Stephanie Kelton, Ph.D.Augustana College

April 12, 2014

Turn that Frown Upside Down:

Copyright 2014 by Stephanie Kelton

A Heartwarming Tale of Debt and Deficits in the Modern Economy

What Do Most of You Want?

Graduate into a healthy economy

Become part of a strong middle-class

Inherit a sustainable planet

Enjoy a secure retirement

In short, you want to live in a Good Society

We Want a Balanced Economythat Works for All of Us

Not too hot

Not too cold

Where Jobs Are Plentiful

And Income is Maximized

Heres Our Problem

Republicans say, "We have a spending problem!"

Democrats say, "We have a revenue problem!

The both decry deficits And both equate

balanced budgets with fiscal responsibility

And It Seems to Make Sense

We know we can only spend what we earn or can borrow

We know too much debt can force a person or a businesses into bankruptcy

We know it's important to save for the future

Today, most of us are up to our eyeballs in unnecessary debt and we

cant see an end to it. And our spending habits are getting worse. It

is a simple fact that if you spend money that you dont have today,

your financial picture will look even grimmer in the future.

Stop Spending Money You Dont Have!

Great Advice... Unless..

Everyone in the economy tries to follow it

Paradox of Thrift Paradox of De-

leveraging

Capitalism Runs on Sales

Spending creates income

Income creates sales

Sales create jobs

Spending Cannot be the Enemy

Its About Calibrating Flows

Leakages Injections

Saving Investment

Taxes Government Spending

Imports Exports

I + G + X

S + T + M

Text FaucetDrain

To Get to Full Employment Businesses must have

more customers

Spending can come from:

1. Domestic private sector

2. Foreign sector (i.e. rest of the world)

3. Our government

But Were Obsessed with Balancing the Budget

We Hold These Truths to Be Self Evident

And WRONG!

Government is like a household or private business

It can spend more than it takes in but only if it can borrow other people's money on affordable terms

There is a limited amount of money available to be loaned out

Continued... There is a fine line between

solvency and insolvency

Once the debt gets too high, creditors will grow weary

They may downgrade your credit rating, and your borrowing costs may spike

You could end up like Greece (i.e. unable to pay your bills)

We Think This Can Literally Happen

Weve Been Fooled

Its Hard to UnFool People

Most people dont understand where money comes from or how it works in the economy

The see government deficits as a negative

They see our national debt as a major problem

What Do You See?

Flat Earth Economics

In economics, we still see the earth as flat

We talk and write textbooks as if the dollar was still tied to gold

Its a mistake thats costing us trillions(CBO)

http://www.stlouisfed.org/publications/re/articles/?id=2157

"As the sole manufacturer of dollars,whose debt is denominated in dollars, the U.S. government can never

become insolvent, i.e. unable to pay its bills. In this sense, the government is not dependent on credit markets to remain

operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has

the only means of creating risk-free dollar-denominated assets.

~STL Federal Reserve

What Are We Missing?

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

We've Been Fooled The gold standard world causes us to see

threats and obstacles where none exist

1. We've run out of money

2. We're at the mercy of the Chinese, the ratings agencies and the bond vigilantes

3. We could end up like Greece

4. We could get hyperinflation like Zimbabwe

The Truth is Hiding in Plain Sight

The world changed in 1971

The US$ works differently now

Shows why the debt crisis was never real

We can't end up like Greece

We actually need the government to run deficits most of the time

What Does the Owl Say? Enter the post-gold-standard

world of Modern Money Theory

FT says it's like an autostereogram

Flipping a switch

Changes the way you perceive things

What I will NOT Say What I WILL Say

Deficits don't matter

The government should keep spending until we reach full employment

We can print our way to prosperity

There are no limits to government spending

Deficits matter, but not the way most people think

Unemployment is evidence of a deficit that is too small

We can have a much more prosperous economy

The government is not revenue constrained; it is inflation constrained

Please Listen Closely

Let's Start with The Goal of Reducing the Deficit

The president wanted to "Go big!"

Simpson-Bowles "and more"

At least $4 trillion in deficit reduction over 10 years

"I'll wash Mitch McConnell's car. I'll walk John Boehner's dog."

~President Obama

Government Balance (%GDP)Actual Projected

CB&PP

Simpson-Bowles/Obama

Which path would you choose?

Think Like an Owl

Let's Put the Deficit in Context

Government Balance (%GDP)

Actual Projected

Government Balance (%GDP)

Non-Government Balance (%GDP)

Actual Projected

Their Deficit is Our Surplus!

Government Non-Government

$$$

A Simple and Indisputable Accounting Fact

G > T

orTheir red ink is Our black ink!

Fiscally Responsible?

FY2013 deficit is down to $680bn

4.1% of GDP

38% drop from 2012

48% drop from 2009

How Big Does the Deficit Need to Be?

What Almost Everyone is Missing

When government goes "down"

We go "up"

Private Surplus

Government Deficit

Where Does the Money Come From?

The Government is the Scorekeeper for the dollar

As Chairman Bernanke explained on 60 Minutes in 2009:

(PELLEY): Is that tax money that the Fed is spending?

(BERNANKE): Its not tax money. We simply use the computer to mark up the size of the account.

It's Time We Realized The government is not like

a household

The US$ comes from the US Government

Not revenue constrained (Greenspan and Bernanke)

If the real resources are available, the financial resources can be there

CONGRESS

A Common Reaction

Understandable!

Pervasive distrust of government

Afraid of what might happen if they discover they have this power

Our Fears Are Costing Us Dearly

Fear of Hyperinflation Fear of China Fear of Bond

Vigilantes Fear of becoming

Greece Fear of Debt and

Deficits

Hyperinflation

By looking down the list you can see what isnt there and, strikingly, what you dont see are any instances of central banks gone mad in otherwise-productive economies.hyperinflation is caused by many things, such as losing a war, or regime collapse, or a massive drop in domestic production. But one thing is clear: its not caused by technocrats going mad or bad. ~Felix Salmon, Reuters

http://blogs.reuters.com/felix-salmon/2012/09/03/why-you-wont-find-hyperinflation-in-democracies/

What Drives Inflation?

Especially Oil

Printing Money Doesnt Do It

And, of course, private banks

have a license to printand they do

most of the printing

China What if China wont buy our

bonds?

Net exporters to US

Results in checking account at Fed

Treasuries are savings accounts at the Fed

We benefit in real terms

The treasury can always raise money by issuing securities. The bond vigilantes really have it backwards. There is always more demand for treasuries than can be allocated from a limited supply of new issues in each auction; the winners in the auctions get to

place their funds in the safest most liquid form of instrument there is for US dollars; the losers are stuck keeping some of their funds in banks, with bank risk.

~Frank N. Newman, 2013

The Bond Vigilantes

Greece

They Are Currency Users

Same debt levels were sustainable when they had sovereign currency

Were Not Like Them

Greece

Spain

Italy

What Should We Be Doing?

Stop waiting for the economy to fix itself

Recognize -- before its too late -- that the deficit is falling too fast and for the wrong reasons

Do the fiscally responsible thing: Cut taxes and/or increase spending now

Our focus should be on macro outcomes not budget outcomes

Nowhere Near Full Employment

Useful Projects

Plenty of Spare Capacity

And No Long-Run Inflation Problem

"Companies are awash with cash. And what they've been missing are enough

customers out there to prompt demand and justify them investing in more plant and

equipment."

~President Obama

Were out of money.

~President Obama

End the Obsession with Balancing the Budget

7 periods since 1776 where government ran surpluses and

paid down debt.

Coincided with 6 Depressions and eventually The Great Recession of

2007-2009

The Budget is a Tool The budget is a means to an end,

not an end in itself

Focusing our energy on balancing the budget leads to bad economic outcomes and human suffering

The budget is a tool that should be used to achieve policy goals, like full employment and modest inflation

Balance the Economy

Not the Budget

Thank You!

To Get to a Balanced Economy, We Need A Better Understanding of How Money,

Deficits and Debt Really Work

@StephanieKelton