Book Review and Celebration: The Deficit Myth
OK, right to the point - READ THIS BOOK: The Deficit Myth, by Stephanie Kelton.
Buy it, borrow it from the library - read it. It will change your whole paradigm on economics, government, politics, unemployment, developing countries, health care, poverty, etc. If you can’t afford the $18 or so, send me an email - NOW, and I will send it to you: carl(at)scheiders.com
If you find reading a challenge - here's a John Oliver YouTube video that will give you a running start. He does not actually understand what these economists do, but it's a start. And it's funny!!
Then come back here and read the rest of this. Our national debt is NOTHING like a home or business.
Paradigm Shift
How to persuade you to do this before your attention span quits?
Perhaps a story would help. Have you ever had a total paradigm shift? That is when your view of the world totally shifts and you know you can never go back there. Like when you learned about sex! Had your first child. Your first grandchild. Learned about a plant based diet? That is what happened to me with this book.
What is Wrong with People?
The election of 2016 hit me like a ton of bricks. And the one in 2020 was worse. 1/3 of the country voted for a person that I saw as a narcissistic idiot. 1/3 voted for a middle of the road, really old guy. And 1/3 DID NOT VOTE! In 2020, even more people voted for the “weird” one. Are we all crazy? I spent a lot of time reading, trying to figure out how humans actually work, since we are clearly not the rational beings I have assumed all of my life. One of my good friends, and some of my family members are in the “other” camp. I wrote about that here. I love these people. How can I get my arms around them and this idea that they are ill or crazy?
Thinking Fast and Slow by Daniel Kahneman also did that to my brain. I wrote about that here. He persuaded me with a few simple experiments that we are somewhat less than rational beings.
How Emotions are Made by Lisa Feldman Barrett did that for my understanding of “emotions” - those things we think are in control of us, but are actually learned responses, culturally created social tools.
Read a Short Paper
Read this short piece, which nicely summarizes the book, and the critics as well.
https://www.jhinvestments.com/viewpoints/investing-basics/what-is-modern-monetary-theory
Watch a Video Explanation
I could go on, and I will if you give me a chance. But just take a few minutes and watch this video. The author uses the graphic symbols from the book to help shift your paradigm. https://youtu.be/3QYJjisPMQY
Author’s Credentials
The book’s author, Stephanie Kelton, is a PhD, one of the leaders of the Modern Monetary Theory “school” of economics. She is joined by many other economists, including Joseph Stiglitz - a Nobel Prize winner - and his book: People, Power and Politics. She served as Chief Economist for the U.S. Senate Budget Committee (Democratic staff), appointed by Bernie Sanders. She describes her tenure in several interesting stories in the book. She had some very small victories there, and learned a lot about how this might actually work.
NPR
If your trusted information sources include NPR, here are some good pieces. Rep. Alexandria Ocasio-Cortez is one of the few elected leaders that gets this. NPR Morning Edition has a balanced presentation:
An NPR Planet Money presentation is here:
https://www.npr.org/2021/01/20/958854717/modern-monetary-theory-classic 23 minutes.
The interview was conducted in 2018, and rebroadcast as a “classic”. The time has come!
If you are of a mind to endure a longer audio program, there is an NPR On Point interview with Kelton and Stiglitz here: Stiglitz comes in at the end.
More Detail
If none of the above persuaded you, and you are still reading here - below is my elevator pitch on this. It is also my tool for understanding. I cannot keep several hundred pages in my head!
Background -
Economics is more of a religion or philosophy than a science. If you are an economist, you are of this school, or that school. You have deeply held beliefs about how finances work, and you interpret everything in those terms. We have the Austrian school, the Keynesian school, etc. Only in recent years has economics adopted a more scientific approach - look at the data, try an experiment, and see what happens. It’s called Behavioral Economics. Richard Thaler built some of it on the research by Kahneman. Nobels both. It is as difficult to shake people out of their “schools'' as it is to persuade a Christian that a Moslem has the correct world view - or the reverse. And those two schools have the same monotheistic roots!
The Gold Standard is gone.
Nixon dropped it in on 8/15/1971. The US currency is no longer tied to any standard. The dollar is solely supported by the United States Government. The U.S. government and similar governments that control their own fiscal currency, are completely in charge of their currency. It need not exchange dollars for anything else. Dollars are supported by the productive capacity of the U.S. economy. This is only true of governments that issue their own currency, tied to no standard. Nixon never understood this when he created it, but many governments are beginning to grasp what it really means.
The Federal Reserve CREATES currency.
Money is not really printed - it is created as an entry on a balance sheet. You may have heard of quantitative easing - what the Fed was doing during the great Recession. They created more and more liquidity, trying to encourage banks to loan more money to the public. We avoided an inflationary disaster because it did not work - but you get the picture.
The government creates debt in its own currency.
US debt is called government bonds. The green money, dollars, are converted into yellow money, government treasuries. This allows the U.S. government to pay interest, thus moving funds across the balance sheet.
The U.S. Government Cannot Be Forced Into Insolvency.
Given the above, there is simply no way for the government to be insolvent. In this world, currency is a simple balance sheet entry - not a true debt that needs to be repaid.
When the U.S. government creates debt, it moves funds to the general public and to foreign nations. Those funds can be used to generate products and services.
When the U.S. government collects taxes, it moves funds OUT of the general public, and deletes them! That removes public liquidity, and slows down economic expansion.
There is No Free Lunch
This is not a free lunch. The U.S. economy must be able to produce the goods and services that are being fueled by the insertion of credit. It if it cannot grow to accomplish that, then the balance sheet is balanced by inflation - making the U.S. dollar worth less in terms of trade for goods and services.
Automatic Brakes Are Possible.
If Congress ever figures this out, the risk of inflation is one of the worst things that could happen. There are already some natural brakes on this, but the MMT group recommends that we construct others. One good one would be an automatic government guarantee of a good job. When the economy is thriving and growing, and does not need and could not support any additional growth, so this government employment option would automatically decline. When the economy is lagging, and there is room for growth, it would automatically expand, by hiring willing workers for public sector jobs. This arrangement would also allow us to establish a true minimum wage, without any legal enforcement required.
A Test
The author described this exchange, which she managed with each member of the Senate Budget Committee. What if you could wipe out the federal deficit with one stroke. Would that be a good thing. The universal answer was YES. Later, another point in time, she would ask, what if we canceled all of the US treasury bonds - basically by paying the holders green dollars for their yellow dollars. Would that be a good thing. The universal answer was NO!
They are two sides of the same coin.
And the NO is a better answer. If the treasury is holding ALL of the cash, then there is nothing in the hands of the public and other countries to use to invest, buy, promote, etc. A zero deficit would be a zero economy. That will not work either.
This is not a theory
The book is full of graphs and numbers and charts, experiments, etc. Look at what Japan is doing if you don’t believe this. They may not have figured it out any better, but they are in fact doing it. Their debt ratio to GDP is 238%. The U.S. one is 105%. We have a way to go before we are going to stretch the capacity of our economy.
I’ll quit. Read the book. Tell your congress person to read the book. Make it a MEME, please. Thanks.
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