Home > Uncategorized > An interview with Stephanie Kelton

An interview with Stephanie Kelton

from Lars Syll

Cody Fenwick: What drives the biggest misunderstandings about government debt in our national conversation?

mythEverything is wrong. The way we talk about federal government debt is, from my perspective, we say things like we’re borrowing from China and foreigners. Hillary Clinton said when she was secretary of State that it’s a national security threat. People talk about it representing a liability to all of us, so we hear people talk about “your share [of the national debt],”  a burden on future generations, that it ultimately has to be paid back, that it’s going to require higher taxes in the future. I could keep going.

So what connects all these misunderstandings? Are we thinking of the government too much like a household or a business? 

Yes, of course. We think that the government has borrowed, and we think that this is real debt. And neither of those things is correct. I say in the book that if I walk into a bank and borrow money, I’m borrowing money because I don’t have it. Right? That’s why I got to the bank to take out a loan. The federal government is not borrowing money because it needs money. It’s not borrowing because it doesn’t have the capacity to finance whatever it wants to spend money on. It has the fiscal capacity; it can just spend. And not only that, the government sells the bonds. And by the time the government sells the bonds, the spending has already taken place. So the bonds cannot possibly be the tool with which the government raises money in order to spend. It’s selling the bonds after the spending had already taken place. Why does it do that? It doesn’t need to borrow, it has already financed the spending.

So we don’t really understand — the public and most economists get this wrong — we don’t even understand what the purpose of selling bonds is. We treat it as a borrowing operation. It’s not. The purpose of selling the bonds is to drain off the reserves, the dollars, to remove some of the dollars the government has spent into the economy and replace them with treasuries. It’s a subsidy to the rich, is what it is.


To Keynes — as to Abba Lerner and MMT today — it was evident that the state had the ability to promote full employment and a stable price level – and that it should use its powers to do so. If that meant that it had to take on ​debt and underbalance its budget – so let it be! Public debt is neither good nor bad. It is a means to achieving two over-arching macroeconomic goals – full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance’, austerity and​ balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is com­monly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authori­ty, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

J. M. Keynes

Few issues in politics and economics are nowadays more discussed — and less understood — than public debt. Many raise their voices to urge for reducing the debt, but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society. And there are no limits to all the — especially macroeconomic — calamities and evils a large public debt is supposed to result in — unemployment, inflation, higher interest rates, lower productivity growth, increased burdens for subsequent generations, etc., etc.

Throughout history public debts have gone up and down, often expanding in periods of war or large changes in basic infrastructure and technologies, and then going down in periods when things have settled down.

The pros and cons of public debt have been put forward for as long as the phenomenon itself has existed, but it has, notwithstanding that, not been possible to reach anything close to consensus on the issue — at least not in a long time-horizon perspective.

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.

But in discussing within which margins public debt is feasible, the focus, however, is solely on the upper limit of indebtedness, and very few ask the question if maybe there is also a problem if public debt becomes too low.

The government’s ability to conduct an ‘optimal’ public debt policy may be negatively affected if public debt becomes too small. To guarantee a well-functioning secondary market in bonds it is essential that the government has access to a functioning market. If turnover and liquidity in the secondary market become too small, increased volatility and uncertainty will, in the long run, lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality, it may be argued – especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure – in a longer run – good borrowing preparedness and a sustained (government) bond market.

To view government debts in terms of the ‘functional finance’ concept introduced by Abba Lerner, is to consider their role in the macroeconomic balance of the economy. In simple, bare bones terms, the function of government debts that is significant for the macroeconomic health of an economy is that they provide the assets into which individuals can put whatever accumulated savings they attempt to set aside in excess of what can be wisely invested in privately owned real assets. A debt that is smaller than this will cause the attempted excess savings, by being reflected in a reduced level of consumption outlays, to be lost in reduced real income and increased unemployment.

William Vickrey

  1. July 3, 2020 at 3:53 am

    I have trouble getting across why selling bonds doesn’t properly explain how it pays it’s way even though they get that the money supply comes from the government, not by borrowing it but by selling bonds to pay for it. It’s weird. non sequiturs included.

    • July 3, 2020 at 12:44 pm

      John, if “they get” that the money supply comes from the government, they’ve got it wrong, or in any case, only half the story. Selling bonds is about financing government expenditure, which is considerably less than banks issue in household and business mortgages (including shares) and devalue by inflating valuations). What I find weird is the assumption that most of us must be employed by persons who have this borrowed money in order to obtain the credit we all need and most of us are worthy of. My wife’s been volunteering for 35 years, being free to do so because I have a pension.

    • Hepion
      July 5, 2020 at 6:49 pm

      Bonds are sold so that bond-holders can collect interest payments – they do not pay for anything.

      Maybe practice was started so that banks would deposit their money in the central bank instead of keeping it in their vaults. Anyway, it acts as a subsidy to the banking system, which might be useful thing. Capitalism absolutely relies on working financial system to function.

  2. shivz
    July 3, 2020 at 4:43 pm

    Query: isn’t the U.S. public debt totally, rpt, totally different from that of all other countries? May be we should consult Greece or Argentina?

  3. Ken Zimmerman
    July 28, 2020 at 1:23 pm

    One element, however, tends to go brazenly missing in even the most vivid conspiracy theories about the banking system, let alone in official accounts. The role of war and military power. There is a reason why the wizard has such a strange capacity to create money out of nothing. Behind him, there is a man with a gun. True, in one sense, he has been there from the start. As noted elsewhere modern money is based on government debt, and that governments borrow money to finance wars. This is just as true today as it was in the age of King Phillip II. The creation of central banks represents a permanent institutionalization of that marriage between the interests of warriors and financiers that had already begun to emerge in Renaissance Italy, and that eventually became the foundation of financial capitalism.

    The US debt crisis is a direct result of the need to pay for the bombs, or more precisely, the vast military infrastructure required to deliver them. This is what was causing such an enormous strain on the US gold reserves in the 1970s. Many hold that by floating the dollar, Nixon converted the US currency into pure “fiat money” — mere pieces of paper, intrinsically worthless, that were treated as money only because the United States government insisted that it should be. In that case, one could well argue that US military power is now the only thing backing up the currency. In a certain sense this is true, but the notion of “fiat money” assumes that money really “was” gold in the first place. Really, we are dealing with another variation of credit money. Contrary to popular belief, the US government cannot “just print money,” because American money is not issued by the government at all, but by private banks, under the aegis of the Federal Reserve System. The Federal Reserve–despite the name–is technically not part of the government at all, but a peculiar sort of public-private hybrid, a consortium of privately owned banks whose chairman is appointed by the United States president, with Congressional approval, but which otherwise operates without public oversight. All bills in circulation in America are “Federal Reserve Notes”–the Fed issues them as promissory notes, and commissions the U.S. mint to do the actual printing, paying it 28 cents for each bill. The arrangement is just a variation of the scheme originally pioneered by the Bank of England, whereby the Fed ” loans” money to the United States government by purchasing treasury bonds, and then monetizes the US debt by lending the money thus owed by the government to other banks. The difference is that while the Bank of England originally loaned the king gold, the Fed simply whisks the money into existence by saying that it is there. Thus, it is the Fed that has the power to print money. The banks that receive loans from the Fed are no longer permitted to print money themselves, but they can create virtual money by making loans at a floating fractional reserve rate.

    All this is surely a simplification; monetary policy is endlessly arcane. Sometimes it seems intentionally so. (Henry Ford once remarked that if ordinary Americans ever found out how the banking system really worked, there would be a revolution tomorrow.) What is remarkable for present purposes is not so much that American dollars are created by banks, but that now the dollars are wholly fiat – cultural creations. The culture of American financial capitalism. A form of capitalism subject to frequent and vast (emphasis vast) downturns and instabilities. Also, a form of capitalism likely to increase and aggravate economic inequality to the extreme.

    • Craig
      July 28, 2020 at 5:13 pm

      First you are correct that the ability to declare war is the one thing that we must never let finance enable and any pol to self interestedly declare.

      Second yes, the FED has the charter to create our money, but the FED is actually the willing handmaiden of the too big to fail banks.

      There is no fractional reserve number. Banks create loans and look for reserves later and their idiotic financial instruments routinely de-stabilize the economy.

      No amount of reform or regulation will fix our monetary, financial and so economic problems. It requires a new monetary paradigm. Only then will we have a system that is so beneficial for every legitimate economic agent that the kind of regulatory teeth and sane guidance necessary to keep the new paradigm from being re-destabilized…will become apparent. You know that cultural norms are largely unconscious. There’s nothing like a continual gift to make conscious what your own self interest is.

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