start such projects.8 What no country can afford, however, are permanent increases in government spending without increasing tax revenue.


    • Not to speak for Dr. Kelton, but whoever wrote those two paragraphs is stuck on the loanable funds myth, that there is a limited pool of savings for investment and those savings are drained by government deficits. This is the height of moronic, confused thinking.

  4. Stephanie, more [wish they had an edit function on here]

    Frank N Newman in his Freedom from the National Debt says that the govt spends first, then the US Treasury issues securities in the same amount to restore balance to the money supply. He makes it seem pro forma. So why would the St Louis Fed write the government does not have the ability to systematically increase spending without any regard for funding it?

    • LOL. The author is probably a mainstream economist working for the FED and doesn’t even understand FED operations. Take it from Former Chairman Ecclese, architect of the modern FED…

      “Well, as I remember the discussion—and I have referred to it in this statement—there was a feeling that this left the door wide open to the Government to borrow directly from the Federal Reserve bank all that was necessary to finance the Government deficit, and that took off any restraint toward getting a balanced budget. Of course, in my opinion, that really had no relationship to budgetary deficits, for the reason that it is the Congress which decides on the deficits or the surpluses, and not the Treasury. If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed.
      Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future. So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true.”

  5. There is one important point missing. The demand for U.S. dollar will continue to rise as long as the U.S. government only accepts U.S. dollar as the sole accepted payment of tax. If the IRS start taking bitcoins only, you will see the price of BTC going skyrocket.

  6. MRW, I had the same question about the St. Luis Fed article, I even sent them emails but no responses. That article seems to be written two different people or someone with split personality. How could they switch sides in two paragraphs. For me it smells like conspiracy. They wanted the tell the true story but still end it with the obligatory mainstream view that the government will run out of dollars, just to appease the bankesters.
    Who knows!

    • Here’s another schizophrenic set of statements. 🙂 from the US Treasury website FAQ on the Public Debt. Whoever wrote the second part is a practical joker.

      Financing the Debt

      Why does the debt sometimes decrease?

      The Public Debt Outstanding decreases when there are more redemptions of Treasury securities than there are issues.

      Like when China cashes in its treasury securities and moves the principal + interest fem savings to checking. “Paying off the National Debt.”

      This is what follows immediately. And you don’t even have to redeem the Treasury securities that they just defined as how you pay off the national debt! The National Debt, the Public Debt, or Debt Held by the Public = all the same thing.

      How do you make a contribution to reduce the debt?

      There are two ways for you to make a contribution to reduce the debt:

      You can make a contribution online either by credit card, checking or savings account at
      You can write a check payable to the Bureau of the Public Debt, and in the memo section, notate that it’s a Gift to reduce the Debt Held by the Public. Mail your check to:

      Attn Dept G
      Bureau of the Public Debt
      P. O. Box 2188
      Parkersburg, WV 26106-2188

      And you know what? There are probably some patriotic idiots who do it. 😉

  7. Mark Robertson

    [1] Jared Bernstein is just like Paul Krugman. Both want more austerity for the 99% — just not right now. Both think that taxes pay for the federal government, and that government spending is “unsustainable.” Both nauseate me.

    [2] Stephanie says, “The first step is to establish that solvency can never be an issue for a government that spends, taxes and borrows in its own (non-convertible) currency.”

    Excuse me, but the US government does not “borrow” from anyone. The US government creates its money out of thin air, by crediting bank accounts. Money that investors use to buy T-securities is held in Fed T-security accounts, which are exactly the same as conventional savings accounts. That money from investors is on loan to the Fed, just as depositors’ money is on loan to regular banks. However the US government does not need or use that money. It does not “borrow” from anyone. The “national debt” is a trivial detail that applies only to the Fed.

    Currency users must borrow, and pay bills, and have an income — but these terms do not apply to currency issuers like the US government. In short, the US government has a debt burden of precisely ZERO.

    The Federal Reserve could instantly pay off the “national debt” (i.e. pay off all T-security accounts) by transferring the money in Fed savings accounts to regular checking accounts, with a little money added for interest. To pay that interest, the Fed would simply create money out of thin air, just like the Treasury does. And paying of this so-called “debt” would not be inflationary, since that money is already in the economy, albeit temporarily out of circulation.

    [3] Stephanie says, “I make all of these arguments when I give public talks on this subject, and the response is always the same: Why didn’t anyone tell us this before?”

    I envy her. The response I get is apathy or hostility. Hence I don’t bother. The peasants cling to their slavery. They adore their poverty and their misery. So it has always been, and perhaps always will be, in all societies everywhere. That’s just the way things are.

    On a happier note, I speak Spanish, and when I explain the principles of MMT to Mexican nationals, most of them get it instantly. They think it makes perfect sense.

    By contrast, most of my fellow gringos are morons.

    • Mark, you’ve got it exactly right! Yeah, I get the same pushback when I try to explain this to my wife and friends.
      I’ll explain the basics of MMT to them and they’ll nod their heads, but they always still say at the end, “But we have to reduce the national debt, it’s so huge!” At that point, I usually just give up. Also, I understand your point about “borrowing”. But I think Prof. Kelton uses the term “borrow” regards to issuing treasury securities as pretty much the defacto descriptor, and while “borrow” is not technically accurate, as you indicate, it is unclear what else to call it. Maybe the MMT’ers can coin another term;) It’s really just an exchange of one entity for another, it just so happens that one is interest bearing, and the other is not. Maybe we can call it swaps! On second thought, probably a bad idea;)

      • John,
        Although it’s not on point, if you feel the arguments aren’t working, you might try this from 2011:

        “Bank Of America Dumps $75 Trillion In Derivatives On U.S. Taxpayers With Federal Approval ”

        To put that in perspective, US GDP in 2012 was around $16 trillion. Really conservative estimates of the costs in Iraq and Afghanistan are running at $6 trillion. Social Security’s Trust Fund is $2.3 trillion.

        All the other Wall Street banks have a lot more derivative exposure. I’ve seen estimates of $700 trillion, but no one really knows.

        IMHO, the austerity-is-for-the-little-people oligarchs leave a bright trail about where their investments are: derivatives, military/national security industrial complex, and Big Pharma. They claim to be deficit hawks, but oppose a Wall Street tax on high frequency traders, oppose pulling back from foreign military bases, and oppose legalizing pot. AFAIK, those three issues enjoy widespread support on the right and left.

      • Mark Robertson

        Okay John, you want another term? Instead of a $16.7 trillion “national debt,” it is $16.7 trillion in national ASSETS.


        When a bank has $1 trillion in deposits, that $1 trillion is lent to the bank by depositors. It is a $1 trillion debt. However the bank also counts the same $1 trillion as an asset. This is not a scam. It is standard double-entry bookkeeping.

        In order to attract more customers, the bank boasts that it has “$1 trillion in assets.” The bank also has $1 trillion in debt, but customers don’t want to hear that. Again, this is not a scam. It’s how banking works.

        Likewise, the Federal Reserve has $16.7 trillion in debt, and $16.7 in assets. $16.7 is the amount of T-securities that have been purchased. You can call this a debt if you like, but it is also an asset. Hence in my previous comment above, I did not say the US government has no debt. I said it has no debt BURDEN.

        The whole thing is a Fed matter (the sale of T-securities, and their status as debts and liabilities). It is trivial, and has no connection whatsoever with the U.S. government’s ability to continue creating money out of thin air. Even if federal taxes fell to zero, and the Federal Reserve stopped selling T-securities, there would be no effect on the federal government’s ability to spend. The US government has INFINITE money.

        Therefore it is deeply insulting to hear morons issue threats about the “national debt.” And it is especially insulting to hear clowns speak of the USA debt-to-GDP ratio, which is meaningless, since the USA has no debt burden, and since the GDP is a one-year measure, whereas T-securities have maturity dates ranging from 30 days to 30 years. (By contrast, Debt-to-GDP is not meaningless for Euro-zone nations, since they surrendered their monetary sovereignty to the Troika).

        On a different note, one reason why the lies continue is that everyone uses the lies for his own ends. Right, left, capitalist, socialist, progressive, conservative, everyone uses the same lies. Just as everyone calls everyone else “Hitler,” so too does everyone point his finger at others, saying, “They’re to blame for the national debt crisis.”

        Of course the US government has no debt crisis, but the slaves don’t want to hear that. The slaves prefer to cling to the lies, since this lets them bicker, and it lets them posture self-righteously.

        Hence the slaves fall deeper into poverty and misery by the day, while the rich get richer.

        Therefore, anyone who rejects MMT is not worth your time. Such people would rather whine than be free. They would rather be “right” than be prosperous.

        In short, they insist on remaining worthless peasants.

        • Mark and John,
          Excellent points – completely agree. On the subject of derivatives, I hear ya, but quite frankly, it just makes my head hurt to think about that financial cataclysm. I know it exists, I’m cognizant of the vastness of it, but I can’t think about it too much – too depressing. Here’s what’s really troubling to me: Regarding Congress and the White House, it can be one of two possibilities, that they understand the monetary system and are just lying to the American public, or they don’t understand it. After reading Leah McGrath Goodman’s book
          “Asylum” about the Nymex, oil markets, futures contracts, etc, I’m leaning toward the belief that most of them don’t have a clue about MMT. I mean, can you point out one congressman or senator that has indicated an understanding of it? I can’t. Nor do i believe the general public understands it. I mean, I’m not the sharpest knife in the drawer, but I’m not clueless, and until I started reading the works of guys like
          Warren Mosler, I too was staunchly in the Austrian school. Anyway, I often ponder if it would be better or worse if the general public understood the fact that the federal government doesn’t really need the money people pay in taxes. Would there be blood in the streets if Joe Six-pack really understood this?

          • John, my understanding of MMT is that government does need taxes, just not to fund government spending. As I understand it there are basically four purposes of taxes: 1. to insure that the government’s currency has “value” in the economy (can be used to extinguish gov. tax liability), 2. to control the velocity of spending in the economy (dampen inflation or stimulate spending), 3. to redistribute wealth within the economy (alleviate poverty and increase opportunity), and 4. to prevent the excessive accumulation and transmission of wealth through inheritance (which is really a subset of #3). Taxes are necessary, just not for expenditures.

            • Oops, omitted real #4. Taxes allow the government to encourage certain activities, such as home ownership and charitable giving, and discourage others such as alcohol and tobacco consumption and gambling. How much government should be involved in these individual decisions is certainly open to debate, but that it is involved is undeniable.

          • Mark Robertson

            [1] “Can you point out one congressman or senator that has indicated an understanding of MMT?”

            I think most congressmen understand the truth, but they are paid to lie. They are paid to claim that social programs must be eliminated or privatized (i.e. given to Wall Street criminals) because the US government is “broke” and “in debt.” Meanwhile we must give more money for wars, for Wall Street bailouts, for subsidies to rich holders of farmland, and so on.

            The reason why rich people pay politicians, professors, and media creeps to lie, is that rich people want a wider gap between themselves and the masses. If everyone has a million dollars, then no one is “special” — but if I alone have a million dollars, then I alone am “special.”

            I am better than you.

            Therefore, in order to increase my personal power, I must widen the wealth gap by getting more for me, and / or making sure there is less for you. Either way increases my “specialness.”

            This craving to widen the wealth gap is a raging addiction that drives the subject to continually search for the next “fix” or the next “high” — i.e. the next step in crushing the masses. It intensifies all the way to the grave. The older a person is (e.g. Pete Peterson, age 83) the more he is obsessed with crushing the masses, because this makes the decrepit bastard feel “alive.” Such psychopaths contribute nothing to society, and they accomplish nothing in their lives, except to cause ruin and agony for millions of regular people. Meanwhile there are always slime-balls (e.g. politicians) eager to help them, so they too can feel “special.”

            [2] “I often wonder if it would be better or worse if the general public understood the fact that the federal government doesn’t really need the money people pay in taxes. Would there be blood in the streets if Joe Six-pack really understood this?”

            Yes, we all wonder about that. If everyone knew the truth, would life become better or worse?

            My view: “Let’s try it. By doing nothing, life for most people is definitely getting worse.”

            • Mark, Joe Firestone believes Congressman Jerry Nadler from New York understands MMT, at least to some extent.

            • I tend to think real reason for extreme conservatism is eugenist/social darwinist agenda.

              Joblessness and poverty are seen as goods because they interfere with family formation and so forth. So such dogmas such as NAIRU are has to be invented and “government can run out of money” to argue against Job Guarantee and full employment.

              Even thought people who hold these views are tiny minority, they argue very vigorously and other people are not very motivated to argue so they tend to dominate policy discussions and thinking with their concepts.

              It is really sad that they are aiming for 5.5% unemployment even in the good times and hidden unemployment is at least twice that. These unemployment measures are a joke – people just don’t think labor marker is for them when demand for labor is low so they are gategorized as not part of the labor force, rather than unemployed.

              • FWIW, in a comment at Firedoglake, Jane Hamsher, once remarked (to the effect) that we needed study into the oligarch’s massive mis-appropriation of the “protestant work-ethic.” Its original meaning had been tortured into a glorification of wealth.

                OT, thanks to all on this tremendous thread.

              • “Never assume for malice what can easily be explained by stupidity.” Considering that those who most vigorously push austerity are usually social conservatives as well, and therefore oppose birth control and abortion, as well as in vitro or any form of reprogenetics or family unit which might be preferenced towards it, and even “liberal austerians”, to coin a phrase, oppose the use of outlays to such an extent (compiling the probability of genetic disorders from potential sperm donors = GATTICA!!!!)- considering all that, it seems they’re more hellbent on dysgenic rather eugenic ends.

                I believe the reason for those who push austerity is that they not only don’t understand MMT, but that their worldview is supported by the misunderstanding. When we discuss raising the minimum wage, the point often made is that higher wages have a far greater impact on consumable income than operating costs, which increases profits; farm workers account for only 6% of costs, and you’d have to raise wages 1666.666% above current rates to double the cost of foodstuff. If you assume the avg. farm worker, both cabbage-pickers and combine mechanics, comes out to about $10/hr and works 50 hrs/wk, that’s $28,600/yr, and times 17 and 2/3rds, that’s $505, 266/yr. If you assume the .1% is chasing the dragon, they would well reason that they’d OD off their profit margins if they soar that high; today’s $100 billionaire would have net worth greater than our current GDP in such a scenario. On the other hand, if you’re assuming the .1% is chasing the dragon and has no MMT understanding, they’d want to cut the 99% slice of the pie instead of growing it; that’s what we’ve been seeing, w/ people blaming unions for securing decent pay and benefits for “the lack of jobs”, as if somehow forcing workers to subsistence wages would make their cable bill more affordable. The only rational explanation is not greed, but misunderstanding.

        • Mark,

          Can’t thank you enough for such a clear, accessible statement of the accounting
          I included the url to this piece and your name when I quoted you in this op-ed from the Milwaukee Journal Sentinel.

    • Mark,

      I’ll co-sign your comment. Brilliant and cogent. You should write a book…”The Essentials of MMT: Modern Economics Made Simple.”

  8. MRW
    “Investment funds mobilized by the government cannot be used in the private sector”. I found this definition of the word “fund”: A sum of money or other resources set aside for a specific purpose.
    It is a true statement that “other resources” (such as labor, materials, etc.) mobilized by the government are no longer available for private sector use.
    From the Greenspan link: “there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody”. So if the govt is creating “money” and paying it to somebody doesn’t that increase the amount of “funds” available for private sector use? I guess it depends on your definition of the word “funds”. Is the St Louis Fed use of the word fund purposely misleading (and)/or are they ignorant? ?

  9. The crowding out of private investment by government spending can only occur if the production capacity of the nation is running close to full capacity. If we are in boom times in other words.

    Even then the idea of crowding out of private investment is dependent on the government having to borrow the money to cover the deficit from the private sector, which we do have to do currently because of laws left over from the gold standard days, but which we don’t have do as a practical matter since the US government can create the money that it needs to spend out of thin air. It doesn’t have to borrow money in order to get money to spend.

    The practical limit to how much money the government can produce that is not balanced by taxes is not the crowding out of private investment, it is inflation, producing more money than the nation has production capacity to produce goods to use.

    So yes, the St. Louis Fed is correct when they say that the government doesn’t have the ability to increase spending without any regard for funding it. But the limit is determined by inflation caused by more money in the economy than the economy can produce goods to buy with. A point that we are currently far from.

    • merkin,

      So yes, the St. Louis Fed is correct when they say that the government doesn’t have the ability to increase spending without any regard for funding it. But the limit is determined by inflation caused by more money in the economy than the economy can produce goods to buy with. A point that we are currently far from.

      That ain’t the way it works, according to Frank N Newman in his Freedom from the National Debt. He was Deputy Secretary of the Treasury. Stephanie Kelton introduced his book here a couple of months ago. It’s only 87 pages, and worth buying. BTW, Newman recommends reading Mosler, Wray, Fullwiler, Galbraith, and Mitchell to anyone who wants to understand how the system works, page 12.

      In this section Newman sets up how to think of it:

      2.2 A Look at Aggregate Financial Investments in the Nation

      It can be very helpful, in looking at some of these issues, to think of the entire financial system in aggregate – as if it were one integrated institution serving the nation’s financial functions. The system marvelously balances itself every day – with help from the Fed, in its role as central bank, which provides flexibility for timing differences, frictions, etc. The Treasury and the Fed are both parts of the U.S. government; they have different responsibilities within the U.S. financial system, but often work together.

      Newman, Frank N. (2013-04-22). Freedom from National Debt (p. 17).

      That said, Newman says the government makes distributions first for whatever it wants to buy (equipment, services, goods). It spends first. Then it replenishes it’s Fed account by issuing treasuries in the same amount. Newman writes, “then total financial assets increase, but there is no change in the money supply or in equity risk or credit risk in the financial system.” This is what Mosler means when he says, “You can’t have a reserve drain without a reserve add.” This also goes to Mosler’s conceptual definition of MMT, which is that it is the Quantity Theory of Net Financial Assets, as opposed to the Econ 101 claim that is the Quantity Theory of Money (money supply X velocity = nominal GDP)**


      In the process of Treasury issuance and redemption, the money involved changes hands but cannot leave the U.S. financial system. There is a huge, deep market for Treasuries, with an average of over $ 500 billion per day traded. Typically when the Treasury issues securities, it has already distributed funds to the bank accounts of investors redeeming securities and to recipients of government payments, from the Treasury account at the Fed. Treasury has been generally keeping about $ 100 billion, sometimes up to $ 300 billion, on deposit at the Fed— that is in addition to the hundreds of billions of other assets, including gold and silver, held by the Treasury. Sometimes the Treasury issues securities temporarily in advance of disbursement, mostly as part of planning for seasonal variations. Generally, the Treasury uses bank money newly received from tax collection and Treasury issuance to replenish its deposit accounts at the Fed.

      Newman, Frank N. (2013-04-22). Freedom from National Debt (p. 18).

      So it has nothing to do with inflation (being the difference between nominal and real GDP), and those two who wrote that stuff at the Fed that I queried don’t understand what they are talking about.
      ** Listen to Scott Fullwiler describe this here starting round the 50 min mark:

    • It’s even worse than that. The past twenty years demonstrate that the United States is not even constrained by its own resource limits. The federal gov’t can achieve full domestic employment and still face little if any consumer price inflation pressure. Foreign demand for US financial assets is so voracious that foreigners are happily willing to work long hours at comparatively little pay simply to accumulate their own portion of such assets. The ’98 Asian financial crisis demonstrated that insufficient US financial assets can disrupt global trade and internal investment and encouraged the building up of massive foreign reserves to protect against such crises.

    • Mark Robertson

      Merkin says, “Even then the idea of crowding out of private investment is dependent on the government having to borrow the money to cover the deficit from the private sector, which we do have to do currently because of laws left over from the gold standard days, but which we don’t have do as a practical matter since the US government can create the money that it needs to spend out of thin air. It doesn’t have to borrow money in order to get money to spend.”

      Yes. Not only does the US government not have to borrow money, it DOESN’T borrow any money. The US government creates its spending money out of thin air, by crediting bank accounts.

      The sale of T-securities (the so-called “national debt”) is a separate matter.

      And yes, because of obsolete laws, the Fed is required to sell T-securities with the same aggregate amount as the federal deficit. But since the Fed “buys” much of those T-securities from itself, it’s all b.s. The obsolete laws remain in order to keep the masses brainwashed.

      The Fed borrows from investors when it sells T-securities.

      However the US government borrows from no one.

  10. MRW,

    There is no logical conflict between the STL Fed’s statement and Greenspan’s there if one believes S=I is causal, ie, they think S=I is like F=ma in Newtonian Physics, like “A Law” if you will.

    Their affirmative/correct solvency assertions have nothing to do with the mistakes they make in regards to causation.

    If you want to increase Investment, then all you have to do is increase Savings. As higher govt deficits lead to increased issuance of US Treasury securities, this reduces Savings and hence crowds out Investment from happening as US Treasuries are debt, not savings in their world.

    So we see them implement QE which forcibly shifts the non-govt composition of USD financial assets away from US Treasury securities and forces the non-govt to hold bank deposits which they believe are Savings, hence we should get an ex ante increase in Investment, etc… “apply a force onto a mass and it will accelerate…”

    Their ability to acknowledge that “there is no solvency issue” has nothing to do with any of this… they know the govt can always pay its bills with USDs. They can easily believe this AND be mistaken that S=I is causal at the same time… I see no logical problem with their thinking here given their assumptions on causality.

    Jared Bernstein, though Progressive in desired outcomes, probably believes the same type of thing that is why he pays homage to the gods or whatever…. Bernstein has no insight into any of this he just parrots what he hears and reads, he is not qualified to comment on econometric systems, doesn’t have the cognitive ability imo…


    • Fama just got a Nobel for this BS, too.

      If you want to increase Investment, then all you have to do is increase Savings. As higher govt deficits lead to increased issuance of US Treasury securities, this reduces Savings and hence crowds out Investment from happening as US Treasuries are debt, not savings in their world.

  11. “it is equal to the non-government surplus, to the penny”

    How does this account for when private banks create money?

    Is it that, when banks create credit money, they have to… borrow matching reserves from the Fed? Which the Fed “waves into existence” (if it’s not available to borrow from other banks)?

    So… (if that’s at least half-way correct), when the Fed creates that reserve for the private bank, does that count as adding to the government deficit? And thus there is sectoral balance, even accounting for private bank money creation through lending?

    If anyone can cite the books or articles clarifying this area, please do…

  12. A really useful resource for you all to provide would be a letter-to-the-editor template. Last Sunday, my local paper (I live in a town of 60,000; we have a daily newspaper) featured a local columnist’s article about the government debt problem ($16 trillion! That’s $53,000 per person!). And yesterday, the paper featured comments from our Congressman about the need for a balanced budget. I would like to write a 100-200 word rebuttal, but it is proving to be difficult to organize my thoughts concisely enough.

    • Maybe this will help you. Also, arm yourself first by reading the Frank Newman book I recommended above. It’s only 87 pages. But at least you can quote a ‘deputy secretary of the us treasury’.

      Our current Secretary of the Treasury Jack Lew was one of the architects of the The Balanced Budget Act of 1997. Take a look on the chart at what happened the moment the Clinton admin instituted that. Obama praised him when appointing him as one of the architects of the Clinton surplus.

    • From Newman’s book:

      8.1 The Myth About Increased Taxes to “Pay off Debt”
      One key assertion often made in these debates, by those who argue against increasing the limit, is that an increase will force Americans to pay more taxes to “pay off the debt.” Chapter 3 explains why that assertion is unfounded. The U.S. has had Treasury securities outstanding every year since 1791 [the National Debt is the amount of money the govt created since 1791 minus the amount of money destroyed (taxes)], has never “paid off” the total outstanding, and will never have to. The U.S. financial system, including Treasuries, is always in balance, regardless of the amount of Treasuries held by the public; investors receiving U.S. dollars for maturing Treasuries must put the dollars in the U.S. financial system. As explained in Chapter 4, this is very different from securities issued by eurozone countries, where euros redeemed in one country can be reinvested in another country.

      8.2 There is No Budgeting to Pay Off the “National Debt”
      Although there are often comments about “the great burden” of past and current deficits, the people responsible for budget preparation do not actually plan for a process to “pay off” of all outstanding Treasuries. In all the debates about the federal budget plans over the coming years, there has been, appropriately, a great deal of focus on how to reduce the annual deficit and someday be able to balance the primary structural budget in hoped-for years of full employment ten years in the future; and there is focus, inappropriately, on the cumulative budget over 10 years. Even in a slow economy, Washington habitually focuses on measures this year or next to “pay down” the cumulative deficit of the next ten years. But that approach takes future projections of good times – with a “hot” economy, when deficit spending would be counterproductive – and drags it to today, when the economy is quite a bit cooler and very much in need of spending. This ten- year cumulative concept is akin to planning for a hot summer next August by turning on the air conditioning now, in January.

      Newman, Frank N. (2013-04-22). Freedom from National Debt (p. 60). Two Harbors Press. Kindle Edition.

    • Why don’t you write an op-ed and use Stephanie’s chart?

      • Actually, I think Scott Fullwiler was the one who came up with that, but I stand corrected if it’s wrong.

  13. i.e. they pay “obligatory” tribute to the Balanced Budget Gods

    And could those “Gods” be existing sovereign debts holders who wish to protect or increase the real yields on the sovereign debt THEY own?

    • One has absolutely nothing to do with the other. ZERO.

      • 1) Deficit spending increases aggregate demand.
        2) An increase in aggregate demand can spur the economy.
        3) An improved economy can lead to more borrowing.
        4) More borrowing can lead to higher interest rates.
        5) Higher interest rates decrease the value of existing sovereign debt.

        • “3) An improved economy can lead to more borrowing.” From whom? The government or banks?

          “4) More borrowing can lead to higher interest rates.” Established by whom? Fed Fund Rate? Or interest rates charged by banks to customers?

          “5) Higher interest rates decrease the value of existing sovereign debt.” Whaaa—?

          • The borrowing would be from the US Treasury.

            Yes, I know the Fed can keep even long-term interest rates low BUT WILL IT if price inflation takes off?

          • “5) Higher interest rates decrease the value of existing sovereign debt.”

            In the first month buy a 3-month $100 T-bill being sold at $96. Your yield is 4.17%.
            In the second month a new 3-month $100 T-bill is selling at $95. The yield is 5.26%.
            Rates (the yield) went up. The current market value, the price you’d get if you decided to sell your T-bill in the second month, went down. The value of existing sovereign declined. Not all the way to $95 since there is value in receiving the payout in 2 months rather than 3 months. Don’t wish for falling rates when taking out a mortgage, wish for rising rates, it means you got money cheap.

  14. Stephanie, very pragmatic, very helpful. Thank you.

    I would encourage other commenters here to share this with their local media, especially the local print media. Their net income is driven by subscriptions and advertising, which in turn relies on the local economy.

    • And point out, while they are doing it, that the federal government economy acts in an opposite way to their state and local governments, all businesses and households. The former being the issuer of the currency. The latter being the users. State and local governments, businesses, and households cannot create money.

      Did you listen to Stephanie’s podcast with Randy? They discuss Fidelity putting out a directive last December to their clients that a reduction to the deficit was going to hurt corporate profits by 31 %. I winging my memory of it. You would need to check the podcast which is linked in the upper right panel above.

  15. Paulo Garrido

    “Followers of my work here and on Twitter know that I refuse to pay homage to the Balanced Budget Gods.”

    Very good. Yet, the evil gods are notorious experts in exploiting our unawareness of how language works to defeat us. In matters of language, one cannot be too careful (Stuart Chase, “The Tyranny of Words”).

    “this very bad thing called the government deficit”

    Definition of ‘deficit’, Wikipedia:
    “A deficit is the amount by which a sum falls short of some reference amount”.

    Therefore, by using the words “government deficit” one concedes that, regarding the budget, the government falls short of the reference (required) amount of money. Inside MMT, this makes no sense.

    How does one escape the concession and frames the debate in MMT terms?

    Substituting ‘government net spending’ for ‘government deficit’.

    Hopefully, soon one will read in the news headlines:
    “Budget sets government net spending to 5% of GDP”

    It does not seem horrible, doesn’t it? Actually, it seems positive.

    “a government that spends, taxes and borrows”

    Definition of ‘borrow’, Oxford Dictionaries:
    “take and use (money) from a person or bank under an agreement to pay it back later”

    Therefore, by using the words “government borrows” one concedes that the government has a use for the money it takes in custody in exchange for treasuries. Inside MMT, this makes no sense. The MMT consistent interpretation is that the government offers remunerated savings accounts.

    “Many economists… refuse to talk about the national debt”

    Definition of ‘debt’, Oxford Dictionaries:
    “a sum of money that is owed or due”

    Therefore, by using the words “national debt” one concedes that the citizens, by the actions of government, owe money to holders of treasuries. Inside MMT, this makes no precise sense, because the government did not borrow the money it received in exchange for treasuries. It is true that the money is due to treasuries holders: it is due in the sense that the government is keeping the money and remunerating its “stillness”.

    How does one escape these concessions and frames the debate in MMT terms?

    A possibility is to substitute ‘government remunerated savings’ for ‘national debt’.

    Hopefully, soon one will read in the news headlines:
    “Government remunerated savings total 125% of GDP”

    It does not seem horrible, doesn’t it? Actually, it seems positive.

    • Paulo, excellent comments. However, although “government remunerated savings” may sound positive, almost no one reading that would have a clue what it means. There has got to be a better term that shares the same positive connotation. I have suggested “cumulative national investment” as one alternative, but perhaps readers can improve on that.

  16. The Lord tests the righteous and the wicked, and the one who loves violence His soul hates. Psalm 11:5

  17. Oops! That Psalm was directed at a war lover in the Gaurdian. Sorry!

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