San Antonio TX, Monday Evening

1. Money is No Object:
No Theory, No Controversy
Stephanie Kelton, Ph.D.
University of Missouri-Kansas City
FPA Experience 2012, San Antonio, October 1, 2012

2. Conventional Economics
• Highly theoretical treatment of banking & gov't finance
• Deposits (Multiplier) Loans
• Deficits (Higher interest rates) Crowding Out
• Highly controversial

3. My Conclusions

4. My Conclusions
• We should be doing so much better

5. My Conclusions
• We should be doing so much better
• Money is no object

6. My Conclusions
• We should be doing so much better
• Money is no object
• The budget deficit is not our enemy

7. My Conclusions
• We should be doing so much better
• Money is no object
• The budget deficit is not our enemy
• China is not our banker

8. My Conclusions
• We should be doing so much better
• Money is no object
• The budget deficit is not our enemy
• China is not our banker
• We aren’t like Greece

9. My Conclusions
• We should be doing so much better
• Money is no object
• The budget deficit is not our enemy
• China is not our banker
• We aren’t like Greece
• We can have full employment and low inflation

10. We’re Living Way Below Our Means
Output gap estimated at
$9.7 billion per day in
lost
"Just say it to yourself – every day the US government is allowing $9.7 billion to go down the drain in lost income just
because they are too stupid to implement sensible direct job creation strategies." ~Bill Mitchell

11. We Face a Simple Problem

12. We Face a Simple Problem
There isn’t enough total
spending to employ
everyone who
wants to work.

13. There is Only One Way Out

14. There is Only One Way Out
• We can only reach our potential if spending grows

15. There is Only One Way Out
• We can only reach our potential if spending grows
• GDP measures how much money is spent buying new
goods and services every year

16. There is Only One Way Out
• We can only reach our potential if spending grows
• GDP measures how much money is spent buying new
goods and services every year
• GDP = C + I + G + (X-M)

17. There is Only One Way Out
• We can only reach our potential if spending grows
• GDP measures how much money is spent buying new
goods and services every year
• GDP = C + I + G + (X-M)
• Spending creates income

18. There is Only One Way Out
• We can only reach our potential if spending grows
• GDP measures how much money is spent buying new
goods and services every year
• GDP = C + I + G + (X-M)
• Spending creates income
• Income creates sales

19. There is Only One Way Out
• We can only reach our potential if spending grows
• GDP measures how much money is spent buying new
goods and services every year
• GDP = C + I + G + (X-M)
• Spending creates income
• Income creates sales
• Sales create jobs

20. Who Will Spend?

21. Who Will Spend?
• Households?
• Lost $16T of wealth from late 2007 to early 2009
• Recovery has been uneven across wealth groups
• Top 10% back to 2004 levels, but median wealth has fallen to 1992 levels
• 25- to 44-year olds suffered the most significant wealth losses
• JPM estimates that GDP growth will be down 1.3% over the next 10 years as this group
rebuilds wealth

22. Who Will Spend?
• Households?
• Lost $16T of wealth from late 2007 to early 2009
• Recovery has been uneven across wealth groups
• Top 10% back to 2004 levels, but median wealth has fallen to 1992 levels
• 25- to 44-year olds suffered the most significant wealth losses
• JPM estimates that GDP growth will be down 1.3% over the next 10 years as this group
rebuilds wealth
• Firms?
• Corporations are sitting on record profits
• Hesitant to hire and reluctant to invest

23. Who Will Spend?
• Households?
• Lost $16T of wealth from late 2007 to early 2009
• Recovery has been uneven across wealth groups
• Top 10% back to 2004 levels, but median wealth has fallen to 1992 levels
• 25- to 44-year olds suffered the most significant wealth losses
• JPM estimates that GDP growth will be down 1.3% over the next 10 years as this group
rebuilds wealth
• Firms?
• Corporations are sitting on record profits
• Hesitant to hire and reluctant to invest
• Foreigners?
• Europe, China, India, Russia, Brazil, etc. slowing or already in recession

24. That Leaves Only ...

25. That Leaves Only ...
• The GOVERNMENT
• And some very powerful myths

26. That Leaves Only ...
• The GOVERNMENT
• And some very powerful myths

27. That Leaves Only ...
We have no
money!
• The GOVERNMENT
• And some very powerful myths

28. That Leaves Only ...
We have no
money!
• The GOVERNMENT
• And some very powerful myths

29. That Leaves Only ...
We have no
money!
• The GOVERNMENT
• And some very powerful myths
Our money
comes from
China

30. That Leaves Only ...
We have no
money!
• The GOVERNMENT
• And some very powerful myths
Our money
comes from
China

31. That Leaves Only ...
We have no
money!
• The GOVERNMENT
• And some very powerful myths
Our money
comes from
China We’ve
already spent
too much.

33. “We’re out of
money .”

34. “We’re out of
money .”

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

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

37. Households

38. Households
• Can only spend what they earn or
what they can borrow

39. Households
• Can only spend what they earn or
what they can borrow
• Might not be able to pay back debt

40. Households
• Can only spend what they earn or
what they can borrow
• Might not be able to pay back debt
• Are subject to market discipline

41. Households
• Can only spend what they earn or
what they can borrow
• Might not be able to pay back debt
• Are subject to market discipline
• Cannot spend more than their income
for very long

42. Households
• Can only spend what they earn or
what they can borrow
• Might not be able to pay back debt
• Are subject to market discipline
• Cannot spend more than their income
for very long
• Have to live within their means

43. Households
• Can only spend what they earn or
what they can borrow
• Might not be able to pay back debt
• Are subject to market discipline
• Cannot spend more than their income
for very long
• Have to live within their means
• Are Users of the currency

44. This House is Different
• Has currency-issuing
capacity
• Is not revenue constrained
• Always has the ability to pay
• Can afford anything for sale
in US dollars CONGRESS

45. This Picture Has No
Economic Meaning

46. An Experiment
THE UNITED NATION OF KELTONIA
10 10
10 10
ONE HUNDRED KELTONIS
From the United Nation of Keltonia

47. Welcome to Keltonia
• I have taxing authority, a standing army, courts,
prisons, etc.
• Some of you live in Keltonia and are subject to
taxes
• To avoid penalty, you must pay me 200 Keltonis
(K 200)
• Let’s see what this means

48. You Are In Debt To Me
Private Sector Keltonia
+ K 200 Taxes Due + K 200 Taxes Due
- K 200 NW
Assets = Liab.+NW Assets = Liab.+NW

49. Pay Your Taxes Now

50. You Can’t!

51. You Can’t!
• Because I haven’t spent any Keltonis into existence

52. You Can’t!
• Because I haven’t spent any Keltonis into existence
• The money to pay taxes comes from government
spending

53. You Can’t!
• Because I haven’t spent any Keltonis into existence
• The money to pay taxes comes from government
spending
• I’ll hire some of you to build roads for me

54. You Can’t!
• Because I haven’t spent any Keltonis into existence
• The money to pay taxes comes from government
spending
• I’ll hire some of you to build roads for me
• Then you can pay your taxes

55. Private Sector Keltonia
+ K 500 Keltonis + K 500 NW + K 500 Keltonis
- K 200 Keltonis - K 200 Taxes Due - K 200 Taxes Due - K 200 Keltonis
Assets = Liab.+NW Assets = Liab.+NW

56. Your Net Financial Assets
THE UNITED NATION OF KELTONIA
10 10
10 10
ONE HUNDRED KELTINIS
K 300 Keltonis

57. A Simple and Fundamental
Accounting Truth
Government Non-Government
$$$
or

58. A Simple and Fundamental
Accounting Truth
G >T
Government Non-Government
$$$
or

59. A Simple and Fundamental
Accounting Truth
G >T
Government Non-Government
$$$
My Deficit is Your Surplus!
or

60. A Simple and Fundamental
Accounting Truth
G >T
Government Non-Government
$$$
My Deficit is Your Surplus!
or
My red ink is Your black ink!

61. Why Don’t You Buy Some Imports?

62. Why Don’t You Buy Some Imports?
• You might decide to spend part of your money on
things produced in another part of the world

63. Why Don’t You Buy Some Imports?
• You might decide to spend part of your money on
things produced in another part of the world
• You can import them as long as others want Keltonis

64. Why Don’t You Buy Some Imports?
• You might decide to spend part of your money on
things produced in another part of the world
• You can import them as long as others want Keltonis
• Spend K 200 on imported goods

65. Why Don’t You Buy Some Imports?
• You might decide to spend part of your money on
things produced in another part of the world
• You can import them as long as others want Keltonis
• Spend K 200 on imported goods
• Now where are we?

66. Who’s Holding Keltonis?
K 100
500
200 200
-K K 200

67. The World is a Closed System

68. The US is a Net Importer

69. The US is a Net Importer
• Each year, we buy more goods and
services from the rest of the
world than they buy from us

70. The US is a Net Importer
• Each year, we buy more goods and
services from the rest of the
world than they buy from us
• This results in a trade deficit in
the U.S.

71. The US is a Net Importer
• Each year, we buy more goods and
services from the rest of the
world than they buy from us
• This results in a trade deficit in
the U.S.
• And a trade surplus in other
countries

72. The US is a Net Importer
• Each year, we buy more goods and
services from the rest of the
world than they buy from us
• This results in a trade deficit in
the U.S.
• And a trade surplus in other
countries
• This can cause unemployment to
increase

73. The US is a Net Importer
• Each year, we buy more goods and
services from the rest of the
world than they buy from us
• This results in a trade deficit in
the U.S.
• And a trade surplus in other
countries
• This can cause unemployment to
increase
• And it can cause the domestic
private sector to lose net financial
assets

74. Unless....

75. Unless....
The government compensates by running a
sufficiently large deficit

76. But, But, But

77. But, But, But
• Deficit spending is irresponsible

78. But, But, But
• Deficit spending is irresponsible
• China won’t stand for it

79. But, But, But
• Deficit spending is irresponsible
• China won’t stand for it
• The Bond Vigilantes Will Get Us

80. But, But, But
• Deficit spending is irresponsible
• China won’t stand for it
• The Bond Vigilantes Will Get Us
• We’ll end up like Weimar or Zimbabwe

81. What Does it Mean?

82. The Hawks Have Their Definition

83. The Hawks Have Their Definition
• A deficit hawk opposes
deficit spending on principle

84. The Hawks Have Their Definition
• A deficit hawk opposes
deficit spending on principle
• Want immediate cuts and
austerity to reduce deficits

85. The Hawks Have Their Definition
• A deficit hawk opposes
deficit spending on principle
• Want immediate cuts and
austerity to reduce deficits
• Often favor gold standard
or 100% reserve backing

86. The Hawks Have Their Definition
• A deficit hawk opposes
deficit spending on principle
• Want immediate cuts and
austerity to reduce deficits
• Often favor gold standard
or 100% reserve backing
• Would legislate rules to
mandate balanced budgets

87. The Doves Have Their Definition

88. The Doves Have Their Definition
• A deficit dove supports
limited deficit spending in
tough economic times

89. The Doves Have Their Definition
• A deficit dove supports
limited deficit spending in
tough economic times
• Want the budget balanced
over the business cycle

90. The Doves Have Their Definition
• 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)

91. The Doves Have Their Definition
• 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

92. The Owls See Things Differently
Owls Doves Hawks

93. The Deficit Owl

94. The Deficit Owl
• Assigns no arbitrary limit
to the size or duration of
the deficit

95. The Deficit Owl
• Assigns no arbitrary limit
to the size or duration of
the deficit
• Supports austerity only as
an anti-inflationary measure

96. The Deficit Owl
• Assigns no arbitrary limit
to the size or duration of
the deficit
• Supports austerity only as
an anti-inflationary measure
• Calls it fiscally
irresponsible to permit
chronic unemployment or
high inflation

98. China Isn’t Our Banker

99. China Isn’t Our Banker
• China has US$ because they are net exporters to the US

100. China Isn’t Our Banker
• China has US$ because they are net exporters to the US
• Rather than holding those dollars in a (checking) account at
the Fed, China prefers to convert some dollars into bonds

101. China Isn’t Our Banker
• China has US$ because they are net exporters to the US
• Rather than holding those dollars in a (checking) account at
the Fed, China prefers to convert some dollars into bonds
• Treasury bonds are, functionally, savings accounts at the Fed

102. China Isn’t Our Banker
• China has US$ because they are net exporters to the US
• Rather than holding those dollars in a (checking) account at
the Fed, China prefers to convert some dollars into bonds
• Treasury bonds are, functionally, savings accounts at the Fed
• I could choose to sell you some Kelton bonds, and we
could call them my “debt”

103. China Isn’t Our Banker
• China has US$ because they are net exporters to the US
• Rather than holding those dollars in a (checking) account at
the Fed, China prefers to convert some dollars into bonds
• Treasury bonds are, functionally, savings accounts at the Fed
• I could choose to sell you some Kelton bonds, and we
could call them my “debt”
• But this in no way burdens me (or you!)

104. China Isn’t Our Banker
• China has US$ because they are net exporters to the US
• Rather than holding those dollars in a (checking) account at
the Fed, China prefers to convert some dollars into bonds
• Treasury bonds are, functionally, savings accounts at the Fed
• I could choose to sell you some Kelton bonds, and we
could call them my “debt”
• But this in no way burdens me (or you!)
• Just listen to Alan Greenspan

105. “[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

106. The Issuer of the Currency Can Always Pay
“[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

107. The Issuer of the Currency Can Always Pay
“[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

108. How does a Currency Issuer Spend?

109. How does a Currency Issuer Spend?
• By directing its bank (usually the central bank) to
credit someone’s account

110. How does a Currency Issuer Spend?
• By directing its bank (usually the central bank) to
credit someone’s account
• There is no "printing of money"

111. How does a Currency Issuer Spend?
• By directing its bank (usually the central bank) to
credit someone’s account
• There is no "printing of money"
• In the modern era, government spending is
accomplished through electronic keystrokes
(Bernanke)

112. 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. We simply use the
computer to mark up the
size of the account.

113. If Money is No Object, Then
Why Can't Greece Pay?

114. If Money is No Object, Then
Why Can't Greece Pay?
• The EUR-17 gave up their keyboards!
• Turned themselves into users of the currency, much like individual US
States

115. If Money is No Object, Then
Why Can't Greece Pay?
• The EUR-17 gave up their keyboards!
• Turned themselves into users of the currency, much like individual US
States
• Italy is like Indiana. Greece is like Georgia.

116. If Money is No Object, Then
Why Can't Greece Pay?
• The EUR-17 gave up their keyboards!
• Turned themselves into users of the currency, much like individual US
States
• Italy is like Indiana. Greece is like Georgia.
• Transferred spending authority to
financial markets

117. If Money is No Object, Then
Why Can't Greece Pay?
• The EUR-17 gave up their keyboards!
• Turned themselves into users of the currency, much like individual US
States
• Italy is like Indiana. Greece is like Georgia.
• Transferred spending authority to
financial markets
• The only reason the Eurozone hasn't collapsed
is because of the ECB - and it's keyboard!

118. We Are NOT Like Greece

120. We Don't Need to
Beg for Help

121. We Don't Need to
Beg for Help

122. Money Matters

123. Money Matters
• Governments should be in control of their
currency

124. Money Matters
• Governments should be in control of their
currency
• Otherwise, they lack the power to keep their
domestic economies on track

125. Money Matters
• Governments should be in control of their
currency
• 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

127. Isn't That a Job for the Fed?

128. Isn't That a Job for the Fed?

130. What About Inflation?
• Eccles wrote that tax increases may
needed to "aid in fighting inflationary
price rises which may occur when
full capacity is approached."

131. We Have Plenty of Capacity

132. We Have Millions of People Who
Want to Contribute

133. We Have Useful
Work For them

134. Not Nearly Enough Jobs

135. It's Not a Free Lunch!

136. It's Not a Free Lunch!
• Everything has a cost

137. It's Not a Free Lunch!
• Everything has a cost
• We have the money

138. It's Not a Free Lunch!
• Everything has a cost
• We have the money
• We have the real resources

139. It's Not a Free Lunch!
• Everything has a cost
• We have the money
• We have the real resources
• We should have much higher incomes

140. It's Not a Free Lunch!
• Everything has a cost
• We have the money
• We have the real resources
• We should have much higher incomes
• But "because we fear becoming the next Greece,
we're turning ourselves into the next Japan"

141. There Is An Alternative to
"Shared Sacrifice" and Stagnation
It begins with the understanding that
Money is No Object
@deficitowl