Economist Stephanie Kelton talks with DCReport editor David Cay Johnston about her new book, the Deficit Myth, Modern Monetary Theory and the Birth of the People's Economy

Economist Stephanie Kelton talks with DCReport editor David Cay Johnston about her new book, the Deficit Myth, Modern Monetary Theory and the Birth of the People's Economy

Proponents of Modern Monetary Theory (MMT) argue sovereign countries aren't operationally constrained by revenues when it comes to government spending because, as monopoly issuers of their currency, governments can print as much money as they need.

Given the huge financial costs of the COVID-19 pandemic, MMT is something we're hearing about more and more. Is it a whacky, flavour of the month theory, or is it the path forward?

In the video below David Cay Johnston, Pulitzer Prize winning investigative journalist, co-founder of DCReport, and Syracuse University law school lecturer, talks with economist Stephanie Kelton about her new book, the Deficit Myth, Modern Monetary Theory and the Birth of the People's Economy.

Kelton is a professor of economics and public policy at Stony Brook University, and a former chief economist on the US Senate Budget Committee (Democratic staff). Kelton also advises policymakers and consults with investment banks and portfolio managers. 

The conversation was hosted by New York's Strand Book Store.

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59 Comments

How wonderful to finally hear from Stephanie Kelton in a NZ publication, such a positive change from all of the usual nonsense that we hear from our mainstream economists who have no understanding of where our money comes from.

SMFH !

"Someone could take the policies of MMT and push them too far. That would be a violation of MMT"
You don't say!
And we reckon that it won't happen?
Dream on.....That is the very reason that market operatives exist; to push whatever system they are given to the absolute boundary, and beyond it will give way. The reason? If 'they' don't someone else will.
MMT is no different in that respect and it WILL be manipulated and abused in the same way that all other systems we have embraced have been.
MMT is not different, and 'the lens that will let us see the true way forward'. It is just another way of achieving exactly the same thing.

The failure to answer the inflation issue is just after 23 min in the video. Her answer is if you get inflation went to far see bw's quote above.
My favourite part is skipping over the reason why some countries chose (or were forced to) dollarise and borrow in USD. I wonder why Argentina is forced to borrow USD for overseas purchases.
I did not watch the whole video. Do they deal with bank credit creation? or is all simplistic sectorial imbalances?

MMT does indeed include money creation by banks as explained in full by economist Bill Mitchell here. http://bilbo.economicoutlook.net/blog/?p=14620

There's nothing in the link about core MMT (the government can create and destroy money). If you follow enough links you find that deficits produce excess government bonds that may encourage lower interest rates from banks(, which encourages more private debt). Why bring up and assert sectoral balances without explaining all the nuances of the private sector being able to create its own credit or "money".

MMT fully recognises that the broad money supply is endogenous. Loans create deposits. It talks about this at length. The private sector makes its spending and saving and borrowing decisions. Then it is up to the government to spend appropriately to fill the spending gap to bring the economy to full employment as most of the time the private sector likes to save overall and not spend enough to do so. So in that sense the deficit is also endogenous. Automatic stabilisers are best to do this. The traditional,mistaken way of seeing the macroeconomy - private sector creates money that the government collects and spends - means that a government can only ever act pro-cyclically. Which is the exact opposite of what it should do - spend counter-cyclically. When the government deficit spends, by definition the net financial position of the private sector increases. When the private sector borrows and lends to itself the net financial position of it does not change - for every asset there is a liability.

Sectoral balances and funding full employment are two independent concepts. Funding or subsiding jobs that can't pay for themselves is just government spending, there is no magic money tree just for this task. The money for this is either taxed, borrowed or printed, the only difference between taking it from the productive sector though taxes or monetary debasement is one takes a bit longer to observe and is more difficult to link back.
Audaxes link is well worth the read:
https://www.zerohedge.com/economics/mmt-ephemeral-cult-symptomatic-peak-...
It's got a bit more time to deal with the argument: "It is a common error to think that deficit spending is the solution to unemployment..."

MMT says you can always create money to bring into productive use all idle domestic resources including idle labour by using appropriate deficits. It does not say you can mysteriously conjure up real resources you don't have - like say oil for NZ. Yes developing economies may need to borrow in foreign currency. The IMF should play a role in stabilising currencies for developing countries to allow them to import investment goods. Yes domestic spending can have impacts on exchange rates which have winners and losers but MMT says let it float and don't sacrifice domestic economy to the exchange rate. Fears of imported inflation and currency crises in nations like NZ are overblown and don't match empirical evidence of many years of current account deficits

NZ has been very reliable at balancing the budget and reducing the deficit, but lets have a look at some South American contries:
https://en.wikipedia.org/wiki/Currency_of_Ecuador#1932%E2%80%932000_Sucre
or any number or Argentine defaults
if you don't manage your currency in an expected way and balance the books and preserve its value no one trusts it and no one who does not have to will touch it. All MMT has to say on this too bad you went too far with the printing.

Exactly what tim says. If NZ government spending balloons up, they will lose their current status as a responsible, cautious manager of their currency and will go to the same basket as countries like Turkey (which does not have much government debt to foreign nations but has a lot of private debt in foreign currencies. NZ also has a lot of private debt in foreign currencies and it does not take much volatility in NZD to put the whole NZ economy in jeopardy.

Fine. There is no legal limit to money creation, but what MMT seems to ignore/forget is that there is a psychological limit. The real source of the status of money is not, in the end, state power, but confidence.
If, or indeed I would argue, when investors finally lose confidence in the US $, then no state diktat will stop the dam breaking.. State power is neither absolute nor permanent. There are many examples from which to choose.

MMT is a description how our monetary system operates here and now, nothing has to be introduced or adopted, as long as the government demands that we pay our taxes in the currency that it issues then there will be a demand for it.

Except the bit where MMT says government's don't need to borrow, and all government's currently borrow to fund spending.

So where did the investors get the money in the first place that they lend to the government? The money they use came from prior deficit spending.

Its an interesting conversation, but unfortunately, the price of relative stability (hegemony) is signing up to a system of reserve currency that is administered by a state with the muscle to back its position up at any time it is required...

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Pretending there is anything "modern" about unlimited money creation is comical. Sovereigns have been abusing their monopoly on money creation for many centuries.

The quantity of money was tied to a physical commodity until the end of the gold standard so that countries couldn't fund their trade deficits without a loss of their gold reserves .This caused many problems such as unemployment as their money supplies shrank as economist Bill Mitchell explains here. http://bilbo.economicoutlook.net/blog/?p=45106

That is only for a specific period of time. Historically, many currencies have experienced periods that they were not tied to any physical assets. So the phenomenon is not a modern one by any stretch of imagination.

I like the way MMT skips into the idea about unlimited money supply, after stating that sovereign states have the right to print money. Like money is just paper, and "that's fine". This is an absolute joke, made for those that want to feel good about using one credit card to pay the min amt owing on another.

Money is not a scare resource. Real resources are scarce. If you have idle resources sitting around wasted, deficit spend through money creation to bring those into productive use. Too much and you get inflation. Not rocket science.

@The Lark ............. have you also noticed that new fangled hard-brained ideas are often given fancy sounding names .

Modern Monetary Theory..........do me a favour !

The GFC was triggered by something called "Securitization" a fancy name indeed, containing the word "secure " which was basically Banks putting shonky loans into a Special Purpose Vehicle and selling them to fund managers as "investments " .

The American Banks did it to "earn fees " ( diversify income streams and earn non-interest income ) and "free up their Balance Sheets "to enable them to make further shonky mortgage loans to " unemployed Black men in Alabama sitting on their porches. " and " Las Vegas strippers to buy investment properties in Florida "

I believe the proponents of MMT have a death wish and will take the weak minded with them down into the abyss.

@Rosenstein, thank you for pointing this out , we have a mass of financially illiterate people in New Zealand .

Need money? No problem ...................just print it .

Maybe people should ask historians about the Weimar Republic , or ask one of the 5,000 Zimbabweans living in Auckland what happens when you simply print more money to pay for things

I am astonished at this whole idea of MMT , which is almost as bad as Bitcoin .........people who think you can make money from a new " currency" that has no controls , no one can tell me how it actually makes any money , there is no limit on the amount in circulation , we have no idea who controls it's supply , and has all the hallmarks of a massive Ponzi scheme

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MMT Is An "Ephemeral Cult" Symptomatic Of "Peak Macroeconomics"

The state’s insolvency is only deferred by monetary inflation for as long as it can pluck wealth from its population by debauching the currency.

Banks cannot be indifferent when ~60% of their lending is extended to the most creditworthy one third of households to facilitate speculation in the residential property market. The recent regrettable increase in asset prices reinforced by official interest rate cuts devalues the earned income of those aspiring to home ownership because salaries and wages never enjoy the same discounted present value rise for time employed. It becomes increasingly hard to be in receipt of fiat currency in exchange for services and work rendered. Time for a reset.

MMT is not a cult, it a description of how our monetary system operates.

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Explain that to those who never get a pay rise because CPI inflation was in fact negligible in the last decade and rising house prices over the same period caused by monetary inflation put a home permanently out of reach. Ideology, cult, whatever?

MMT only describes the operation of the monetary system, it didn't design it. Politicians still have the ultimate say on what happens within the economy but if they had a better understanding of how things work then we might have less poverty and homelessness and less household debt.

Well he does say at the start "there will be a lot of criticism of this work by people who are small minded and petty". What a bigot.

Gareth, you referenced an economist. I can't access the link, but I'm betting the Limite to Growth aren't mentioned.

In which case, the discussion is irrelevant.

Not really. It's possible to maximise a short term outcome.

Should be easy to take all taxes to zero then too.

MMT tells us that taxation doesn't fund the government, but it doesn't say that it is not important. Taxation has other purposes as Beardsley Ruml director of the New York Federal Reserve Bank (1937–1947) had this to say. "Taxes for Revenue are Obsolete". The real purposes of taxes are : to "stabilize the purchasing power of the dollar", to "express public policy in the distribution of wealth and of income", "in subsidizing or in penalizing various industries and economic groups" and to "isolate and assess directly the costs of certain national benefits, such as highways and social security".
https://en.wikipedia.org/wiki/Beardsley_Ruml

And yet every government uses taxes for revenue.

That is just institutional and accounting protocol. Whenever there's a war to be fought, watch how revenue doesn't prevent things being bought and paid for. Ways and means are found.

Government spending creates currency by crediting bank accounts, taxation does the opposite, it deletes currency from bank accounts. The government is a sovereign currency issuer it has no need of other peoples money. We need the governments money, it doesn't need ours.

And yet every government uses taxes for revenue.

Taxation deletes currency therefore it cannot be used for anything. Spending comes first, taxation and borrowing occur afterwards, this is where mainstream economists get it wrong. Stephanie Kelton compares it to a game of monopoly where the game cannot commence until the banker deals out some money to the players. We cannot pay our taxes until the economy has first received the money from the government. Taxpayers cannot create this money as counterfeiting is illegal.

And yet the government says it can't spend anything until it has used tax money as revenue.

Regardless of how you choose to pretty it up, the simple fact is that governments ACT as though they need tax revenue before they can spend money (in general). And because that's how they act, that's what the reality is.

So you believe everything that our politicians tell us, do you or they really believe that taxation is paying for the governments economic recovery and where did the $60b of QE money come from?

As a new participant, I want to send a big 'thank you' to the team around 'interest.co.nz' for this refreshing news channel where information stays information and opinion stay opinion.
Listening to Mrs.Kelton and here interpretation or better her reasoning why a destruction of value of a currency is wonderful, I believe you can go back through human history step by step and recognized where the current ruling empire developed & enforced trading rules and, if the rules - always in their favor - started to bite them as other trading partners had caught up on these rules and started to best them, a sudden change of rule was enforced.
The cycle started again with looser on the trading partners end - empires always win if the can back it up with military power.

Over the last 70 years, we have seen this happening now with the USA sitting at the rudder of global trade and controlling it by the USD.
- Implementing a global gold standard with the major back-up security safely a Ft.Knocks , then destroying it
as it got burdensome.
- Worldwide selling of CDOs, now allowed by the Gramm-Leach-Bliley Act in 2000, to sprinkle uncomfortable
debt to trading partners and then pulling the carpet under their feet with the GFO.
- Then inventing QE as a 'valuable' tools to counter crisis.
All financially sound nations (or blocs of them) followed as the international trade is interwoven with the USD and 'not following' would have meant a huge disadvantage in trade as currencies would have reached unsustainable heights against the USD.
With the current crisis, all nations that are accepted as liquid or resourceful enough were allowed to followed this ideal of money creation called QE by the financial markets. A lot of people within politics and economics squirm and get headaches, but all follow in the end as the system seems to have helped the US and EU survive GFC. All it did was stretching the lifeline of an overburden idealized system, nowadays based on consumption and none-essential services.

Now, we need a good argument why the theory behind QE, the MMT, is the grant solution to calm our conscience and that all past wisdom of trade in money, goods and services backed by productivity are child's play and has always been so.
( re-writing reality is part of changing rules, by the way, as we see it now daily by Mr.T)

You just heard it from Mrs.Kelton... whether this is an unconscious reaction to a situation nobody wants to find himself in, or its an approach to calm nerves for a while longer on the huge debt the USA and others have accumulated, I do not know.
But one thing is clear to everybody of us:
If productivity and growth of economy is not increasing, all measures of increase the money supply will lead to massive long-term inflation of currencies with all the negative consequences to the population.

Its time for the current empire to try and shuffle the set of economic rules again soon, I believe, once all partners with valuable resources are highly indebted too or hold an uncomfortable advantage in trade by higher productivity.

Let's see how it will enfold this time. The trust is almost gone with most trading partners and the reserve currency status of the USD is debated in many circles. The empire's main power is based on controlling trade routes and it has acted as the biggest consumer of goods - so a favorable trading partner - but foreign trade imbalanced starting to hit home.

We see an attempt to de-valuate foreign US debt by the massive additional US QE programs. Next step might be to destabilize now inflated foreign currencies by offering another 'safe haven' for international money in form of a digital currency with a new form of backing. Will trading partners follow again with grinding teeth and settled with debt against a fresh US 'secure' equity or has the trust eroded to far already or will there be an alternative or a challenge to the status quo?

Only bullies and children can avoid taking responsibilities for their actions ... and strong empires.

The next few years will be the most interesting times in my lifetime beating the cold-war tensions by far.
Watching this comment section for a while now, I believe we all, unconsciously, starting to prepare ourselves with financial decisions for this storm to hit home. Several of the traditional, globally accepted rules have already been eroded within the last 12 years. Value and safety of government bonds? A share market that represents the medium or long-time value of a company?? Investment in overvalued residential or commercial property when a majority of the population are employed to perform jobs that are only required in a high-end world of heavy consumption of limited resources with direct destabilization impact on the environment we require to function???
A very 'interesting' scenario, and another reason to be happy to live in New Zealand even as this storm will hit here as bad as everywhere else. We are still a young nation to adapt quickly and use the remaining resources in a sustainable way. Stabilizing our environment hand-in-hand with change towards a resilient economic model under the umbrella of a functioning democracy - what a challenge! ... and chance ;)

MMT is a poor justification of moral hazard. If value is extracted by government for the benefit of one group then another group is having the value extracted from them. Asset bubble investors and prudent savers are just two groups affected.

As sectoral balances show us, the government sector and the private sector are a mirror image of each other and they cannot both be in surplus at the same time. Only when the government runs deficits are net financial assets created to fund private savings. A link here for further explanation. https://gimms.org.uk/fact-sheets/sectoral-balances/

Sectoral imbalances are fig leaves of imagination for economists.

Wynne Godley who first devised sectoral balances was a very clever economist, they are a simple accounting identity showing stocks and flows and you cannot argue with mathematics.

If real resources are scarce and the government purchases them for itself depriving others of their use then yes one group is benefiting over another. However, if resources - like labour - are lying underutilized and unproductive - then the government spending to bring them into productive use is not depriving another group of anything. People should think more about the morality of persistent unemployment and the long term consequences for our democracy.

Oh dear not another academic economist. I gave up economics a long time ago. I live in the real world now where financial gravity obeys the laws of universal monetary physics.

If a country has X number of goods and services and assets (which is the net present value of all the goods and services that asset will produce in future) at time 0 that are valued at Y units of the currency, then the X*Y=total money supply (MS). Now If you print more money at t1, there are five possible outcomes (total possible combination of X and Y is 8, but three of these combination are impossible to happen when MS increases) :
1) X increases but Y decrease (i.e. the supply of real goods and services is simulated so much that demands drops and prices must drop to a new equilibrium)
2) X increases but Y is not changed. This is similar to 1 but more limited.
3) X increases and Y increases. There is a smaller increase in supply compared to 1 and 2 and the additional demand (enabled by printed money) is now greater than the supply pushing the prices up.
4) X decreases but Y increases. Supply drops and but there is a greater demand enabled by printed money pushing up prices (the greater the quantity of printer money the greater the increase in prices).
5) X is not changed but prices increases. This is similar to 4 above.

One might argue that 1 and 2 are desirable, the desirability of 3 depends on the relative magnitude of increase in prices and supply, and 4 and 5 being undesirable.
Experience shows that only US manages to achieve 1 and 2. This is because their money printed enables local demand but the supply to meet that demand is increases elsewhere (i.e. China, Japan, Germany etc produce more to meet the additional supply). This is due to USD unique position as the global trade currency.
In almost anywhere else, you are much more likely to end up with 4 or 5. Terrible outcomes.

We are so lucky, we do not have to work to improve our lot. The lot in Government have our Backs.
to get them
That is why we are so deeply in their debt.

Orr maybe that is why we are unable to get the Economy going after a mere six weeks of idleness and some people need a Government Handout to pay the bills as they had no "Savings" to get them through a 'Down Turn".

A minor problem has become a major problem. We now run our lives as a deficit, so we are deeply in debt to pay for our rise in wages.

So we can just reduce the Interest on Savings Accounts to pay for the increase in future large debt. Then allow Banks to expand their Portfolio until the cows come Home, the sheep get shorn, the rents get raised, the fruit gets picked by overseas interests, who come here to earn a meager wage to raise the pickers who will come here in the Future.

But that leaves just why Tourism is needed to pick the teeth of the Housing Market to raise the income of a resilient Nation of flights of fancy to keep our Taxpayer owned Major Airline, overpaid and over here and over indulged to fly our Politicians to meet their mates to talk about the economy elsewhere.

Now do you understand. They think money grows on trees, so they are uprooting the freely planted conifers to plant millions of taxpayers into eternal debt. The system is called working. some do, some don't. We just need some more who do, rather than those that don't.

Then we can free up the free enterprises and freely discuss the true State of Affairs. Nuffin is free, except printing money to raise the Roof of the eternal problem... of those who paid too much for lots and lots of Tourist Accommodation, rather than simple houses for simple folk, to simply live in....and get a Capital Gain, out of a Capital Idea, until it all turns to Custard over a Covid-19 into 2020 and beyond.

Get back to Work, stop Typin....Oh I just did.

That is the purpose of taxation, to limit demand within the economy and maintain the value of the currency. Savings will also do the same. Unemployment is a sign that the government is not spending enough and that there is spare capacity within the economy. A job guarantee would solve this problem and even out the supply and demand issues. An article here for further explanation on how money flows through the economy and is taxed back again. http://www.matchesinthedark.uk/spending-chains-sankey-diagrams/

Now improving supply is good. But to improve supply you will need to import a lot of stuff. When would you get the needed token (i.e. USD) to import those? from your export industries. So you cannot meaningfully increase supply of anything unless you are improving your exports volume or value or both as your exports are enablers of your imports (unless you are Argentina were your governments mortgage the country to get the USD). But export industries are not where there is spare capacity. In what country export industries are not already running at full speed? So putting more labor into them is unlikely to have any positive impact on their output levels. The printed money will then need to go somewhere that is import oriented (i.e. you can expect other countries will increase their supply to enable you building than massive dam or power station or whatever). This will happen either by private sector (i.e. foreign investors/creditors accept to be involved in NZ) or by government direct involvement (i.e. creating debts repayable in foreign currencies). The latter is obviously dangerous (Argentina). As to the former, I am not sure this will be very easy to sell (I.e. China, US or Australia coming to own NZ power stations) politically and also requires acceptance by others who are not under your control. They must see a real reason to part with their USD.
Again, this is completely different in the US as they spending on local projects, is enabled by receiving real stuff form everywhere in crazy quantities, so the Americans can consume a greater supply of everything (fuel, food, construction materials etc) for money that they receive from government for doing absolutely no productive activity (like group A digging a hole, while group B is filling the same hole) (i.e. the rest of the world absorbs all the printed money, so the equations i said above do not apply to US).

We have been running current account deficits for decades now and have had no problem in financing them and our dollar is sought after with currency traders and bond holders. We are a stable commodity trading nation and our currency is freely floating and not pegged to any other. NZ dollars are easily exchanged for US dollars where necessary to pay for imports if we don't already hold them and without the need to borrow.
There are many jobs that could be given to people without work that would not need to increase our level of imports but that might also increase our own levels of productivity and exports.

This is the daftest thing to have come out economists heads since Karl Marx espoused the idea of a utopian egalitarian society , where we all eat caviar , drink Moet and Chandon live in mansions in Remuera or Greenhithe and have a family Rolls Royce with a driver .

Quite simply anyone who thinks we should just print money to meet our expenses is not in touch with reality

I notice that you do not criticise the creation of money by the banks. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creatio...

David Cay Johnston is someone else I just cant take seriously

"Is it a whacky, flavour of the month theory, or is it the path forward?"

Neither
It describes the system as we have it pretty well
But it doesnt solve anything
Each year, the economy only serves up the amount of goods and services it serves up... (courtesy of "easy"resources
make as many money claims as you like... promise the earth, give tokens out everywhere ...
but easy resources have finite limits

Unemployed and underemployed people are a wasted resource.

Some people still believe that the world is flat, he may be one of them.