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Professor Stephanie Kelton -- Its Not Just Deficits

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Transcript: Stephanie Kelton Interview



Listen to the podcast here.

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Interview recorded Thursday, October 25, 2012.

Here it is! From deep inside your radio.

HARRY SHEARER:  This is Le Show, and we are frightfully close to Election Day, and I think some of us are heaving a sigh of relief, if not utter, utter, utter joy, that this will soon be over one way or the other. And one of the sources of joy is that we will no longer have to hear the bipartisan consensus about the economy, our state of finances, being yelled from every rooftop.

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I've been reading and seeing video seminars on the Internet, which we have these days, from a source of somewhat differing perspective on what we've been led to call the fiscal cliff and all the rest of it -- the danger of the deficit, the crime we're committing upon our grandchildren -- so I've invited one of those folks who's been writing and appearing on these video seminars in to be my guest today on Le Show. Sitting in -- are you in Kansas City?


HARRY SHEARER:  Dr. Stephanie Kelton, who is an Associate Professor at University of Missouri Kansas City and a Research Associate at the Levy ("lee-vie")? Levy ("levee")?

STEPHANIE KELTON:  Levy ("lee-vie").

HARRY SHEARER:  Levy Institute in New York City. And welcome, first of all.

STEPHANIE KELTON:  Thank you so much for having me.

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HARRY SHEARER:  My pleasure. The university and the institute seem to be the loci of this group of economists and people who study the economy who have a -- I'm tempted to say a radically different understanding, than what we're given by the Washington-New York consensus. Is that right?

STEPHANIE KELTON:  Well, there certainly are a large number of us that are affiliated with one or both of those institutions. There are people, you know, all over the place, and as the understanding about how things work grows, we continue to pick up numbers, and so we've got people not just all over the U.S. in academic institutions, but also outside the U.S.

But interestingly what we have is really a growing number of people who are subscribing to what we're doing, paying attention to what we're doing, inviting us to come and speak to their groups, and they come from the finance industry, and so that's been kind of a surprise. But I guess in some ways, you know, a lot of these folks have training and background in accounting, and so a lot of what we do emphasizes through the other side of the ledger, and every time someone talks about the government's deficit, you forget that when the government spends more than it collects from you, that somebody else ends up with the difference, and that's the other side of the ledger. So these finance and accounting types seem pretty intrigued by this.

HARRY SHEARER:  So let's start at the beginning. What's money?

STEPHANIE KELTON:  Well, money is a relationship that exists between two parties, and it signifies a party who is the debtor and a party who's the creditor. So money is a balance sheet relationship where you've always got both sides of the balance sheet at work. You know, somebody's asset is somebody else's liability. Somebody's IOU is somebody else's balance sheet asset.

So money isn't this thing. We tend to think of money as a thing, something that you can pick up, something that exists in physical form, and there's only, you know, so much of it. Or if there isn't only so much of it, most people think there should be a limit. And really, in the modern era, money is something that we create with keystrokes. We use computers. When you walk into a bank and you sit down with the loan officer and you say, "I've got this plan for a small business I'd like to start," or "I'd like to expand my business," or "I want to buy a car or a computer or pay for school" or whatever it is -- the loan officer doesn't get up from the desk and say, "Just a second. Let me go and find out if we have any money we're lending out today."

HARRY SHEARER:  (laughs)

STEPHANIE KELTON:  That doesn't happen. Right? The loan officer doesn't look in the vault to find out if they can make the loan. They look at you, and they look at your work history and how much you make, how long you've been there, what kind of debt you have. You know, they look at your balance sheet, not their balance sheet. And if they think they can make money by extending credit to you, then they simply use the computer. They credit your bank account. You get money and they get this asset called a loan.

HARRY SHEARER:  Or in the last decade they didn't even look at you.

STEPHANIE KELTON:  They didn't even look, right.

HARRY SHEARER:  Yeah. So did -- your point of view is that this changed when the United States and ultimately a lot of other countries went off the gold standard and money ceased to be a representation of something payable ultimately by the provision of certain -- you could always go and demand certain precious metals for your piece of paper?

STEPHANIE KELTON:  Right. Right. Exactly. So before 1971 the monetary system that we had in the U.S. looked very different from the one that we have today. It was based on a system of fixed exchange rates. It was a global monetary system where you had 44 countries participating. This is something that was an outgrowth after the end of World War II. It was called the Bretton Woods system because it was designed and put into place, conceived at a place called Bretton Woods, New Hampshire. And so 44 countries got together and decided to fix the value of their currency, so the Mexico peso would be convertible into so many U.S. dollars, and the French franc into so many U.S. dollars, and the German mark into so many U.S. dollars, and then through the dollar those currencies would be convertible into gold. So a fixed price, you know, $35 an ounce. So you convert your deutschmarks into dollars and then your dollars into gold.

And when you have a system like that in place, of course you have to be careful about how much you allow your money supply to expand, because you're promising to convert the dollar on demand into this very finite resource called gold.

Well, after 1971, President Nixon took the U.S. off of the Bretton Woods system. We don't have this old archaic gold standard convertibility currency system anymore. We have what's sometimes referred to as just a pure fiat money system. It's -- our money isn't backed by anything physical. It's not convertible on demand into any other country's currency or into any hard asset or anything like that. We quite literally can have an infinite supply of U.S. dollars. Okay? There is no inherent limit to the amount of currency that can be created in the modern era.

And this isn't, you know, a crazy idea that I dreamt up. This is something that Alan Greenspan has been really candid about. And he's said it over and over again. You can find the videos, read the testimony. He says quite plainly that there is no limit to the government's capacity to create the currency.

And that's why all of these, you know, these debates that you hear about, all this hand wringing over the size of the national debt, and what if we can't pay it back, and the rating agencies, and what if the U.S. defaults on its debt, and all this, and Greenspan comes out and he says, "This is ridiculous. The debt is denominated in the U.S. dollar. The U.S. dollar comes from the U.S. government. We always have the ability to pay the debt,always."

HARRY SHEARER:  We hear the United States government, especially during the election campaign, being compared to two different entities -- to a household and to Greece. Might you explain why the U.S. economy does or doesn't resemble a household in America and/or Greece?

STEPHANIE KELTON:  Sure. I would be very happy to. If I could dispel and disabuse people of these two myths, we would have an entirely different national conversation.

So, first the household debt analogy. This is a really powerful one. And the finances that most people are familiar with, of course, are their own personal finances. And so I think it resonates with them when they hear people make the argument that the federal government faces the same kinds of constraints that you and I face, that we have to tighten our belts when times get tough, and the federal government should do the same thing. And the person who really I think hammered this home so was Ross Perot with his little charts and his feisty little attitude, you know, telling the American people that we're on the verge of bankruptcy in this nation and if he ran his business the way the government runs its operations, why, he'd be broke, and all this. So that's where that really, really comes from. And today, you know, it's the Peterson -- Pete Peterson and his ilk that are pushing this.

So ask yourself, what is the difference? Why is it that a household has to live within its means? Why is it that a household can only borrow so much before it runs into possibly a situation where a bill comes due and the household can't pay? Why is it that businesses sometimes go bankrupt? Why is it that state governments or, you know, Orange County -- why is it that some of these folks can actually go bankrupt?

The fundamental difference between a household, a business, a state or a local government and the U.S. federal government is that the U.S. federal government is the issuer of the currency, and everybody else that I mentioned is merely the user of the currency. We all have to go out and get the dollar in order to spend the dollar. We either have to earn it, we have to borrow it, we make investments, we may have interest income -- whatever, but we have to come up with the currency from some source.

The U.S. government in contrast is the source of the currency, right? The U.S. dollar comes from the U.S. government. Congress has given itself a monopoly over the issuance of the U.S. dollar. If you and I try to do it, we go to jail. It's called counterfeiting, right? But the U.S. government has the monopoly right to create the currency. And as the issuer of the currency, it can, as Alan Greenspan has said, as Ben Bernanke has said, it can never run out, it can never go broke, and it can never be forced to miss a payment.

Greece, you asked about Greece.


STEPHANIE KELTON:  So this is a very interesting, a very interesting example. Because what you have in Europe is, you know, this collection of countries that decided at various points in time -- not everybody adopted the euro at the same time -- but they all decided to give up their individual sovereign currencies. Eleven of them did this in 1999 and then gradually six more countries joined, so today there are seventeen. But all of these countries used to have a currency that came from them. The lira --

HARRY SHEARER:  The franc, the lira --

STEPHANIE KELTON:  Right! Right. Right. And today they have this currency that they can't issue. And in order to spend they have to go out and get the currency from somebody else. And so you look at Italy, that today has a debt-to-GDP ratio that is almost exactly where it was 15 years ago, only 15 years ago you didn't have a debt crisis and today you do. What's the difference? How come they could always pay before? Same debt load. And the difference is because they had promised to pay lira, and the lira came from the Italian government.

Same for Greece. High debt is not something entirely new to Greece, but it was always sustainable before because the debt was denominated in the drachma, and they could always come up with the currency when they needed to make a payment.

HARRY SHEARER:  Just incidentally, who does issue the euro?

STEPHANIE KELTON:  That would be the European Central Bank. They have the monopoly over the issue of the currency, and that's why, you know, time and time again when we've seen governments get into trouble where they're reaching the point where their debt levels are unsustainable and there's the possibility that they actually might miss payments, the only place the currency can really come from, the only entity that can deal with the solvency crisis, is the ECB. So the ECB steps in, provides the funds, and, you know, this thing can go on. As long as the ECB is willing to do that, the euro can survive, but there's just really no other, no other alternative under a system like that, because these countries are borrowing in a currency that doesn't come from them.

Financial markets realize that they're lending to currency users and not currency issuers, which is exactly why the financial markets have so much power. It's why they're able to bully these countries in a way that they can't bully the U.S., they can't bully Japan, they can't bully the U.K.

Look at Japan's debt-to-GDP. It's twice ours. It's 200% debt relative to the size of their economy. Ours is about 100% debt to GDP. Where are Japan's interest rates? Right where ours are. Zero short-term and about 1% long-term. Why? Why is Japan's debt twice as big as ours and their interest rates are at zero, U.K. same thing, U.S. same thing, and in Europe interest rates are all over the place -- 6%, 6 - , 5, 7? It's because financial markets recognize that they're lending to currency users, that there's a real possibility of default, and in order to compensate them for the risk they're taking in lending to these currency users, they want a premium. And so they're able to extract that higher interest rate by virtue of the fact that, you know, you might default, so you've got to compensate.

HARRY SHEARER:  Those are so-called bond vigilantes that we keep hearing about.


HARRY SHEARER:  Let's get back to us. The corollary of what you're saying would be the question, does the United States have to either tax or borrow to get money to spend? The federal government?

STEPHANIE KELTON:  No. It doesn't need to finance itself by raising taxes or collecting money through the sale of bonds, which is what we call borrowing. No. That is not that purpose of either of those operations. The currency comes from the government. So, could the government write checks on its account at the Federal Reserve and just allow the balance in that account take an overdraft? Right? So allow the balance in its account at the Fed to go negative, deeper negative, deeper negative? And the answer is yes, it could. Currently there are laws in place that prevent the federal government, that prevent the Treasury, from running its account at the Fed into the negative. 

But who came up with that rule? Congress, of course. So, there is no financial constraint. The U.S. government is not revenue constrained in the way that private business is or in the way that we're constrained.

HARRY SHEARER:  Well if that's true, why are they taxing us?

STEPHANIE KELTON:  Well, taxes play an important and historically very interesting role. You know, if you look at the history, one of the examples that we often use is we talk a little bit about the colonization of Africa by the British. You say, "You know, the British sail over and they have a look around and they say, "You all have some really terrific res--'" I'm paraphrasing.

HARRY SHEARER:  Yeah! (laughs) You're putting it mildly, too.

STEPHANIE KELTON:  "You all have some really --" (laughs) "You all have some really great resources here. How's about we make a deal and you sell us some of this great stuff and we'd be happy to pay you for it, and here are some British pounds." And the Africans, you know, look at the currency and they say, "Well, it's lovely, but no thanks, cheerio, and safe trip home." And the British said, "Well, no, actually, we really, really want the resources, so here's what we're going to do. We'll start imposing taxes -- it could be a head tax, it could be a village tax -- but we're going to impose a tax liability on you, the tax liability is payable only in the British currency, and the penalty for not paying the tax is --" And then, you know, use your imagination. The penalty was pretty stiff. So all of a sudden these African people who had no interest in working to get the British currency suddenly became very willing to work and provide resources in order to get the currency. And the reason is that the currency had no value to them until the tax was imposed and the liability was imposed on them. In other words, until they were forced into debt. And the only way --

HARRY SHEARER:  You're saying that taxes create the demand for the currency?

STEPHANIE KELTON:  Historically you can find this. You can find this in the literature. Historians are very good on this, anthropologists are very good, numismatists are very good, and economists are really terrible at this --

HARRY SHEARER:  (laughs)

STEPHANIE KELTON:  -- because they're lazy scholars by and large. And so, yes, the literature, the work is out there, and historically you can find this.

And look, if you had asked the German people -- and they did ask the German people -- hey, poll after poll, do you want the euro? Would you like to give up the deutschmark? And the Germans said "Absolutely no. We are not signing onto this. We like the deutschmark. We've been through a lot with our currency here. This thing is stable. We're keeping it. We don't want to take any risks." And the German government said, "Wait a minute. We're going to go ahead and introduce the euro. From this point forward, all payments by government will be made in this new currency, and all payments to government will be collected in this new currency."

And it's that decision by the government about how it's going to make its payments and what it's going to accept in payment to itself that drives the currency, that ends up making that currency the currency that circulates within the national borders.

HARRY SHEARER:  So they didn't have to confiscate lira and francs, they just were not payable as debts to the government.

STEPHANIE KELTON:  Exactly. And they quickly stopped circulating as widely accepted.

HARRY SHEARER:  Okay. The other half of the question. Why does the United States government borrow?

STEPHANIE KELTON:  Well, it's a relic of an old monetary system, and one that was designed to ensure that you didn't have too much of the currency created when you had a convertible currency. So, you know, currency was convertible into gold. So at this point the answer with the new monetary system, the one we have today, the answer is that when the government sells bonds, it's a way for the government to hit and maintain positive interest rates. This gets a little bit complicated, but if you think about the government running deficits, that is, spending more money than it collects from us in the form of taxes -- well, what that does is it leaves the private sector, and in particular the private banking system, with a bunch of extra money that economists refer to as reserves. So if banks are sitting on lots of reserves because the government is --

HARRY SHEARER:  Let me, let me -- sorry, let me --


HARRY SHEARER:  -- slow down to --


HARRY SHEARER:  -- for a show business person's understanding of this --

STEPHANIE KELTON:  Okay. (laughs)

HARRY SHEARER:  This is the surplus in the private sector you were referring at the beginning to as the offset on the other side of the ledger sheet from the government deficit.

STEPHANIE KELTON:  That's right. So if the government buys a $100 billion aircraft carrier -- it's harder to do just a single purchase, but I'll try to do this -- a $100 billion aircraft carrier, and it collects in only $90 billion in taxes, well, the person who put the $100 billion into their checking account, that bank has $100 billion in what we call reserves. And now let's say the customer at that bank pays the $90 billion tax liability, 90 comes out, but there's still an extra $10 billion in the banking system and in the private sector. And if you're not doing anything to get rid of those extra reserves" Bank reserves circulate between banks, and so what happens is banks are required in the U.S. to hold reserves. That is, they keep checking accounts at one of the twelve Federal Reserve banks, and they hold reserves against a fraction of what their customers keep on deposit with them.

HARRY SHEARER:  This is so-called fractional reserve banking?

STEPHANIE KELTON:  Fractional reserve banking. And sometimes the banks have more reserves than they want to hold and sometimes banks don't have as many as they're legally required to hold. And so you have this market out there called the federal funds market. And the banks with too many can get together with the banks with too few and they make a loan, and the price that you pay for those reserves is the federal funds rate. And a lot of people will have heard that, you know, when they talk about the Federal Reserve changing interest rates or something, you hear about the fed funds rate.

Well, if the government is putting more in than it's taking out by spending more than it's collecting in taxes, then the banks are accumulating reserves. And if this is happening on a wide scale, right? All the banks are accumulating more reserves, then everybody wants to be a lender and nobody wants to be a borrower. And so the price goes to zero. And so your overnight interest rate, the federal funds rate, quickly falls to zero.

Today it's a policy decision to keep it at zero, but that's not how things normally work. Normally the government wants the interest rate above zero, and so what they've done historically, for decades now, is they sell bonds. They say, "Well, the interest rate is zero, because you all have all of these reserves and you're trying to get rid of them because they don't pay you any interest. Let's sell you some bonds, and then you hold U.S. government bonds that pay you interest and I'll take those reserves from you." And so it allows -- the bond sale is a way for the government to maintain positive interest rates. This is the short answer to a kind of complicated question.

HARRY SHEARER:   Mhmm, mhmm. Well, it leads to the question of, which we hear constantly talked about in the political context of who's buying U.S. debt, U.S. federal government debt, and we're depending on the Chinese and we're putting our grandchildren in hock. Let's examine both halves of that one. Are the Chinese the main holders of U.S. Treasury debt at this point in time.

STEPHANIE KELTON:  No. Not by a long shot. No. They hold about a trillion dollars out of the total roughly $16 trillion, so, no, it's not a trivial amount, but it's also --

HARRY SHEARER:  Well, I got that on me.

STEPHANIE KELTON:  (laughs) Yeah. It's not a trivial amount, but it's also not -- it's also not something we should be wringing our hands over the way we do today.

Look, China has U.S. dollars because China has a strategy for domestic growth that relies heavily on China's desire to produce things and ship them to other people to enjoy. So as long as this is part of their strategy and they want to grow their industries by making things and shipping them to foreigners, they're going to end up with the currency of foreign countries. And in the case of the U.S., when the Chinese send us more goods and services than we send them, they end up with U.S. dollars. Which is fine. So, we get the stuff and they get the credit to their bank accounts. Now, what they do is they say, "Well, we have all these U.S. dollars in our bank account, but they don't pay us any interest. So, why don't we flip these out of our checking account into our savings account, which is basically what the U.S. Treasury is to them. It's like having a savings account instead of a checking account.

HARRY SHEARER:  So they get interest paid on the bonds.

STEPHANIE KELTON:  They get interest, and because the U.S. government is only promising to pay to U.S. dollars, and because it's the issuer of the U.S. dollar and it can never run out, it can always pay the interest, it can always pay back the principal, and when they do, we put the money back into China's checking account, and then what does China do? Do they say, "Oh, good, we have lots of dollars. Now we can go buy more goods and services from the U.S."? No, they say, "Put it back in our savings account," right? "We want the Treasury." So they just keep flipping it back and forth from checking into saving, all the while they're toiling away the day in conditions none of us would want to be working in, producing things, cheap things, sending them to us to enjoy. And what do they get in return? They get more credits to their checking account that they flip into their savings account. And we act like they're winning and we're losing. And we send convoys of, you know, high-level government officials over there to tell them to stop allowing us to abuse them this way.

HARRY SHEARER:  (laughs) The other half of that. What's happening to our grandchildren? Who's doing what to our grandchildren?

STEPHANIE KELTON:  Well, we're not doing them any favors at the moment, that's for sure. Cutting education, laying off teachers, letting our infrastructure fall into disrepair to the tune of, you know, $2.2 trillion, and a D rating overall. I mean, we're not leaving them a whole lot to be proud of., in energy and environment and any number of things, and a, you know, retirement system, Social Security, the cuts that they -- the programs that may not be there for them when they need them and so forth. So we make all of these choices and the excuse is always, "Well, we'd love to do better but we can't afford it." Because we don't understand our own monetary system. We think the dollar comes from China.

HARRY SHEARER:  Made right on the same assembly line as iPad. I left one question hanging from the previous question. Who does own most U.S. Treasury debt then, if not China?

STEPHANIE KELTON:  Oh, well, it's on the books of financial institutions, banks, pensions, corporations. I mean, these are good, safe, default-risk-free --

HARRY SHEARER:  Mainly American?

STEPHANIE KELTON:   Mainly American, sure. Sure.

HARRY SHEARER:  So if I were listening casually to you -- I'm trying to pay more attention -- but if I were a casual listener, I would say, "Well, she's just sort of fronting for a policy of just spend it all and, you know, raise taxes." I mean, is this just an ideological water carrier for the Democrats?

STEPHANIE KELTON:  Well, no, because they frustrate me more than anybody does.

HARRY SHEARER:  Well, welcome to the club!


STEPHANIE KELTON:  I mean, you know, who wants to strike the Grand Bargain? Who said "go big"? Who said "four trillion"? No, most of this kind of talk is actually coming from the Democrats. It's not a free lunch.  

There are lots of things that we don't do today to recover the economy to where we should recover it, and you're just sitting here looking at still very close to 8% unemployment, and we've chased so many people out of the labor force that the real numbers are much higher than that. And every single day we're leaving around $10 billion on the table in lost output, lost income, because of all of the unemployment.

And you know all the social problems that go alongside that -- a housing market that we haven't addressed the problems there, and so on and so forth. So there are real costs, and there are lots of things that we forgo every day because we don't do what we should be doing.

But this is not -- what I've been saying shouldn't be interpreted to mean, because you can spend and you can create the currency in an infinite way, that you should go out and spend to infinity. That's not it at all. What I'm saying is that when you have about 23 million Americans who want to work and they want full-time work and they're unable to find it, when you have things that need to be done, useful things that need to be done -- like, I mentioned the $2.2 trillion in infrastructure investment that needs to be made, and you have folks who want to work, and you have useful things that need to be done, and you have the financial wherewithal to make that happen, it's not financially responsible.

We hear a lot about fiscal responsibility.


STEPHANIE KELTON:  What could be more fiscally irresponsible than being the monopoly issuer of the currency and keeping it so short that people can't get the currency when they want to work in exchange for the dollars so that they can buy things. And so you put people to work, you pay people to work, people go out and spend, businesses have customers, businesses hire -- this is not really rocket science.

I'm sort of dumbfounded every day I go through life at the complexity that apparently people -- people can't figure out the simplicity of this. You know? You run your economy at full employment. If there's unemployment, it's an indication that the deficit is too small. If you get inflation, it can be an indication that you're spending too much. That is, if the inflation is the result of, as they say, too much money chasing too few goods. But if your economy is starting to heat up and you begin to see inflationary pressures that are coming because there's too much demand and you don't have the supply capacity, you can't produce enough goods and services, then you have to slow that demand down, and you do that either by cutting spending or by raising taxes.

Right now we have this national conversation taking place about, you know, the debt and the deficit and the Chinese and the burdens and the rating agencies and all this kind of crazy talk that we need to start cutting now, raising taxes and cutting spending, and we've got 23 million people without work. You know, this isn't -- you're supposed to do the opposite in this situation.

HARRY SHEARER:  Okay, you did mention the "I" word, which I'm sure some people have been screaming at their radios for some time now. So let's tackle it head on. If the government doesn't need to tax and it doesn't need to borrow in order to spend and it spends willy-nilly, people will say hyperinflation, wheelbarrows full of paper money just to buy a loaf of bread, the familiar images in our heads of the Weimar, which certainly still scares the Germans if nobody else. Inflation is a constraint. You've acknowledged that. How great a constraint is it?

STEPHANIE KELTON:  Well, it would be a significant constraint if we didn't have the excess capacity and the millions and millions of unemployed workers. So you expect price pressures when your markets get tight, when you're running your factories very near their capacity, when the labor market gets so tight that, you know, you have basically a job opening for every job seeker. Then you know you're really close to full employment.

You know, you don't get hyperinflation by running your economy at full employment. Let's not forget that under the Clinton years, the so-called Clinton boom, we had full employment in this country. We had as close as what I am comfortable referring to as full employment where we actually had one job vacancy for every job seeker. And that was the first time in 35 years that we'd achieved those kinds of numbers. Our inflation rate was so low, nobody even talked about inflation. Inflation was not even on the radar screen. We had high rates of growth of GDP, our unemployment rate officially was 3.7%. We had high growth, low unemployment, and modest inflation. So we did this before and we did it in the not-so-distant past.

All I'm saying is that the way we're running the economy right now, this is not fiscally responsible. This is dysfunctional finance. We're getting everything wrong. We've got all kinds of room to run here and we can safely crank up aggregate demand. We can safely cut taxes on those that we think will be most likely to go out and spend, and that spending leads to the sales that then lead to job creation, and we can safely increase government spending on programs like infrastructure, education and the kinds of things that we believe generate real economic growth and prosperity and leave our children and grandchildren better off than they would be otherwise.

HARRY SHEARER:  Your colleague Warren Mosler, I believe, says that the decision whether to cut taxes or to increase spending, or the balance between those, remains a political decision, that this understanding of economics does not dictate one or the other or the particular formula for the combination -- is that correct?

STEPHANIE KELTON:  Sure. Absolutely. I mean, look, I sometimes use the phrase, "Cash registers don't discriminate." You know, when you go to the grocery store, somebody might say to you, "Paper or plastic?," but nobody will ever say to you "Private or public?" And so whether the additional spending comes because we had a payroll tax holiday and millions of Americans have more take-home pay and more money to eat or pay down debt or to go out and buy something new, or whether it comes from, you know, direct government spending, cash registers don't discriminate. So, yes, it is very much a political decision.

HARRY SHEARER:  I want to double back to the question of the bond vigilantes for a moment, just to nail something down. This very day I heard a member of the Conservative government -- well, the coalition government, actually, it was a Liberal Democrat I think, official in the British government, asked about the fact that the IMF had said, "You know, Britain may need to think about sort of putting the brakes on its austerity program if it wants to enjoy actual growth in the economy." He said, "We're not going to backtrack on our policy because our policy" -- which is basically sort of an austerity light as compared to what Greece and Italy and Spain and Ireland have been through -- "our policy has kept interest rates down, has increased confidence in the market, which has resulted in lower interest rates." "Confidence in the market" -- is that code for bond vigilantes looking for the next, you know, fish in the water that may be emitting blood?

STEPHANIE KELTON:  Yeah, I guess so. I love the taking of credit for something that -- you know, interest rates are going to be low as long as the Bank of England says interest rates are going to be low. This is not a reflection of the success of the austerity program or the placating of the bond markets or anything else, it's simply a reflection of the fact that if the central bank establishes a low interest rate and then pledges to keep rates low, as the Fed had done here, that market participants are going to anticipate low interest rates across some period of time out in the term structure, and so you're going to have low interest rates. I mean, when you set the interest rate, you're going to have whatever interest rate you decide upon.

HARRY SHEARER:  Well, then, you mean the Fed decided that interest rates should be 17% in the late 1970s?

STEPHANIE KELTON:  Absolutely! That was Paul Volcker's doing. Yes, absolutely. This is the first -- this was something that was known as the great monetarist experiment. And of course the greatest monetarist who ever lived was Milton Friedman. This is the old Chicago School of Economics.

You know, in the Seventies the U.S. was experiencing that ugly thing called stagflation where we had a period of time where we simultaneously had high unemployment and high inflation. And Paul Volcker, who was the chairman of the Fed before Alan Greenspan, decided he was really going to tackle inflation. And being a good monetarist, he decided that the way to bring down the inflation rate is to try to reduce the rate of growth of the money supply, because they have this idea that if your money supply grows at 6%, you're going to have 6% inflation, and if you can bring your money supply growth rate down to 2 -, 3%, your inflation rate will come down proportionately.

So what Volcker did was attempt, for the first time really, to control the rate of growth of these monetary aggregates. And I'm not going to get into all this because it gets a little bit too technical with M1s and M2s and M3s and all that, but he tried to control how much banks were actually lending, these different measures of the U.S. money supply, and when he decided to target the money supply, he let go the interest rate. And you can do both.

And so, yes, U.S. interest rates went very high. The prime rate, which is the interest rate that banks are supposed to be charging their best corporate customers, went to 21% under Volcker. But that was absolutely a policy decision.

HARRY SHEARER:  What -- you mentioned the name earlier, and I want to get back to it. Why is there a bipartisan consensus that's pretty much written in concrete these days, that the deficit is a bad thing, that the national debt is going to crush our grandchildren, that we can't afford these things that you talked about before that might be desirable for the state of the economy and for the employment of Americans who want to work, this consensus that we are debt constrained and tax constrained -- revenue constrained -- and you mentioned the name Peter G. Peterson, so --


HARRY SHEARER:  -- would you fill us in on that a little bit?

STEPHANIE KELTON:  Well, here's someone who has made a financial commitment to establishing a narrative in the American psyche and hammering it and hammering and hammering, and recognizing that it would take time, it would take, you know, financial commitment, but that this message if drilled in hard enough and long enough could infect every political party, on both sides. And it absolutely has done that. I watched the first debate between Obama and Romney, and somebody said, you know, "Who do you think won?" And I said, "Pete Peterson."

HARRY SHEARER:  (laughs)

STEPHANIE KELTON:  It's obvious. You know, I'm reading just today in -- Reuters put something out about the CEOs of more than 80 big U.S. corporations, and these corporations include the likes of Goldman Sachs and Boeing and JPMorgan, and these guys have all gotten together and they're pressuring Congress to reduce the federal deficit. And what do they want? They want tax cuts, of course, and spending cuts. And what do you think is on the receiving end of the spending cuts? Of course it's entitlements, right? So these CEOs from more than 80 of these big U.S. corporations got together and wrote a letter in the Wall Street Journal website. It was supposed to go up today in fact. And they're emphasizing the fiscal cliff and the need to bring down the deficit. Now they want, they're concerned about, you know, how big the deficit is, and I read that the statement itself was organized by a campaign called Fix the Debt. And this campaign's been urging Washington to, you know, put aside their partisan differences and let's all get the U.S. back on a sustainable fiscal path and all that stuff. And Pete Peterson is connected to this group. And so he seems to be in everything and behind everything.

HARRY SHEARER:  Hmm. The economy that you talk about, in terms of -- well, you've talked about two things. One, the understanding of how money works, and then B, the resultant political decisions that could be made that could affect the economy. The second would seem to be an economy that grows at a fairly healthy rate and that would be -- call me a dreamer -- good for everybody. Why would those corporate CEOs not want an economy with a lot more people working and able to consume and driving economic growth to a much higher rate than the anemic rate it is at now?

STEPHANIE KELTON:  Well, I don't -- I think they should, right? They should want 23 million more Americans with more money to spend. You would anticipate that that would be in their financial interest and that they would recognize that.

The only thing I can really think is that the national dialogue is so set with the haves and the have nots and the makers and the takers and the 1% and the 99%, and so when anybody in the middle class or anyone who's poor or any part of the 99% says, "We don't want you to cut this program because it helps us," or "We want more investment in education" or whatever it is, the politicians, you know, they pat their pockets and they say, "We'd love to help you but there's no way to pay for it." And so the 99% point at the 1%, and they say, "They have all the money. 

Go get the money from them." And the 1%, having the power and influence that they have, successfully push back against that. And so you have these two sides pitted against one another as if, you know, in order to pay for something, you have to rob Peter and pay Paul. And what the 1% should really do, I think, is to point at the Congress and say, "Don't look at me. 

They have all the money." You know? I mean, turn the attention where they really could effectively say, "Hey, don't come to me and say you're going to raise my taxes. I'm not causing any inflation. You don't need to raise taxes unless you're trying to cool something down."

So at least right now, you know, if you want those programs, this is who you need to go talk to. Go talk to your politician, because these guys can vote and appropriate and the funding will be there.

HARRY SHEARER:  I'm getting the idea that what one of the things you folks are doing, aside from trying to redirect our attention towards the actual way that the monetary system works in the post-1971 era, is -- if this is not the purpose, this seems to be the effect -- is to take the moralizing out of it. We've been taught, by what we've been hearing in the so-called national debate, that there's something immoral about having a high debt. There's something immoral about having these deficits. There's something that is against the way people should -- again, from the household analogy, obviously -- but there's a morality factor here that I think moves Americans who don't even, wouldn't know the Federal Reserve if they walked into the front door of it.

STEPHANIE KELTON:  Yeah, I -- for whatever reason, I just started thinking about Murdoch. And, you know, it's obviously not God's will that the federal government be in deficit. There is a moralizing -- we're -- it's a de facto sign that you're behaving imprudently, right? If there's a negative number on the ledger, we've done something wrong. We've gone wrong somewhere. And what we're trying so hard to do is to get people to recognize that if they spend 10 and only take away 9 from us, that we got the extra 10, you know? That their deficit is our surplus, that their redding is our blacking. And it's a very hard thing to flip that switch and get people to spin the way that they view, you know, the government's deficit and the debt and so forth, and it's a very powerful narrative, as you said, playing into morals and fear, and the fear of China, and the fear of the rating agen-- there's, both of those things are extremely difficult to get people to overcome. Both the moral aspect and the fear.

HARRY SHEARER:  What would happen if Ron Paul got his way and the United States went back on the gold standard?

STEPHANIE KELTON:  Well, we had eight depressions on the gold standard and zero off of the gold standard. It is a system that constrains you in a way. 

You have a flexible system today that provides you with policy space that you simply do not have when you're on a fixed exchange rate system, a gold standard system, when you're adopting a currency that you don't control like the euro -- those types of monetary systems, the gold standard and the rest, they place constraints on you that limit your fiscal space. 

And the reason it's important is because when you have an economic downturn, and you inevitably will -- every single market economy on the planet has cycles. We have booms and we have busts, every one, independent of the type of monetary system you have. So when that bust inevitably comes, you just won't be able to respond effectively. Which is exactly why countries went off the gold standard every time they went to war and every time there was a serious economic downturn. They all go off gold. Every time. In other words, it works until it doesn't work.


STEPHANIE KELTON:  That's what I would say about gold.

HARRY SHEARER:  So there is a series of seminars or lectures on the Internet right now at Columbia University that you and Warren Mosler and R--


HARRY SHEARER:  Randy Wray --


HARRY SHEARER:  -- have participated in so far. Does this indicate that an Ivy League school's economic department has endorsed what you guys are saying?


HARRY SHEARER:  (laughs)

STEPHANIE KELTON:  What it does indicate is that the law school -- and because so much of what we do has legal, you know, underpinnings and implications for government policy and law -- the law students got behind this and they organized this. And it's a year-long seminar. They're doing four or five this semester and four or five next semester, free and open to the public and all that. But it's just a really heroic effort that was put together by a young law student at Columbia who discovered our work a few years ago and began following it and then began obsessing about it in some way and then when -- you know, as if it's not enough work to be a student at Columbia Law School, he decided he would raise funds and organize a year-long seminar series about these ideas. But he is getting people to moderate the sessions, people who are in the Journalism Department who are prize-winning journalists, and people from the History Department, and so forth. So it's really given us an opportunity to interact with some scholars in different fields and collaborate and so forth.

Now, Joe Stiglitz is there at Columbia University in the Economics Department, and you know, this is Nobel Prize-winning economist, former head of the World Bank. This is a very, very smart man who has moved closer and closer over the years to the position that I've been espousing, you know, for the last hour or so. And you can just see it. You know, he's really starting to connect the dots. And so is Paul Krugman. And so is Martin Wolf, who writes for the Financial Times. And so are people at The Economist. And so are people at the Washington Post and the Wall Street Journal. 

All of these news outlets and magazines and so forth have run stories that develop the ideas that I've been putting forward here with you today, and this is exactly what we need. We need more people saying these things and a more diverse, you know, group of individuals from different walks of life and different -- you know, media, press, academics and so forth. 

And eventually I think people will start to recognize that this is -- we're just describing the way things work, and we really do have the capacity to improve conditions without harming people, that this debt and deficit bogey is doing real harm.

HARRY SHEARER:  You are the editor, I believe, of New Economic Perspectives, a web blog, yes?


HARRY SHEARER:  And one of the people who's written for that, or who writes for it fairly frequently, has been a guest on this program, Bill Black, so if any listeners who were intrigued by Bill Black or what's been talked about here today want more, neweconomicperspectives -- dot com, is that correct?


HARRY SHEARER:  Dot org. New Economic Perspectives, newconomicperspectives.org would be the place to go.

Dr. Stephanie Kelton, thank you so much for being with me today. You've made it clear enough that I can understand it, and that's a big deal. But thank you very much, and continued good luck to you.

STEPHANIE KELTON:  It's been an honor and a pleasure. Thank you so much.

HARRY SHEARER:  Thank you.



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Retired ('92)after working for every Administration since Truman, with the exception of the last 3 administrations. Mainlining golf is a major addiction, along with grandchildren, travel, great books and the leisure to really absorb it all. A (more...)

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