–Why the politicians, the media and even many economists still don’t get it.

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.

Among the Tea (formerly Republican) Party’s many hates, is the hatred for federal deficits, and they share this antagonism with nearly every American. Yet, based on my own personal reading, I believe the media and the politicians, and many economists do not even know what a federal deficit is, let alone how it relates to the federal debt.

Let’s begin with semantics. A quick trip to dictionary.com says:

DEFICIT: 1. the amount by which a sum of money falls short of the required amount.
2. the amount by which expenditures or liabilities exceed income or assets.
3. a lack or shortage; deficiency.
4. a disadvantage, impairment, or handicap: The team’s major deficit is its poor pitching.
5. a loss, as in the operation of a business.

Look at all the negative words: Fall short, lack, shortage, deficiency, disadvantage, impairment, handicap, poor, loss. From the standpoint of intuition, clearly a “deficit” is something to be avoided. Yet, a federal deficit merely is the arithmetic difference between two, mostly unrelated numbers: Federal taxes collected vs. federal dollars spent.

These numbers are mostly unrelated, because federal taxes do not pay for federal spending. Either can exist without the other, and subtracting one figure from the other is meaningless — or at least has been since 1971, when we went off the gold standard. Prior to then, federal taxes did pay for federal spending, so there was some justifiable logic in comparing taxes with spending. Today, such a comparison is like subtracting the number of runs the Cubs score in a particular game, from the number of people who attend that game.

Having said that, one reason to subtract taxes from spending does remain, and it is an important one. Because the federal government creates federal dollars by spending, and federal taxes destroy federal dollars, federal deficits are the net amount of federal dollars the federal government creates each year.

Does creating federal dollars sound like an activity which should be viewed as “falling short, lacking, a shortage, a deficiency, a disadvantage, an impairment, a handicap, something poor or a loss”? When you think about it, doesn’t creating federal dollars come closer to positive words like: “Income, surplus, profit, accumulate, increase, build and benefit”? And when you think about it further, isn’t that exactly what the so-called “deficit” does for our economy? A growing economy requires a growing supply of money, and the federal deficit supplies that money.

Because the word “deficit” historically has had negative connotations, many people find positive connotations to be impossible to imagine, thus the ongoing efforts to reduce the deficit, when in fact, the efforts should be to increase the deficit. But it gets worse. There is widespread belief that federal deficits increase the dreaded federal debt, and that federal debt is nothing more than an accumulation of federal deficits.


Like “deficit,” debt is a word with strong pejoratives. According to thesaurus.com, words related to “debt” are: “bankrupt, beggared, behindhand, insolvent, liable, minus, not paying, owing, unable to make both ends meet, unpaid, unremunerated, unrequited, unrewarded, worse than nothing.” With a family history like that, is it any wonder that “debt” has such bad press?

Federal “debt” actually is an accumulation of federal debt instruments, of which the four majors are: T-bills (one year), T-notes (10 years), T-bonds (30 years) and TIPS (Treasury Inflation Protected Securities — 5, 10, and 30 years). The debt process is this:

1. Federal government creates dollars out of thin air, by crediting a creditor’s bank account. At this instant, dollars and deficit are created but no “federal debt.”
2. Federal government elects to create T-securities also out of thin air, when it exchanges them for previously-created dollars. At this instant, federal debt is created. The money supply does not change, as the dollars are destroyed the instant the T-securities are sold.
3. To redeem the T-securities, the federal government re-creates dollars, exchanging them for T-securities and destroying the T-securities. Again, the money supply doesn’t change.

So all federal “debt” is nothing more than the total of outstanding T-securities, which are created and redeemed with no effect on the money supply, other than liquidity (dollars are more liquid than T-securities). Neither creating, nor redeeming T-securities has any inflation repercussions, and because a Monetarily Sovereign government does not use income for spending, T-securities are a useless relic of the gold standard days, neither affecting, nor affected by, federal tax collections, federal spending, economic growth or the federal deficit.

For such a benign investment — one neither causing nor reducing inflation, neither increasing nor reducing taxes, neither increasing nor reducing the deficit, and one whose sole effect is to reduce economic liquidity — federal “deficit” surely has acquired a bad name, based on the almost universal desire to reduce it. And strangely, this effort at debt reduction does not take the logical step of merely eliminating the creation of T-securities, but rather it focuses on reducing federal deficits, which do not have an operational relationship with federal debt.

Isn’t it amazing that your favorite politician, your favorite newspaper editor, your favorite talk-show moderator, your favorite columnist and the vast majority of the world’s economists do not understand this basic, operational truth: Even were federal taxes to equal federal spending (a deficit of zero), this would not change the Treasury’s need or ability to create/sell T-securities, and even were T-security creation/sales to be eliminated, this would not change the federal government’s ability to create dollars. Instead, they spend their lives decrying the federal deficit, which is necessary for economic growth, and decrying the federal debt, which has become meaningless for virtually all economic purposes, rather than focusing on properly directed methods for improving our lives.

So, the next time you read or hear some self-anointed “expert” saying the federal debt must be reduced, or the federal deficit increases the federal debt, or worries about whether other countries will buy our debt, or worries that “paying off the debt” will cause inflation or the current favorite bogey man, hyperinflation, know this: No matter what the credentials, that person simply does not know what he/she is talking about. Period.

After so many years, the flat-earth, leech-applying, flag-flying, evolution-denying, deficit-decrying, logic-defying, repeatedly-lying still rule, stomping through our lives, damaging everything in their path. With barely a whimper from us.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth.


9 thoughts on “–Why the politicians, the media and even many economists still don’t get it.

  1. There might be something in that, the word deficit having such an inherently negative connotation it can distort a rational evaluation of government spending. If it had a more nuetral word describing it maybe it would be easier to get the MMT message accross.

    Any ideas what the deficit could be called instead of deficit? Perhaps something like Spending Balance, and report it as a positive number? (with surplusses reported as a negative)


  2. Net Dollars sounds suitably nuetral, but I’m sure there are others, ideally one word.

    On a seperate subject, I notice you and Mosler disagree over the role of taxes & interest rates in controlling inflation. Do you think it could be a case of horses for courses, ie. in a debt based economy like the US, UK, Australia etc. because the overall private debt level is very high, interest rates would be an effective tool in controlling consumption, but in a country with a high savings rate and low private debt maybe taxation would be the more effective tool?


  3. I agree with the basic thrust of the above article, but there are a few details I’m not happy with. E.g. I don’t like this paragraph:

    2. Federal government elects to create T-securities also out of thin air, when it exchanges them for previously-created dollars. At this instant, federal debt is created. The money supply does not change, as the dollars are destroyed the instant the T-securities are sold.

    Strikes me that “at this instant” the money supply DOES change. That is, Fed / govt machine issues T-securities to the private sector and takes dollars off the private sector and extinguishes those dollars.

    Indeed, the next para (3) says “To redeem the T-securities, the federal government re-creates dollars….” Agreed.

    So to summarise, when T-securities are created and sold to the private sector, money is destroyed. And when those securities are redeemed, money is re-created. Isn’t that right?

    Next, the passage “For such a benign investment — one neither causing nor reducing inflation”. Strikes me that if the Fed / govt machine buys or sells Treasuries, there COULD be an effect on inflation. Indeed, you say in the preceeding para that such buying or selling influences liquidity. Agreed. And if the Fed / govt machine bought up Treasuries (ie. Did some QE) given full employment, then the additional liquidity would be inflationary.

    I.e. just to be strictly accurate, the phrase “unless the economy is at full employment” needs to be included in that para.

    Finally, in an article like the above, can I suggest a clear distinction should made between what the Fed does and what the Treasury / government does? Treating the two as a single unit is legitimate for some purposes. But when explaining the mechanics of Treasury creation and destruction, I think the two should be kept separate.


  4. Ralph,

    T-bills are a form of money (called “L.”). The creation of T-bills creates money; exchanging them for dollars destroys money. The entire creation/trade/destruction takes place as one operation. The only change is a loss of liquidity.


  5. Good article, it helps to clarify MMT concepts and how the US Bond market is independent from the MMT “money” issuance process.

    When money is issued by the gov’t they can track it in an account called “Dollars Issued” or “Dollars Supporting GDP”. The account is incremented when gov’t spends money into existence and decremented when taxes are paid. The amount issued would merely show how much “money” is in the economy to support a neutral inflation/deflation environment (this presumes a fiscally responsible gov’t, sound money policy and a tax system with built in stabilizer(s) [consumption tax (e.g. fairtax.org) + capital gains tax).

    What would really help is to drive/hammer home the fact that the US does not have a debt based “money” system. US gov’t spends money into existence independent of the US Bond market.

    To simply our world and focus resources on fiscal responsibility, sound money and a neutral inflation/deflation economic policy the US Bond market should be shut down. Once the US Bond market is eliminated it will be glaringly obvious that the FED is superfluous, therefore Ending the FED the next logical step. Absorb FED responsibilities into US Treasury with strict congressional oversight (MMT knowledgeable committee(s)) and public scrutiny.

    A whole series of threads on fiscal responsibility, tax reform and tax policy can tackle the areas outside of the MMT operational structure.


  6. Great article! I agree.

    Except I think a tight moneyist would put the onus not on the creation of debt, but the nearly simultaneous crreation of money. What gives govt the right to print money in the first place, they might argue?

    I would say the government has a role to create the infrastructure for commerce, employment, the division of labor, and wealth. A most essential part of that infrastructure is money, and it must expand as the economy expands, mainly toward the production of full employment. Inflation results from improper investment, another story. Of course tight-moneyism is long-term self-defeating protectionism for the rentier class. The concern and direction of the government should be for the good of all. Thus money should be printed to meet an employment target. But I’d say best have the government create useful jobs in education and infrastructure broadly defined, and spend the money on salaries.

    Now economies have been expanding (or collapsing) for a long time, now we have the global economy, is it immune from collapse? And further, can growth continue forever?

    My guess is probably not, we will need possible a different kind of economy in a resource collapsing world. Fortunately, we are not in full collapse just yet.

    Meanwhile, the ruling class seems intent on creating a phony collapse, or actually one following another, stealing the silverware while they still can is the way I see it.

    Right now, we need to expand government money/debt enormously and build the renewable energy economy. If we don’t (and it’s hard to imagine we will) we will be toast before long. The path to Zimbabwe is failing to build the infrastructure we will need in the future, and sticking with the destructive carbon fossil system instead.

    Capitalist energy provision like we have now doesn’t work, it steals from the future. That’s the story of the past 250 years in a nutshell.

    Public energy systems are superior, and that is true in many other sectors including heathcare (should be fully nationalized, not merely single-payed).

    Capitalism’s failure to deliver the goods to most has been diguised by “growth” based on depleting and corrupting the environment. In the no-growth environment of the future, the choices are slavery or universal equity. We must choose the latter, or the former will be imposed on us.


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