Monetary Policy Flapping in the Wind
The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy
By Stephanie Kelton
New York, 2020
Stephanie Kelton’s new book has attracted much attention, and Bob Murphy and Jeff Deist have already reviewed it, with devastating results. Why another review? The policies proposed in the book are so pernicious that further exposure of what she has in store for us is needed, and I have some new points to offer for your consideration. Besides, there are few things I enjoy more than writing a critical review.
Kelton, who teaches economics at Stony Brook University, writes clearly, though I wish she would not so frequently repeat in her endnotes passages from the text. The essence of the book is straightforward: it’s impossible for the United States, and other monetary sovereigns, to run out of money. “Today, we have a purely fiat currency. That means the government no longer promises to convert dollars into gold, which means it can issue more dollars without worrying that it could run out of gold which once backed up the dollar. With a fiat currency, it’s impossible for Uncle Sam to run out of money.”
A monetary sovereign doesn’t have to worry about how to get money to pay for the goods it wants produced. Government spending does not need to be backed by anything. There is always new money available. “Think about where the points come from when you play a card game or go to a basketball game. They don’t come from anywhere! They’re just conjured into existence by the person doing the record keeping….Uncle Sam doesn’t lose any dollars when he spends, and he doesn’t get any dollars when he taxes” (emphasis in original). When Congress votes money for a program, either new money is printed or the Fed increases credit balances. Borrowing does not change this: selling T-bills just involves more typewriter strokes.
Kelton hastens to assure us that she opposes unlimited government spending. She knows the dangers of inflation. “No one wants to live in a country where inflation gets out of hand. Inflation means a continuous rise in the price level…if prices start rising faster than most people’s incomes, it means a widespread loss of purchasing power. Left unchecked, this would mean a decline in society’s real standard of living. In extreme cases, prices can even spiral out of control, gripping a country in hyperinflation.”
She isn’t much worried by this possibility. Our problem today is not too much infla
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