John, Try this thought experiment. The last time the US had zero national debt was 1835, when Andrew Jackson wiped it out. Now imagine that the US had run balanced budgets every year since 1835. If you have US dollars in your savings account, where did those dollars come from? It's true that the private banking system creates most of the dollars in circulation, but that money is all spoken for. Banks create money by issuing loans, which are simultaneously assets and liabilities for both bank and borrower and must sum to zero. So unless you robbed a bank or are involved in a Ponzi scheme where new bank loans are used to cover old loans, it would not be possible for you to have any savings expressed in US dollars.
So the non-gov't sector wants savings, and the gov't wants to give it to them! The constraint is inflation. It's a monument to the size and strength of the US economy that our Treasury could inject $28 trillion into the world economy (pre-pandemic) while keeping inflation and interest rates below 2%.
Now it's probably true that the so-called "national debt" can be as high as it is because the top 1% has captured almost all of this money--and they're not spending it because they've already bought all the toothpaste and toilet paper they need! A dollar not chasing basic goods and services doesn't fuel inflation.
To see why this is probably true, note that the current "debt" of $31.5 trillion, if divided evenly among Americans, would amount to almost $100K for every man, woman and child in the nation. Imagine what would happen to the price of goods and services if this were to magically happen. Tens of millions of Americans would rush to buy all the things they've done without for years. Prices would skyrocket as demand far outstripped supply.
Please do not construe this as a defense of the top 1% and the economic status quo. I'm just trying to point out what seems to be the truth about the distribution of wealth in our economy.
The non-government sector includes the private sector, i.e., people and firms, and the non-federal government sector, i.e., states and cities.
All of these entities want to save some of their income for future use, if they have adequate income to do so. This savings represent money that has basically been taken out of circulation.
Since all spending is someone else's income, taking money out of circulation for savings reduces both.
GDP can be defined as Government Spending + Private Spending + Net Exports. If Private Spending is reduced by savings (the net savings desires of the non-government sector), one of the other sectors must make up the difference or GDP falls leading to a recession or worse. Because of our long-term trade deficit, Net Exports is negative value, which means more money not available for domestic spending, i.e. GDP.
That leaves the government sector to provide the necessary money to cover the negatives of savings and Net Exports to avoid a recession or depression.
Perhaps your reading has included the Sectoral Balance explaining the above, or the concept of Net Financial Assets which is held by the private sector and is equal to the federal deficit, to the penny.
Your spending is someone else's income. Total spending is total income.
If someone saves, total income is reduced. If the private sector, net, tries to save, total income declines, and that reduces savings. If they still try to save, total income is reduced even more. That is what Marx called a crisis of capitalism. That sounded bad it was renamed it depression. That started to sound bad so it was renamed it a recession.
When the government spends more than it taxes the money must come from somewhere.
They can print notes. They can create balances in accounts with the federal reserve. Or they can sell government bonds. All of these things create financial assets that the private sector can and must hold. Savings.
If the private sector refused to hold accept physical currency, or have balances with banks, or buy bonds then the government could not run a deficit.
One idea is that the government sets the deficit and the private sector has no choice but to buy bonds or hold cash. Another idea is that the private sector decides to save, leave their money in the bank or in bonds, then the government has no choice but to run deficit.
The government budget balance should be set to square the circle of private savings desires.
If the private sector wants to, net, spend more than it saves, the government must run a surplus. If the private sector wants to, net, save more than it spends, the government must run a deficit. Otherwise there could be inflation, on the one hand, or depression on the other. This is not the only cause of inflation or depressions. But it can be one.
Just a couple of points. The deficit is not "set" by the government. The deficit is the post hoc result of the spending and taxing activities of the government. It's the residual after spending and tax revenue. The deficit is the amount of spending that has not been taxed back, that is, money left in the economy as Net Financial Assets of the private sector. That creates the savings.
"Another idea is that the private sector decides to save, leave their money in the bank or in bonds, then the government has no choice but to run deficit." This has the causality backwards. The government creates a deficit (or surplus) from its spending and taxing decisions. With a deficit, it can "print" money, or issue Treasury securities. The latter is a holdover of the days when we were on a gold standard and is no longer necessary to fund current government expenditures.
Treasury securities are mostly issued through an auction process where the Primary Dealers (mostly banks) are required to bid on the securities available and then purchase them at the settlement price. If the Primary Dealers can't sell them to anyone else, the Fed can buy them, as it has done for many years.
Articulate Source explains it more fully in response. It is just an accounting identity. Put another way, just remember that every dollar in circulation is offset by debt somewhere. The more debt the government has, the less debt there is in the private economy.
So if people and businesses would rather save than be in debt, the government has to be the debtor. Government debt =net private savings.
Indeed I think Federal debt needs a new name because it's so unlike all other forms of debt. It's more like an equity account, retained earnings, etc.
Unless the gov't has borrowed euros or rubles or renminbi, it can NEVER be in "debt." I think Warren Mosler was the first to point out that when treasury bonds are sold, it's not to "borrow" money but rather to remove excess currency from the banking system. This maintains the Fed's target interest rate, which would otherwise plunge to its natural rate--zero. Since the selling and buying of gov't bonds creates the illusion of borrowing, maybe it's time to eliminate the whole business and simply pay interest on reserves that are fully insured by the gov't. Tie the interest rate to the inflation rate and be done with it.
flipshod - The debt does indeed need a new name. People are taught to avoid debt but the federal debt is nothing like personal debt.
Perhaps we could start calling it the Net Financial Assets of the private sector. Some MMT academics use that term. Or, maybe Treasury Deposits since the money in Treasury securities is not used by the government, but sits there as if it were in a safe deposit box waiting for the owner to redeem their cash.
However, I'm talking about replacing the term "debt" when referring to Treasury securities because it's misleading and it's being used to scare people about the size of the deficit.
The misconception that the federal "debt" is something bad like household debt is a major barrier to getting folks to understand how the US monetary system actually works.
I don't think there's any getting around using the term debt to describe what the federal government is accruing when it sells Treasuries. If being in "debt" means owing money to someone or something, then, when someone buys a T-bill, the federal government owes them money.
Usually, when someone complains about the federal government carrying too much debt, I reply by saying something like "Oh, you mean the private sector is saving too much?" If nothing else, that usually gets them to either respond by saying some stupid, incoherent thing that can easily be picked apart, or to shut up.
I'll confess that, for many years, it never really occurred to me that, roughly speaking, public sector debt = private sector savings. Like most of us, I'd been trained only to see the "debt" side of the equation, and not the savings side. And then I encountered MMT and I experienced the Gestalt shift that I imagine most people experience when they first encounter MMT.
The trick here is not to deny that the federal debt is, in some sense, "debt": It's to get people to see the other side of the equation.
That's a great retort! I'm going to adopt it with your permission.
The whole concept of federal debt gets a bit sticky because the money put into Treasury securities isn't actually used by the government. It sits in the securities account and is returned upon redemption. One writer likens it to a safe deposit box. You put money in and it stays there until you redeem the security and the money is returned to you, which means that technically it's not a liability of the government, just like the contents of a safe deposit box aren't a liability of a bank.
However, explaining that takes time and your retort is simpler and can potentially lead to a more productive conversation.
A quibble. The public sector debt is exactly (not roughly) equal to the private sector savings.
Typical liberal b.s. only reason we get away with your opinion is US$ is the Worlds Reserve Currency (for current time anyway) ... that doesn’t stop money/resources be massively wasted by Federal Spending...of course most Economists are essentially Federal Government Workers anyway.... getting life time jobs at Universities , Big banks, or actual Feds. You have an extremely strong reason for favoring Big Federal Government
It’s great that you engage with (seemingly) content that is outside the scope of your political standing. From this piece, it seems to position its theory outside of the R\D blame game by showing how Trump was right during COVID, and Clinton failed when he tried to “balance” the budget. But, given how we are all poisoned by our curated information feeds, I understand your flippant response. I hope we all can build together eventually 🇺🇸
Monetary operations of our sovereign fiat monetary system don’t have a political bias. Our federal government is the sole issuer of its own currency. It can never run out. It can never default unless politicians force default. A balanced budget is irrelevant when our federal government can issue all that it needs.
There seems to be no way around the fact that virtually all participants in the debt ceiling kerfuffle are idiots. Rather than attempting to reason with cretins, I suggest that, instead, we demand that each Congress-critter who opposes raising the debt ceiling submit a list of all of the items of federal spending for their state or district they will agree to forgo to avoid raising it. I predict that, were they required to do so, they'd cease whining about the ceiling immediately.
I like stopping the partisan finger pointing. But it wouldn't hurt to blame both Parties--i.e. Congress--for policies that have contributed to the supply-push inflation that we are experiencing, namely trade wars (e.g. with China) and economic sanctions (on Russia), as Stiglitz has pointed out. These policies have pushed the Fed into raising interest rates. Why not remind the American people of the elephant in the room--Congress itself?
If the trade and economic sanctions were accomplishing their objectives, that's one thing. But the trade deficit with China is actually increasing, and the Ruble is as strong as ever. We should be throwing in the towell but the hawks in Congress and the White House have other agendas than the health of the US/EU economies.
I wish Stephanie would help the American people understand the connection between the Trade Deficit, the wars of empire, and the government spending deficit. As Stephanie points out, the government must be in the "red" for the rest of us--including our trade partners--to be in the "black." The rest of the world strives to be "in the black" in dollar terms (the dollar being the global Reserve Currency) to keep the IMF off their backs. Who's the only player that can sustain "red" finance indefitely? Only the fiat creator of dollars via interest-bearing bonds. Where do those bonds come from? US federal spending deficits. This , in a nutshell, is "Triffin's Dilemma," first posited in the early '60's. It's the burden of the Reserve Currency sovereign for providing a growing money supply for the world at the expense of the domestic economy. In the current trade regime, the U.S. taxpayer is funding capital outflows via Treasury bonds in order for private wealth holders to invest abroad and privatize their profits from the sale of their goods back to U.S. consumers. In short, the US public debt is a "U.S. public money-->international private profit" scheme. It's a scheme that benefits international capital and the FIRE sector at the expense of U.S. workers, U.S. infrastructure, U.S. States and Cities, all of whom have experienced shrinking income and tax revenues for decades. We are financing the de-industrialization of America and turning the economy into a rentier economy.
We'd like to spend our public deficits in ways that help the U.S. economy. US public finance at the expense of workers, cities and States (e.g. via a strong dollar) would seem to be the height of stupidity and unfairness. Stupid because continuing on this path really does undermine the long term credit-worthiness of the U.S. by weakening its foundations. The unfairness is obvious, now, to all and is contributing mightily to political instability.
Ironically, there are indications we are headed into a recession. Excessive trade deficits hurt GDP, and is one reason why the US. economy is so anemic. So now we must increase deficits to help stabilize the economy. Cutting spending now would turn a normal recession into a deep recession.
Look up Triffin's dilemma to understand why we are in this awful position. There is a way to get out of it: let the dollar decline, endure the resultant moderate trade-induced inflation, and help the U.S. economy recover from its addiction to trade deficits. Let inflation provide a price signal to industry to raise domestic output. It really is Macro-Economics 101.
Growth in actual productive capacity and GDP is what we need to reduce the Debt/GDP ratio. That will then change the appetite (particularly by private business) to invest and incur debt for real growth. Then the Corporate sector will become net borrowers rather than net savers. They'll want to be "in the red". Only then (if I understand MMT correctly) can the public deficits start declining.
No one party is to blame. The proponents of modern monetary theory (The idea that governments can and should print as much money as they need to spend) are the ones to blame. The central figures in the FED and the people in positions of power able influence fiscal and monetary policy are to blame. Anyone who supported the unlimited printing of money and the dropping of rates to zero to stave off economic contractions is the blame.
Money = debt and as Mosler says (I think) the national debt is simply the national money supply. So why don’t we frame it this way? “Senior economists think there is too much money in the economy and the answer is to take some of yours”. I suspect it wouldn’t be a long debate.
It’s true that the balance between taxation and debt is what balances the economy? But the idea that money should be free to borrow and that there should not be any semblance of a budget with the federal government so they can spend as much as they want, can’t be good for the strength of the dollar or the stability of the currency/ monetary system in general.
MMT never said governments can print “as much money as they like”. It says governments can print money to deploy unused resources, including the unemployed. And if there’s not enough space in the economy government can tax the sector in question to free up capacity for government to do whatever it thinks is in the public sector.
Look at all the USA money that China has been collecting. The interest they get pales in comparison with the money they hold. What do we owe to China for all that money they are holding? We just owe China more USA money that we freely create at will.
The Money=Debt ONLY calculation is at the heart of the real and deepest problem we have actually. The word ONLY designates the calculation/paradigm concept as a monopolistic one. All monopolies are problematic because they are expressions of Lord Acton's dictum that "Power corrupts and absolute power corrupts absolutely." And of course there is systemic power and then there is REAL power, namely the power of a paradigm concept which is harder to grasp and perceive than the obvious temporal universe power a monopoly demonstrates. In fact the Debt ceiling/National "Debt" controversy arises out of the difficulty in discerning paradigms, in this case the current/old paradigm of Debt ONLY as the sole form and vehicle for the creation and distribution of new money.
The quickest way to break the mental spell of an old/current paradigm is to look and keep on looking at the problem resolving applications of the new paradigm until the grip of all of the educational and cultural orthodoxies that have taken root in your mind around the old paradigm are answered by the obvious benefits of the new.
Maybe you should re-read the post. It's not that hard to understand. Better yet you could ask a question about what you don't understand about the post...rather than just troll.
Printing of money is fiscal policy. Zero interest rates is Monetary. So which is it you don’t like or do you think our policy should be to have no policy?
Money printing is not directly controlled by anyone. The FED sets interest rates for the banks which in turn makes borrowing more or less accessible. When more people borrow money, more money is created. And conversely so when less people borrow. My qualms are with the monetary policy set by the FED and the complicity policies of the federal government to abandon any semblance of a budget and spend as much as they want, knowing that more money can be printed no matter what.
Fiat money is created when governments run deficits. Credit money is created when banks make loans.
Fiat money is interest free and adds to the national money supply (same as national debt). Credit money sucks interest payments out of the economy.
Credit is always destabilizing. Fiat is always stabilizing. We agonize over too much fiat money and wholly ignore the order of magnitude more credit money.
I understand that deficits require the creation of new money since more money was spent than generated, but isn’t it still the purchase of treasury assets and money lent to banks that increases the money supply? How is the creation of fiat money different?
I think you may have a few things wrong here. The deficit is the money created and not taxed back in that fiscal year. More money is NOT created to finance the deficit. When the spending occurs the money is generated. MMT argues that the Federal Budget office should examine spending plans in the budget to ascertain the impact on inflation due to possible resource limits. So that constrains spending. Instead the office has an arbitrary rule it follows -- the debt ceiling. So those are limits on spending and fiat money creation.
The money created by banks is constrained by the availability of worthy credit customers. And that may drive lending past the resource constraints of the society causing inflation. It will also limit future lending as defaults and/or default risk increase. Banks become more restricted in lending. The economy cycles down. But another aspect is the boosting of asset prices from increased credit provided by banks.
The economy crashes or at least slows as customers do not seek or are not approved for more credit. Bankruptcies may ensue. Money is then destroyed as bad debts are written off.
So essentially the money created through treasury asset purchases is what funds the government and they recoup part of that money through taxation. The difference in the money created and spent, and the tax revenue is the deficit. At the same time, the low rates create higher lending rates which creates new money temporarily until debts are paid back again. Is that right?
The headline speaks for itself. There is no debt crisis whatsoever. Typical fearmongering nonsense by both Democrats and Republicans just to score political points with their base. As Stephanie Kelton mentioned, Trump was right about the debt and yet Republicans still lie about America going off some sort of fiscal cliff. Its beyond embarrassing at this point. Enough with the finger pointing and its time to start looking out for the economy and the American people and stop trying to score political points with the media. Once more, there is no debt crisis.
I would like to hear “The federal debt is a private sector asset. My colleagues and I are working to make it an asset of the people.”
Actually that was pointed out in the Canadian parliament in 1942 when the MPs were discussing with the governor of the Bank of Canada, Graham Ford Towers. the growing war debt. He, Towers, agreed with an MP who asked if the debt was a private sector asset. The finance minister of the day who led Canada’s delegation to Bretton Woods, J. L. Ilsley, then said we need to discuss how to make it an asset of the people.
I almost shared to my Facebook timeline but couldn’t. I speak to MMT often and always reference Dr Kelton. Yet, it seems to contain too much about what politicians and orthodox economists are saying not enough about the Why they’re not right. However, I’m ADHD and boar quickly. Or, I get anxious when positives are not weaved into a discussion as the negative bombs are being dropped. Nonetheless, Dr Kelton is my Go-To economics expert.
Bingo! The CBO scores spending bills based upon their effects on the deficit when it should be scoring those bills based on their effects on inflation. 
How about imposing beneficial price and asset deflation with a 50% Discount/Rebate policy at retail sale? If inflation is no longer a threat the dems can't pretend deficits must be paid for and republicans can't claim that deficits are inflationary any more.
The same way that the banks create upwards of 95% of our new money, with equal accounting entries that sum to zero. The differences are 1) its performed at retail sale which mathematically and macro-economically ends inflation and 2) instead of a debt contract its a gift of money and 3) its so integrative it unifies the normally opposed political and economic agendas of the left and the right because it increases economic democracy and purchasing power (democrats) and potentially doubles demand for every enterprise's goods and services while enabling the lowering of taxes for everyone as well (republicans).
The exact actions of the policy are: 1) Opted in retailers give the consumer a 50% discount on virtually every product and service and open a new T account labeled Sales Discounts. The monetary authority debits the total of their discounts granted back to the merchant so they are made whole on their overheads and margins of profit. Voila! Paradigm change in the economy and the money system.
If this system doubles demand for almost every good and service, how is it not inflationary?
Also, you wrote the “monetary authority debits the total of their discounts granted back to the merchant . . . . “ Did you mean “*credits* the total of their discounts. . . “ or am I totally misunderstanding the system you’re proposing?
Do the math! If you can buy a $60k Tesla for $30k that is not only not inflationary it is beneficial price DEFLATION. That blows away every monetary orthodoxy in existence.
I believe all sales accounts have normal credit balances so to equal/zero out the account the monetary authority would debit the amount back to the merchant. Its elementary accounting practice.
The car still costs $60k, it's just that the government is picking up half the tab. You're effectively doubling the purchasing power of every household in the country, which sounds to me like the recipe for extreme inflation.
I believe it is empirically true that Republicans only care about the size of the federal deficit when Democrats hold the White House. They believe it is to their political advantage to behave in this fashion.
What I wonder is: Why do the Democrats allow this game to continue?
By now they know (a) that the Republicans will kick up a fuss every time the debt limit needs raising; and (b) if there's a government shutdown, the Republicans will get the lion's share of the blame. The Democrats could simply have abolished the debt limit once and for all when they held both houses of Congress. That would have deprived the Republicans of an issue and freed up Congressional time for more important issues. That the Democrats have not done so suggests that they want to keep the game going solely to provide the Republicans with opportunities to embarrass themselves. Fine for the Democrats -- but for the country?
MMT has the communication problems you mention all right. What it doesn't have is a set of policies that immediately and directly impact the pocket books of the individual. Think about it. Why didn't people bitch about the debt when they received their COVID stimulus checks? Because it was a direct gift of money and hence it benefited them. I'll bet the bankers really quacked in their boots and wanted to put their fingers to their mouths and go SHHHH! when the decision was made to implement that once or twice-off policy. A 50% Discount/Rebate policy at retail sale is the perfect direct and immediate beneficial policy MMT and every other monetary reform movement needs to break the spell of Finance's dominance. It simultaneously slays our three biggest economic problems:
1) continual erosive price and asset inflation
2) chronic scarcity of individual demand
3) the communication problem you mention, as an immediate and continuous doubling of everyone's purchasing power with a 50% Discount/Rebate policy at retail sale is the best thing "since sliced bread".
Messaging? How did Trump win in 2016 and get 40 million Twitter followers? He pressed the 50 year old ignored and oppressed button. Why not press the human civilization long dominated and enslaved button that Finance's monopolistic paradigm of New Money Creation Must Only Be Debt as in Burden to Repay and integrate Monetary Gifting DIRECTLY AND CONTINUOUSLY into the Debt Only system?
Here's a related post I just made on Steve Keen's substack podcast:
All of what you say regarding neo-liberal macro is spot on of course, but why do you treat private banking as a legitimate business model? Think about it. Finance is a shit load of additional costs that is always either post-retail sale or pre-production consequently clearly marking it as an exterior parasite on the the rest of the actually legitimate economic/productive process. And it matters not that calculus can justify its costs mathematically, its non/anti-economic in nature. You toss in the fact of its increasingly unethical dominance of every other business model and 95-99% of every individual agent and what's the argument FOR it???
A true publically administered banking system has so many advantages over the private system its a testament to acculturated unconsciousness that no one is advocating for it. For instance, a public banking system would not need to make a profit thus it could both change the terminal ending point of the entire economic process from retail sale to the point of loan signing and thus incorporate finance into the legitimate economy. It would also much more easily enable us to integrate debt jubilee continually into that process with a 0-50% Discount/Debt Jubilee policy at point of loan signing. (the more rational and ecologically sane the financing the higher the debt jubilee percentage). Let's have some innovation for "the roving cavaliers of credit". Better yet, let us apply an aspect of the natural philosophical concept behind every historical paradigm change namely grace, in this instance monetary grace as in gifting.
That 6.2 trillion dollar CARES act bill Trump was talking about contained 2.2 trillion dollars of fiscal policy and 4.0 trillion dollars of monetary policy (lending). Loans are not recorded as "federal government deficits.'' Can anyone tell me if any of the 4.0 trillion (fed money) in the CARES act was in the form of ''forgivable loans?" At the very least they were low or no interest loans that corporations could receive and be used to do "Stock BuyBacks."
No one seems to be concern with the amount debt wall street has compiled (private sector wealth)! Hmmmmmmm, I guess we have the currency issuer to bail them out. Let also not forget the trillions of dollars the fed pump into the banking system and buying troubled assets in the years following the GFC.! No mention of private sector debt. It's only when certain people receive Federal deficit dollars (net spending) that "Federal Government deficits" become a problem.
The Federal debt needs a new name because it's more like an equity account than a debt. I suggest National Retained Earnings because it is a measure of private savings.
Limit the growth to the growth of the productive part of the private sector. We don't really need to give financial props for the rentier part of the private sector.
I'm with the Congressman, prioritize humans. Even the ones who disagree with me, frustrate, irritate and do not “like” me. We’re all in this situation together.
MMT describes how money works for countries that only owe debt in their own currency. Whether or not it solves any problems depend entirely on how we use the insight (lens) provided by MMT.
MMT is more than a description. It's authors call for a job guarantee and permanent zirp ( primarily) to ensure full employment and price stability. You may have missed my facetiousness. The "problem" is that these recommendations smooth out the business cycle and would likely prevent market extremes. That's an issue for those who control and exploit such outcomes.
I caught the facetiousness, but that does not preclude a serious response. ZIRP doe not insure full employment, the jobs guarantee does that. Zirp does not insure price stability. Increasing the money supply in step with the growth of the economy might help price stability. There is a time value to money that ZIRP seems to ignore.
John, Try this thought experiment. The last time the US had zero national debt was 1835, when Andrew Jackson wiped it out. Now imagine that the US had run balanced budgets every year since 1835. If you have US dollars in your savings account, where did those dollars come from? It's true that the private banking system creates most of the dollars in circulation, but that money is all spoken for. Banks create money by issuing loans, which are simultaneously assets and liabilities for both bank and borrower and must sum to zero. So unless you robbed a bank or are involved in a Ponzi scheme where new bank loans are used to cover old loans, it would not be possible for you to have any savings expressed in US dollars.
So the non-gov't sector wants savings, and the gov't wants to give it to them! The constraint is inflation. It's a monument to the size and strength of the US economy that our Treasury could inject $28 trillion into the world economy (pre-pandemic) while keeping inflation and interest rates below 2%.
Now it's probably true that the so-called "national debt" can be as high as it is because the top 1% has captured almost all of this money--and they're not spending it because they've already bought all the toothpaste and toilet paper they need! A dollar not chasing basic goods and services doesn't fuel inflation.
To see why this is probably true, note that the current "debt" of $31.5 trillion, if divided evenly among Americans, would amount to almost $100K for every man, woman and child in the nation. Imagine what would happen to the price of goods and services if this were to magically happen. Tens of millions of Americans would rush to buy all the things they've done without for years. Prices would skyrocket as demand far outstripped supply.
Please do not construe this as a defense of the top 1% and the economic status quo. I'm just trying to point out what seems to be the truth about the distribution of wealth in our economy.
The non-government sector includes the private sector, i.e., people and firms, and the non-federal government sector, i.e., states and cities.
All of these entities want to save some of their income for future use, if they have adequate income to do so. This savings represent money that has basically been taken out of circulation.
Since all spending is someone else's income, taking money out of circulation for savings reduces both.
GDP can be defined as Government Spending + Private Spending + Net Exports. If Private Spending is reduced by savings (the net savings desires of the non-government sector), one of the other sectors must make up the difference or GDP falls leading to a recession or worse. Because of our long-term trade deficit, Net Exports is negative value, which means more money not available for domestic spending, i.e. GDP.
That leaves the government sector to provide the necessary money to cover the negatives of savings and Net Exports to avoid a recession or depression.
Perhaps your reading has included the Sectoral Balance explaining the above, or the concept of Net Financial Assets which is held by the private sector and is equal to the federal deficit, to the penny.
Let me know if this helps.
Stay safe.
There are accounting identities.
Your spending is someone else's income. Total spending is total income.
If someone saves, total income is reduced. If the private sector, net, tries to save, total income declines, and that reduces savings. If they still try to save, total income is reduced even more. That is what Marx called a crisis of capitalism. That sounded bad it was renamed it depression. That started to sound bad so it was renamed it a recession.
When the government spends more than it taxes the money must come from somewhere.
They can print notes. They can create balances in accounts with the federal reserve. Or they can sell government bonds. All of these things create financial assets that the private sector can and must hold. Savings.
If the private sector refused to hold accept physical currency, or have balances with banks, or buy bonds then the government could not run a deficit.
One idea is that the government sets the deficit and the private sector has no choice but to buy bonds or hold cash. Another idea is that the private sector decides to save, leave their money in the bank or in bonds, then the government has no choice but to run deficit.
The government budget balance should be set to square the circle of private savings desires.
If the private sector wants to, net, spend more than it saves, the government must run a surplus. If the private sector wants to, net, save more than it spends, the government must run a deficit. Otherwise there could be inflation, on the one hand, or depression on the other. This is not the only cause of inflation or depressions. But it can be one.
A very good and Articulate comment. :-)
Just a couple of points. The deficit is not "set" by the government. The deficit is the post hoc result of the spending and taxing activities of the government. It's the residual after spending and tax revenue. The deficit is the amount of spending that has not been taxed back, that is, money left in the economy as Net Financial Assets of the private sector. That creates the savings.
"Another idea is that the private sector decides to save, leave their money in the bank or in bonds, then the government has no choice but to run deficit." This has the causality backwards. The government creates a deficit (or surplus) from its spending and taxing decisions. With a deficit, it can "print" money, or issue Treasury securities. The latter is a holdover of the days when we were on a gold standard and is no longer necessary to fund current government expenditures.
Treasury securities are mostly issued through an auction process where the Primary Dealers (mostly banks) are required to bid on the securities available and then purchase them at the settlement price. If the Primary Dealers can't sell them to anyone else, the Fed can buy them, as it has done for many years.
Articulate Source explains it more fully in response. It is just an accounting identity. Put another way, just remember that every dollar in circulation is offset by debt somewhere. The more debt the government has, the less debt there is in the private economy.
So if people and businesses would rather save than be in debt, the government has to be the debtor. Government debt =net private savings.
Indeed I think Federal debt needs a new name because it's so unlike all other forms of debt. It's more like an equity account, retained earnings, etc.
Unless the gov't has borrowed euros or rubles or renminbi, it can NEVER be in "debt." I think Warren Mosler was the first to point out that when treasury bonds are sold, it's not to "borrow" money but rather to remove excess currency from the banking system. This maintains the Fed's target interest rate, which would otherwise plunge to its natural rate--zero. Since the selling and buying of gov't bonds creates the illusion of borrowing, maybe it's time to eliminate the whole business and simply pay interest on reserves that are fully insured by the gov't. Tie the interest rate to the inflation rate and be done with it.
flipshod - The debt does indeed need a new name. People are taught to avoid debt but the federal debt is nothing like personal debt.
Perhaps we could start calling it the Net Financial Assets of the private sector. Some MMT academics use that term. Or, maybe Treasury Deposits since the money in Treasury securities is not used by the government, but sits there as if it were in a safe deposit box waiting for the owner to redeem their cash.
Why not just call it "savings"?
Great idea! Because that's exactly what it is.
However, I'm talking about replacing the term "debt" when referring to Treasury securities because it's misleading and it's being used to scare people about the size of the deficit.
The misconception that the federal "debt" is something bad like household debt is a major barrier to getting folks to understand how the US monetary system actually works.
I don't think there's any getting around using the term debt to describe what the federal government is accruing when it sells Treasuries. If being in "debt" means owing money to someone or something, then, when someone buys a T-bill, the federal government owes them money.
Usually, when someone complains about the federal government carrying too much debt, I reply by saying something like "Oh, you mean the private sector is saving too much?" If nothing else, that usually gets them to either respond by saying some stupid, incoherent thing that can easily be picked apart, or to shut up.
I'll confess that, for many years, it never really occurred to me that, roughly speaking, public sector debt = private sector savings. Like most of us, I'd been trained only to see the "debt" side of the equation, and not the savings side. And then I encountered MMT and I experienced the Gestalt shift that I imagine most people experience when they first encounter MMT.
The trick here is not to deny that the federal debt is, in some sense, "debt": It's to get people to see the other side of the equation.
That's a great retort! I'm going to adopt it with your permission.
The whole concept of federal debt gets a bit sticky because the money put into Treasury securities isn't actually used by the government. It sits in the securities account and is returned upon redemption. One writer likens it to a safe deposit box. You put money in and it stays there until you redeem the security and the money is returned to you, which means that technically it's not a liability of the government, just like the contents of a safe deposit box aren't a liability of a bank.
However, explaining that takes time and your retort is simpler and can potentially lead to a more productive conversation.
A quibble. The public sector debt is exactly (not roughly) equal to the private sector savings.
Typical liberal b.s. only reason we get away with your opinion is US$ is the Worlds Reserve Currency (for current time anyway) ... that doesn’t stop money/resources be massively wasted by Federal Spending...of course most Economists are essentially Federal Government Workers anyway.... getting life time jobs at Universities , Big banks, or actual Feds. You have an extremely strong reason for favoring Big Federal Government
It’s great that you engage with (seemingly) content that is outside the scope of your political standing. From this piece, it seems to position its theory outside of the R\D blame game by showing how Trump was right during COVID, and Clinton failed when he tried to “balance” the budget. But, given how we are all poisoned by our curated information feeds, I understand your flippant response. I hope we all can build together eventually 🇺🇸
"Blah blah blah liberal. "Yadda yadda yadda big government." "Most economists are government employees" LMFAO ;-)
Monetary operations of our sovereign fiat monetary system don’t have a political bias. Our federal government is the sole issuer of its own currency. It can never run out. It can never default unless politicians force default. A balanced budget is irrelevant when our federal government can issue all that it needs.
There seems to be no way around the fact that virtually all participants in the debt ceiling kerfuffle are idiots. Rather than attempting to reason with cretins, I suggest that, instead, we demand that each Congress-critter who opposes raising the debt ceiling submit a list of all of the items of federal spending for their state or district they will agree to forgo to avoid raising it. I predict that, were they required to do so, they'd cease whining about the ceiling immediately.
I like stopping the partisan finger pointing. But it wouldn't hurt to blame both Parties--i.e. Congress--for policies that have contributed to the supply-push inflation that we are experiencing, namely trade wars (e.g. with China) and economic sanctions (on Russia), as Stiglitz has pointed out. These policies have pushed the Fed into raising interest rates. Why not remind the American people of the elephant in the room--Congress itself?
If the trade and economic sanctions were accomplishing their objectives, that's one thing. But the trade deficit with China is actually increasing, and the Ruble is as strong as ever. We should be throwing in the towell but the hawks in Congress and the White House have other agendas than the health of the US/EU economies.
I wish Stephanie would help the American people understand the connection between the Trade Deficit, the wars of empire, and the government spending deficit. As Stephanie points out, the government must be in the "red" for the rest of us--including our trade partners--to be in the "black." The rest of the world strives to be "in the black" in dollar terms (the dollar being the global Reserve Currency) to keep the IMF off their backs. Who's the only player that can sustain "red" finance indefitely? Only the fiat creator of dollars via interest-bearing bonds. Where do those bonds come from? US federal spending deficits. This , in a nutshell, is "Triffin's Dilemma," first posited in the early '60's. It's the burden of the Reserve Currency sovereign for providing a growing money supply for the world at the expense of the domestic economy. In the current trade regime, the U.S. taxpayer is funding capital outflows via Treasury bonds in order for private wealth holders to invest abroad and privatize their profits from the sale of their goods back to U.S. consumers. In short, the US public debt is a "U.S. public money-->international private profit" scheme. It's a scheme that benefits international capital and the FIRE sector at the expense of U.S. workers, U.S. infrastructure, U.S. States and Cities, all of whom have experienced shrinking income and tax revenues for decades. We are financing the de-industrialization of America and turning the economy into a rentier economy.
We'd like to spend our public deficits in ways that help the U.S. economy. US public finance at the expense of workers, cities and States (e.g. via a strong dollar) would seem to be the height of stupidity and unfairness. Stupid because continuing on this path really does undermine the long term credit-worthiness of the U.S. by weakening its foundations. The unfairness is obvious, now, to all and is contributing mightily to political instability.
Ironically, there are indications we are headed into a recession. Excessive trade deficits hurt GDP, and is one reason why the US. economy is so anemic. So now we must increase deficits to help stabilize the economy. Cutting spending now would turn a normal recession into a deep recession.
Look up Triffin's dilemma to understand why we are in this awful position. There is a way to get out of it: let the dollar decline, endure the resultant moderate trade-induced inflation, and help the U.S. economy recover from its addiction to trade deficits. Let inflation provide a price signal to industry to raise domestic output. It really is Macro-Economics 101.
Growth in actual productive capacity and GDP is what we need to reduce the Debt/GDP ratio. That will then change the appetite (particularly by private business) to invest and incur debt for real growth. Then the Corporate sector will become net borrowers rather than net savers. They'll want to be "in the red". Only then (if I understand MMT correctly) can the public deficits start declining.
Michael Hudson has already done that, and I've shown how we can eliminate that deepest cause of imperial war mongering (domestic economies de-stabilized by ever increasing private debt) in my book. https://www.amazon.com/dp/B07PLNJLRN/ref=sr_1_1?keywords=wisdomics-Gracenomics&qid=1552358772&s=books&sr=1-1-catcorr
Thanks Steve. Yes--Michael Hudson has done that superbly. I'm hoping Stephanie can be an additional voice. I'll check it out your book!
No one party is to blame. The proponents of modern monetary theory (The idea that governments can and should print as much money as they need to spend) are the ones to blame. The central figures in the FED and the people in positions of power able influence fiscal and monetary policy are to blame. Anyone who supported the unlimited printing of money and the dropping of rates to zero to stave off economic contractions is the blame.
Money = debt and as Mosler says (I think) the national debt is simply the national money supply. So why don’t we frame it this way? “Senior economists think there is too much money in the economy and the answer is to take some of yours”. I suspect it wouldn’t be a long debate.
It’s true that the balance between taxation and debt is what balances the economy? But the idea that money should be free to borrow and that there should not be any semblance of a budget with the federal government so they can spend as much as they want, can’t be good for the strength of the dollar or the stability of the currency/ monetary system in general.
MMT never said governments can print “as much money as they like”. It says governments can print money to deploy unused resources, including the unemployed. And if there’s not enough space in the economy government can tax the sector in question to free up capacity for government to do whatever it thinks is in the public sector.
But that "idea" is merely your straw-man; MMT does not say any of what you cite.
If you were to read the article you might understand its central point: there is no crisis and thus no-one to blame.
Look at all the USA money that China has been collecting. The interest they get pales in comparison with the money they hold. What do we owe to China for all that money they are holding? We just owe China more USA money that we freely create at will.
The Money=Debt ONLY calculation is at the heart of the real and deepest problem we have actually. The word ONLY designates the calculation/paradigm concept as a monopolistic one. All monopolies are problematic because they are expressions of Lord Acton's dictum that "Power corrupts and absolute power corrupts absolutely." And of course there is systemic power and then there is REAL power, namely the power of a paradigm concept which is harder to grasp and perceive than the obvious temporal universe power a monopoly demonstrates. In fact the Debt ceiling/National "Debt" controversy arises out of the difficulty in discerning paradigms, in this case the current/old paradigm of Debt ONLY as the sole form and vehicle for the creation and distribution of new money.
The quickest way to break the mental spell of an old/current paradigm is to look and keep on looking at the problem resolving applications of the new paradigm until the grip of all of the educational and cultural orthodoxies that have taken root in your mind around the old paradigm are answered by the obvious benefits of the new.
Now that we have poured a little tasty italian dressing on your wonderful word salad, could you tell us what you mean?
Maybe you should re-read the post. It's not that hard to understand. Better yet you could ask a question about what you don't understand about the post...rather than just troll.
You all might like the most recent edition of Macro&Cheese with Rohan Grey -https://realprogressives.org/podcast_episode/episode-209-the-recurring-saga-of-the-debt-ceiling-with-rohan-grey/
Printing of money is fiscal policy. Zero interest rates is Monetary. So which is it you don’t like or do you think our policy should be to have no policy?
Money printing is not directly controlled by anyone. The FED sets interest rates for the banks which in turn makes borrowing more or less accessible. When more people borrow money, more money is created. And conversely so when less people borrow. My qualms are with the monetary policy set by the FED and the complicity policies of the federal government to abandon any semblance of a budget and spend as much as they want, knowing that more money can be printed no matter what.
Fiat money is created when governments run deficits. Credit money is created when banks make loans.
Fiat money is interest free and adds to the national money supply (same as national debt). Credit money sucks interest payments out of the economy.
Credit is always destabilizing. Fiat is always stabilizing. We agonize over too much fiat money and wholly ignore the order of magnitude more credit money.
Just mint the coin for goodness sake.
I understand that deficits require the creation of new money since more money was spent than generated, but isn’t it still the purchase of treasury assets and money lent to banks that increases the money supply? How is the creation of fiat money different?
I think you may have a few things wrong here. The deficit is the money created and not taxed back in that fiscal year. More money is NOT created to finance the deficit. When the spending occurs the money is generated. MMT argues that the Federal Budget office should examine spending plans in the budget to ascertain the impact on inflation due to possible resource limits. So that constrains spending. Instead the office has an arbitrary rule it follows -- the debt ceiling. So those are limits on spending and fiat money creation.
The money created by banks is constrained by the availability of worthy credit customers. And that may drive lending past the resource constraints of the society causing inflation. It will also limit future lending as defaults and/or default risk increase. Banks become more restricted in lending. The economy cycles down. But another aspect is the boosting of asset prices from increased credit provided by banks.
The economy crashes or at least slows as customers do not seek or are not approved for more credit. Bankruptcies may ensue. Money is then destroyed as bad debts are written off.
So essentially the money created through treasury asset purchases is what funds the government and they recoup part of that money through taxation. The difference in the money created and spent, and the tax revenue is the deficit. At the same time, the low rates create higher lending rates which creates new money temporarily until debts are paid back again. Is that right?
A better term for what private banks create is promises of money. fiat and credit are not the terms that get at the essential difference,
Nobody supported unlimited govt spending.
The headline speaks for itself. There is no debt crisis whatsoever. Typical fearmongering nonsense by both Democrats and Republicans just to score political points with their base. As Stephanie Kelton mentioned, Trump was right about the debt and yet Republicans still lie about America going off some sort of fiscal cliff. Its beyond embarrassing at this point. Enough with the finger pointing and its time to start looking out for the economy and the American people and stop trying to score political points with the media. Once more, there is no debt crisis.
I would like to hear “The federal debt is a private sector asset. My colleagues and I are working to make it an asset of the people.”
Actually that was pointed out in the Canadian parliament in 1942 when the MPs were discussing with the governor of the Bank of Canada, Graham Ford Towers. the growing war debt. He, Towers, agreed with an MP who asked if the debt was a private sector asset. The finance minister of the day who led Canada’s delegation to Bretton Woods, J. L. Ilsley, then said we need to discuss how to make it an asset of the people.
I almost shared to my Facebook timeline but couldn’t. I speak to MMT often and always reference Dr Kelton. Yet, it seems to contain too much about what politicians and orthodox economists are saying not enough about the Why they’re not right. However, I’m ADHD and boar quickly. Or, I get anxious when positives are not weaved into a discussion as the negative bombs are being dropped. Nonetheless, Dr Kelton is my Go-To economics expert.
Stephanie Kelton is ok, Michael Hudson is better.
Instead of imposing a financial budgetary limit on governmental spending, we should impose an inflationary budgetary limit.
Bingo! The CBO scores spending bills based upon their effects on the deficit when it should be scoring those bills based on their effects on inflation. 
How about imposing beneficial price and asset deflation with a 50% Discount/Rebate policy at retail sale? If inflation is no longer a threat the dems can't pretend deficits must be paid for and republicans can't claim that deficits are inflationary any more.
How does that Discount/Rebate policy work, exactly?
The same way that the banks create upwards of 95% of our new money, with equal accounting entries that sum to zero. The differences are 1) its performed at retail sale which mathematically and macro-economically ends inflation and 2) instead of a debt contract its a gift of money and 3) its so integrative it unifies the normally opposed political and economic agendas of the left and the right because it increases economic democracy and purchasing power (democrats) and potentially doubles demand for every enterprise's goods and services while enabling the lowering of taxes for everyone as well (republicans).
The exact actions of the policy are: 1) Opted in retailers give the consumer a 50% discount on virtually every product and service and open a new T account labeled Sales Discounts. The monetary authority debits the total of their discounts granted back to the merchant so they are made whole on their overheads and margins of profit. Voila! Paradigm change in the economy and the money system.
If this system doubles demand for almost every good and service, how is it not inflationary?
Also, you wrote the “monetary authority debits the total of their discounts granted back to the merchant . . . . “ Did you mean “*credits* the total of their discounts. . . “ or am I totally misunderstanding the system you’re proposing?
Do the math! If you can buy a $60k Tesla for $30k that is not only not inflationary it is beneficial price DEFLATION. That blows away every monetary orthodoxy in existence.
I believe all sales accounts have normal credit balances so to equal/zero out the account the monetary authority would debit the amount back to the merchant. Its elementary accounting practice.
The car still costs $60k, it's just that the government is picking up half the tab. You're effectively doubling the purchasing power of every household in the country, which sounds to me like the recipe for extreme inflation.
Another talking point is The Federal deficit is the private sector's surplus.
I believe it is empirically true that Republicans only care about the size of the federal deficit when Democrats hold the White House. They believe it is to their political advantage to behave in this fashion.
What I wonder is: Why do the Democrats allow this game to continue?
By now they know (a) that the Republicans will kick up a fuss every time the debt limit needs raising; and (b) if there's a government shutdown, the Republicans will get the lion's share of the blame. The Democrats could simply have abolished the debt limit once and for all when they held both houses of Congress. That would have deprived the Republicans of an issue and freed up Congressional time for more important issues. That the Democrats have not done so suggests that they want to keep the game going solely to provide the Republicans with opportunities to embarrass themselves. Fine for the Democrats -- but for the country?
MMT has the communication problems you mention all right. What it doesn't have is a set of policies that immediately and directly impact the pocket books of the individual. Think about it. Why didn't people bitch about the debt when they received their COVID stimulus checks? Because it was a direct gift of money and hence it benefited them. I'll bet the bankers really quacked in their boots and wanted to put their fingers to their mouths and go SHHHH! when the decision was made to implement that once or twice-off policy. A 50% Discount/Rebate policy at retail sale is the perfect direct and immediate beneficial policy MMT and every other monetary reform movement needs to break the spell of Finance's dominance. It simultaneously slays our three biggest economic problems:
1) continual erosive price and asset inflation
2) chronic scarcity of individual demand
3) the communication problem you mention, as an immediate and continuous doubling of everyone's purchasing power with a 50% Discount/Rebate policy at retail sale is the best thing "since sliced bread".
Messaging? How did Trump win in 2016 and get 40 million Twitter followers? He pressed the 50 year old ignored and oppressed button. Why not press the human civilization long dominated and enslaved button that Finance's monopolistic paradigm of New Money Creation Must Only Be Debt as in Burden to Repay and integrate Monetary Gifting DIRECTLY AND CONTINUOUSLY into the Debt Only system?
Here's a related post I just made on Steve Keen's substack podcast:
All of what you say regarding neo-liberal macro is spot on of course, but why do you treat private banking as a legitimate business model? Think about it. Finance is a shit load of additional costs that is always either post-retail sale or pre-production consequently clearly marking it as an exterior parasite on the the rest of the actually legitimate economic/productive process. And it matters not that calculus can justify its costs mathematically, its non/anti-economic in nature. You toss in the fact of its increasingly unethical dominance of every other business model and 95-99% of every individual agent and what's the argument FOR it???
A true publically administered banking system has so many advantages over the private system its a testament to acculturated unconsciousness that no one is advocating for it. For instance, a public banking system would not need to make a profit thus it could both change the terminal ending point of the entire economic process from retail sale to the point of loan signing and thus incorporate finance into the legitimate economy. It would also much more easily enable us to integrate debt jubilee continually into that process with a 0-50% Discount/Debt Jubilee policy at point of loan signing. (the more rational and ecologically sane the financing the higher the debt jubilee percentage). Let's have some innovation for "the roving cavaliers of credit". Better yet, let us apply an aspect of the natural philosophical concept behind every historical paradigm change namely grace, in this instance monetary grace as in gifting.
That 6.2 trillion dollar CARES act bill Trump was talking about contained 2.2 trillion dollars of fiscal policy and 4.0 trillion dollars of monetary policy (lending). Loans are not recorded as "federal government deficits.'' Can anyone tell me if any of the 4.0 trillion (fed money) in the CARES act was in the form of ''forgivable loans?" At the very least they were low or no interest loans that corporations could receive and be used to do "Stock BuyBacks."
No one seems to be concern with the amount debt wall street has compiled (private sector wealth)! Hmmmmmmm, I guess we have the currency issuer to bail them out. Let also not forget the trillions of dollars the fed pump into the banking system and buying troubled assets in the years following the GFC.! No mention of private sector debt. It's only when certain people receive Federal deficit dollars (net spending) that "Federal Government deficits" become a problem.
Thanks for the article, Dr Kelton.
Great timely article.
The Federal debt needs a new name because it's more like an equity account than a debt. I suggest National Retained Earnings because it is a measure of private savings.
So an equity account for the private sector? And retained earnings of the public? That accumulate over time? As in govts debt is our surplus?
Kinda. It's like an equity account that should be expected to grow, more or less, at the rate of growth of the economy.
Limit the growth to the growth of the productive part of the private sector. We don't really need to give financial props for the rentier part of the private sector.
I'm with the Congressman, prioritize humans. Even the ones who disagree with me, frustrate, irritate and do not “like” me. We’re all in this situation together.
The problem with MMT is that it solves the problems.
MMT describes how money works for countries that only owe debt in their own currency. Whether or not it solves any problems depend entirely on how we use the insight (lens) provided by MMT.
MMT is more than a description. It's authors call for a job guarantee and permanent zirp ( primarily) to ensure full employment and price stability. You may have missed my facetiousness. The "problem" is that these recommendations smooth out the business cycle and would likely prevent market extremes. That's an issue for those who control and exploit such outcomes.
I caught the facetiousness, but that does not preclude a serious response. ZIRP doe not insure full employment, the jobs guarantee does that. Zirp does not insure price stability. Increasing the money supply in step with the growth of the economy might help price stability. There is a time value to money that ZIRP seems to ignore.