This article was first published by BBrief on 22 May 2025
“Government red ink is private sector black ink” – Stephanie Kelton ad nauseum The above charts, and ones similar to them, are frequently employed online and in presentations by economist and author Stephanie Kelton to support the Modern Monetary Theory (MMT) claim that contrary to ‘conventional’ [correct] wisdom, government deficits aren’t harmful but instead are a gain to the economy. The charts juxtapose government deficits against the private sector balances (in the US), revealing what appears to be a correlation between government deficits and private sector balances. Kelton and other MMTheorists argue that government red ink (referring to deficits) is a gain for the private sector, as it causes their balances to rise (black ink). This isn’t just Kelton’s idea, but an MMT proposal which states that increasing government spending leads to the increase in the financial net worth of the private sector (i.e. individuals and businesses). On this issue, MMTheorists don’t stray from mainstream [Keynesian] economists. John Maynard Keynes also argued that government spending would have a multiplier effect on the private sector, as whatever the government spends would flow to businesses and individuals equipping them with means to spend on other individuals and businesses, and so on. MMT only deviates from Keynesian orthodoxy in that – although they claim otherwise – they throw caution to the wind and by stating that taxes aren’t necessary, save to fight inflation. While Keynesians argue that some government spending can be funded using taxes, MMT claims that all government spending can be funded through deficits (issuance of new currency, not borrowing). In criticising those who detract from the MMT narrative, Kelton wrote: “…the idea is that government deficits eat up some of the dollars that would otherwise have been invested in private sector endeavours that promote long-term prosperity. We will see why the reverse is true – fiscal deficits actually increase private savings – and can easily crowd-in private investment.” Is this MMT claim true? I ask this question not because it is the right question to ask when dealing with MMT, but because it isn’t. MMTheorists love this questioned and are trained to respond to it with not only a resounding “yes”, but with the data (as in the charts above) to support it. It is in fact true that when the government issues new currency to fund projects, the money goes into the hands of government officials, private contractors, vendors, etc. At the end of the day, all these individuals – including the government employees return home to spend or save their earnings gained from working for the government, so definitionally, government red ink is in fact private sector red ink. The right question for the good economist to ask then, is whether or not deficits – especially as prescribed by MMT – are good for the economy. Unfortunately for MMT, it isn’t. Is the Government’s Red Ink harmful? When studied in the Austrian tradition (which I represent), economics teaches that without proper theory, the economist cannot make heads or tails of data. Understanding sound economic theory is what informs the economist that an increase in the financial net worth of a nation doesn’t necessarily confer social benefit to the nation. When the government spends newly issued currency as MMT proposes, the new currency doesn’t automatically conjure new resources. The currency doesn’t cause factories, oil fields, better skilled workers, etc. to spontaneously appear. New currency doesn’t create new wealth, so though private sector balances are higher – as the charts show – no new wealth is created. Given that new currency doesn’t create new wealth, when it is spent, all it does is drive up prices, as there is now more money bidding for the same number of commodities in the economy as before the money was introduced. This is the cause of price inflation. MMT harmed Zimbabwe In Zimbabwe, as the government – in the spirit of MMT – issued Zimbabwean dollars, the private sector balances rose to a point where children were worth billions if not trillions of Zim dollars, yet none would argue that there were no increases in the financial net worth of Zimbabweans. MMT harmed America In a zero-hedge debate between MMT economist Nathan Tankus and Austrian economist Dr Robert Murphy, in defense of MMT, Tankus claimed that the CoViD stimulus increased the financial positions of Americans during the pandemic, yet inflation soared in the period that followed; Americans had higher cash balances, but they were poorer in real terms. These are clear examples of how the MMT proposal is very leading, and why one shouldn’t just accept the data at face value. Conclusion Government red ink is in fact private sector black ink as MMT claims, but this isn’t a good thing, and we must not let MMTheorists mislead us into thinking it is. [1] https://x.com/StephanieKelton/status/1762551074366312762 [2] https://x.com/StephanieKelton/status/1668394888658911232 |
