we believe in various myths to make
sense of reality and rationalize the systems we live in for thousands of years
we believed in the divine right of kings often you will find that the dominant ideologies
of society conveniently fit the economic interests of those who are at the top of that society's
hierarchy people's own egos often play a strong role in maintaining these myths it's not
exactly comforting to realize that so much of what you are taught is nothing but a lie
it is often easi
er to get people to believe myths than it is to convince them that their
way of thinking is already based on myths one of the most common myths in today's political
discourse that for some reason still hasn't died out is the notion of the deficit the narrative
that governments need to balance the budget and that the so-called national debt is an impending
catastrophe there is a lot of unfounded hysteria surrounding the national debt especially in
countries like the united states canada aust
ralia and the uk many people in countries like these
still believe that their governments are flat broke and that their budget is unable to tackle
some of the most important issues of our time whether the policy debate is about health care
infrastructure high-speed rail education housing or a green new deal to combat the impending
climate catastrophe the same question inevitably arises how are you gonna pay for it where will you
get the money you want people to have homes how can we afford
that you want to invest trillions of
dollars into climate change program to transition to a sustainable economy to mitigate the impending
climate crisis but what about the deficit how are we gonna find the monies it's not
like money grows in the federal reserve i mean trees isn't the u.s national debt
like 12 trillion or 28 trillion or something won't future generations have to pay back the debt
that the government created in its own currency a lot of people unironically think this way even
a
lot of politicians believe this myth and the ones who secretly do know that the deficit is just a
mythical boogeyman have to keep pretending that it's real either because they don't want you to
know that you are indeed capable of demanding nice things from the government or because the
deficit myth is already so deeply ingrained into the political unconscious that politicians are
scared to challenge it sometimes politicians lie about the deficit as a talking point to perpetuate
the myth
of fiscal responsibility and use it as an excuse to push for austerity or shut down
progressive policies that the corporate donors won't like and often the politicians themselves
are ignorant enough to actually believe the myth the deficit hysteria is not just unfounded
bologna it is a highly dangerous myth that holds back human progress the way that many people
talk about the deficit today is comparable to how flat earthers talked about and still talk about
the sun and the earth before co
pernicus but i feel like many of us intuitively know that there
is something wrong with the deficit narrative and the way people think about it as many of the
holes in the narrative are quite easy to spot why is a deficit only brought up when it comes to
spending on social programs how come politicians don't ask how can we pay for it when they push for
multi-trillion dollar wars bailing out the banking sector we're giving billion dollar tax cuts to the
wealthy which all add massively to the
deficit why do conservative politicians always fear monger
the most about the deficit despite historically running the most deficits hell even washington
insiders like dick cheney admitted that deficits don't matter unless you are drinking the kool-aid
of ideology on the daily you can easily spot the clear contradictions in all of this but we are not
given the means to articulate it this video will provide you with the necessary means to absolutely
destroy the deficit argument when you enc
ounter it while many of the deficit hawk talking
points could easily be disproved just by old-school Keynesian economics and many economists
today who are not total conservative ideologues usually understand that governments don't
operate like households the main economic school of thought which has by far the most rigorous
and encompassing analysis of the deficit myth and how the modern monetary system in general
works is what is now called "Modern Monetary Theory" also known as MMT for sh
ort contrary to the
dogma spouted by conservative deficit duds and libertarian goldbug fanatics mmt is not just
printing money and it is not even a prescriptive policy ideology it's almost misleading
to call Modern Monetary Theory a theory because it's really more just a description of how
the modern monetary system actually works based on facts that are very hard to disprove once you
understand them those who critique it without first actually bothering to engage in the material
itself us
ually do so because mmt invalidates some of their ideological assumptions while many
of the ideas in modern monetary theory are not particularly new and derived from keynesianism mmt
provides a more well-articulated and updated lens for understanding the modern monetary system
and gets some key insights into the origin of money and taxes from fields that are outside
economics as well such as history and anthropology now i don't want to name drop too many unfamiliar
names but it is worth giv
ing a shout out to the economists most known for popularizing mmt such as
warren mosler larry randall ray bill mitchell and most recently stephanie kelton and her wonderful
book the deficit myth key works and lectures from all of these economists can be found in the
description of this video for further learning if you are interested but i will try to give you a
concrete picture of the main ideas in this video so it is accessible as possible once you
understand the key realities of how the
modern monetary system actually works the mythology
surrounding the deficit discourse will be demystified and you will go absolutely mad trying
to watch the backward discourse on the deficit that is so heavily polluted by this deficit
mythology but first what even is the deficit and the national debt the deficit is simply a
subtraction of two numbers how much money the government puts into the economy subtracted by how
much is taken out of the economy the national debt is simply the all-tim
e record of how much money
the fed put into the economy minus how much it subtracted out of it via taxation that's it the
national debt may look scary but in reality no citizens are gonna have to pay for it and no one
ever will and that's okay what matters is not how big the deficits are but rather who the deficits
are benefiting is the deficit being used for wars and corporate bailouts or is it being used to
fund things like affordable housing good quality public transportation universal h
ealth care and
tuition-free college future generations if they are lucky enough to survive climate change won't
have to worry about paying off the national debt but they will have to worry about paying off their
private student debt and their private mortgage debt as well as the impending climate crisis
coincidentally conservative deficit hawks don't seem to care very much about any of these things
while this may be obvious if you didn't drink the conservative kool-aid growing up for most o
f us
we have to unlearn first in order to see the truth to deprogram the deficit ideology that is
so deeply ingrained into the public psyche so let's demystify it one step at a time the
first step to deconstructing the deficit myth is understanding that governments are not like
households even though we hear this analogy all the time we often hear politicians say that
governments must get their fiscal house in order that the government must tighten its belt and that
the government is livin
g beyond its means this is a completely backward way to think even though
it works as a personal narrative to simplify reality in people's heads many people have the
tendency to apply their microeconomic thinking of private business and personal households to the
macroeconomics of the government and the overall economy after all if households ran continuous
deficits like virtually all governments do then most people would be bankrupt but in reality
governments do not function like household
s which should be quite evident unless your brain
is swimming in ideology contrary to popular belief governments with currency sovereignty cannot run
out of money i repeat governments with currency sovereignty cannot run out of money even though
you probably never thought much about this before something deep down inside of you intuitively
already knows this basic truth governments with currency sovereignty are the monopoly issuer
of their currency but just remember that this fiscal freedom
only applies to governments
that have their own currency and have most of their debt in that currency governments with
currency sovereignty include the united states canada the uk australia china japan and a few
others keep these countries in mind because all of what is being said in this video is applicable to
countries with currency sovereignty even though i will be mostly referring to the united states as a
primary example for simplicity's sake because most people are familiar with us p
olitics the arguments
of modern monetary theory apply to countries like this where the government is the monopoly issuer
of a fiat currency and is not on a gold standard so this does not apply as much to countries
in the european union who have to use the euro and rely on the european central bank or to
countries which do have their own currency but hold much of their debt in a foreign currency
such as venezuela argentina and lebanon these countries do not have currency sovereignty the
not
ion that governments with currency sovereignty cannot run out of money has become an irrefutable
fact ever since most of the world abandoned the gold standard which was formally abandoned on an
international level under richard nixon in 1971 but the usa abandoned the gold standard
multiple times most notably in 1933 under fdr for those who don't know the gold standard
constrained the ability of governments to create currency as an equivalent amount of gold
reserves had to be held in proport
ion to the amount of money stored gold is a finite resource
and the gold standard system proved to not make very much sense as governments had to spend
more and more to maintain the capitalist system so the united states finally abandoned the gold
standard officially under richard nixon and most other countries did the same afterwards ever since
then governments who issue their own fiat currency and impose taxes in that currency spend in that
currency and issue debt in that currency can nev
er run out of money the government will always
be able to make all payments as they come due so any payment that it has promised to make
whether it's your social security retirement pay wars military spending government programs or
interest payments to government bonds denominated in its own currency then the government can always
make those payments the way it used to work is that governments would actually print up that
currency or stamp the coins to make the payments but today it's mostl
y handled electronically so
it's a bit misleading to say that governments print money governments create most of their
money virtually via their central bank by typing numbers onto a screen without boring you with
the nitty-gritty details the way it basically works now in the usa for example is that the us
treasury spends by having the federal reserve the central bank credit the reserves of a
commercial bank and that bank credits the accounts of the appropriate recipients of the government
spending the various actors that the government needs to carry out a certain policy voila money
created on a computer with nothing but a keystroke while many politicians probably won't admit
this all of the chairmen of the federal reserve the people supervising the money creation will
the united states can pay any debt it has because we can always print money there is an infinite
amount of cash at the federal reserve we print it digitally so we you know we as a central
bank we have the abi
lity to create money the banks have um accounts with the fed much the same
way that you have an account in a commercial bank so to lend to a bank we simply use the computer
to mark up the size of the account that they have with the fed technically the central bank is
formally considered independent in most countries but in reality it essentially functions as the
government's bank the government effectively decides what the central bank's objectives are
and of course it finances much of the
federal government's policies by crediting commercial
banks and the appropriate accounts to those who need to carry out the policy this common method
of fed money creation is not to be confused with quantitative easing also known as qe which is a
less common policy that a lot of people falsely equate with money printing qe is when the central
bank purchases longer-term securities from the market in order to increase the money supply
and encourage lending and investments now we don't have ti
me to get into the technicals of
qe but if you want to understand the difference between money printing and quantitative easing
the channel money and macro has a really good video about it that i highly recommend now back to
fed money creation let's use one more example to illustrate how federal governments with currency
sovereignty finance most of their policies while this essentially works in a very similar way
for every country with currency sovereignty let's take the uk as another examp
le to visualize just
in case you still don't get it when parliament approves the budget parliament gets the central
bank the bank of england in this case to credit the bank accounts of the institutions and the
individuals necessary to make that policy happen and there you have it now that the budget has
been approved new money has just been created and entered the private sector if you still aren't
convinced and think that it just can't be so simple then i would highly recommend checking ou
t
the statements from the central banks themselves the bank of england for instance published a paper
in 2014 that clearly outlined this process of how money is created and you can also find countless
statements from those who worked as chairman of the federal reserve in the united states as
referenced throughout this video the proof is in the pudding by now an alarm bell in your brain
is probably going off isn't government spending supposed to be financed by taxation where does the
money
come from it has to come from the taxpayer right isn't that what taxes are for to finance
government spending as counter-intuitive as it sounds taxes do not fund government spending
what taxes don't fund government spending nope taxes do not fund the majority of government
spending at least not on a federal level local and provincial governments on the other hand who
cannot create money do use taxes to finance much of their expenditures while also relying on
federal government handouts to f
inance the rest which is usually created by newly created
government money by the central bank but in general the federal government does
not rely on taxpayers to spend money for the federal government spending comes first and the
taxes come later the taxes are not to finance the spending it's the truth that many economists
know and even some politicians know it but because most of the electorate doesn't know it political
representatives have to keep pretending that it's somehow possible fo
r the government to run out of
money and of course it works as a quite convenient talking point for politicians to use as an excuse
to privatize public assets and social programs the state has no source of money other than the
money people earn themselves there is no such thing as public money that is only taxpayers money
margaret thatcher is wrong or flat out lying did it ever occur to these squareheads where the money
originally came from and who creates the currency a stubborn conservati
ve might say well doesn't
the government get all of its money from taxes according to this logic there is no public
money there is only people's money which the government uses then the question you should
ask them is where do taxpayers get their money well they earn them through wages paid by their
firms that they work at ok then how do the firms get money consumers purchasing their products
or services with the money that they earn from the firms that they work at as you can see if you
b
elieve the delusion that the taxpayer is at the center of government spending then you get into a
never-ending cycle that can never explain how the currency originally got into the economy content
check what the bank note says next time you get some dollar bills it will say bank of england if
you are in the uk or federal reserve note if you are in america take a moment to think about it if
the government really needed your taxpayer money to finance the spending then virtually every
governme
nt would not be running continuous budget deficits by always spending more into the
economy than it takes out of it by now you might be thinking to yourself if governments don't
rely on taxpayer money for federal spending then what even is the purpose of taxation
why bother with taxes at all the answer might surprise you and you will find out towards the
end of the video as seen in the time stamps but first let's address the common misconception that
government deficits are financed by borr
owed money a common rebuttal to what i have said so far
would be if the federal government issues its own currency and can create money digitally
out of thin air then why does it issue debt in the form of bonds doesn't this mean
that the government is borrowing our money most governments such as the usa do allow
people to purchase government bonds in exchange for interest payments which the
central bank pays with newly created money the government coordinates deficit spending by
selling an
equivalent amount of securities but it is highly misleading to say that the government
is borrowing money because it isn't relying on borrowed money at all the federal government is
not selling bonds because it needs the dollars bond sales just allow holders of reserve balances
to trade them in for u.s treasuries it's done to support interest rates not to fund the government
a federal government bond is really just a savings account with the fed what basically happens
when one purchases a
federal government bond is that one is swapping their money from one
savings account to another savings account with the fed you will never have to worry about
whether a sovereign currency issuing government like the united states will default on its debt
because it issues that debt in their own currency the central bank will always be able to continue
making the interest payments by crediting the appropriate bank accounts federal governments with
currency sovereignty like the united states
the uk canada australia and japan don't actually need
to issue bonds but they choose to for various reasons for one government bonds function
as reliable savings accounts with the fed where people can collect interest payments
bonds can be used as a tool to encourage people to save money and not spend it to clarify
once again the point is that neither taxpayer money or a borrowing funds federal government
spending for countries with currency sovereignty the federal government spends first
taxes second and then chooses to issue debt in the form of bonds with interest which
functions as safe assets for people's savings the only so-called economists who don't understand
this are those whose thinking is stuck in the era of the gold standard and fixed exchange rates and
they have not updated their thinking to the modern monetary system which uses a fiat currency with a
floating exchange rate while it's really not easy to simplify if there is one message to take from
this video t
hat you should most certainly remember is that governments that issue their own currency
and issue most of their debt in that currency cannot run out of money and do not rely
on the money of taxpayers or bond buyers now while the government can't run out of money i
certainly can and with pretty much negligible ad revenue on these videos i will need your help
to keep high quality content like this going and unfortunately i don't get al jazeera
money or generous donations from leftist comedy
billionaires so if you think these videos
are important and give you value your collective support on patreon can make all the difference now
back to the video but if governments can't run out of money then what are the limitations to how much
money they can create why can't they just deposit each of us a one million dollar check the answer
is no the government cannot print unlimited money well technically it can but not without serious
ramifications mmt obviously recognizes that there are
indeed real limitations to government spending
but they're not exactly financial limitations the two biggest limitations to federal government
spending are number one inflation and number two most importantly the real resources available in
the economy let's first look at inflation because that tends to be what people worry about the most
inflation is a very multifaceted phenomenon which would probably require an entire video of its
own but for now what you need to know is that inflation is
caused by multiple factors inflation
is simply the continuous increase in prices most governments usually aim for a stable
amount of inflation for a healthy economy and deflation in contrast which is the opposite
is usually a sign of a stagnating economy but if prices continue to increase too much while
incomes stay the same people's money has less buying power in their own currency thus leading
to a lower standard of living and when prices increase so rapidly to the point where they're
o
ut of control this is when we get hyperinflation a very rare phenomenon inflation takes shape in
different forms first there is what is called demand pull inflation which is when demands for
goods and services significantly outweighs the supply for them one could argue that demand pull
inflation is one of the multiple factors behind the increase in prices we have seen recently this
year as businesses are increasing prices to recoup lost profits from the coronavirus stagnation and
are capita
lizing on the big increase in demand following the opening up of the economy but this
is likely not the main cause behind the inflation we are seeing now what is more relevant right
now is cost push inflation the second main type of inflation cost push inflation occurs when there
are noticeable increases in the costs of important goods and services where no suitable alternative
is available for example a serious drought could lead to massive crop failures and food shortages
that send prices
soaring as supply collapses or powerful storms could wipe out oil refineries
causing the prices of energy to spike cost push inflation is often caused by the rising costs and
key parts of production such as oil raw materials and transportation costs which have become very
relevant in the age of global interconnected trade examples include supply chain disruptions and
fluctuations in the price of oil both of which increase the costs of production and in turn
caused the prices of many import
ed goods to rise this type of inflation is primarily what is to
blame for the price increases we are seeing in many countries at the moment contrary to
the dogma that conservative hyperinflation hyperventilators will tell you larger deficits
do not automatically lead to hyperinflation in fact most of the time they don't even lead
to much inflation at all as real world evidence clearly shows us japan has the highest debt to gdp
ratio in the world of about 256 percent as of 2021 and they have
been at the top of that list for
quite some time now yet for the longest time they can't even get out of deflation the opposite of
inflation let that sink in this tends to make the brains of deficit hawks absolutely explode because
they haven't accepted two basic facts countries that issue their own currency and most of their
debt in that currency cannot run out of money and two that the cause of hyperinflation is not
large deficits governments all around the world including the united sta
tes created insane
amounts of new money after the 2008 crash and experienced little to no subsequent inflation
governments have also increased the money supply even more significantly during the coronavirus
crash and we have not seen any substantial inflation until recently due to the supply chain
disruptions and shortages of important goods the connection between money creation and inflation
is not as clear-cut as many people assume it is rare cases of hyperinflation such as zimbabwe
vene
zuela lebanon and weimar germany are extremely rare and were caused by multiple severe
catastrophes in their real economy and these situations were not helped by the fact that all
of these countries owed an insane amount of debt in a foreign currency for all the interested nerds
out there i have some helpful studies listed in the description if you want to learn more about
what exactly caused hyperinflation in these places dr kelton's book the deficit myth also
has an in-depth chapter on in
flation but the point is is that creating more money does not
automatically lead to more inflation and inflation is a multi-faceted phenomenon way beyond the
scope of this video anyone who gives you a short oversimplified idea or one single cause
of inflation is most definitely lying to you now while creating money does not automatically
lead to more inflation government spending does have very important constraints if countries
do not have the physical productive capacity capable of produc
ing and consuming an adequate
amount of goods and services as alluded to earlier this brings us to the primary limitation of
money creation and that is the real economy there are real limits to the amount of workers that
exist who the government can hire to do things and there is also a limited amount of natural
resources available and each country generally has their own limitations to their productive
capacity aka their economy's internal speed limit let's take funding a war as an example
just to
illustrate while we should all be against wars i hope the libertarian argument that we just
can't afford it doesn't really hold up it's just not a good argument because countries with
currency sovereignty can always afford another war at least nominally there is a reason why the
usa is comfortable spending so much money on the military every year and even spending trillions
of dollars on things like the iraq and afghanistan wars the limitations in this case is not the
amount of mo
ney that exists but rather how much actual people are willing to fight in that war how
many tanks and weapons are capable of being built and how much fuel is available to power all of
these war operations the real horror of these wars is not the amount of taxpayer money wasted
but rather the huge loss in real human life that occurred the us government didn't use taxpayer
money to pay for the iraq and afghanistan wars and they didn't use taxpayer money to pay for
the trillion dollar cares ac
t that recovered the financial sector during the coronavirus crash same
goes for the obama stimulus package after the 2008 crash the us government paid for this stuff the
same way it pays for most things it simply gets the federal reserve to create money and deposit
in the appropriate accounts of the actors needed to make these things happen if the us government
were to implement an ambitious progressive policy like a green new deal or a universal basic income
we would simply do the same th
ing here is warren mosler a known mmt economist explaining
how simple this process would actually be so when somebody says to me how do we pay for the
green new deal i say well congress appropriates the money and then uh the treasury instructs
the fed to credit the appropriate accounts and that's how it's paid for and then
the green new deal people go yeah that okay and so and there's no disputing that you
can ask anybody in a fed yeah that's how it works that's how we pay for things we cha
nge the number
in the account who you know who else said well bernanke said that we have the quote greenspan
said that we have these quotes from fedship now the question you have all been waiting for
which i waited until the end of the video to discuss because it is the finding of modern
monetary theory that shocks people the most if governments with currency sovereignty
can't run out of money and don't require taxes to finance federal spending then what is
the purpose of taxes why do we n
eed taxes at all the answer might surprise you actually it
will probably make your head explode there are multiple reasons for taxation but mmt boils down
the role of federal taxation to two core purposes number one governments looking to provision
themselves and create demand for their currency a government needs to find ways to get people to
do things for the society that it's supervising so the government imposes a tax liability that
essentially forces people to have to look for work to
earn enough currency to pay the tax by creating
demand for the currency and getting people looking for work the state provisions itself and creates
value for that fiat currency which would have otherwise been worthless of course pegging a
currency to gold adds some complications to this but we left the gold standard a long time ago for
a reason and because governments primarily run on fiat currency now it makes more sense to describe
the modern monetary system that we have now to clarify on
ce more how governments provision
themselves and generate demand for the currency via taxation let me use the following example
that economist warren mosler likes to use let's say i have all of you watching this
video in a room with me and i offer you one of these tokens to mop the floor for me
let's call this fiat currency donkey coins would any of you mop the floor for one donkey
coin probably not how about for two donkey coins probably not because they're completely worthless
now if i h
ad two guards with a machine gun waiting by the door and you had to hand in one of the
donkey coins to get out would you then change your mind everybody would and everybody would
try to mop the floor because you would need to in order to earn the donkey coins as you would
need to pay one of them to the guards in order to get out the door this analogy essentially
describes how government taxation works and how it generates demand for their fiat currency
this may sound coercive but it's essen
tially the reality of how the state works the state by its
nature always involves some level of coercion if the state didn't enforce tax collection via
law enforcement and agencies like the irs then the value of the currency would essentially become
worthless the federal government creates a hole in your pocket with a tax bill in order to get you
to need their currency so that the government can then issue that currency and have users of
that currency work and trade for that currency most s
overeign fiat currencies work this way
the relationship between state fiat currency tax liabilities and debt has been well documented
in the field of anthropology the narrative that money tokens spontaneously sprung up free of
state coercion as part of a natural market evolution from barter has been debunked many times
many anthropologists most famously the late david graber call it the myth of barter but the origin
of money is a complicated topic that we simply do not have enough time for
in this video now let's
move on to the second main purpose of taxation to control inflation taxes are one of the many
methods of reducing inflation by subtracting money out of the economy this is to control the money
supply and to prevent the economy from overheating and it can also prevent people from hoarding
too much money what a great job that's doing taxes can also serve other smaller purposes such
as discouraging certain behaviors like taxes with things like smoking taxes can also be
used for
moral purposes reducing inequality although the efficacy of taxes on reducing inequality highly
depends on the type of taxes and how well they're enforced okay finally there you have it now it
should be clear that how are we going to pay for it is not the question we should be asking
it's not the government's digital budget that needs to be balanced it's the real economy the
only limitations to government spending that we should be concerned with are the real resources
in our real
economy and not letting inflation get out of hand not only would policies like building
good infrastructure and high-speed rail not cause much inflation but many progressive policies like
universal care pharmacare and public affordable housing would actually be deflationary as they
would significantly lower prices in the cost of living but if what mmt says is really true then
how come governments don't embrace it and start using their budget to actually implement policies
that optimally be
nefit their people they sure seem to do so when it comes to optimally benefiting
the rich on first glance it might appear that most politicians are either stupid self-interested
afraid to challenge a status quo or all of the above but here is where i would argue that mmt
does not have the answer in my opinion certain other schools of thought do mmt is definitely
useful for monetary policy but it does not encompass the power dynamics of different economic
classes and the inherent class inter
ests of the state to see more about class interests and the
nature of the state i highly recommend my videos on the democrats and the stock market i also
talk about this stuff extensively on my patreon exclusive podcasts and my second channel one dime
radio which you should definitely subscribe to if you haven't already lastly if you enjoyed this
video and found it helpful please leave a like for the algorithm gods and consider sharing it with
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rn from it we really need to get this message out
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