The Deficit Myth

22 Mar, 2021 at 12:15 | Posted in Economics | 6 Comments The Deficit Myth: Modern Monetary Theory and the Birth of the  People's Economy eBook: Kelton, Stephanie: Kindle StoreSoon after joining the Budget Committee, Kelton the deficit owl played a game with the staffers. She would first ask if they would wave a magic wand that had the power to eliminate the national debt. They all said yes. Then Kelton would ask, “Suppose that wand had the power to rid the world of US Treasuries. Would you wave it?” This question—even though it was equivalent to asking to wipe out the national debt—“drew puzzled looks, furrowed brows, and pensive expressions. Eventually, everyone would decide against waving the wand.”

Such is the spirit of Kelton’s book, The Deficit Myth. She takes the reader down trains of thought that turn conventional wisdom about federal budget deficits on its head. Kelton makes absurd claims that the reader will think surely can’t be true…but then she seems to justify them by appealing to accounting tautologies. And because she uses apt analogies and relevant anecdotes, Kelton is able to keep the book moving despite its dry subject matter. She promises the reader that MMT opens up grand new possibilities for the federal government to help the unemployed, the uninsured, and even the planet itself…if we would only open our minds to a paradigm shift …

Precisely because Kelton’s book is so unexpectedly impressive, I would urge longstanding critics of MMT to resist the urge to dismiss it with ridicule. Although it’s fun to lambaste “magical monetary theory” on social media and to ask, “Why don’t you move to Zimbabwe?” such moves will only serve to enhance the credibility of MMT in the eyes of those who are receptive to it.

Robert P. Murphy / Mises Institute

Can a government go bankrupt?
No. You cannot be indebted to yourself.

Can a central bank go bankrupt?
No. A central bank can in principle always ‘print’ more money.

Do taxpayers have to repay government debts?
No, at least not as long the debt is incurred in a country’s own currency.

Do increased public debts burden future generations?
No, not necessarily. It depends on what the debt is used for.

Does maintaining full employment mean the government has to increase its debt?

dec3bb27f72875e4fb4d4b62daebb2fd161b36392c1a0626f00cfd2ece207d84As the national debt increases, and with it the sum of private wealth, there will be an increasingly yield from taxes on higher incomes and inheritances, even if the tax rates are unchanged. These higher tax payments do not represent reductions of spending by the taxpayers. Therefore the government does not have to use these proceeds to maintain the requisite rate of spending, and can devote them to paying the interest on the national debt …

The greater the national debt the greater is the quantity of private wealth. The reason for this is simply that for every dollar of debt owed by the government there is a private creditor who owns the government obligations (possibly through a corporation in which he has shares), and who regards these obligations as part of his private fortune. The greater the private fortunes the less is the incentive to add to them by saving out of current income …

If for any reason the government does not wish to see private property grow too much … it can check this by taxing the rich instead of borrowing from them, in its program of financing government spending to maintain full employment.

Abba Lerner


  1. Do increased public debts burden future generations?
    No, not necessarily. It depends on what the debt is used for.

    • Sorry hit Post Comment before asking my question:
      What do those assertions even mean?
      What is public debt used for? What is its use? (Not asked ironically; not looking for any non-MMT answer centered on what the debt was spent on, since MMT would say debt is not spent, not necessary for public spending and public spending would be on public goods / investment, which may or may not be a “burden” depending on its nature)
      What is the mechanism by which public debt would burden future generations? Would servicing or paying the debt reduce future production / consumption? How?

      • In the public’s imagination it’s like running a credit card and future generations will have to pay the interest and principle because our politicians can’t stop spending. Which hasn’t the slightest bit to do with reality.

    • I think it could only depend on the non-financial effects of today’s actions on the lives of people in the future.
      If the state created money merely to reshuffle markets for financial assets, then I don’t think future generations would have to care.
      But thinking of physical effects — in the 50’s atomic energy was a popular issue, and I was reading yesterday about a plan to detonate underground atomic explosions to loosen up oil deposits — fracking before its time. If Texas had been turned into a huge poisonous hole, future generations (i.e. us) would have to cope with that. That plan remained hypothetical, thank heaven.
      Resource depletion, damage to earth’s life-carrying capacity, damage to the human genome, etc. definitely would burden future generations, and if present-day fiscal policy winds up funding projects that do that kind harm then our descendants won’t need to thank us.

  2. The problem is that Kelton merely substitutes inflation myths for deficit myths. Since the private sector easily switches from bond vigilantes to inflation mongers, it still dictates government policies.
    Far better to dispel both deficit and inflation myths. Printing money can be used to fight inflation too, as the Fed demonstrated in September 2019 when it started printing money liberally to end repo market hyperinflation.
    Inflation should be seen as a payments system problem; the Fed knows how to fix payments systems, by printing money.

  3. Is inflation a constraint? No… see the GFC

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