Thursday, January 15, 2015

A new light shines in the US Senate

This was submitted to the Albuquerque Journal and the Santa Fe New Mexican today. If either publishes it, I'll update this post.
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Senator Bernie Sanders has lit a spark in the US Senate Budget Committee. Recently appointed ranking minority leader of that committee, the Senator has tapped Prof. Stephanie Kelton as his Chief Economist. Such appointments usually go unnoticed but not in this case. Already the appointment is being cussed and discussed, because Prof. Kelton advocates alternatives to the economic policies that have failed us for the past thirty years.

Prof. Kelton was recruited from her job as Economic Department Chair at the University of Missouri - Kansas City. Yes, the “show me” state. This department is an intellectual center of Modern Monetary Theory (MMT) that describes the way a sovereign, nonconvertible, fiat currency with a floating exchange rate actually works in the economy. Much confusion in the economic world today stems from a basic misunderstanding of how a fiat currency differs from one based on say, gold. This sheds a whole new light on the way we view current news and political discussions.

MMT recognizes that household and state budgets are not the same as the federal budget, because the US government is the only source of US dollars. The US government stands opposite the private sector on our national balance sheet. That is, federal deficits become private assets.

The private sector by itself cannot accumulate net savings. In our economy one household’s spending is another’s income. If one household saves by spending less than its income, it will prosper. But, if all households save there will be less spending overall, and less income overall. So, the economy will suffer unless the saving of some is offset by the borrowing of others. However, federal spending puts dollars into the private sector, so federal debt provides net private savings to the penny. Strange as it may seem, the highly scorned National Debt Clock is also the National Savings Clock. 

This chart from the CBO has been annotated to show that recessions tend to occur after periods of low deficits.

While liberals and conservatives argue about how to balance the federal budget, MMT realizes that balancing the budget can weaken the economy. The MMT understanding of monetary operations is consistent with observations of economic recessions following periods of too-small federal deficits and that federal surpluses are even worse. Presidents Bill Clinton and Andrew Jackson have in common that both were praised for running federal surpluses even though both were followed by devastating economic collapses. History shows that over the last 200 years each of the seven periods of significant federal surplus was followed by a depression. 

MMT also realizes that inflation can arise from too much spending by either the federal government or the private sector. Recently, our economic woes resulted not from federal deficits but from the private sector’s inability to pay its bills. 


MMT advocates alternatives to the policies of austerity that have led the economies of many nations around the world down the rabbit hole. Prof. Kelton brings new light by which we might find our way out of the hole.