Book: “The Deficit Myth” – Stephanie Kelton (Read)

Improve the world economy, all the while ditching arbitrary constraints.

Rating: 4 out of 5.

Stephanie Kelton aims to demystify the government budget deficit propaganda that is reigning fear all over the world and redirect the readers’ attention to more important metrics such as inflation and unemployment rate. Through Modern Monetary Theory (MMT), the author also proposes an interesting solution to navigate the inevitable ups-and-downs of business cycles – guaranteed employment programs by the government.


Don’t Think of a Household

  • Currency “issuers” are fundamentally differently from a currency “user”. The issuer, with infinite printing capabilities (it does not have to tax or borrow before it spends), is limited only by fundamental metrics of a country such as employment rate and inflation.
  • The purpose of the tax is not to raise money, but to control inflation, discourage undesirable behaviors, and incentivize people to work hard and earn the currency with which they pay taxes in. A virtuous cycle of productivity. The US government does not “make” any money when it taxes its citizens, it only subtracted money out of the system.
  • The is more income and wealth inequality today in the US than any other time in US history. This income discrepancy will create troubles because capitalism runs on sales (GDP), and the wealthy save more than they spend.
  • The government still operates through the PAYGO model, where one must formulate tax revenue to subsidize the cost of a program before the program can be passed. An unnecessary delay and hassle that potentially hinders public well-being by delaying and cancelling well-structured programs.

Think of Inflation

  • “The government deficit isn’t supposed to balance. Our economy is.” Too small of a deficit can lead to unemployment, too high can lead to inflation. The way government defines natural unemployment and healthy inflation rate are all arbitrary, and more of an after-the-fact observation.
  • Modern Monetary Theory suggests that a government backed job guarantee program geared towards a care economy is a solution to the unemployment problem during business cycles. It also acts as an automatic stabilizer, with government spending more in recessions and spending less in booming times. As for inflation, the government hasn’t been evaluating impacts when they pass trillion-dollar bills, and the US economy is generally fine because there is enough slack in the economy to absorb the money.

The National Debt (That Isn’t)

  • Debt-to-GDP is irrelevant. It’s all about inflation (governed by slack and productivity). The so-called debt is an instrument that the US utilizes to its advantage. A trade deficit with China means Chinese ship goods to the US, and US pays more USD to China (can be converted to treasuries), which is just a number that the US can pay down whenever they want with 1 keystroke.
  • The Greek default is a result of converting to Euro. It is no longer a currency issuer, but a currency user.
  • Currency issuers have the power to control interest rates, so financial markets have no way of pushing these currency issuers into crisis. By printing money to replace debt instruments, investors now hold the same value of their bond in cash, which means the net wealth is unaffected. It could push prices lower (deflation) because while net wealth is unaffected, income is, with future income becoming 0 because you now hold cash.
  • Fighting deficit led to depression in many cases in the past. The US has experienced six significant economic depression, each preceded by a sustained period of budget balancing.

Their Red Ink Is Our Black Ink

  • People believe that government deficit results in lower savings because the loanable fund theory suggests that there is a fixed pool of money available for borrowing, and if the government borrows money for its deficit, other borrowers will face higher borrowing cost with less cash availability. MMT rejects this because fiscal spending ultimately leads to more money in the non-government bucket, it could potentially lead to lower savings of the poor though if the money flows to the rich. Without intervention, the additional reserve by the government drives the interest rate lower.

“Winning” at Trade

  • Foreign debt can be dangerous, as observed in Venezuela and Russia when natural gas fracking in the US drove oil prices down significantly, and when Argentina soybean prices collapsed. These countries have a lot of US denominated debt, so their ability to pay back is critical, but countries like US, UK or Australia don’t face the same risks.
  • A rising interest rate means a higher borrowing cost for developing countries that need US denominated debt. It also makes US assets more desirable, leading to currency devaluing for developing countries (and ultimately hyperinflation), a double gut punch. The interest rate hike by Paul Volcker in 1979 ultimately led to crashes in developing countries. A lessened dependency on US dollar could be important (could be alluding to crypto).

You’re Entitled

  • Entitlement programs are necessary and doesn’t need to be self-sustaining because US is a currency issuer. The rich want it gone because they would like to see the money go to better use, which just leads to greater imbalance.

The Deficit That Matter

  • The real deficits today are good job deficit, savings deficit, health care deficit (infant mortality rate in the US is more than twice the average for all developed countries), education deficit, infrastructure deficit (graded D+), climate deficit, and equality deficit (in 1950, S&P 500 CEO made 20x as much as the average worker, it is 361x in 2017).

Building an Economy for the People

  • Argentina’s Jefes de Hogar plan is like the proposed MMT government guaranteed job program. The program employed 13% of the total labor force, and 75% were women. 50% of participants leave the program to join the private sector within 3 years. Extreme poverty fell by 25% within 6 months.

The deficit propaganda focuses on the wrong metrics to gauge the economy’s health, instead look at inflation rate and unemployment rate. The balance sheet is arbitrary to a sovereign country (currency issuing), and there are much more serious deficits like the infrastructure, healthcare, and climate deficits. It is time to stop worrying about losing the trade game to other countries (because you’re not really losing) but balancing the economy fundamentally bottoms up (starting with employment).


Through the lens of MMT (am particularly interested in the Japan markets, Rakuten and Z Holdings) applied to investing, the continued low interest rate and deflation phenomenon in Japan could be interesting to think through.

Taiwan is equally problematic compared to the US in terms of CEO-to-employee pay ratio, and much worse on housing prices-to-salary ratio. The proposal of a guaranteed job could be an intriguing solution, but perhaps best done through private sector & public sector partnerships, maybe C.Hut (my own startup attempt) could be an interesting solution.

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