The Deficit Myth

What if everything you’ve been taught about government finance is backwards? In The Deficit Myth, Stephanie Kelton challenges the conventional wisdom that the U.S. federal government must tax or borrow before it can spend. Drawing on Modern Monetary Theory (MMT), she argues that because the United States issues its own currency, it can never go broke in its own money. The true constraint is not revenue but the availability of real resources—labor, materials, and productive capacity. Kelton’s project is both diagnostic and emancipatory: she wants to show you that what we call fiscal constraints are actually political choices.

Kelton’s argument unfolds in a provocative sequence. First, she dismantles the “government as household” analogy and explains the difference between currency issuers and currency users. Second, she redefines what deficits, debt, and inflation mean within a sovereign monetary system. Third, she examines how MMT reframes debates about entitlements, jobs, trade, and climate. Finally, she invites you to focus on the real deficits that threaten prosperity—deficits of health, education, infrastructure, and democracy.

Currency Issuer vs. Currency User

You balance your checkbook because you’re a currency user. But the U.S. government is the currency issuer—it creates dollars by spending them into existence. When Congress authorizes spending, the Treasury instructs the Federal Reserve to credit a recipient’s bank account. No taxpayer’s wallet is opened first. Taxes and bond sales merely change where the dollars reside and help regulate demand and inflation, not fund spending. Warren Mosler’s story about paying his kids with business cards captures the logic perfectly: the cards had value only because he demanded them in payment for “taxes.” In the same way, federal taxes create demand for dollars but do not finance the government’s ability to spend them.

Kelton sums this up with the sequence S(TAB): spend first, then tax and borrow. The conventional order—(TAB)S—is a political illusion. Understanding that order is like switching from a geocentric to a heliocentric model of fiscal reality.

Deficits as Surpluses for the Private Sector

A federal deficit is not evidence of waste; it’s a mirror of private-sector savings. According to economist Wynne Godley’s sectoral balances framework, one sector’s deficit is another sector’s surplus. When Washington spends more than it taxes, households and firms accumulate net financial assets—government bonds and deposits that make up private wealth. This reverses the “crowding out” myth. Rather than draining the pool of savings, deficits expand it. When policymakers cut deficits too aggressively, they remove financial assets from the private sector, often leading to recessions (as the U.S. experienced after the budget surpluses of 1835 and 1999).

Inflation, Not Insolvency, as the Real Limit

If the U.S. can create unlimited dollars, doesn’t that mean runaway inflation? Kelton’s answer is nuanced: deficits become dangerous only when they push spending beyond real productive capacity. The limit isn’t financial; it’s real. Inflation occurs when demand outpaces the economy’s ability to produce goods and services. Thus, the job of fiscal policy is functional—not to balance books but to balance the economy. When unemployment is high, deficits are necessary; when inflation accelerates, taxes or spending cuts can slow demand.

To stabilize prices and employment simultaneously, Kelton and other MMT economists advocate a federal job guarantee—a standing offer of public employment at a fixed wage that anchors the labor market and replaces involuntary unemployment with a living-wage buffer. This policy acts as an automatic stabilizer, expanding in downturns and contracting in booms, while building public goods and services.

Debt and Global Finance Through a New Lens

Kelton reinterprets the national debt as the cumulative record of dollars the government has provided to the rest of us. Treasuries held by households, pension funds, or foreign governments are our assets, not future burdens. China’s holdings of U.S. bonds, for instance, represent its savings in dollars earned by exporting to America—not an instrument of control over U.S. finances. Insolvency risks arise only in nations that lack monetary sovereignty—countries that borrow in foreign currencies or peg their exchange rates (as Greece discovered under the euro).

The Moral and Political Reframing

Kelton’s deeper challenge is moral and political: she wants you to stop asking, “How will we pay for it?” and start asking, “Do we have the real resources and political will?” Programs like Social Security, Medicare, and climate adaptation aren’t unaffordable; they’re decisions about resource use. The Social Security trust fund is an accounting construct—its “shortfall” is legal, not monetary. Congress could alter the law tomorrow to guarantee payments indefinitely. What truly matters is ensuring there are enough doctors, caregivers, and sustainable energy systems to meet society’s needs without generating inflation.

In Kelton’s paradigm, the real “deficits” that deserve alarm are social and ecological: deficits of jobs, education, infrastructure, health care, and climate resilience. Modern Monetary Theory, in essence, reframes money as a public tool for collective well-being. By revealing that fiscal limits are choices, not natural laws, it transforms how you can imagine using public power to build a fairer, more sustainable future.

Kelton begins by demystifying money itself. The U.S. government, as the sole issuer of the dollar, operates differently from households, states, or businesses that must earn before they spend. When Congress approves spending, the Treasury and the Federal Reserve coordinate to mark up bank accounts electronically—creating dollars with a keystroke. Taxes and bond sales happen afterward, primarily to manage inflation and control interest rates, not to fund expenditures.

Issuers vs. Users

The difference between an issuer and a user is the foundation of monetary sovereignty. You, like households and firms, are a currency user. The U.S. federal government is the issuer. This distinction means Washington cannot run out of dollars any more than a scoreboard can run out of points. It can, however, overspend in real terms if it creates more money than the economy’s capacity to produce goods and services allows.

When the Rule Applies—and When It Doesn’t

Not all countries share this freedom. Those that borrow in foreign currencies or lack their own fiat money (like Greece under the euro or Argentina under dollarized arrangements) face genuine financial constraints. For fully sovereign issuers such as the U.S., U.K., or Japan, the limit is inflation, not insolvency. Japan’s massive public debt illustrates the point—its bonds are denominated in yen, a currency it issues, and inflation remains subdued despite towering debt ratios.

Political Myths and Misleading Analogies

Public discourse remains chained to the household analogy—what Margaret Thatcher and countless budget hawks invoked when saying, “There is no such thing as public money.” Kelton exposes how this framing narrows policy imagination. When you believe every dollar of new spending must be “paid for,” you trap yourself in an artificial scarcity mindset that sidelines urgent investment in infrastructure, health, or the environment.

Understanding monetary sovereignty flips the political narrative. It gives you analytical clarity: fiscal debates should begin with resource constraints, not revenue myths.

Kelton redefines deficits as tools of public purpose. Each dollar the government spends beyond its tax intake becomes someone else’s asset—a deposit in the private sector’s bucket. The so-called national debt is simply the accumulation of those dollars over time. U.S. Treasury securities function as safe savings instruments for investors and as policy levers for the Federal Reserve. You can think of them as interest-bearing forms of the same dollars that circulate in the economy.

Why 'Crowding Out' Is a Myth

Mainstream economists claim that government borrowing competes with private borrowers, pushing up interest rates and shrinking private investment. Kelton, building on Wynne Godley and Abba Lerner, shows that in a sovereign-currency world, this story confuses accounting with causation. Bond issuance converts bank reserves into Treasuries—it doesn’t sap a limited pool of savings. If the central bank wishes, it can set interest rates anywhere, as the Fed did by pegging rates during World War II or as modern Japan does through yield-curve control.

Foreign Holdings and Dependence Myths

When critics say “we owe China,” they misunderstand the flow of funds. China holds Treasuries because it earns dollars selling goods to America and wants to hold a safe, interest-bearing U.S. asset. The dollars originated in the U.S.; they can only return as spending or investment. The United States does not depend on foreign savings—it provides the world’s reserve currency. This system creates both privilege (cheap imports and financing) and moral responsibility (managing global stability).

Lessons from History

Periods of rapid debt reduction—such as Andrew Jackson’s 1835 debt elimination or the late 1990s surpluses—were followed by severe recessions because the private sector lost net financial assets. The pattern reveals a consistent macro truth: government deficits are the mirror image of private savings. The sustainable debt question should therefore focus not on balance-sheet ratios, but on whether fiscal policy maintains full employment and price stability.

Under this lens, responsible governance means running deficits large enough to supply the private sector with desired savings while investing in the nation’s long-term productive capacity.

Kelton’s critics often invoke inflation as the Achilles’ heel of her argument. She concedes that overspending can cause inflation but insists that deficits without price acceleration signal an economy operating below potential. The government’s fiscal stance should flex with resource availability—not arbitrary budget targets.

Functional Finance and Policy Calibration

Abba Lerner’s functional finance provides the guiding rule: judge fiscal policy by its results—full employment with price stability—not by whether budgets balance. MMT modernizes this idea by adding automatic stabilizers like the job guarantee. When recessions hit, a public job program instantly offers employment at a fixed wage, preventing income collapse. When the private sector rebounds, participants transition back to private work, shrinking the program naturally.

Inflation Sources and Misdiagnosis

Kelton distinguishes demand-pull inflation (too much spending) from cost-push shocks (oil, supply constraints) and institutional price-setting (monopoly power). She argues that policymakers too often conflate these, blaming fiscal expansion even when inflation originates elsewhere. For instance, raising interest rates to protect against phantom inflation can unnecessarily destroy jobs and income.

The Job Guarantee as Nominal Anchor

A job guarantee, paying a standardized living wage, establishes a wage floor and acts as a stabilizing buffer against both inflation and deflation. It transforms unemployment from an economic necessity into a policy choice. In this framework, the proper question becomes: are we using our resources efficiently to employ everyone who wants to work without generating inflationary pressure?

Kelton applies MMT’s logic to some of the most politically charged issues—Social Security and Medicare. She argues that framing these programs as financially unsustainable is a category error. The federal government can always make payments in dollars. What matters are the laws that authorize those payments and the real resources those dollars command.

The Trust Fund Mirage

Social Security’s trust fund gives the illusion of pre-funding, but it’s essentially an internal accounting device holding U.S. Treasuries—claims from one arm of government on another. Under current law, if the balance reaches zero, benefits must be cut, even though the Treasury could technically pay. Congress created the rule and could change it. By contrast, Medicare Part B has legal authority for indefinite general funding, so it’s never described as insolvent. Apparent solvency differences are statutory, not economic.

Three-Part Entitlement Lens

Kelton emphasizes three distinct layers: financial ability (the government can always create dollars), legal authority (Congress must grant it), and real capacity (enough doctors, hospitals, and caregivers). Confusing these layers fuels bad policy. The U.S. has the monetary means to fund elder care and health services but must invest in training and infrastructure to deliver real value without inflationary strain.

Beyond Austerity Politics

Billionaire-funded campaigns, such as Peter G. Peterson’s network and groups like the Committee for a Responsible Federal Budget, have long promoted entitlement cuts under the banner of fiscal responsibility. By focusing public fear on accounting deficits, they divert attention from policy options that expand capacity, raise equity, and protect the vulnerable. MMT reframes these debates as matters of distribution and resource planning, not solvency.

The real question is political: do we want to uphold intergenerational security and health, and will we allocate resources accordingly?

Trade imbalances, often portrayed as national losses, look different through the MMT lens. A U.S. trade deficit means America imports more goods than it exports—enjoying a real surplus of goods while sending out dollars that foreigners mostly save or invest in Treasuries. The economic issue lies in how those patterns affect domestic employment and distribution, not in dollar flows themselves.

Sectoral Balances and Employment

Extending Godley’s framework, the three-sector identity (government, domestic private, and foreign) shows that if the U.S. runs a trade deficit and the private sector wants to save, the government must run a deficit to maintain balance. Otherwise, private savings erode and recessions follow. Attempts to balance the federal budget while the country imports heavily force households and firms into debt—a prelude to instability.

Workers and Local Stability

Tariffs and protectionism can’t fix structural job displacement caused by trade liberalization and automation. Kelton instead advocates direct fiscal responses—public job programs and social investment—to ensure that workers displaced by global shifts don’t fall into poverty. A job guarantee and active labor policies can maintain full employment regardless of foreign trade positions.

Developing Nations and Policy Space

Many developing countries lack full monetary sovereignty because they borrow in foreign currencies or tie themselves to fixed exchange rates. Their vulnerability to capital flight and debt crises underscores the global inequality in monetary systems. Kelton calls for international reforms that expand global South autonomy—through local-currency financing, technology transfer, and fairer trade norms—so that fiscal sovereignty is not a privilege of the rich world alone.

Kelton concludes by shifting the conversation from financial to human deficits. You don’t live or die by the size of the federal deficit; you live with the deficits that shape real lives—of jobs, housing, savings, education, infrastructure, and a livable climate.

The Job and Savings Deficits

Globalization, automation, and austerity have hollowed out secure employment. Many Americans now juggle multiple low-wage jobs with little savings for retirement. The shift from defined-benefit pensions to 401(k)s transferred risk from employers to workers, creating a pervasive retirement crisis. A robust Social Security system, paired with direct job creation, could close both the employment and savings deficits simultaneously.

Education, Infrastructure, and Climate

Education debt, failing infrastructure, and climate inaction are the true ticking bombs. Under an MMT lens, funding is not the barrier; the challenge is mobilizing real resources in time. The climate clock measures how little carbon budget humanity has left. Massive green investment—similar in scale to World War II mobilization—can rebuild infrastructure, decarbonize energy, and create millions of jobs, all within the bounds of real capacity.

The Democracy Deficit

Kelton links economic inequality to political capture. Billionaire donors and corporate interests skew policy toward austerity and deregulation. This “democracy deficit” constrains the use of public money for collective well-being. Closing it requires campaign finance reform, participatory budgeting, and renewed civic engagement—so fiscal capacity serves public goals rather than entrenched wealth.

By redefining what counts as a deficit and recognizing that money is never the main obstacle, Kelton opens the door to a politics of possibility. The real scarcity lies in imagination, not dollars.

For Kelton, Modern Monetary Theory doesn’t stop at diagnosis—it prescribes a new fiscal architecture anchored in public purpose. The central proposal is a universal job guarantee: a federal commitment to offer meaningful, publicly useful work to anyone willing and able to work at a living wage. This idea turns full employment from rhetoric into reality.

How It Works

Funded federally and administered locally, the job guarantee functions as a macroeconomic stabilizer. When private demand falls, the program expands automatically, employing people in community, care, and environmental projects. When the economy improves, workers transition to private jobs, reducing public payrolls. The program absorbs slack in the labor market without the suffering of mass unemployment.

Historical Precedents and Outcomes

New Deal programs like the Works Progress Administration showed what this can look like—millions employed building parks, schools, and infrastructure. More recent analogs include Argentina’s Jefes de Hogar and India’s MGNREGS, which proved that public employment can be both stabilizing and socially transformative. MMT scholars estimate that millions could work in such programs yearly in the U.S., creating vast social value.

Anchoring Prices and Values

By setting a fixed wage floor, the job guarantee provides a nominal anchor for prices, replacing involuntary unemployment as the main anti-inflation tool. It redirects labor toward public needs—care for the elderly, environmental restoration, and community infrastructure—turning monetary sovereignty into a mechanism for inclusive prosperity.

Kelton ends with a call to action: use your understanding of money’s true workings to demand policies that reflect shared priorities. The question is no longer “Can we afford it?” but “Will we choose to build it?”