Book Review: The Deficit Myth by Stephanie Kelton

Reading this book, you really get a sense of Stephanie Kelton’s anger at our failing political system. Her frustration is palpable throughout, as she talks through the pain the last fifty years of economic theory has inflicted on the poor in the US, in developing countries around the world, and on our environment.

Pain that in her view, and the view of Modern Monetary Theorists, could have been totally avoided.

In a nutshell, Modern Monetary Theory (MMT) is an economic viewpoint that seeks to change the way we think about a balanced economy and how it should work for everyone.

black and white street sign

The central insight of MMT is that any government with a nationally regulated fiat currency cannot run out of money. So, the United States, United Kingdom, Japan, Canada – all of these countries are literally unable to go bankrupt, no matter how much they spend. This is because with a printing press, or a stroke on a keyboard, these governments can simply create new money into existence anytime they wish. Like the banker in Monopoly, Kelton says, countries with their own currency cannot go bankrupt. Countries with a currency though, like Greece, can.

So, while all of our politicians worry about the deficit (the gap between government income and expenditure) endlessly, MMT theorists like Kelton argue that it really doesn’t matter. Instead what really matters, and what we should really worry about, is inflation.


I’m not an economist. Many of the concepts in this book are probably beyond my understanding. But the narrative is engaging, and highly educational. Kelton has a great ability to simplify the most complex economic topics, and she makes her argument in 6 short chapters, designed to dispel six major economic myths.

The first myth is that government spending is not the same as household spending. The deficit is not like running up a credit card bill. This is because the government is the one that makes the money! They can’t run out of it, like we can, because they can make more.

1 U.S.A dollar banknotes

Within that, Kelton argues that the idea the government taxes and borrows to fund expenditure is totally backwards. Instead, the government spends, and then taxes and borrows, with the main goal of keeping inflation down and to meet policy goals – like taxing the rich to try and achieve a more equal society. The government does not need us to pay for things – all the money we have originally came from the government.

Secondly, Kelton argues that we shouldn’t be worried about using the deficit as a measure of the success of an economy. The deficit can grow massively, but it can always be paid off if a government wants to. The money can always be made available if needed, because the government can create it! Even government bonds that the deficit is currently financed with is just another form of currency the government creates – mostly because it allows them to control interest rates.

Inflation is the real danger, not the deficit. Inflation is what can cause the price of goods to skyrocket, can cause people to lose their jobs and cause companies to go bankrupt. Kelton argues that the way we tackle inflation today is unproductive. Typically, whenever employment is too high, governments or central banks will increase the interest rate on borrowing. This will keep a certain number of people unemployed, which economists believe will keep inflation rates down. If unemployment rates get too high, the interest rate will be slashed to encourage companies to hire.

Kelton believes this is counterintuitive, and that the best way of controlling inflation is for the government to stop worrying about the deficit, and for elected bodies like the House of Commons and the US Congress to take more of a direct handle on the issue of inflation. The view of MMT theorists is that the best way to do this is with a federal job guarantee, which will allow the government to set the inflation rate as the minimum wage.

white concrete dome museum

Kelton believes this is counterintuitive, and that the best way of controlling inflation is for the government to stop worrying about the deficit, and for elected bodies like the House of Commons and the US Congress to take more of a direct handle on the issue of inflation. The view of MMT theorists is that the best way to do this is with a federal job guarantee, which will allow the government to set the inflation rate as the minimum wage.

The third myth is that we don’t need to worry about the national debt, despite what politicians say. Kelton believes this is basically a useful political lie – and that the idea our grandkids will have to pay for our spending is just a fiction. Interestingly, she points out that when the government is in surplus, the economy actually tends to do worse, as it means that government spending that could be put to use improving infrastructure or building hospitals, is just being kept by the government for no good reason.

The fourth myth is that government debt negatively affects private investment, as it is more secure to invest in buying government bonds rather than inventing in private companies. In fact it’s the opposite, when there is a government deficit, there is always a non government surplus, as the extra money goes to the economy.

This isn’t always good. It can lead to unequal wealth distribution if government deficits are causing surpluses in the wider economy, but that wealth isn’t being spread equally. Government bonds in the US are decided by auction (lowest interest rates offered) and are highly attractive, used by private banks, investors and for pensions etc, which are all helped by a deficit.

low angle photo of city high rise buildings during daytime

The fifth myth is that deficits in trade don’t mean that our countries are losing money, it just means we’re getting more stuff from abroad. This also means as a net importer, countries rely on the UK to support many of it’s industries This supports jobs abroad, but can cost jobs here, leading to political unrest. However, we don’t need to balance our foreign trade budgets to protect jobs at home. MMT theorists argue that the government should create a federal jobs guarantee – with everyone having the right to a job.

Instead of creating trade wars, Kelton argues the US should be instead focussing on improving the quality of trade. Reducing slave labour, improving climate restrictions and making sure that trade is not harming ecosystems should be our priorities, rather than trying to stop one country being ‘ripped off’ by another.

purple and pink heart shaped illustration

The final myth is that we can’t afford to fund important government programs like the NHS, education and pensions because of the deficit. MMT theorists that we can always afford to fund these services, as long as the overall inflation balance is met and we have enough real resources, doctors, hospitals ambulances to fill the needs.


Kelton offers a powerful argument against inequality, unemployment and climate change, purely in economic terms. As she mentions throughout, MMT offers a powerful argument for a different way of looking at the economy, no matter your own political persuasion.

I’d highly recommend reading this book. You may not agree with everything, and it takes some time to get used to the central argument – Kelton will take many of your assumptions about the economy and turn them on their head. But the compelling point is that whatever holes exist in the theory, we don’t have the luxury of not changing the way our economy works.

Poverty, climate change and inequality are political choices and in this book Kelton proves that alternatives are available. We just have to make them a reality.  

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s