The Deficit Myth
changing the conversation on government debt
Artwork: Hilma af Klint, “Group IV, No. 7, The Ten Largest, Adulthood” (1907)
Hey everyone,
You ever hear about how the U.S. debt is growing, and how we're going to have problems if it keeps growing?
This kind of thinking is what Stephanie Kelton, the author of The Deficit Myth, is trying to change.
This book came onto my radar after a recent discussion at work surrounding Hong Kong's Legislative Council passing the Stablecoins Bill. We were talking about whether countries like Argentina, with troubled fiat currencies, might benefit from switching to a stablecoin system.
Stephanie Kelton is a professor of economics and a former economic advisor to Bernie Sanders. She’s also one of the most prominent advocates for Modern Monetary Theory (MMT). Her main claim is that countries like the U.S., which control their own currency (have monetary sovereignty), don’t need to "save money" the way households do. And more importantly, we’ve been thinking about government deficits all wrong.
This is one of those books where I found myself agreeing with every claim the author puts out, but when we arrived at the conclusion, I realized just how far it strays from my previous understanding. Here are some of the key ideas that Kelton presents:
The Government Is Not Like a Household
This is the foundational idea. We think that governments, like households, must earn money (via taxes) before they can spend it. But that’s not true for a government that issues its own currency. Households are currency users. The government is a currency issuer.
The government has a monopoly over money creation: it can print as much as it wants. When the government wants to spend money, it doesn’t need to raise taxes first. It simply approves a budget and spends. Taxes are collected after the money is spent, and bonds are issued if we spend more than our taxes to make up the difference. This is where the deficit comes from.
Kelton goes even further: every dollar in existence had to have come from the government first. The government doesn’t need your dollars. What the government actually cares about are real outcomes: infrastructure, healthcare, education, social services. Dollars are just the tool.
So if taxes don’t fund spending, what are they for?
To create demand for the national currency (you need dollars to pay taxes)
To control inflation (by reducing overall demand)
To redistribute wealth
To encourage or discourage certain behaviors (like taxing pollution)
Government Debt Isn’t Scary
Kelton argues that the fear-mongering around deficits is overblown. It’s bipartisan (Democrats often cite needing to raise taxes, while Republicans often advocate for cuts), but both sides argue with a flawed premise: that deficits are dangerous in and of themselves.
In reality, a country with monetary sovereignty can never go bankrupt in its own currency. It can always create more money to pay its debt. The real consequence of overspending is inflation, not insolvency/bankruptcy.
Here’s a powerful reframing she makes: every dollar of government deficit is a dollar of non-government surplus. This identity must always hold. In other words, government spending puts money into the economy, into people’s pockets. If spent well, that money circulates, contributes to someone else’s income, and creates the desired multiplier effect. Here Kelton argues that money distributed to the wealthy isn't going to be impactful because chances are they don't need to spend that extra money, and if they don't spend it, we don't get the desired multiplier effect.
The only time government spending becomes a problem is when the economy is already at its full capacity—one way to think about it is when the country is already at full employment. That’s when further spending risks becoming inflationary.
Deficit Fear Is Mostly Political
One of Kelton’s most interesting conclusions is that the fear of the deficit is more political than economic. Politicians often use “the deficit” as a rhetorical tool—something they can point to when they want to block a program they don’t support. But the reality is, there’s always “room” when it comes to things like military spending. The difference is political will, not economic limitation.
Kelton’s argument is that the constant invoking of the deficit serves to shut down important conversations—about healthcare, education, climate investment—by pretending we can’t afford them. Her message is: stop asking How will we pay for it? and start asking Do we have the real resources (people, skills, materials) to do it?
My Thoughts and What Still Feels Unsettled
Although Kelton distinguishes between inflation and insolvency as different risks, I think for the average person, they end up looking very similar. Whether your currency is devalued or your government defaults, the outcome often feels the same—people become poorer and have less to spend. In that sense, concerns about rising debt still feel legitimate. When thinking about it that way, this book doesn’t necessarily contradict my current understanding; it reframes it.
I think the big question that this book provokes is on that Ray Dalio raises in his book How Countries Go Broke: “What would happen to interest rates and all that they affect if government debt growth isn’t slowed? Can a big, important country with a big reserve currency like the U.S. go broke?” He argues this isn’t just academic, it’s a question with real consequences for investors, policymakers, and everyone else.
My understanding of this subject is still limited. But if there’s one thing I’m certain of after reading this book, it’s that economics isn’t a science in the sense that there is a clear, definite answer. There isn’t a clear, universally accepted playbook. This is scary because policies based on these varying views on macroeconomics have very real impact on our wellbeing. Therefore, I believe it is of the upmost importance that we welcome and explore all perspectives.
This is why I appreciate reading this book. I walked away with a new lens. The book challenged my deeply held assumptions and moves the conversation forward. I hope if this is interesting, you’ll consider giving it a read too, and let me know what you think.
Thanks for reading,
— David He