Does federal deficit spending cause inflation? The absolute proof.

So-called federal “debt” isn’t real debt. It is the net total of all deficits, i.e., the net difference between all federal income and outgo. 

Because, by law, the federal government does not run a negative balance in its basic checking account (The Treasury General Account), it offsets the bookkeeping “debt” by accepting deposits into Treasury Security accounts (wrongly termed “borrowing”).

This is nothing more than a technical bookkeeping convention. The government does not actually use those deposits to pay its bills. Instead, it creates new dollars, ad hoc, to pay all creditors.

The T-security deposits remain where they are, safe in their accounts. That is what makes them the safest place to deposit unused dollars.

The fundamental purpose of T-securities: To provide an absolutely safe place to store unused dollars, and this safety adds to the stability and worldwide acceptance of dollars.

If the dollars were used, their safety would be compromised, and the fundamental purpose of T-securities would be lost.

There is a widespread belief that deficit spending causes inflation. No evidence exists for that belief. It simply is an article of faith supported by . . . faith.

Here is a comparison of federal deficits (which total to federal “debt”) vs. inflation.

The highs and lows of federal deficits (red) do not correspond to the highs and lows of inflation (blue). No cause/effect relationship can be found.

There have been many periods of high federal deficits that correspond to low inflation. There also have been many periods of low deficits and high inflation. This effect could not exist if federal deficit spending caused inflation.

So what does cause inflation?

All inflations are caused by shortages of critical goods and services, the most important of which is oil. The oil price, which is reflected in supply and demand, affects the prices of almost all goods and services.

An oil shortage affects manufacturing costs, agriculture costs, shipping costs, and heating costs. Oil prices affect inflation dramatically:

When the price of oil (green — reflected by supply and demand) goes up, inflation (blue) goes up, and when shortages ease, inflation goes down). Oil prices are the primary drivers of inflation.

The other significant driver of inflation is food, which also is affected by supply and demand:

The price of food (black) closely parallels inflation (blue).

The need for food does not vary significantly. The price of food is affected by supply and production costs. 

The supply of food primarily is caused by weather and disease. Production costs especially relate to oil prices which affect shipping, planting, harvesting, and other manufacturing costs.

Finally, lest someone argue that federal deficit spending causes oil prices to rise, we offer the following graph:

There is no historical relationship between federal deficit spending and oil prices. The highs and lows of each do not correspond.

The resistance to federal deficit spending primarily is based on two false premises:

–That our Monetarily Sovereign government somehow could run short of its own sovereign currency, and

–That federal deficit spending causes inflation

Wrong and wrong.

The real reason for complaints about federal deficits is different: Most deficit spending supports the middle- and lower-income groups (Medicare, Medicaid, Obamacare, and the many anti-poverty initiatives).

The income/wealth/power Gap between the rich and the rest makes the rich rich. The wider the Gap, the richer are the rich. Without the Gap, no one would be rich; we all would be the same.

So the rich, who run America, want to widen the Gap by reducing Medicare, Medicaid, and other deficit spending.

To widen the Gap, the rich spread the disinformation that deficit spending causes inflation. And that mantra has become accepted knowledge by the media, politicians, and economists.

And it simply is wrong.


  1. There is a strong historical relationship between the price of oil (which reflects supply/demand) and inflation
  2. There is a strong historical relationship between food prices (which reflect oil prices, weather, and disease).
  3. There is a strong historical relationship between oil prices and food prices.

May we please, at long last, put to bed the unsupported notion that federal deficit spending causes inflation?

Replace it with a factual basis that inflation is caused by shortages, most often shortages of oil, which lead also to shortages of food and other goods and services.

Shortages actually can be cured by federal deficit spending to acquire or produce the scarce goods and services. For example:

  • The shortage of oil can be reduced by federal spending to advance the use of renewable energy sources.
  • The shortage of labor can be reduced by lowering labor costs: Federally funded Medicare for All, the elimination of the FICA tax. and federal support for job training.

  • The shortage of food can be moderated by government support for better farming practices.

Federal deficit spending is necessary for a healthy economy. Trying to cure inflation by recessing the economy is a fool’s mission, but that is exactly what Congress is trying to do.

In the science of economics, let us finally accept fact over intuition.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell


The Sole Purpose of Government Is to Improve and Protect the Lives of the People.


The Hyperinflation Myth Explained

There is a widespread myth that hyperinflations are caused by excessive government money “printing.” Perhaps you are among the vast majority who believe this pernicious myth.

Well, it simply isn’t so, and the belief alone is responsible for great misery, worldwide.

Consider these excerpts from the following article:

Fed analysis warns of ‘economic ruin’ when governments print money to pay off debt
NOV 26 2019, Jeff Cox, CNBC

St. Louis Fed economists warn in a paper of potential “economic ruin” if policies that advocate money-printing to pay off government debts are ever adopted.

Immediately, the article provides us with a misunderstanding. “Money-printing” never is used for paying off U.S. federal debt.

The federal debt is the total of net deposits into Treasury security accounts. When you buy a T-bill, T-note, or T-bond (aka “federal debt”), you open a T-security account, and into that account, you deposit the price of the T-security.

There, your dollars remain, collecting interest, until the T-security matures, at which time, your dollars — the dollars you deposited plus the interest in the account —  are returned to you.

During that entire round trip — you depositing dollars and those same dollars being returned to you — the only so-called money “printing” has occurred daily over a period of years, as your account accumulates interest.

The U.S. federal government could pay off the entire U.S. debt today, if it wished, simply by returning the $20 trillion that currently exist in T-security accounts. No money “printing” or taxes involved.

Returning to the article:

“A solution some countries with high levels of unsustainable debt have tried is printing money.

“In this scenario, the government borrows money by issuing bonds and then orders the central bank to buy those bonds by creating (printing) money,” wrote Scott A. Wolla and Kaitlyn Frerking.

“History has taught us, however, that this type of policy leads to extremely high rates of inflation (hyperinflation) and often ends in economic ruin.”

They cite Zimbabwe in the 2007-09 period, Venezuela currently and Weimar-era Germany . All three faced massive deficits that led to hyperinflation due to money printing.

In fact, all three nations provide examples of the real cause of hyperinflation, and it isn’t money “printing.”

(As an aside, money is  not printed; it is created via bookkeeping. Money has no physical existence. A dollar bill actually is a title to a dollar. Just as the paper title to a car is not a car, and the paper title to a house is not a house, the paper dollar bill, is not in itself a dollar. The actual dollar is nothing more than a non-physical accounting notation on the government’s books.)

The cause of general price increases, i.e. inflation, is shortages. Usually, these are shortages of food or energy. It is shortages, not money “printing” or full employment or excessive demand (as some people claim), that makes prices go up.

Hyperinflation in Zimbabwe began in February 2007. . In the late 1990s, the Robert Mugabe government evicted white landowners and gave their farms to blacks.

Many of these “farmers” had no experience or training in farming. As a result, from 1999 to 2009, the country experienced a sharp drop in food production, creating massive food shortages.

The non-farmers were unable to obtain loans for capital development, (money shortage). Food output capacity fell 45%, manufacturing output 29% in 2005, 26% in 2006 and 28% in 2007, and unemployment rose to 80%.

Everything, especially food, was in shortage, which is what caused the Zimbabwean hyperinflation.

Hyperinflation in Venezuela began in November 2016 during the country’s ongoing socio-economic and political crisis.

Since the 1990s, food production had dropped precipitously, with the government beginning to rely upon imported food using the country’s then-large oil profits.

In 2003, the government created a currency control board that placing currency limits on individuals, and that caused widespread shortages of goods.

In 2005, the government announced the initiation of Venezuela’s own “great leap forward”, following the example of Mao Zedong’s Great Leap Forward. An increase in shortages began to occur that year as 5% of items became unavailable.

In January 2008, 24.7% of goods were reported to be unavailable in Venezuela, with the scarcity of goods remaining high until May 2008, when there was a shortage of 16.3% of goods. Shortages increased again in January 2012 to nearly the same rate as in 2008.

In 2013, shortage rates continued to increase and reached a record high of 28% in February 2014. In January 2015, the hashtag #AnaquelesVaciosEnVenezuela (or #EmptyShelvesInVenezuela) was the number one trending topic on Twitter in Venezuela

General shortages caused the Venezuelan hyperinflation.

The Weimar Republic, Germany
The Weimar Republic experienced hyperinflation, between 1921 and 1923, primarily in 1923.

In April 1921, the Germany Reparations Commission announced the “London payment plan”, under which Germany would pay reparations in gold or foreign currency in annual installments of 2 billion gold marks, plus 26% of the value of Germany’s exports.

Since reparations were required to be repaid in hard currency, one strategy that Germany used was the mass printing of banknotes to buy foreign currency, which was then used to pay reparations, greatly exacerbating the inflation of the paper mark.

The brief German hyperinflation was caused by shortages of hard currency with which to pay for imports of goods, especially food and food production.

The resultant shortages caused the general increase in prices, i.e. the German hyperinflation.

In summary, prices rise not because the people have too much money (Germans, Zimbabweans, and Venezualians certainly didn’t) but because needed products, mostly food and/or oil, are in short supply.

Back to excerpts from the article:

The Fed analysis references a paper on MMT (Modern Monetary Theory) in a sidebar box on monetary “owls” — the owls, “suggest that a government that controls a fiat money system is not constrained because it can simply create more money to pay its debts.”

Indeed, MMT supporters argue that a country that runs up debts in its own currency can never default, and as long as inflation remains tame, there really are no problems with government deficit spending.

They further say that public spending can be used to stimulate the economy, that essentially a deficit in the public sector can be a surplus in the private sector.

In this, MMT is absolutely correct, and noted economists agree:

Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.”

Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

St. Louis Federal Reserve: “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.

The article continues:

The total federal government debt is just over $23 trillion, or 103.2% of GDP.

The Fed itself has come under criticism for “money printing,” which it did in three rounds of quantitative easing during and after the Great Recession.

This came along with keeping its short-term lending rate anchored near zero for seven years.

However, the central bank’s stated aims were to bring down long-term interest rates and stimulate economic growth, not to finance the national debt.

And that is exactly what happened. Despite all the hand-wringing from the deficit hawks, inflation stayed low, the economy grew, and the national debt was not “financed.”

Nothing “finances” the national debt if the word “finance” means pays off. The national debt is not like your debt, my debt, business debt or state/local government debt.

The national debt is just the net total of deposits into T-security accounts, that are paid off by simply returning the money in those accounts.

“There are ways in which the government can make investments today, that increase deficits today, that produce higher growth tomorrow and build in the extra capacity to absorb those higher deficits,” Stephanie Kelton, professor of public policy and economics at Stony Brook University, said in a video for

“Their red ink becomes our black ink and their deficits are our surpluses.”

Kelton added that deficit spending can be used to fund improvements in education, infrastructure and other inequality-reducing programs without causing long-term damage.

Absolutely, 100% correct is Stephanie, a very bright lady with whom I have been in contact for many years.

Some of the most prominent advocates for MMT are Democratic presidential candidate Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez, both of whom identify as democratic socialists, as well as former Pimco economist Paul McCulley.

Too bad Sanders and Ocasio-Cortez do not really believe what Kelton has told them. They continue to search for ways to “pay for” Medicare for All, when the solution hangs right before their eyes: The federal government can and should pay for Medicare for All via deficit spending.

And contrary to what Ocasio-Cortez claims, this does not require more borrowing. Remember this quote from the St. Louis Fed: ” . . . the government is not dependent on credit markets (i.e.borrowing) to remain operational.

Most mainstream economists and Wall Street authorities, however, reject the basis that deficits don’t matter absent inflation.

Bond market guru Jeffrey Gundlach at DoubleLine Capital has called MMT “a crackpot idea,” while former White House economist and Treasury Secretary Larry Summers has labeled it “dangerous.”

However, hedge fund king Ray Dalio at Bridgewater Associates said its adoption is “inevitable” amid growing wealth disparity.

“Most mainstream economists and Wall Street authorities” do not understand the truth of Monetary Sovereignty. They still disseminate the “Big Lie,” that federal financing is similar to personal financing, where debt is a burden on the debtor.

Federal debt (deposits) is not a burden on anyone — not on the federal government and not on future taxpayers. It is a benefit to the economy and to taxpayers, and does not cause inflation.

There has been no relationship between changes in federal debt, aka deficits  (blue) and inflation (red).

One of the many places where MMT (Modern Monetary Theory) and MS (Monetary Sovereignty) differ is with regard to the relationship between “full” employment and inflation.

MMT claims that one cause of inflation is “excessive demand.” We never have seen anyone point to nationwide demand as excessive (especially when inflation describes not one or two products and services, but an entire nation). We cannot agree on MMT’s proposed solution to inflation: Taxes.

Taxes are recessionary, and the opposite of inflation is not recession; it is deflation. Taxes are austerity, and are not a cure for inflation.

MMT also says that deficit spending at a time of full employment is inflationary. Again, we disagree. Deficit spending means the federal government’s taxation is less than its purchases of goods and services.

It is not clear why the federal purchase of goods and services during times of full employment (if those times ever really have existed outside of WWII), should be more or less inflationary than during times of low employment.

The theory seems to be that during full employment, people have more money (not necessarily true), and they will spend rather than save that money (also not necessarily true), and when they are spending in competition with increased government spending, all that increased demand will cause inflation.

The main problem with that hypothesis is that in the real world, it never actually happens:

1) No one can agree on exactly what “full employment” is.

a. Does “full” employment include single or married, men or women or children and of what age?
b. Does one person earning $100K equal four people each earning $25K?
c. Does “full” include only full-time or part-time work, and exactly what are the definitions of each?
d. Does “employment take into consideration productivity, i.e is one man on a riding mower equal to 4 men pushing manual lawnmowers?
e. And what about unemployed or retired people. Some have a great deal of money to spend; others don’t. How is that accounted for?

2) Federal spending not only increases demand, but it also increases supply. In response to federal contracts, contractors gear up to create more product to meet the anticipated demand.

3) The federal government generally buys different things than the public buys, creating demand in different areas, so a general increase in all prices does not ordinarily occur. Prices may increase in specific products or materials but overall price increases are not caused by federal buying except during major wars, when the government buys so much a broad range of products is affected.

Consider the case of Medicare for All. Will federal funding of this program cause a general increase in prices at a time of “full” employment? Will it cause a shortage of food and/or oil, the main cause of inflation?

That is the real question, and I submit the answer is, “No.”

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell


The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.