Stephanie Kelton Profile picture
Sep 20, 2020 22 tweets 4 min read Twitter logo Read on Twitter
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Let's talk about the "deficit" that isn't. The conventional way to talk about the government's fiscal position is to look at the difference between how much money the Government spends (G) and how much it collects via Taxation (T).
G > T means the government is spending more than it collects in tax payments. Convention has us refer to this as a fiscal "deficit."

G < T means the government is spending less than it collects in tax payments. Convention has us call this a fiscal "surplus."
Standard definitions of a "deficit" include: Image
So a "deficit" (G > T) implies a "lack of" something, a shortfall, or a "deficiency."

e.g. If the government spends $100 but only collects $90 in tax payments, we're told that the government is "short" $10.
We're taught that the government "borrows" 10 dollars in to cover the "shortfall."

"Borrowing" happens when the government sells bonds (Treasuries in the US, gilts in the UK, JGBs in Japan, etc.)
When G > T and bonds are sold, we are told than the government's "borrowing" drives up the "national debt."

Then, of course, we're told that the "debt" has to be "paid back," and panic sets in.

I have a huge problem with all of this. Let me explain.
Here's an image from my book, The Deficit Myth. It illustrates a core tenet of MMT, namely that when G>T, the government is ADDING dollars (or pounds or yen, etc.) to the non-government part of the economy.… Image
The image adopts the conventional framing of G>T as a government "deficit." I think we should change that framing. Here's why: as @wbmosler likes to say, "the government neither has nor doesn't have money."
What that means, in my Two Bucket model, is that the government's bucket is special. Why? Because it is the currency-issuer. And that means it has an infinity bucket. ∞

(Take a deep breath, I know about inflation)
The government doesn't reach into its bucket and grab some pre-existing 💵 (or 💷, or 💴). The government spends its currency into existence when it buys goods & services from the non-government sector. Spending gives rise to new💵, which is added to the non-government bucket.
The government pulls something out of nothing. That is the power of the infinity bucket. (Otherwise known as the Congressional power of the purse.) Think of the $2.2 trillion CARES Act, which conjured $2.2 trillion into existence from the infinity bucket.
When the government adds more dollars than it subtracts, it makes sense to say that the government is augmenting any *surplus* in non-government bucket. But does it make sense to describe the government bucket as being in *deficit* ?
Lots of people are getting anxious right now because the US government is expected to run a fiscal "deficit" of roughly $4 trillion (mostly due to the ~$3 trillion in added spending due to COVID-19).
But what, exactly, is the government "short"? The answer, is nothing. Think about it, what is $3 or $4 trillion subtracted from infinity? Answer: ∞
By the way, the same is true for G < T. Governments that are eager to restore fiscal "surpluses" are missing the point entirely. (Looking at you 🇦🇺)

What is the impact of, say, a $30 billion fiscal "surplus" when you add it to the infinity bucket? 🙃 It's still infinity!
As MMT shows, currency-issuing governments face no purely financial constraints (there is an inflation constraint). The government can't spend an infinite number of because there aren't an infinite number of goods and services available for sale in .
It can, however, purchase whatever is *available for sale* in its own currency, including all unemployed labor.

Bottom line: you can debit (or credit) the infinity bucket until the cows come home, but it will not alter the spending capacity of a monetary sovereign.
(Yes, I know about "confidence." Yes, there are historical examples of governments abusing these powers. A collapse of confidence (often after loss of war), means the supply of goods & services available for sale in the government's own currency collapses. MMT understands this.)
The bigger points:
G > T doesn't draw down the supply of available funds, and G < T doesn't top them up. It's a bottomless bucket that doesn't "hold" anything. Accounting conventions have us using words like "deficits" and "surpluses," but that really muddies the waters.
There is no deficit--i.e. no shortfall that has to be atoned for ("paid back") in the future. Spending from the infinity bucket creates the currency that pays for the spending. Everything is "paid for" at the point of purchase.
But what about "the debt"? More unfortunate terminology. Chapter 4 of my book is titled "The National Debt (That Isn't) The bonds are just the dollars that were spent into existence but not taxed away. They exist as part of the savings & wealth of the non-government sector.
We don't have a deficit problem (there is no deficit). We don't have a debt problem. We have a communication problem. /end

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More from @StephanieKelton

Sep 10
🧵 5 Myths that Deserve Straightening Out

via Paul Sheard, former vice chairman of S&P Global. 1/10…
"The first is that the government has to borrow in order to spend and run deficits. It’s the other way around...'raising revenue' is just a cover story." 2/10 Image
"A related myth is that the government needs to repay its debt. 'Debt' is a misnomer; government debt is just money (or purchasing power) in another form." 3/10 Image
Read 11 tweets
Aug 21
Just saw this announcement from the Clinton Global Initiative, touting a competition to raise "awareness about creating a sustainable fiscal future." It is worth remembering ..... 1/ Image
That Bill Clinton was the last POTUS to preside over a fiscal surplus. It is also worth remembering why those surpluses weren't sustainable. Pay close attention to the dates as you look at each slide. The fiscal surplus appears in 1998. 2/ Image
The Congressional Budget Office was projecting surpluses over the entire decade (2001-2011). They had the debt-to-GDP ratio dropping to just 6.3% by 2010, and the White House was boasting that the US would be "debt" free by 2013. 3/ Image
Read 11 tweets
Aug 19
Interest Rates and Fiscal Sustainability
"The orthodox conception of fiscal sustainability demonstrates a fundamentally flawed understanding of the interactions of the Fed, the Treasury, and private financial institutions within the U. S. financial system"…
The paper is full of insights (and policy implications) that are worth your time if you want to understand key differences between MMT and mainstream macro. Image
"concern over whether or not a deficit is accompanied by bond sales is irrelevant for understanding the potential inflationary effects of the deficit." And we know bond sales drive paranoia (vigilantes, burdened grandchildren, debt crisis, etc.) so ask yourself why we issue them. Image
Read 11 tweets
Aug 10
via James Galbraith (Aug 9, 2023)
"Back in 2021 and early 2022, a posse of prominent economists...all of Harvard...[argued] that inflation, fueled by federal spending, would prove “persistent"... 1/
But...inflation peaked on its own in mid-2022 (owing partly to sales from the US Strategic Petroleum Reserve). There was no persistence, no surge from the 2021 fiscal stimulus, and no wage-driven inflation from low unemployment... 2/
...There also has been no recession, unemployment has not risen, and higher interest rates have not deterred business investment...3/
Read 8 tweets
May 26
With notable exceptions, coverage of the debt ceiling debacle has been incomplete (at best) and dishonest (at worst). 1/
Let's start with the basics. The executive branch is bound--under the Constitution--to spend when Congress says spend. The law requires the president/Treasury to honor its spending obligations. The president and Treasury Secretary have taken an oath to uphold the Constitution. 2/
The debt ceiling statute applies to a *specific set of instruments*. Let's call them "brown pebbles." 3/
Read 15 tweets
May 24
I call it covert monetary financing:
"the federal [government] can essentially finance ANY amount of DEFICIT that they want merely BY PRINTING BONDS and making sure they sell in the market ... and WE ARE INVOLVED IN THAT FINANCING OF THE FEDERAL BUDGET." ~Alan Greenspan
Here’s how Scott Fullwiler explains it. Image
Read 4 tweets

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