–All you want to know about federal deficits, in 273 easy words

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.

Perhaps the biggest problem with Monetary Sovereignty is it’s so counterintuitive. It does not match our everyday experience. You and I don’t create unlimited money out of nothing. Even the states, counties and cities and many nations can’t do it. But the federal government routinely creates dollars and T-securities seemingly from thin air. It just feels wrong.

And because it feels wrong, the notion that deficits can climb and climb, and still remain “sustainable,” (whatever that means) feels wrong. The fact that federal taxes and federal borrowing do not pay for federal spending feels so wrong as to be laughable. And why won’t our children and grandchildren have to pay for the debt? It just feels wrong.

And surely, if we keep printing money, we’ll be another Weimar Germany, won’t we? And, if I spend more than I earn, won’t I eventually go bankrupt, and if so, why won’t America? And why does everyone – I mean everyone– say the federal deficit should be reduced, if it isn’t true? And really, if every politician, newspaper editor, columnist, economist and teacher says the federal deficit must be reduced, why should people believe me?

All 300+ posts on this blog attempt to defeat each of those doubts with facts. But intuition is a powerful opponent. And I long have felt the need for an ultra short piece anyone can understand, not only intellectually but intuitively. And this is what I’ve come up with. Tell me what you think.


In 1971, the U.S. went off the gold standard, and became “Monetarily Sovereign,” which created two basic questions:

1. How much can a Monetarily Sovereign government deficit spend?
2. How much should a Monetarily Sovereign government deficit spend?

The answer to #1 is: An infinite amount. That is what “Monetarily Sovereign” means. The federal government’s “printing presses” are limitless. They can create endless dollars to pay endless bills and to service endless borrowing. Unlike state and local governments, the federal government never can run short of money. That’s why federal taxes and borrowing, which are relics of the gold standard, don’t pay for federal spending.

The answer to #2 is: Enough to grow the economy but not enough to cause excessive inflation. (A little inflation is considered desirable.) Deficit spending is the government’s process for adding dollars to the economy. Money is the lifeblood of an economy; a growing economy requires a growing supply of money. Federal deficit spending is a compromise. Too little and we have recession or depression. Too much and we have excessive inflation.

Today, lack of growth, not excessive inflation, is our major problem, so we should increase deficits to stimulate growth. If excessive inflation were to emerge, we will have two methods to control it:

1. We can reduce federal deficits and/or
2. We can raise interest rates to increase the value of the dollar.

Both would reduce inflation, though historically, reduced deficit spending has caused recessions, while increased interest rates have not. Which is the better choice?

This is a foolish time to focus on preventing excessive inflation, when our urgent need is to grow the economy.

What do you think? Can it be simpler?

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetarily Sovereign, and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a dopey teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it screwed up the economy.”


25 thoughts on “–All you want to know about federal deficits, in 273 easy words

  1. Roger, thank you for Monetary Sovereignty in a nutshell. Now I see.

    Confucius say: “Man who stand on hill with mouth open will wait long time for roast duck to drop in.”

    Same as man who worry about debt and deficits will wait long time for roast duck to drop. Duck will not drop in mouth, same as debt and deficits will not drop on economy.

    But, I still worried. Should I keep all my cash tips (savings) in the hollow Buddha on my refrigerator or should I buy gold?


  2. Rodger,
    What took the longest to sink in for me was the fact that savings and the trade deficit took away from agg. demand. If one can understand the sectoral balances, the light bulb goes off. The “debt” is really a savings account of accumulated $US by those who export to us. Deficits are required because people take money out of circulation when they save. And you can’t have real inflation with high unemployment and a huge output gap.
    I don’t suppose there is an ultrashort soundbite. I read it now and it looks great. If I read it a year ago, I don’t know. (I read Mosler’s 7 Deadly Innocent Frauds three times and still was confused about a few things).


  3. Thank Roger. I confess I only hid my money in the Buddha for the first two weeks I lived in this country. Now I have better hiding place.

    I am busboy in Tex-Mex. I have worked 2 years 2 months in this country. I have saved $21,314 American in tips. My salary goes for food, housing, transportation. When I go back to China in five years I have $75,000 (maybe more I hope). I must also confess I don’t have a green card. But, I don’t want to stay here, I only work 5 more years then go home. Thank you. I worry very much that I will not be a prosperous man when I go home to China with my $75,000 American dollars in five years. Thank you again for answering my question.


    1. The dollar will be worthless in 5 years. You’d be lucky to convert that $75,000 to more than 7.50 RMB. 😛


      1. Thank you japanese waterboy. You have made me very worried again.

        I hear this talk at Tex-Mex that dollar soon be worthless. But Roger tells me dollar is good. Keep your money in dollars he says. I am a poor man I don’t have bank. I am afraid of bank. I only have my dollars I earn. I am very nervous man, that’s why I read all Roger writes and many others.

        What can poor people do? Is my American money good money I ask everyone?

        My Tex-Mex boss says inflation now is bad, it’s not good for business. But Roger says inflation is part of Monetary Sovereignty, it is built into system. Mish says dollars don’t float they sink: “Fiat currencies don’t float, they sink at varying rates.”

        I read Mish, I get very scared. Roger does not scare me. But, I wonder if Monetary Sovereignty is good for busboys like me? Or if I need gold. I am still very confused and don’t know what to do. I am sorry for being poor busboy who asks dumb questions.


        1. I say buy stocks, monetary sovereignty or not, the market is going to the moon, man. But what do I know, I’m just an ignorant waterboy.


          1. I can’t buy stocks, I don’t have paperwork. Also I am afraid of stock market. Don’t stocks go down or crash? I know rich men like Roger and Mish all buy stocks. But I am not a rich man.

            I want to keep all my money safe and in 5 years go home to China.

            America is a great country for rich men. But what does a poor busboy do with his hard earned money that many say will be like toilet paper?


          2. Yes, I am now considering trading some of my dollars for RMB. Thank you. But I have some worries that Chinese government play games if they issue new currency design in a few years.


  4. “Monetary Sovereignty for Busboys”? Hurry, get one for free with purchase of a copy of FREE MONEY!

    Nice try, I don’t see much of a difference though. It’s a bit like making quantum mechanics intuitive for busboys. Intuition is powerful because it’s from what people perceive directly. A busboy sees his friends, neighborhood businesses or local governments go bankrupt with too much debt, how can he intuitively know the federal government is different?

    One thing that will change this country’s busboys’ intuitions for generations to come is for Obama to push a few computer keys to eliminate the debt at the Oval Office with Reid, McConnell, Boehner and Pelosi celebrating behind him. Of course, if he did that, your blog would no longer be needed since Barry would become “the Monetary Sovereignty guy who saved America”.


    1. Except that Francisco is simply wrong about where money ultimately comes from. It comes from the looters – governments. That’s the fact. It doesn’t come from “the men who produce”. “Making money” is otherwise known as counterfeiting.

      The kernel of truth in this speech is that modern capitalism is founded on modern banking, which is what Schumpeter and others have called the defining difference in modern capitalism as opposed to earlier monetary economies. Since the founding of the Bank of England, the world has had “fractional reserve” banking tied to State money. This allowed the monetization of private debt, that of the capitalist to a bank, and allowed private enterprises to raise large sums of liquid, acceptable money in a flexible and controlled way, to advance economies to the eventual benefit of all.

      Since then, most money has been private credit money which is leveraged on and backed by state money, which is in turn founded on the state’s power to tax. So this has allowed private enterprising “men who produce” to “make money”. But it only works well if the assistant score-keepers, banks, do their real job and help the real economy, instead of going wild, corrupt and take over the government to enrich themselves, as we have seen recently.


  5. Re the last three paragraphs of the above highlighted quote, I don’t think raising interest rates are a good way of controlling inflation. This is first because one of the effects of higher interest rates is reduced aggregate demand (e.g. households take out fewer mortgages and businesses borrow and invest less). So to that extent there is no difference between reducing the deficit and interest rate increases: both reduce AD.

    Next, it’s true that raised interest rates increases the value of the dollar, but this is a “step change” or a “once and for all change”. This won’t get at the basic cause of inflation. I.e. if unemployment is below NAIRU, and a wage / price spiral is in operation, then raising the value of the dollar won’t solve the basic problem.

    Third, fiddling with interest rates is distortionary: it affects business (and households) that happen to be significantly reliant on variable rate borrowing, but not businesses that are more reliant on equity finance. So raising interest rates hits the former, and people shift from the former to the latter type of business. And when employees shift from one employer to another, unemployment rises while they shift. Then when interest rates are reduced, they shift back again: the unemployment raising effect continues!

    In contrast, adjusting the deficit (assuming this takes the form of tax adjustments AND public spending adjustments) affects just about EVERY sector of the economy equally. Thus the above “employee shifting” phenomenon does not take place.

    In short, I agree with the Warren Mosler policy: make the current zero rate a permanent feature, and do all adjustments by adjusting the deficit.


  6. Ralph,

    Yes, Warren and I argue about this all the time. Your (his) theory is nice, but I have history and reality on my side:

    1. Almost all recessions have been caused by reduced deficit growth. That’s reality. Do you like substituting recessions for inflation?

    2. The Fed has been remarkably successful using interest rates to fight inflation. That’s reality. Contrary to the MMT postition, high interest rates have not caused inflation. That’s reality.

    3. Adjusting the deficit is a too slow, too political, too heavy handed, sledge hammer process, as witness what’s going on right now. That’s reality. See: How to fight inflation. By the time Congress got anything done, we would be in a serious inflation.

    And then there’s, which taxes to raise; which spending to cut; by how much? Practically speaking, it cannot be done.

    As I said, you and Warren have a nice theory, but it conflicts with reality. That said, in the unlikely event interest rates were unable to stop inflation, I would try to adjust deficits as a last resort.

    Rodger Malcolm Mitchell


  7. Rodger

    I believe that most people (your critics/general population) need to be educated that gold is just a comodity these days. A majority of people do not understand what it means to be ‘off the gold standard’.

    A lot of people believe, incorrectly, that gold equals currency. Gold is just a shiny metal that use to be used as a monetary medium of exchange.


  8. You told that until I sent you facts you will not respond or post my messages. Well, that is fair since it is your site and you have the freedom to allow /deny anyone to use it. I respect that. Here is some real data on wealth and the housing bubble. They are related because a person wealth is the sum of all his assets, not just his money supply. Here is some interesting reading -> http://www.zerohedge.com/article/guest-post-housing-bubble-broke-middle-class


    1. Yes, the middle and lower classes are in deep trouble. According to the debt-hawks (which includes the politicians, the media, the mainstream economists and the public), the solution to this is to raise taxes and/or to cut federal spending, both of which remove money from the economy.

      Some solution!

      Pretty soon, Monetary Sovereignty is going to begin looking pretty good. Meanwhile, an entire nation severs its own throat, and who is to blame?

      Rodger Malcolm Mitchell


  9. Roder, I think #1 on infinite money is more theoretical that reality. The Fed cannot just print out an infinite amount – I think you’ve confirmed that for me before. So there is a limit at which the dollar will become less desirable and trade will shift away from US dollars to other currencies. Seeing the growing efforts to replace the dollar as the world’s reserve currency and the near historic weakening of the dollar happening now, I think that while we’re not yet at the limit of the Fed’s dollar creation ability we can certainly see it from here.

    The US dollar does rely on something to provide it value. It seems to me that “something” is the US economy. As long as the US remains the primary economic engine of the world, the US dollar retains its unique position as the world’s reserve currency. Should the US economy slide, the dollar declines and that is indeed what we’re seeing right now. I think I accept your premise that it is not too many dollars creating inflation but the increasing loss of confidence in the US economy. That loss of confidence drives up the cost of energy which drives inflation. Should that confidence decrease enough and we lose our status as the world’s reserve currency (and there are growing efforts to do exactly that), we’re in some pretty deep trouble.


  10. Chris, you are confusing question #1 with question #2.

    There is absolutely, positively no limit to the federal government’s ability to create money. If you think there is, please tell me, what is the limit of the Treasury Department’s printing presses?

    What you are talking about (i.e. “dollar declines”) is called “inflation,” and today, we are nowhere near inflation.

    As for being the world’s so-called “reserve” currency, this is meaningless. Hundreds of currencies in this world are not the “reserve” currency. So, are China, India, Japan, Canada, Australia, Germany et al in trouble because they are not the “reserve” currency? No. Then why would we be in trouble?

    Rodger Malcolm Mitchell


    1. Hi Rodger

      While there is no theoretical to the federal government’s ability to create money there must be a realistic limit. Otherwise, let’s just fire up the presses and give everyone in America a billion dollars. That way we’re all wealthy beyond dreams! Obviously, that won’t work so while the fed can print the dollars, they dilute them to the point that inflation is inevitable. No, we’re not there today but there is a limit out there somewhere.

      Being the world’s reserve currency is about demand. Oil, gold, etc is all done in dollars so the world needs dollars. On a global scale, nobody really cares about rupees or yen. Those fluctuate, so what? But US dollars is a different story, the world has vested interest in keeping the US dollar string. Once it loses reserve status, nobody will care as much about US dollars.


  11. Hi Rodger. For lack of a better word, I’m a recent MMT convert. I have an undergraduate degree in economics, but it certainly didn’t feature study of MMT. Your blog has been instrumental in my learning process so first of all, thank you.

    On to a question. I completely understand how government “borrowing” is really just moving money from checking to savings. That said, what if the big exporters and holders of dollars (eg, Japan and China)decided that the US Government was creating too many dollars and decided to exchange them for Yen, Yuan or Euros?

    I assume they don’t want to do this because it would basically torpedo their exports, but I want to confirm my thought process. More broadly, what are the ramifications of currency flows as they pertain to MMT?

    Thanks again for your work. It’s reaching average working Americans like me. I’m in financial services, and I’m started to inject it into client conversations. The battle against economic ignorance can be won. Keep fighting the good fight!


  12. Glenn,

    The big exporters then would offer their dollars on the market. Based on supply and demand, this would reduce the trading value of the dollar and increase the trading value of yen.

    That could be inflationary, as more dollars would be required to import goods and services. However, if the Fed increased interest rates, that would increase demand for dollars, thereby increasing the value of dollars.

    That’s the overly simple explanation. In truth, there are many factors, financial and political that affect demand for dollars. Interestingly, ever since we went off the gold standard, inflation has related to oil prices more than any other factor. (See:https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/)

    Rodger Malcolm Mitchell


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