This document discusses modern monetary theory and its view of government spending and deficits. It argues that a sovereign government that issues its own currency cannot go bankrupt and can afford to spend as needed. In contrast to conventional views, MMT asserts that unemployment is economically inefficient and support should be given to maintaining full employment. The sectoral balances of an economy are also discussed, showing that one sector must run a deficit if another runs a surplus.

1. Money is No Object:
Accounting for Deficits, Taxes and Trust in the 21st
Century
Stephanie Kelton, Associate Professor, University of Missouri-Kansas City
Financial Planning Association Annual Retreat Conference, May 5-8, 2012

2. What is Money?
“Money is the most powerful and pervasive secular force
on the planet. Yet for most, it’s a source of mysticism and
mystery.”
- Dick Wagner, JD, CFP®

3. Barter Theory
• Dominant within Economics
• Metallist/Monetarist
• Spontaneously Originates in
Private Sector
• Replaces Clumsy Barter
• Eliminates “double-
coincidence of wants”
“Truck, Barter and Exchange”
~Adam Smith
• Reduces Transactions Costs

4. The Evolution of Money
(textbook story)
• Primitive monies
• stones, beads, shells, feathers, fish,
cattle, etc.
• Precious metals
• Paper with metal backing
• Fiat money -- Trust?

5. Textbook Conclusion
• Money is what money does
• A veil over the real economy
• Not important in its own right
• Money, debt and finance don’t even fit into
many economic models

6. Credit and State Theories
• Chartalist/Cartalist
• Anthropologists, Sociologists,
Numismatists
• Find origin of money in credit/debt
relations
• Precedes markets and exchange
• Separate currencies not a
coincidence
Roman tally sticks, British Museum • State plays central role

7. Regardless of Origin, Today
• All money exists as an IOU
• The “I” is the debtor
• The “U” is the creditor
• IOUs are recorded in a money of account
• The Australian dollar
• The US dollar
• The Japanese Yen
• The British pound
• The _____ Euro???

8. Money is Not an Object
• The money of account is abstract
• Like an “inch,” a “foot” or a “yard”
• It cannot be seen or felt
• It is represents a social debt relation
• In any modern nation, the money of
account is chosen by the national
government

9. The Power of the State
• Recognized as far back as Aristotle, through Adam
Smith and into the modern era
• John Maynard Keynes told us:
“The age of Chartalist or State Money was reached when the
State claimed the right to declare what thing should answer as
money to the current money-of-account...To-day all civilised
money is, beyond the possibility of dispute, chartalist.”

10. A Sovereign Government
• Defines the money of account
• Imposes taxes, fees and other
obligations
• Decides what it will accept in payment
to itself
• Chooses how it will make its payments

11. Sovereign Money
• Most governments choose their own unique
money of account and issue their own unique
currency
• “One Nation, One Money”
• Most governments also require that taxes be
paid in a currency that the state has the
exclusive power to issue
• These currencies are “sovereign money”

12. Taxes Drive Money
• As long as the state has the power to enforce its tax
laws, the people will need the government’s money
• The currency will have value, and people will sell
things to the government in order to get the
government’s money
• Whatever the government accepts in payment to
itself will become the “definite” money in the system
• The final means of settlement

13. The Hierarchy of Money
• The private sector Most acceptable
“leverages” the Government
government’s money
Banks
• Layering of IOUs with
Non-financial Business
differing degrees of
acceptability
Households
• But private sector cannot
create net financial assets
• Only one final means of
Least acceptable
payment

14. The US Hierarchy
Issues the currency
Taxes and spends at the top
$ of the pyramid
in dollars
Non-convertible
fiat money
United States Government

15. The Benefits of Sovereign Money
• The government can never “go broke” or “run
out” of money
• It can afford anything for sale in the domestic unit
of account
• It does not need to borrow its own currency
• It can set the policy interest rate at any level
• It has an expanded policy space

16. Pre-1973, Bretton Woods
Had to limit
spending to
Promised to convert Gold
protect gold
US$ into gold at a reserves
fixed price $
Dollars were
subordinate
United States Government

17. Post-1973 Fixed Exchange Rates
Had to limit spending
Did not issue the currency US$
to protect reserves
at the top of the pyramid
Ruble, Peso, etc.
Heavily dependent on
Sacrificed control of trade surpluses
interest rates
Russia, Argentina, Southeast Asia and Mexico

18. What about the Euro?
• EMU is an exceptional case
• The currency is divorced from the nation
• “One Market, One Money”
• The euro is effectively a foreign currency from the
perspective of the individual nations
• The EUR-17 are USERS of the currency
• They lack the powers of a sovereign ISSUER

19. The Eurozone
Does not issue the Governments can
Euro
currency that sits at the “run out” of euros
top of the pyramid
Heavily dependent on
Must pay market trade surpluses
interest rates
Any EMU Country

20. Money Matters
• Governments should be in control of the
currency that sits at the top of the pyramid
• Otherwise, they lack the power to keep their
domestic economies on track
“By virtue of its power to create or destroy money by fiat and its power to take
money away from people by taxation, [the State] is in a position to keep the rate
of spending in the economy at the level required to [maintain full employment].”
~Abba P. Lerner

21. How does a Currency Issuer Spend?
• By directing its bank (usually the central bank)
to credit someone’s account
• Frequently happens without even writing a
check
• In the “modern money” era, government
spending is accomplished through electronic
keystrokes (Bernanke)
• The monopoly issuer of the currency can
always meet its obligations (Greenspan)

22. “We’re out of
money .”
“The government, just like
every American household, has
to live within its means.”

23. Is the Government Like a Household?
• No - not anymore
• We abandoned the gold standard
• We ended Bretton Woods
• We have “modern money” created
by keystrokes on a computer
• But we act as if we are still stuck in
a fixed exchange rate world

24. Afraid of Becoming Greece

25. Why is the Eurozone a Train Wreck?
• The EUR-17 gave up their keyboards!
• Became users of the currency, much like individual US States
• Italy is like Indiana. Greece is like Georgia.
• Transferred spending authority to the financial
markets
• Forced to accept job-killing austerity or risk
defaulting on euro-denominated debt

26. The US Still Has its Keyboard
• The US Government
cannot “go broke”
• It cannot “run out” of
money
• It is the monopoly issuer
of the currency
• It cannot run out of
keystrokes anymore than
a scorekeeper can run
out of points

27. Money is No Object
• As Chairman Bernanke
explained on 60 Minutes in
2009:
(PELLEY): Is that tax money
that the Fed is spending?
(BERNANKE): It’s not tax
money. [W]e simply use the
computer to mark up the
size of the account.

28. The Issuer of the Currency Can’t Go Broke
“[A] government cannot become insolvent with respect to
obligations in its own currency. A fiat money system, like the
ones we have today, can produce such claims without limit”
~Alan Greenspan, 1997

29. Then Why the Weak Recovery?
• Policymakers (and most economists) don’t understand
how the monetary system works
• They think the government faces the same kinds of
constraints that users of the currency
(i.e. households, businesses and state/local
governments) face
• They warn that our fiscal path is unsustainable
• And they ask for “shared sacrifice”

30. The Hawks Want Immediate Cuts
• A deficit hawk opposes
deficit spending on principle
• Often favors “sound
money” (e.g. gold standard
or 100% reserve backing)
• Would legislate rules to
mandate balanced budgets

31. The Doves Want Eventual Cuts
• A deficit dove supports
limited deficit spending in
tough economic times
• Want the budget balanced
over the business cycle
• Support rules to limit the
size of the deficit (e.g.
Europe’s Fiscal Pact)
• Prefer to wait until after the
economy begins to recover
before imposing austerity

32. A New Bird in Town: The Deficit Owl
http://animalsexplaineconomics.tumblr.com/

33. Owls Doves Hawks

34. A New Brand of Macro
• Discovering an emerging school of
economic theory
• Modern Monetary Theory
(MMT)
• Exposes the fallacies in conventional
economic theories
“Academically, that school has
• Views unemployment as socially not been challenged. And from
harmful and economically inefficient
what I study on it, they’re right!”
• Supports a full employment economy ~Bernard Lietaer

35. The MMT Deficit Owl
• Assigns no arbitrary limit
to the size or duration of
the deficit
• Relates government’s
balance sheet to the rest of
the economy
• Uses sectoral balance sheet
approach

36. A Simple and Fundamental
Accounting Truth
G>T
$$$
Government Non-Government
$$$
T>G
Government Surplus = Non-government Deficit
Government Deficit = Non-government Surplus

37. What They Show
• In any given period, the sectoral balances show whether
a particular part of the economy is:
• Spending more than its income
• Running a deficit
• Spending less than its income
Surplus
• Running a surplus
Deficit
• Spending just equal to its income
• Balancing its budget

38. The Whole Enchilada
Internal: Domestic Private Sector
Internal: Government Sector
External: Foreign Sector

39. One Rule
• The laws of double-entry
bookkeeping apply
• All sectors cannot take in
more than they spend
(i.e. be in surplus)
• All sectors cannot spend
more than they take in
(i.e. be in deficit)
• At least one sector will be in
deficit

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Beware Swings in Private Sector Balance
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42. The Private Sector Balance
• As a general rule, the private sector needs to be in surplus
• Households and firms cannot continually borrow more than their income
• At some point, lenders will run out of creditworthy borrowers who are willing to
spend
• Private debt levels may become unsustainable (Minsky)
• When an expansion driven by private sector debt reaches an end, sales soften,
jobless claims trend higher, and economic activity falters
• Government revenues soon fall short of expenditures and the government’s
budget eases

43. Achieving a Private Sector
Surplus
• There are only three ways to put the private sector in
surplus:
• 1.) Run a government deficit and a current account surplus
• 2.) Run a government deficit > current account deficit
• 3.) Run a government surplus < current account surplus
• Only countries with trade surpluses can avoid running
government deficits
• But not everyone can be a net exporter!
• As long as our current account is in deficit, the US government needs to frequently
be in deficit

44. But We’re Terrified of Deficits
• What if people lose
trust in the dollar?
• What if China
refuses to buy our
bonds?
• What if interest
rates skyrocket?
• What if we set off
hyperinflation?

45. So We Live Well Below Our Means
25 million
Americans unable to
find full-time work
Output gap estimated at
$9.8 billion per day in
lost income
One in four children
$2.3 trillion infrastructure deficit
in poverty

46. There Is An Alternative
to Shared Sacrifice and
Economic Stagnation
Twitter: @deficitowl