The Deficit Myth — Stephanie Kelton

Why can’t the government just print more money?

That’s a pretty obvious question, and I feel it’s not often answered satisfactorily. This book discusses the way money works from the viewpoint of Modern Monetary Theory (MMT), which seems to make a lot of sense. As I understand it, here’s how things should work.

Imagine there was some sort of primitive barter economy, or an economy based on gold or something. Eventually a Government evolves to run the country. The Government needs to get things done (pay for hospitals, roads, police, and a thousand other things).  The way they do this is to tell people that in return for them doing all this work, they will levy a tax on economic activity. The tax must be paid in “dollars”. Then the government prints a whole lot of dollars and uses them to pay for the hospitals, roads etc. The dollars are valuable because everyone needs them to pay their taxes, so the dollar becomes the universal currency.

The problem is that the more dollars that get printed, the less each individual dollar is worth, so their purchasing power decreases. This is inflation.

The solution is simple: the government already collects a lot of dollars in tax. So when it receives dollars as tax payments, it simply destroys them. This removes dollars from the system and helps to prevent inflation. So the Government can add money into the system by printing and spending it, and removes money from the system by levying taxes. In this way it can manage the amount of money in the system so as to avoid inflation.

Of course, dollars are fungible, so destroying a billion dollars in tax and then printing a billion dollars would have the same effect as simply redistributing the billion tax dollars as Government spending. That is probably why people generally act as if this is how things actually work: everybody talks about the Government “spending tax dollars” and worrying that they could somehow run out of money. But there seems no reason why the spend has to exactly equal the tax take. One reason may be the way money gets introduced into the system, where the government gets the Reserve Bank to print the money and then borrows it and pays interest. This seems rather byzantine and also pointless.

Anyway, this book provides a more nuanced understanding of how money works than you’d ever get from the mainstream media. Though the scheme I described above may be a butchered misrepresentation of the book, it has definitely opened up my thinking about how money works, how it could work, and how it should work.

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