Stephanie Kelton’s “The Deficit Myth”


Subjective righteous sentiments do not constitute the analytic terms and relations of objective natural science. Faraday’s and Maxwell’s psychic dispositions do not constitute the explanatory terms and relations of electromagnetics.  Thompson’s and Kelvin’s existential desires and fears are not the explanatory conjugates of the science of thermodynamics.  Daniel Bernouilli’s and Bossuet’s personalities do not constitute the functional relations of  fluid dynamics. Feynman’s quirkiness is not isomorphic with the intelligible patterns of quantum electrodynamics.

The noble sentiments of the political left or right are no excuse or justification for deliberate suppression of the whole truth, for selective half truths, for careless economics, for excessive and misleading rhetoric, and for totalitarian propaganda.  When an economist fails to tell the truth, the whole truth, and nothing but the truth – whether out of ignorance of an intelligible systematics, or sheer political malice, or the imperious desire for fame – and ignores the inexorable swindle of inflation menacing the financial system, the economist loses all credibility.

Ideally, money should be constant in exchange value.

… the dummy (money) must be constant in exchange value, so that equal quantities continue to exchange, in the general case, for equal quantities of goods and services.  The alternative to constant value in the dummy is the alternative of inflation and deflation.  Of these famous twins, inflation swindles those with cash to enrich those with property or debts, while deflation swindles those with property or debts to enrich those with cash; in addition to the swindle each of these twins has his own way of torturing the dynamic flows; deflation gives producers a steady stream of losses; inflation yields a steady stream of gains to give production a drug-like stimulus. [CWL 21, 37-38]

Stephanie Kelton is a proponent of so-called Modern Monetary Theory.  She has recently authored a book of fictive science entitled The Deficit Myth.  Ironically, the book must itself be classified as a myth.  (See CWL 3, 536-46/ 560-69) The negative observations of the previous subsection, “Modern Monetary Theory Quackery,”  apply in spades in any critique of Kelton’s book.  So-called Modern Monetary Theory is quackery proposing a socialist halfway house on the road to inflation and totalitarianism.

The first thing Stephanie Kelton must do is read Lonergan’s Macroeconomic Dynamics: An Essay in Circulation Analysis – especially Section 15, Circuit Acceleration (1). She will reach an understanding of critical differences between her descriptive work and Lonergan’s purely-relational science;  and by so doing, she will find herself repudiating the Modern Monetary Theory previously espoused by her and welcomed by the ignorant, self-aggrandizing politicians whom she advises.

Kelton’s distinction between the issuer of money and the user of money is not an explanatory economic distinction.  It is nothing more than a description of who does what.  It is not an explanation of interconnections and interdependencies of functional productive and monetary flows with one another. Of relevance to the issuer are the requirements for monetary capital for expeditious transactings of the aggregates of magnitudes and frequencies in the productive circuits.  Of relevance to the aggregate of users and redistributive mobilizers is how to apportion the money between outlays and expenditures in point-to-point, point-to-line, point-to-surface  etc. operations.  Should new money for expansion be directed to supply in the operative circuits through (S’-s’O’) and (S” – s”O”), or to demand in the operative circuits through (D’-s’I’) and (D” – s”I”), or should it be channeled only to idleness and inflation in the Redistributive Function?  Should credit be employed to bridge gaps in time in the operative circuits or to distort values in the Redistributive Function?

Macroeconomic theory should address how money should enter the system through S’ and S”:

[(S’ –s’O’) = ΔT +(R-O) +ΔR (CWL 15, 67)

Kelton and MMQ lack a scientific, dynamic heuristic and, so, do not seek, much less reach, a theory of dynamically balanced flows nor an explanation of what combinations of flows are intrinsically inflationary.  MMQ does not explain potential and kinetic inflation. Proponents can only say vacuously, “Let’s spend as much as we want to spend and see what happens.” They mention inflation as a possibility, but have no nuanced science of what must necessarily constitute inflation – whether the inflation will sticks out quickly for all to see or it is hidden by a counterbalancing distortive violation of the principles and laws of the process.    They may recognize and describe inflation when it occurs, but description is not explanation; description is only emptily postulating without explaining by principles and laws.

It is now necessary to state the necessary and sufficient condition of constancy or variation in the exchange value of the dummy.  To this end we compare two flows of the circulation: the real flow of property, goods, and services, and the dummy flow being given and taken in exchange for the real flow….Accordingly, the necessary and sufficient condition of constant value in the dummy lies in its concomitant variation with the real flow. (CWL 21, 38-39)

 Already a distinction has been drawn between description and explanation.  Description deals with things as related to us.  Explanation deals with the same things as related among themselves.  … despite their intimate connection, it remains that description and explanation envisage things in fundamentally different manners.  The relations of things among themselves are, in general, a different field from the relations of things to us. (CWL 3, 291/316)

Further general preliminary ideas:

The old political economists were champions of democracy; and if the content of their thought has been found inadequate, its democratic form is as valid today as ever.  That form consisted in the discovery of an economic mechanism and in the deduction of rules to guide men in the use of the economic machine, a rule of laissez fairefor governments and a rule of thrift and enterprise for individuals … but it is still insufficiently grasped that new and more satisfactory rules have to be devised.  Without them human liberty will perish.  For either men learn rules to guide them individually in the use of the economic machine, or else they surrender their liberty to be ruled along with the machine and a central planning board …the one issue is the locus of control.  Is it to be absolutistfrom above downwards?  Is it to be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankindnot specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives. (reference?)

Lonergan sought “universal laws which men themselves administrate in the personal conduct of their lives.”

The idea of engineering human welfare is repugnant to Lonergan, for ‘managing people is not treating them as persons.  To treat them as persons one must know and one must invite them to know.’  Making the survival of democracy possible by ‘effectively augmenting the enlightenment of … enlightened self-interest’ cannot be identified merely with the Enlightenment’s project of steering public opinion from unenlightened to enlightened self-interest.  Instead, Lonergan envisaged a vast and long-term educational effort.  He insisted that rational control of the economy ‘can be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives.’(CWL 15, Editors’ Introduction, lxxi)

The proponents of MMQ must not be unscientific cheerleaders but rather scientists whose initial task is to understand, formulate, and teach “universal laws which men themselves administrate in the personal conduct of their lives.”  They must discover a system to whose laws all persons must adapt and within whose laws economic conduct is to be administrated.

In equity (the basic expansion following the surplus expansion) should be directed to raising the standard of living of the whole society.  It does not.  And the reason why it does not is not the reason on which simple-minded moralists insist.  They blame greed.  But the prime cause is ignorance.  The dynamics of surplus and basic expansion, surplus and basic incomes are not understood, not formulated, not taught….. [CWL 15, 82]

And,  MMQ’s self-righteousness is utopian dreaming and sentiment without intelligence.  (See CWL 3, 218-45/244-70)

A rigidly egalitarian system belongs to a perfectly egalitarian world; (but) a world in which men are, in fact, unequal must find a different system.  What system?  If the idealism is sentiment without intelligence, it is as likely as not to mate with the underground cynicism of the revolutionaries to foist upon us a dictatorship of the proletariat in which the proletariat does not dictate, a dictatorship of the Herrenvolk in which the Volk obeys the Fuhrer.  But if that idealism can be brought too learn the discipline of logic and of scientific reflection, then it will impose a generalization of the exchange economy.  To determine the nature of such a generalization is the aim of this inquiry; but at once this is at least evident.  The vast forces of human benevolence can no longer be left to tumble down the Niagara of fine sentiments and noble dreams.  They have to be assigned a function and harnessed within the exchange system, for in no other way can that system shake off its fictitious fetters to move consistently towards its maximum. [CWL 21, 36]


The proposals of MMT’s current proponents would wind up frustrating the social changes they wish.  Their proposals would effect entrepreneurs receiving back more than they paid out in outlay. The immediate effect would be higher price levels at the basic final markets, initiating a distortion colloquially called a “boom”:

With G at zero, positive or negative transfers to basic demand (D’ – s’I’) and consequent similar transfers to surplus demand (D” – s”I”) belong to the theory of booms and slumps.  They involve changes in (aggregate basic or aggregate surplus) demand, with entrepreneurs receiving back more (or less) than they paid out in outlay (which includes profits of all kinds).  The immediate effect is on price levels at the final markets, and to these changes (in price), enterprise as a whole responds to release an upward (or downward) movement of the whole economy.  [CWL 15, 64]

Continuity, equilibrium, concomitant variations, and realization of full potential must be achieved within the limits and limitations of the present situation in the whole dynamic organism.

(the productive process) is the totality of activities bridging the gap between the potentialities of nature, whether physical, chemical, vegetable, animal or human nature, and, on the other hand, the actuality of a standard of living.  Such activities vary with the conditions of physical geography and with the cultural, political, and technical development of the population. (CWL 15, 19-20)

An initial and provisional theorem of continuity was enounced in a preceding chapter (CWL 21, §24).  Now it may be indicated in its full generality. ¶ The analysis has revealed that the economic system is a pattern of aggregate dynamic relationships arranged in different kinds of velocity and accelerator rhythms. In the real order there are the primary and secondary rhythms, with the former accelerated by the latter.  In the monetary order there are the rhythms of excess release from the redistributional area to the primary and secondary rhythms; and again, the former accelerate the latter. (sic) ¶ Now the general theorem of continuity is that this complex machine has a nature that must be respected.  Absolutely, there is no necessarily right value for the monetary accelerators DT’, DT”, DC’, DC”; again, absolutely, there is no necessarily right values for the six multipliers C’, C”, T’, T”, G’, G”.  But what is true is this: as soon as a few of these are determined, the rest become determined within narrower limits, for all form part of an organic whole; to violate this organic interconnection is simply to smash the organism, to create the paradoxical situation of starvation in the midst of plenty, of workers eager for work and capable of finding none, of investors looking for opportunities to invest and being given no outlet, and of everyone’s inability to do what he wishes to do being the cause of everyone’s inability to remedy the situation.  Such is disorganization. Continuity, on the other hand, is the maintenance of organization, the stability of the sets and patterns of dynamic relationships that constitute economic well-being in a society. ¶ While the provisional theorem of continuity (§24) did regard the static phase, it is important to observe that the general theorem regards any phase.  There is a general historical movement of ideas, opportunities, and decisions integrating into that major rhythm in which transformations are followed by exploitations only to bring forth new and deeper transformations.  Within this broad historical scheme of things, the role of any age, and still more of any country, is but a small thing: the past was settled by our forebears, and the future will be in the hands of posterity; only the present is ours, and it is only within the limits that we make of the present what we wish.  Our starting pint is already determinate: we have to face things as they are; we may never lose sight of them or attempt to reckon without them.  But not only is there ever a broad and unalterable datum of things as they are; there are also the limitations which this datum imposes on things as we are going to make them.  ¶ The theorem of continuity is the abstract and formal aspect of such limitations in the economic order.  At the moment the exchange process is static or expanding or contracting.  We may like it so or we may wish it different.  But in any case there is some determinate range of values of the multipliers and of the monetary accelerators – of C’, C”, T’, T”, G’, G”, of DC’, DC”, DT’, DT” – that corresponds with such a decision.  Moreover there has to be an internal coherence between these values, and to violate this coherence is to rout economic organization.  Just as the movements of the controls of an airplane must be coordinated and all coordinations are not possible at all instants, so also he economic machine as its controls, which can be moved only in concert and only in a limited number of ways at any given time.  ¶ Such is the general theorem of continuity.  In the abstract and in a general way, it affirms that the economic process can proceed only within the limits of equilibrium of the various phases.  To step outside them is to bring about a general breakdown. (CWL 21 73-5)

Stephanie Kelton’s “The Deficit Myth”

We now refer to pages and contents of Stephanie Kelton’s The Deficit Myth [Kelton, 2021] and give our observations:

Page.xvii:  “last year’s $3.1 trillion deficit poses no risk to our national finances or to future generations and why larger deficits are part of the solution to the current crisis.”

Observation: The money constituting a deficit may circulate in either of the two circuits or in the Redistributive Function’s secondary markets for previously-issued stocks, bonds, real estate, and art.  That part of the deficit which finances the government’s beneficial point-to-line investments may be worthwhile if there is an adequate return on the investment.  If it simply circulates in the basic operative circuit as more money chasing fewer goods, or in the Redistributive Function to inflate secondary assets, it is a foolish waste and sacrifices savers as sacrificial lambs.  (Ball and Mankiw’s  analysis has attempted to address these contingencies.  Ball, Laurence M. and N. Gregory Mankiw (2021) “Market Power In Neoclassical Growth Models”; Working Paper 28538;; National Bureau of Economic Research, Cambridge, MA [Ball and Mankiw, 2021] )

Page 2, lines 7-8: Observation: the deficit bogeyman is real; the government can, in fact, default on its debts either by legal default and settlement or by the debasement of the currency and the reduction of purchasing power of those holding cash.  If the Fed were to purchase much of the government’s debt by merely crediting “Money in Circulation”, on its balance sheet, then forgive the debt, the excess money created would remain in circulation to work its inflationary swindle.

Page 2: 18-20: “This book uses the lens of Modern Monetary theory (MMT) … to explain this (MMQ’s) Copernican shift.”

Observation: Copernicus said the earth revolves around the center-sun rather than the sun around the center-earth.  MMQ calls its backward economics a Copernican shift.  Lonergan’s Copernican shift is that the science of economics centers upon the structure of the objective dynamic productive process rather than centering upon thesubjective psyches of efficient-causal participants as to utility and timing of preferences.

Our aim is to prescind from human psychology that, in the first place, we may define the objective situationwith which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems.  Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest generality and attempt to deduce the human adaptations necessary for survival. [CWL 21,42- 43]

Page 2: 27 “the misguided goal of a balanced budget”

Observation:  Tell it to the states whose constitutions require a balanced budget, and to Weimar Germany and, more recently, to Zimbabwe and Venezuela.

In Germany in January 1921, a daily newspaper cost 0.30 marks.  Less than 2 years later, in November 1922, the same newspaper cost 70,000,000 marks.  All other prices in the economy rose by similar amounts.  This episode is one of history’s most spectacular examples of inflation, an increase in the overall level of prices in the economy. [Mankiw 2007, 12]

 Also see,

Page 2: 29-30 Observation:  Functional Macroeconomic Dynamics advocates a fair sharing of prosperity and, thus, seeks the implementation of the basic expansion and a proper distribution of income within the bounds yielded by Macroeconomic Field Theory.  MMQ does not have a monopoly on the quest for fairness.  But MMQ’s so-called theory is cockamamie; it is sentiment is without intelligence and would menace and ultimately harm the financial system on which prosperity depends.


Page 3: “the idea that taxes pay for what the government spends is pure fantasy.”

Observation: MMQ has no theoretical concept of concomitance, solidarity, equilibrium, continuity, and expansion of the economic process in phases.

Note:  A man ignorantly jumped off the roof of an 80-floor building.  As he passed each of the floors from 80 through 2, he said, “All right so far, guess I’ll never suffer a crash.”

Page 3, 28 – page 4, 7:  Observation; MMQ has no theory of what is intrinsically inflationary.  If irresponsible current spending does not manifest inflation immediately, MMQ would falsely claim that it is not a cause of inflation.

Page 8, 23-27  “I tackle the idea that the federal government should budget like a household.  Perhaps no myth is more pernicious.  The truth is, the federal government is nothing like a household or a private business.  That’s because Uncle Sam has something the rest of us don’t – the power to issue the US dollar.”

Observation: The government is not a third party.  It is We-The-People acting collectively.  It performs investment and consumption functions just like the private sector.  It borrows for investment and consumption just like the private sector.  The economic principles and laws of borrowing and lending do not change.  True, the government can roll over debt and blindly concern itself only with the interest obligations.  But so can a unit of enterprise or a household roll over its debt at maturity as long as its bank is confident of its ability to ultimately repay. The assignment of the function of being the technical issuer of money is not the granting of a license to menace and damage the financial system by intrinsically inflationary actions.

Banks are willing to increase the quantity of money as long as there is no appearance of uncontrolled inflation, but they curtail and even contract loans as soon as an upward spiral of prices menaces the monetary system.  Thus the root of the failure of the mechanism is the failure to obtain the anti-egalitarian shift in the distribution of income.  [CWL 15, 138]

JMC note to readers:  Enough already! I’m sick of debunking Modern Monetary Quackery.  I’m just repeating what I’ve said elsewhere and wasting a lot of my time.  Perhaps I shall return to continue this quoting and commenting, so for now I’ll just say “To be continued.”  But readers should not hold their breath waiting for more entries to this section.

To be Continued