WBD246 Audio Transcription

Modern Monetary Theory with Stephanie Kelton

Interview date: Wednesday 29th July 2020

Note: the following is a transcription of my interview with Professor of Economics Stephanie Kelton. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this interview, I talk to Stephanie Kelton, professor of economics and public policy at Stony Brook University. We discuss the benefits of modern monetary theory, why increased spending may not lead to inflation, national debt and money printing.

“The people who were so sure that deficits drive interest rates up or that QE is inflationary, those people who asserted those things with real fervour, I think are demonstrably wrong.”

— Stephanie Kelton

Interview Transcription

Peter McCormack: Hi Stephanie, how are you?

Stephanie Kelton: I'm great, how are you?

Peter McCormack: I'm really good, thank you. Thank you for coming on the show. You came under a recommendation from Joe from Bloomberg.

Stephanie Kelton: Yeah, from Joe Weisenthal. He's a good guy!

Peter McCormack: Yeah, he's been on the show. Okay, so let's get into this. This is going to be a subject which will be controversial in the Bitcoin world because most Bitcoiners tend to be fans of Austrian economics, and not particularly fans of MMT. Yet we are in a world of MMT.

It's not something I fully understand. I'm not going to sit and defend Austrian economics to a very deep level because I'm not an expert, but I am going to ask questions around the ideas or things I've heard and I've also listened to the majority of your book this week whilst on my Peloton, this week and last week.

I definitely have questions, lots of things I'd like to go through with you. Just before we go into it, just some people who are listening because not everyone will know you, can you just give people a bit of your background like who you are, what you do, and then talk about why you wrote this book because I think that will be a good setup for us?

Stephanie Kelton: Sure! Well I'm an economist, I've been teaching economics at the university level for 20 years. I spent 17 years at the University of Missouri in Kansas City. Now, I'm at Stony Brook University, which is on Long Island, in the state of New York. I took a little bit of time away from academia, I took a leave of absence, and I went to work in the US Senate. I served as the chief economist for the Democrats in the senate for a period of time in 2015 and part of 2016. I was an adviser to the Bernie Sanders presidential campaign and I just recently wrote a book.

You asked why did I write the book, I've been working in a space for a long period of time, and this is what has become known as MMT. I just wanted to... I always try out Twitter. Twitter is the place where I go to test drive the way that I like to say things. I think communication is really key and you can get that instant feedback on Twitter if you found a way to phrase something that really resonates and helps people see things more clearly. It's like you immediately know you've hit a gold mine with a certain phrase or whatever. So I don't know, I think that I feel like in many ways I wanted to communicate with the broader public.

As an academic, you write research papers, and you communicate with a certain audience, with your scholarship, but there's this broader public out there who's so misinformed, I think, about a lot of issues that are really important, and I wanted to give them an entry point into the work that I and other MMT economists do that would be really just accessible. Somebody could pick up this book with no prior training in economics... In fact, it's probably better if you don't have it because there's less unlearning that you have to do, no fancy mathematical equations to get in the way and scare readers off.

So I just wanted to see if I could write a book that would help empower people to take place, to take part in the discourse around public policy and a lot of the issues, and protect them from the myths and misunderstandings that they're bombarded with by media and politicians, and so forth.

Peter McCormack: Do you get stuck in some of the Twitter warfare at all?

Stephanie Kelton: I really don't think I do. I've been on this hell site for a long time. Like I said, I find it useful in a lot of ways. There are, obviously, flame throwers and people who get very aggressive, and I've just always tried to avoid engaging with people like them. Happy to engage and debate with honestly interested people who are treating the ideas fairly.

They have genuine questions I want to try to provide answers and so forth, but there's obviously, a lot of ... For the same reason that one should never read the comment section of the New York Times, there are just certain things you don't leave in your mentions or life is probably going to be pretty unhappy.

Peter McCormack: Well I'm going to treat this fairly, I want to listen and I've got questions. I do think maybe when this goes live, you might want to ignore your Twitter for a couple of days. There might be some Bitcoiners who would disagree with you, but I do want to listen because I found the book fascinating. Actually, I've got a question about the book because I didn't actually check in, and I think you did. Did you narrate it yourself?

Stephanie Kelton: I did yeah.

Peter McCormack: So I've got an interesting question for you. So I have this other podcast where I do these mini documentaries, and this very strange thing happened whereby I recorded it, my very first long form episode, which is about 35 minutes, and it was about Steven Mnuchin. We had to make some changes and when we went back to record it, my voice sounded entirely different. So we ended up having to re-record the whole thing again. Now I don't imagine you narrated this all in one session, right?

Stephanie Kelton: Well don't we all think that our voice doesn't really sound... When we hear ourselves, we say, "Oh, that's not me. That's not what I sound like," but you're saying it actually distorted the way that you really do sound.

Peter McCormack: No, two different times of the day because the days were separate. When you put them together, it sounded just slightly different. It was obviously...

Stephanie Kelton: Really?

Peter McCormack: Yeah. So interestingly, when I was listening to your book, there was one point I noticed that happened, which is something I wouldn't ever have noticed, but it's a hell of an undertaking to narrate a whole book.

Stephanie Kelton: It was very strange. I was reluctant to do it, but I had... Actually, while I was in Australia the first part of the year, I was there for two weeks in January of this year. I did a lot of media while I was there and one of the things I did was a podcast radio interview with a blind host, so he digests everything just about through audio. He said, "Who's going to read your book?" I said, "Well, I don't know. There's been no decision." He said, "Oh, you have to do it." I said, "No, no, no. I was thinking there needs to be some great reader with a great voice or something."

He said, "No, I really encourage you to read your own book." It was really because that impacted me and persuaded me to do it, but I'll tell you, it's a weird experience because you don't do it all in one day, you can't. I can't imagine anybody who could. Maybe somebody could, I couldn't. They carved out three days. I was in this little room in the publishing house, it has the little studio and you sit in a tiny little room and they give you tea and honey. There's a banana on the table, there's a microphone in front of you, and then there's a glass window.

You can see the tech person on the other side. So you have, basically, a Kindle-like version of the book. The tech person has a version of the book. So they're following along as you read and you mess up, and you mess up, and you mess up. You read words that aren't there, and then he catches it, and you have to go back, but we also found it hadn't gotten to print yet, which was great because we found a lot of little typos and that sort of thing. The other thing that happened is that you find out how much noise your body makes just naturally.

So I had all of these gurgling happening through the whole thing, and he would hit the button, and he speaks through the system and he goes, "Stomach," and then he tells you where to start, and it was just like three solid days of him telling me my stomach was making these gurgling sounds, and we had to go back and repeat and repeat, but I'm glad I did it. In the end, I'm glad I spent the time to record it because I think a lot of people have told me how much they appreciated having the author narrate the book.

Peter McCormack: Well three days is impressive because I'm going by memory, is it about 12 hours long?

Stephanie Kelton: We didn't go 12, but we definitely went beyond 8 all three days.

Peter McCormack: Yeah, because if I have to do, say, 30 minutes of narration, I'd do it with my engineer and he's remote, but I do it with him there on Zoom. It takes usually at least two hours and it's intense. At the end of that two hours, I am wiped out. So the fact that you did perhaps eight hours across three days is pretty intense.

Stephanie Kelton: Yeah, I wonder where you noticed the change in the sound of my voice or whatever because I did go through the entire book, and then at the very end when I was so relieved to hit the last word on the last page, he said, "They want us to come back and record maybe the first four pages, the introduction again because you changed."

You get into a groove and those first four pages, you've never done it before. So there's probably the sound of hesitation and you're less comfortable, and then by the time you get to the end, so I had to suck it up and go back and read the first few pages again or something. I wonder if maybe that's...

Peter McCormack: I think it's that because you've got a first half hour chapter, the intro, I think it would have been there. One of the things I've only noticed now since I've started doing my own narrations for the podcast, I've noticed how often everybody says, "You know," which I didn't notice before. Now I can't unhear it. So anyway, that was very interesting to hear. Okay, so listen, it's very interesting, but like I said, I've got a lot of questions. I've got a lot of questions because it contradicts a lot of the things that I hear from certain Austrian economics that I've interviewed as part of trying to understand Bitcoin, and their view on the economy.

I think a good starting point here is if you were to explain because some of the people who are listening won't actually know what this is, but what is Modern Monetary Theory? Also, where does it differ from say, Keynesian theory? Because I think I noticed Paul Krugman, he's not a fan of Modern Monetary Theory, but he is a Keynesian, right?

Stephanie Kelton: Okay, so the first part of your question is the hard one, what is Modern Monetary Theory? Because the truthful answer, the full answer is that it's the name that's been given to this body of scholarship that has been produced over the course of two and a half decades from what originally were a handful of economists that's grown some over time, but it's a rich scholarship. It's a branch of macroeconomic theory, it's like a school of thought.

So everybody listening to your show is very familiar with the Austrian school of thought, and probably knows the Keynesian school of thought. You know that there's a Marxist school of thought, maybe you know that there's post-Keynesian and institutionalist, and I could go on. So you have in macro this menu of auctions to think about, a framework for analyzing the macro economy. MMT has entered the fray and become one of a number of contending approaches to macroeconomic theory.

So what makes MMT different from some of the others? Well the starting point for us, I think, is recognizing that the currency itself, in our case the US dollar, is a simple public monopoly that the government is the issuer of the currency, and the rest of us, I say in the book, are just users of currency. That distinction is important because if you get that distinction right, then you can start to understand why the government can operate its budget in ways that are very different from the rules applied to a household, to a private business, to state and local governments.

They can behave in ways that look irresponsible and even unsustainable to us, but if you begin to understand the nature of the currency, the monetary system, then you can start to understand why it isn't inherently unsustainable for the government to spend more than it takes in every year, for the government to issue bonds and we call that borrowing, and we refer to it as debt, and we think somehow that's problematic.

MMT, I think, provides a lens that helps us to better understand the mechanics, the monetary operations, the monetary system, so that we don't draw wrong conclusions about the federal government's budget and finances and liking them to those of a household private business.

Peter McCormack: Okay, so I watched Peter Schiff, you know Peter Schiff, the gold bug? I watched him on Joe Rogan, and he said the government is broke, the US government is broke. I've also often heard about this debt ceiling. It seems to exist, the scary debt ceiling that then gets raised. It's almost like they've raised the level of the house. So can you explain why the debt ceiling exists, and then why it's not necessary? You also don't agree that the government is broke?

Stephanie Kelton: Yeah, I don't agree that the government is broke. I think all evidence to the contrary. If we were broke, we wouldn't have Congress spinning out multi-trillion dollars spending bills left and right. We're on the cusp of another one here maybe any minute, any day, any week and that is not the kind of thing that you do when you are penniless and incapable of spending. So no, I don't think that's correct. The debt ceiling is like this anachronistic thing.

First of all, it's important to say it's a self-imposed constraint. It's something that exists because Congress put it there. It's something that can go away if Congress removes it. Currently, the US has been operating without the debt ceiling in place. So right now, it is not there, Congress made it go away. They may one day bring it back. I hope they won't, but if they do, it's a way of saying, "I want to check myself periodically." So here's why it doesn't make sense because when Congress authorizes legislation like let's take for an example the $2.2 trillion cares act, which Congress passed in response to the coronavirus and the economic meltdown.

They said, "Okay, the house, the Senate, everybody came together, $2.2 trillion so-called in this cares act." That is Congress making a commitment, right? That's Congress saying, "We're going to spend $2.2 trillion." Now, if something happened in the interim and the debt ceiling was in place, and a point was reached where you were going to butt up against the debt ceiling, that is Congress saying, "I want a second chance to think about the prior commitments I've made."

You've already authorized the spending, so now it's like coming in after the fact and saying, "Well, I don't know if I want the Fed to clear those payments. I know I committed to making them, but I'm not sure I want to go forward." So it's a pretty counterproductive thing to do. We're one of the only countries in the world that operates with a thing like this in place. Like I said, it's not there now.

Peter McCormack: In the UK, we've had, ever since the 2008 crisis, especially under the Conservative government, we've had what was known as austerity, which was very unpopular. It seemed to be a number of programs that affected the poorest in society where we had this thing called bedroom tax, whereby if you had a social property and it had two bedrooms and you're only using one, you were taxed on it to try and encourage people to use that room or move out.

A lot of very tough programs, but the idea was to bring down our deficit here. What I found quite interesting in your book is that you talked about a deficit being a good thing. So can you talk me through that?

Stephanie Kelton: Yeah, so the way I like to say it is that every deficit is good for someone, okay? Every deficit is good. So the question for me then is, well, for whom and for what? So the deficit is nothing more than the difference between two numbers. That's what it is. We measure it every year and we say, "Okay, one number is how many, in your case, British pounds the government spends into the economy, and the other number is how many British pounds is the government subtracting out of the economy mainly by taxing people?"

So it's the difference between those numbers. If the government adds more dollars in, spends more dollars into the economy, then it subtracts away. We labelled it a deficit. We say the government has engaged in running a fiscal deficit, and people will rail and say, "Oh my God! Why are they mismanaging their finances? Why can't they live within their means? We rail against the deficit!" What we forget to do, what we fail to recognize is that if they put 100 in and I only take 90 back out, somebody gets 10, right? The government's deficit is always and everywhere matched by a financial surplus in some other part of the economy. It has to be that way, this is by the rules of accounting.

So they're deficit. The thing we call the deficit is also a surplus. We just don't refer to it from our perspective, our vantage point what's happening to our balance sheets. We only talk about it with respect to what's happening in the government's balance sheet. Well that's not interesting. I don't care what number falls out of the budget box every year, I care about the health of the real economy, I care about inflation, I care about unemployment, I care about whether society's needs are being met, I don't care what the number that falls out of the budget box.

So I just feel like a lot of the problem we have is just a communications problem. It's the word we've chosen to use to describe what's actually happening. Calling it a deficit creates unnecessary anxiety because people immediately say, "Deficits are bad." If I turn on the TV and I see my football team down by two goals, and I say, "Oh, if Arsenal is going to pull this off, they're going to have to overcome a two-point deficit against Liverpool," well, then deficit is bad.

Peter McCormack: They won't come back, not against Liverpool.

Stephanie Kelton: Not against Liverpool! But you know what I'm saying.

Peter McCormack: I do.

Stephanie Kelton: The words we use are really problematic. The same thing happens when we describe the government borrowing. We say the government is borrowing money to fund the deficit or finance the deficit. Then we call the resulting government bonds the debt, and then we go right into your share of the debt and debt. It just triggers people.

Peter McCormack: I'm still on your football analogy because firstly, you called football and not soccer, which is amazing. You've recognized that...

Stephanie Kelton: I lived in England.

Peter McCormack: You've recognized Liverpool are the best team, which is also excellent. So I'm just going to stick with that. I'm always going to be fan of yours for that. Yeah, Arsenal are terrible! How did you know that Liverpool are the best?

Stephanie Kelton: Listen, I lived in England for a little while, and the only football match that I ever attended, saw a lot, was an Arsenal game. I won't tell you who won because I don't remember.

Peter McCormack: When was this? How long ago?

Stephanie Kelton: '96?

Peter McCormack: Wow! '96?

Stephanie Kelton: '97, '96.

Peter McCormack: So you probably went to Arsenal when they're at Highbury, the old ground, because they've got a new big new ground. It was a really tight ground.

Stephanie Kelton: All I remember is that you couldn't have your beer at your seat like you can at a baseball game or a sporting game here, and that the visiting team fans were literally put in a small section and that there were guards around them. They were being protected. That's what I remember.

Peter McCormack: Well it's not so much protection. It's more because basically, with UK football, if you put them together, everyone will just start fighting, especially if they've had a bet.

Stephanie Kelton: Yeah, they've built a wall around the opposing team's fence. Then I think they were allowed to leave first, so they could get a head-start maybe getting to safety. No, it was a great experience, I loved it.

Peter McCormack: Sometimes they have a police corridor from the ground to the train station to get them out. So anyway, sorry, back to this. Sorry, you distracted me because I'm a Liverpool fan and we won the title this year! It's the first time in 30 years. So the fact that you picked them out was a good thing. Okay, so let's get back to this. So it's a highly relevant time right now, and it's a good time to discuss it because we have gone from a 2008 financial crisis to an even, in some ways, a more scary crisis. I think the GDP drop in the UK was 24%.

I don't know what it was in the US. Headlines are lots more government borrowing. Headlines yesterday, I think, the gold price is up close to, if not over $2,000 now. I saw that there were reports in the Financial Times of a weakening dollar. So I know that you can't print unlimited amounts of money, I understand that there is an inflationary impact on increase in the money supply.

I've been to Venezuela, I've seen the impact on that. I've obviously read about Zimbabwe, Lebanon recently. I'm also aware that even places like Turkey now I think is about 13% inflation. Is inflation the only downside in your world to a massive increase in the supply of money? Is that the only thing we have to be aware of?

Stephanie Kelton: No, but I don't also think that it's a massive increase in the supply of money per se that poses the greatest risk to potential runaway or accelerating prices. You look at a place like Japan and you say, "Okay, here's a country that has virtually committed itself over the past three decades to trying to achieve its own 2% inflation target." All they want is 2%. My God, they would rejoice if they could hit 2%. I was there last year, it's all policymakers and politicians talk about, "How do we reflate? How do we get to 2%?"

They cannot do it. I think a lot of people say in spite of all of the so-called money printing, all of the QE, all of the expansion, the monetary base and so forth, in spite of that, they can't move the needle on inflation. They cannot get even close to hitting their own 2% inflation target. Now maybe we just simply have things backwards. This idea that all you have to do is crank up the printing presses, increase the money supply, and that there's some automatic transmission mechanism that gets you from increased money supply to increased prices is just not born out by the evidence. Remember, after the financial crisis, Bernanke tried too. The Fed struggled for nine years, QE1, QE2, QE3, right?

We were there too, huge expansion and we're doing it again with loan buying and expansion debate. So it isn't enough, it won't get you to inflation. Do I worry about things other than inflation? Sure, but MMT tries to emphasize that the relevant constraint in all of these discussions that take place about public policy government finance, you hear people say, "Oh, President Obama," Peter Schiff, you mentioned, "we're running out of money, we're going broke." No, we're not, that's bad logic.

But can we spend too much? Yes. Is there evidence that at present we are at risk of creating an inflation problem because of what Congress has done so far with trillions of spending what the Fed has done? There's no evidence of that. So inflation is really tricky phenomenon. It's a dynamic process. You can get it for reasons that have nothing to do with an increase in the money supply, nothing to do with that. Look at, for example, Milton Friedman would say, "Inflation is always and everywhere a monetary phenomenon," and it became described as too much money chasing too few goods.

I think for a lot of people, we go straight to the too much money part, and we forget about the too few goods part. So you look at what's happened in countries like Zimbabwe, for example. People say, "Well, Zimbabwe had hyperinflation." Yes, they did. Why did that happen? People think, "Well, the government must have just printed a lot of money and it created hyperinflation." Well, no. What actually happened is that this guy Robert Mugabe came to power and he wanted to reward the freedom fighters.

He took land away from the Whites who've been farming land for forever and redistribute it and gave land to the Blacks, to freedom fighters, who didn't know how to farm the land. You have massive food shortages and all of a sudden, you're an agriculture economy. You got to feed your people, you're not growing the food, a massive collapse in the supply of food, so now you're trying to import food, but nobody wants your currency, so you have to buy foreign currencies.

The value of your currency collapses as you're trying to import food to feed your people. So the point is there's a lot going on in Zimbabwe that goes way beyond printing money leads to hyperinflation. You have a collapse of the productive capacity of the supply, and that can easily create an acceleration of prices.

Peter McCormack: Okay, so I guess what you're saying there is an increase in the money supply, a loan doesn't guarantee hyperinflation, but if that happens alongside a cut in productivity, that could lead to a higher inflation. So would you say at the moment we are at risk of that because we have significant parts of, especially here in the UK, significant parts of our economy have been locked down. Some parts are coming back and I think there's going to be some interesting side effects on that. 

So for example, if you go to the pub now, you have to book in and you have to be sat at a table where it's used to be you could be able to stand two, three people deep at the bar trying to get a drink. So these bars have a lot less customers. Naturally, they may have to raise some of their prices. So could the lockdown and the stimulus package lead to... Is that a scenario where we could have higher inflation?

Stephanie Kelton: Yeah, it's a great question. So the way I think about it is first, recognize that inflation is meant to be a term that applies to a generalized increase in prices. So not just the price that you have to pay at the pub for the meal, for the beer or whatever, but generalized increase in prices. So how do we measure this stuff? Well, we put together price indices, right? So you have government officials and others who build these indices.

They are constructed by human beings, we decide what goes in and then we decide how to weight each of those contributors. So housing, healthcare, energy, food, all of the things that are supposed to represent the spending behaviour of the average consumer, we try to capture that. Then we track the movements overtime of those individual consumer goods and how the prices are changing.

So I think your thinking is, your logic is perfectly reasonable to say, "Well, if restaurants are operating at reduced capacity, might you see some price increases in retail, in restaurant, and that sort of thing. So it's like, "Sure, that could happen." If airlines are operating...

Peter McCormack: Sorry to interrupt there. Can I just add to that that was a single example, but what I'm starting to think now is we're actually, potentially at the junction in the road where we're going to see a wholesale shift in the global economy. What I mean by that is a lot less people flying, the airline industry probably won't recover for years. Another issue is that a lot of people don't want to return into cities. I know there's been a move, say, in places like San Francisco that I know of two companies have become remote first companies.

I think it's Facebook and Coinbase, where they've seen the benefits of people working from home, which the secondary effect of that is it affects the retailers who used to rely on the stuff in the offices. I know that in London, we've got that problem as well. So we're potentially seeing this wholesale change in the economy, which I don't think can happen without a drop in GDP because I think certain number of businesses are going to suffer and going to struggle, and then people are going to have to rebuild new types of businesses.

So it's not just that one scenario only. I just can see just a significant drop in the overall productivity of the country because of this. Yet at the same time, the only option the government had is up until this point we've had the furlough schemes, but after that, we're probably going to have an increase in welfare payments and social payments for those who are unemployed etc. So the two things that you said, potentially, to inflation, I feel like they could be happening right now.

Stephanie Kelton: Look, I still continue to feel like what we're up against the headwinds are deflationary forces. That is how I feel. I feel like incomes, it's not as if we're going to sustain incomes at their current level, but productivity and output is going to fall.

Peter McCormack: Agreed.

Stephanie Kelton: So everybody is going to have more purchasing power and we're going to go out and spend. Incomes are collapsing, unemployment is likely to remain high for a very long period of time and I see everyday people who are being told, "Well, your salary is being reduced." You're going to keep working, but you're going to have a pay cut. Well how much are you going to consume when your pay is cut by 10 or 20 or more percent?

So it's a tension of these forces, where there are going to be some bottlenecks in some industries and prices are going to increase, but alongside that, like you said, what's going to happen to commercial real estate? What's going to happen to housing? Right now, we've got an eviction crisis right here in the United States tens of millions of people face. So then what happens to apartments?

What happens to rental prices? So yes, some things are going to get more expensive, but I am very worried about entire industries, incomes, and other prices just significantly falling in this kind of environment.

Peter McCormack: Is it unhelpful to look at aggregate inflation then because we're going to have inflation? So we might see food inflation and see fuel deflation. We might see...

Stephanie Kelton: Exactly.

Peter McCormack: ... Property inflation. We might see deflation in other areas. We only ever get an aggregate inflation price in the news, which is based on the UK basket of goods. Actually, should we have different measures of inflation and deflation so we understand the different parts of the economy this is affecting?

Stephanie Kelton: Yeah, we do, right? I know you know there are different measures of inflation. Sometimes we strip out things that are considered volatile like food and energy, sometimes we leave them in. The Fed likes the measure called Core PCE, Personal Consumption Expenditure. Other people think of CPI or we have Producer Price Indices and GDP deflation. We've got a lot of different things, but you're right. If energy prices continued to remain low, we had a period of time where oil was so cheap to buy oil that you were making money on storage.

So energy prices could collapse, but at the same time, healthcare prices could spike because private health insurance companies could be raising premiums, which they are, and that could... Since energy, healthcare, and housing are three big drivers of headline inflationary pressures, if you have one category going way up like healthcare, and another category coming down like energy or housing, if we're going to have an eviction crisis and housing prices are going to collapse, people are losing their homes, you're being foreclosed on, you're losing your apartment, I think housing prices would likely fall in that environment.

So on balance, you're right. You say, we might see the headline inflation come down even as things like food and, I don't know, what did we say? Healthcare and other things are becoming much, much more expensive. Education, what's going to happen to college, the cost of tuition? Schools right now are saying, "We're going to cut tuition by 20% because you can't be on campus," and a lot of parents are complaining.

They're saying, "Why am I paying full fare if my child can't be in the room with a professor and have the college experience and all that?" Colleges are trying to hang on by their fingertips. So they're saying, "Well look, we're going to cut tuition." So that's a big contributor to CPI or a measure like that. What is the cost of education? Well that's likely to come down.

Peter McCormack: So your feeling is this all just balances out?

Stephanie Kelton: Well I don't know if it balances out. I'm saying no-one knows, but there's push and pull in so many of these major categories that it's just really hard to say on balance what happens, but what I don't see are all of the major categories moving together in one direction, where it's a no-brainer to say, "Of course, we're going to be facing higher inflation."

Peter McCormack: Okay, so help me understand then what are the risks with MMT because inflation is a risk. You talk about that in your book, it has to be controlled inflation.

Stephanie Kelton: Okay, so yes, if inflation is the relevant constraint, then how should we think about it? We've been having a conversation about some supply side factors, oil price shocks can feed through into inflation that has nothing to do with how tight you're allowing the labour market to get, how hot you're running the economy or anything like that.

So we recognize and I talk about it in the book, the way economists usually think is that you can have an uptick in inflationary pressures for supply side reasons, cost push sort of things, and then you can have the demand pull sort of forces at work, where you're really running in the economy so hot that we don't have the productive capacity to keep up. Businesses can't turn out enough new goods and services to keep pace with that higher spending, with that higher demand, and then you get inflationary pressure. 

So the way that I've been talking about this lately that seems to be effective in terms of helping people understand is I know that a lot of your listeners, probably most, are not watching video, they're just listening to the audio, but I'm holding in my hand a diet Coke, some standard sized can of soda. It holds 16 ounces of liquid, so that's what I have. Now, I know that this can has 16 ounces of liquid in it, and I know that this glass that I'm holding, which is empty, is a 16-ounce glass.

It will hold exactly 16 ounces of liquid and not a drop more. So I can open this can and I can start pouring into this glass and I can get every drop of liquid into this glass without overflowing the glass. I can do that. So think of the glass as the economy. I can pour too fast, and if I start pouring too fast, even though it's only 16 ounces, I can still cause the thing to run over.

Peter McCormack: This is the speed limit you talk about?

Stephanie Kelton: Right. So if I'm applying too much pressure to a certain part of the glass, a certain part of the economy, if I'm trying to do infrastructure, big infrastructure at a time when we don't have the construction workers, architects, engineers, the machines, if there's a residential housing boom or commercial or if people are building a lot of stuff and the people and the equipment is already in use, then the government coming in and saying, "I want to do big infrastructure," it's going to put them in competition with the private sector for those resources, and it can create inflationary pressure.

What I'm saying is I can watch what I'm doing and I can pour the liquid in, and when I see, like I do right now, you can't see it, but I can, I can see it's starting to bubble up. So I back off, I stop pouring and I wait until the foam goes down. If I manage it all just right, then I get it right it to the top of the lip, nothing drops out, nothing spills over, and it's beautiful. Look, the real world is messier than that.

Peter McCormack: Of course, yes.

Stephanie Kelton: We can't look at the economy in the same way I can look at this glass and know exactly when to pull back and how much space I have. So what do we do as economists? What do we do as public policymakers and others? Well, we try to get estimates. We take the economy's temperature through time, we look at the unemployment rate, we look at capacity utilization rates, we actually call businesses and survey them. We do it every single month, and we publish the data and we say, "How much of your existing plant and equipment are you currently utilizing?"

The business says, "We're at about 80%," or "We're at about 73% of capacity," and put those statistics together and publish that. So we have ideas, we have macro models, Fed models, you got 100 different operations or more who have large scale macro models, who could take a piece of legislation. Let's say Congress is thinking, "I don't know, we might have a recovery underway here. The labour market might be picking up. It might be getting close to the glass being full. I don't know if it's safe to put some more liquid in. What do we think?"

So you analyze, so you run models and you try to figure out. If we were to do $200 billion of additional spending, $500 billion right now, what is the likely impact on inflation? You model this stuff. Is it going to be imperfect? Yes, but are you going to have a reasonable estimate? Sometimes you'll miss on the upside, and inflation will turn out to be a little higher. Sometimes you'll miss on the downside, but the point is that we've done this stuff before.

We used to be really good at it in the '40 and '50s, coming out of World War II, during, and coming out of World War II. The US did an extremely good job managing inflationary pressures in an environment where government spending massively ramped up to virtually 50% of total spending. We didn't end up with a hyper inflationary problem or anything. People figured it out.

Peter McCormack: What's the range? If you as an economist who believes in this, what is the safe range of inflation that you wanted to keep within? I know most target 2%.

Stephanie Kelton: What matters is people's real income. You don't want to get in to a situation where inflation is running at 4%, let's pick a number, per annum and wages are only increasing at 2% per year, and everybody is becoming 2% in real terms poorer every year. So you don't want to get into that kind of a situation. The point I'm trying to make is that the government is just one spender in the economy, and it isn't nearly the biggest.

Consumers get most of the space in that glass I talked about, they get to do most of the spending. The government has to compete for space in the glass with everybody else who's spending, and that means households, which account for more than two-thirds of total spending. They have to share space with private businesses, and have to share space with the rest of the world. So if you want to apply more liquid, you have to try to get a sense of whether the glass can safely accommodate the additional liquid that you want to put in, the spending, the additional spending you want to do, and recognize that that isn't going to be a 16-ounce glass forever.

It will be an 18-ounce glass, and it will be a 20-ounce glass that some of the spending that's done, the private sector through innovation, R&D, improvements in technological know-how, more capital equipment. That grows the size of the capacity over time. Government can make certain investments that also enhance the productive capacity of the economy over time. So pretty soon, we can pour 18 ounces into the glass without a problem or 20 ounces.

Peter McCormack: Okay, so I get what you're saying, this is very much macroeconomic theory. I guess if I was looking from the angle of the Austrian economist, one of the things about it is that potentially whilst this works at a macro level, on an individual level this may be unfair. So one of the thing is there's this website. Have you seen this website? It's basically "What The Fuck Happened In 1971." It talks about what happened and it's got a lot of charts since the US came off the gold standard.

It highlights things, for example, that productivity has increased since 1971 by 246%, but compensation has only increased by 115%. There are also the people that point to the fact that whilst MMT as an economic theory will keep the economy growing, potentially, it drives greater inequality because what ends up happening is the new dollars end up going to those who need it the least, and those that need it the most don't tend to see it.

Also, one of the things you talk about, sorry, I'm throwing a lot in here, is that actually, the real reason for taxation is fairer distribution of income. It's not so much that the government need it, but inflation tends to be an unfair tax because some people will say inflation is essentially a hidden tax, and it's an unfair tax. Do you understand those criticisms?

Stephanie Kelton: Well I don't even know that they're criticisms. I think most of what you just said, most, not all, is more or less true. It's not a criticism of MMT. They're recognizing that worker productivity, the trajectory has gone like this, while the real median wage has gone like this. I'm showing one increasing over time and the other flat lining. That's just the reality, that's just what the data tells us. Now some people will interpret that to say, "Well, what changed in 1971?" If you look at the economic policy institute, EPI, they are probably the ones who put the chart out that this person or this website is using to refer to this because they either popularized.

I think they started this thing, but EPI will give you very different reasoning for that divergence of real median wages and worker productivity. EPI economists won't say, "This is because the US went off the gold standard." EPI economists will look at this and say, "This is down to a lot of things, the decline of the manufacturing base, the decline with that of unions that were there to protect workers' wages and to fight for those wage increases and globalization", and later on another six or seven reasons to explain why that picture looks like that as opposed to just saying, "Oh, that's when we went off the gold standard, that must be what wrecked everything."

Is it true that deficits can be used to deliver that financial windfall, what we talked about earlier, to people who least need the help? Sure. I would argue that's what the Republican tax cuts did. So the Republicans came in in December of 2017, passed these massive tax cuts, corporate income tax and personal, 83% of the benefits on the personal income tax side went to people, the top 1% of the income distribution.

Peter McCormack: The top 1%, yeah.

Stephanie Kelton: So when I said every deficit is good for someone, that's true, Republicans understand this. They know that increasing the deficit will increase somebody else's surplus. They just want to direct the flow of the financial savings, the surplus, to the people who they care most about helping, and that happens to be people who least need the help. But look, if we operated the budget differently, we could have added the same $2 trillion to the deficit, but diverted those financial surpluses into the hands of people who most need the help. Now the other point you raised is, does it end up going to the rich anyway?

So if you help a poor person and all they have to do is paid a lender back or their landlord, they're struggling, it's just turn. It passes right through their hands and goes to Jeff Bezos or somebody like that. Well yeah, and we have other structural problems in the economy that we need to figure out how to allow, let's say, the bottom half of the population to be something other than just a consumption unit that turns dollars back to people at the very top because that's what happens too often.

Peter McCormack: Yeah, I guess one of the things I struggle with because it's good timing to do this because I did a four-part series about Steve Mnuchin, and it started out trying to understand what happened post-2008 financial crisis when he started the One West Bank and essentially built this foreclosure machine. So what I ended up doing was I had to actually go back and study what happened in the great depression, on what FDI did with housing policy, and then I jumped forward, and I looked when Glass–Steagall was essentially, I wouldn't say repealed, it's more like neutered.

That was campaigned for under Reagan, but actually happened under Clinton, and then the economic crisis happened under Bush, and a lot of the stimulus afterwards came during Obama. So it felt like actually, a lot of the... How would I put it? Malinvestment by the government has been by both parties. I know I think there was a sound argument for the Democrats having a leaning to being a fairer distribution of income and the Republicans tend to be, I would say a little bit, especially under Trump, supporting the wealthiest, but at the same time, the point I'm trying to get to is that you talk about in the book that the government isn't like a household.

It doesn't have to have budget responsibility like we do. Look, if you don't earn enough money, well you can't pay your mortgage, you're going to lose your home, and you have to make sure it happens. I do the same. I have to make sure I can buy food for my children. I wonder if, and if actually government does need that kind of budget responsibility because the incentive structure for those in power is to support the wealthiest friends and also potentially invest in, as I understand it, the US came off the gold standard to fund the Vietnam war, which I think we all agree was a disaster, but also at the same time, perhaps now there's an incentive for Donald Trump to misuse the deficit to keep the stock market high because he's got an election coming.

So I guess the general thing I'm trying to say is that the incentive structure for those in power is to misuse this ability. You probably have a very solid economic argument how MMT can work if it's used ethically. I just don't think the powers would be used these things ethically.

Stephanie Kelton: Well so first, I will say that MMT works as a description because the first answer I gave you about MMT is that it's a framework for analysis, it's a lens. So it works because it helps us to understand the monetary system, the nature of government finance, and so forth.

That is not to say, and I say it many times I think in the book, that doesn't mean that the currency issuer can't abuse the power of the purse, and you just ran through a series of examples that's been decades where you say, "I don't like what they did here, and I don't like what they did there." Well I don't like it either, but MMT didn't make that happen. We didn't come around until the mid 2000s or whatever. So we can't really finger MMT and say, "This is the thing that will happen when you're thinking takes hold." 

This isn't true. Janie said Reagan proved deficits don't matter, so the budget was being used aggressively in the '80, the deficit, to massively increase defence spending and to do big tax cuts. Those are two things that Reagan did. MMT didn't make it possible, so the monetary system made it possible. Look, it's a democracy, so we elect officials. We know there's a problem with money, with finance in terms of our electoral process, the influence of big money in the political system, how we have entrenched it with Citizens United.

So yes, we've got a lot of people who are elected in theory to be representatives of the people in their districts and to do right by them and to promote the public interest and serve the public purpose and so forth, and they get to D. C. and then they find for a variety of reasons that they are casting votes that are not largely aligned with the interest of the people who put them there, but instead, serving the interest of the powerful and the wealthy and so forth. So we know that happens. So what is the answer to that? It's got to be in the political process. It's not in the economics. It's in the politics process.

Peter McCormack: Can you separate the two, really? Because it feels like supporting MMT comes with an acceptance that there will be malinvestment by those who get to increase the deficit and spend the money. So how do you change that? How do you have budget responsibility?

Stephanie Kelton: Well so I tried in the last chapter of the book to tackle this question, this exact question. Who did I write this book for? I wrote this book for people. I wanted this book to empower regular people, so that when your elected official comes back to his or her district... I'm a voter in Kansas, my Congressman comes back to the district and stands before some subset of people who elected him and sent him to be a member of Congress.

I started saying, "Why aren't we doing more to..." and I lay out the concerns that I have about our economy, my wellbeing, my perceived, whatever. I say, "Why aren't you voting for this? Why aren't you doing something to solve these problems?" He says, "Look, I agree with you. I wish we can do more, but we got this deficit. We got this $24 trillion debt. We are broke, we can't do that." That is my answer to your question.

It's the accountability has to come from us, and as long as we are misinformed, as long as we believe them when they say, "Listen, I can only use the budget to do tax cuts for the rich because I was trying to grow the economy. I can't afford any of this other stuff." So how do we get better budgeting? How do we get a better use of public money because it's federal money? People talk about taxpayer money and all, it's not taxpayer money, okay? It's federal money, it's our money.

How do we get more transparency, better accountability from our elected officials? I think part of the answer starts with the rest of us understanding the nature of the money itself, what are the limits? What are the constraints? What can we legitimately ask of government and what are the constraints? Let's start improving the political discourse. Let's have a better debate, and then over time, I hope end up with better public policy.

Peter McCormack: Okay, so I'm just trying to digest this. Could I argue that it is the individual's money and it's not government money in that it is our productivity, your productivity, you writing the book and creating the book and selling it that that creates value and it's my productivity in creating the podcast and getting sponsors that creates value, and that the government doesn't actually create money apart from...

The only way it generate revenue is by taking from us or printing it. Therefore, if they have target inflation, they're actually reducing the wealth that we actually create. So could you see a fair argument for flipping your point there and actually say that it is our money, not theirs?

Stephanie Kelton: No, but I'll give you my reasons.

Peter McCormack: You understand my point, though, don't you?

Stephanie Kelton: I do. Look, I'm going to go back and use the example of the cares act again, the $2.2 trillion. It just starts as a document, it is Congress writing down on paper, literally, their intentions, "We want to spend $2.2 trillion, we want money to go to the small business association for the PPP program. We want money to help support the unemployed. We want this $1,200 one-off so-called stimulus payment. We want to do this, we want to do that." So they cobbled together a plan and they said, "This is what we want to spend." They didn't take our money. There's no our money in that.

This is Congress writing down a plan of spending, sending that through, getting the votes, getting the signature from the president, and then what happens? The federal reserve is put on notice. The Fed is the government's physical agent, it's the government's bank. That piece of legislation effectively orders up $2.2 trillion from the federal reserve. It says it is Congress saying to the Fed, "Get ready because we just ordered $2.2 trillion and you're going to make the payments." How does the Fed do that?

Well they changed the numbers in the appropriate bank accounts, they carry out the payments on behalf of the US Treasury and every payment that is made was authorized by Congress, our elected body politic. So that's where the money comes from. Now, if you want to say, "The government can't create value. All it can do is dilute what we already had, so this is a horrible thing." Well hang on. How much better off would the economy be without that support, with all of those small businesses going under, with all of those people losing their rent?

Peter McCormack: Well I think I could throw something in here. I think this is when nuance is needed because one of the things I've... I had debated this, we've got a few people, especially with the libertarians, who are criticizing the money printing. I was like, "Well, what else could they do?" A lot of people will say, "Well, let people run their businesses and let businesses fail," but I do think without some kind of stimulus program there were people who would not be able to work, who would have no income, and their only option would be beg in charity or crime.

So I understand why something had to be done and whether or not you agree with that, I understand why something had to be done, stimulus checks, very helpful. The one challenge I would give and particularly towards what Steve Mnuchin said is these loans that were offered to huge companies, including I think some of the largest hedge funds even received money, there were lots of companies that received money to allow their business to continue, but these businesses are ultimately going to fail anyway.

Also, some of these people could have borrowed money in the private markets. So I think there's some things we have to look at here because almost certainly, that money enabled the stock market to stay relatively... Actually to grow, and in keeping the stock market at a higher level whilst other people are losing their jobs and trying to survive on $1,200 stimulus checks, we know that the people who tend to own stocks and shares and gold tend to be the wealthiest, so it creates a bigger wealth gap. So I think nuance there is needed.

Stephanie Kelton: Okay, I'm not going to argue with you Peter at all. No question that both things are true that some people who desperately needed help got help and that that benefits not just the person who got the help, but their neighbour as well. It's better for me if my neighbours are being foreclosed on and the value of all the homes in this neighbourhood, including mine, are collapsing, it's better if the worker is continuing to receive some income because I'm a...

Hey, I'm Starbucks and I'm still open, and I can still have some long line of cars of people who can afford to spend a few bucks on a coffee every day. It is also, of course, true that a lot of people who didn't necessarily need to tap that lending facility got help, absolutely true. So what do you do though? I think what a lot of people would say is time was of the essence. We didn't have time. Congress didn't have time to carefully carve out language in the cares act that would only allow funds to go where they were most needed.

Now, there were things they could have written in that would have ensured that more small businesses, minority-owned businesses and others had better access and so forth. There were things that could have been written in that weren't that allowed the big guys and the connected folks with the fancy accountants and the financial advisers and others to put them way ahead of the pack and exhaust that initial $350 billion. So yeah, it's imperfect. Legislating in a crisis is bound to result in some people taking advantage of getting federal money that you wouldn't ordinarily like to see happen.

Peter McCormack: Well I think this goes back to my other point where I think this is the main problem I have with MMT outside of the first point that I think some of it can be a little bit unfair. I think inflation is in some ways an unfair hidden tax, but it's... You know what? In the UK, I'm very jealous that we don't have a Constitution. The reason I'm jealous is you have this base set of rules that you can refer to for your country. The reason I don't believe you'll ever have a tyrannical dictator in the US is because of your Constitution.

The great thing about the Constitution and the forefathers from the limited amount I've studied it, is they understood the weaknesses of men. I should say men and women, but they understood the weaknesses of humans and our own flaws. So they built a Constitution around that to protect against that. I think one of the difficulties is that the Constitution is wide enough to protect how government spends money. Essentially, one of the things I've noticed is this is Wall Street and Goldman Sachs alumni started to take up high performing roles in the US government.

You will have seen it with Elizabeth Warren, she thinks Trump administration is an extension of Wall Street. I guess that's one of my main problems is there is a... Structurally, it is set up in a way that they can protect their own. So whilst even if I want to agree with MMT, I think structurally the way politics operates in the US, it's set up so it can be abused, it can be corrupted. Whilst we can go back to the voting booth and vote against this, really, I think you need wholesale structural change to even allow it to be slightly fair.

Stephanie Kelton: Look, I'm sympathetic to what you're saying. Again, MMT is not a... See it's not going to protect us from bad actors, it's not going to protect us from the special interests taking positions of power, and diverting public policy to serve the interest of tiny group of individuals. Look, I'm conceding all of that. What I do say in the last chapter of the book though, is that the federal budgeting process, we get to decide before coronavirus, the federal government budget was $4.5 trillion. That is how much the federal government spend every year on all the program, $4.5 trillion, right?

Now of course, that number is much bigger. It will be $6.5 trillion, $7 trillion and $8 trillion, whatever it's going to be, Congress can always write and pass any budget-spending bill it chooses. So what should be the checks that are in place? Right now, there's mainly one, and that check is it goes through the Congressional budget office. You want to spend money? You want to pass a bill? Send it to CBO, see what they say. So we have this budget scoring agency that is supposed to be non-partisan and all that kind of stuff, they look at the bill and they say what, "Hmm, let me study this proposed spending to see if it adds to the deficit."

That's the primary concern. If you can get your bill through the Congressional budget office with a good score, and let me tell you, having worked in the Senate, that's what it's like. Members of Congress write a bill and then cross their fingers. They sit back and wait what is CBO going to say, "What is CBO going to say? Am I going to get to vote on this?" and so forth. What I'm saying is that is probably the least useful feedback we could possibly ask for. Let's help lawmakers with a better framework for analyzing proposed legislation. I don't care if it adds to the deficit.

I care if it carries inflation risk and if lawmakers have adequately mitigated that risk, if there's been a careful analysis of the proposed spending, I care if it widens income and wealth and inequality. Nobody asks CBO to look at this proposed spending and give feedback to lawmakers to say, "What is this going to do to the wealth gap? What is this going to do to the distribution of income?" and so forth. So we don't ask those questions. So there are a lot of changes that we could make, and I propose them to the federal budgeting process itself that would better protect people like us from lawmakers abusing the power of the purse, and I think help us get better outcomes.

I'm not suggesting that I have the perfect plan and I can fix it all and plug all of the possible holes where money is going to leak into the buckets of the very rich. I can't do that, but I think I can provide some insights for getting us a better framework for how the government spends money, what the evaluation, the analytics behind that before we give the green light to go ahead and spend.

Peter McCormack: So what you're saying is, you accept, I guess, some of my criticisms, and you're saying that is a trade off of the federal government having the ability at times of crisis to be able to support growth in the economy, to be able to support welfare payments, to hopefully create jobs in other parts of the economy?

Stephanie Kelton: Yeah, I don't want to so constrain. I would not want to so constrain Congress that when you're hit with a crisis like coronavirus, that you have institutionalized legal frameworks say, where Congress can't act in a matter of days or a week to spin out a bill and address the unfolding crisis because it would violate this, it would violate that, it would... You know what I mean?

Peter McCormack: Yeah, no, I do. Interesting enough, a couple of months ago I interviewed a libertarian by the name of Scott Horton, and he actually agreed that we're in a very unique situation on the coronavirus that he almost agrees that the federal government has to do something. It was quite interesting to have that conversation. I guess outside of coronavirus, still I wonder.

So what do you think of the Austrian school of thought that a fairer system is based on the individual and there would be a requirement? Okay, let's not go for Austria, but let's say there would be a requirement for the government to balance the budget. What are the implications of having a balanced budget?

Stephanie Kelton: Well in the US context, so in the book, in let's say chapter five, it will be a lot easier if I could use visuals in some sense, but look...

Peter McCormack: Well hopefully, everyone will read this book afterwards and I will put it in the show notes because I think people should.

Stephanie Kelton: So let's suppose we could take as a starting point that the goal is to get a full employment economy, that we want the glass full. Now we have to recognize that there are a lot of leakages that happen, every dollar that I save and don't spend is a dollar that can't be captured by some producer trying to sell their goods and services. Saving is a leakage. Every dollar that is taxed away from me is a dollar I don't have and can't spend buying some good or services. So taxes are leakage. Every dollar that I spend buying goods or services produced abroad is a dollar that can't be captured by some US producer who is trying to earn a revenue, turn a profit, and stay in business.

So it leaks out of the US economy. So we got these three leakages, savings, taxes, and buying imports. So the question you're asking is if government had to balance its budget, if it had to match the amount of liquid it pours in to the glass with the amount that it takes out of the glass, then the question is, can we keep the glass full? How can we keep the glass full? The private sector as a whole normally wants to be in a position where it is net saving, where it is spending less than its income. So it's not filling up our glass sufficiently because it wants to take some of those dollars and leak them out, saving.

The rest of the world doesn't buy as much from us as we buy from them, so dollars are going out of our glass and filling somebody else's bucket. So that's all lowering the water level in our glass. The only way to keep the economy at full employment, given the desire of the rest of the world to net save dollars, that's why they're net exporting to us, they want to earn our currency and save it, and the desire of the private sector to net save, to spend less than its income, the only way the output gets sold is if somebody provides an injection.

There has to be somebody who's willing to spend more than their income to allow everybody else to spend less than their income. So that is the macroeconomic logic that tells you what happens if the government balances its budget. It means chronically, given the saving desires of the other two parties, the rest of the world and the private sector, you're not going to have a full employment economy.

Peter McCormack: I would argue that saving is a positive. It's a positive for people to save, and it's a negative that the value of the money they've saved is debased by inflation. I would argue also that if we are encouraging people to spend, we're not encouraging... We're not building a sound solid economy based on high quality production. We're actually incentivizing the production of cheap crap.

Stephanie Kelton: That doesn't necessarily follow. Of course, saving is good at the individual level. I want to try not to spend all of my income. I would like to try to set something aside, save for the future. I don't want to work for everyday for the rest of my life. So at some point, I'll stop working, my wage income will go to zero, and I'd like to have some savings set aside, but recognize the point I made, which is every dollar I choose to save and not spend is a dollar that isn't captured by some seller of output.

So if I take my take home pay and I just say my husband and I sit down and we come up with a budget plan and we say, "You know what? We're going to start saving 10% of our income." We've been saving, let's say, 5% and we're going to double that. So we're going to save more every month, that's great. That puts us in a more secure position to pay college tuition in the future, retire, whatever. If everyone in the economy tries to accomplish this, tries to spend less and save more, then I hope it's pretty clear that you are reducing aggregate expenditure, which means that the output doesn't get sold. A lot of businesses are going to lose customers and capitalism runs on sales.

You can't make spending the enemy of capitalism because that's what our GDP is, it's nothing more than a measure of the total number of dollars that are spent on newly produced goods and services in economy in a given period of time like a year. So spending is the engine here. Does that mean that everything people spend money on is high quality, whatever? No. Go to the mall, you see the kiosks with the little squishies and all the little fidget spinners, and there's a lot of crap out there that we're spending money on, but if somebody's buying it, then that must be a reflection of the value that they place on this fidget spinner for God forsaken reason or another.

Peter McCormack: Now I understand, we've got fidget spinners all around our house somewhere or another! I think the point I'm trying to get to is that isn't it a case that if we would all save 10%, that increases the scarcity of the dollar, therefore, increases the value of the dollar?

Stephanie Kelton: No.

Peter McCormack: So what I've learned about this is wrong.

Stephanie Kelton: I think so.

Peter McCormack: Because I would have thought that...

Stephanie Kelton: Dollars don't go away. Why would it increase the value of the dollar?

Peter McCormack: Because I would have thought in my world is that if I really don't want to spend my dollars or pounds, whatever, I really just want to look after them, people have to produce things that I really want to buy. So the quality of production of items goes up. Perhaps the value of items goes up, but again, by the way, hugely, I'm a depth here, but as I understand it, this just comes out to simple supply and demand. If the supply is constricted, then the value goes up.

Stephanie Kelton: Yeah, I just don't think it works that way. We have seen qualitative improvements in the production of a whole range of electronics. Producers improve the quality or the perceived quality of products over time and at the same time, you get a lot of crap that's produced. We invent new, but you're not going to get...

Peter McCormack: I can give you a good example and this is the only time because I can use Bitcoin as an example, and I know you're not in that area, but let's just use that as an example that there's the 21 million Bitcoin that are limited by supply. I hold on to my Bitcoin, I don't want to spend them and lots of people do the same. As other people want those Bitcoin, their relative value to the dollar or the pound goes up, similar to gold. Gold is exactly the same.

As more people want access to gold, especially right now, and people aren't willing to sell it, therefore, the relative value of gold to the dollar or pound goes up. Therefore, the value of gold is going up. I assume the same would be true about the dollar or the pound. If I wanted to save my pounds and dollars and you did, and I was less willing to spend it, the relative value of that goes up as well.

Stephanie Kelton: So look, here's a real world example. People say, well, suppose the dollar gets easier to get. Let's say we make the dollar easier to get internationally. As governments run deficits, it's easier to get dollars. Does the value of the dollar automatically go down? It turns out there are God knows how many, thousands and thousands of empirical studies that attempt to look at what happens to the value of the dollar let's say in relation to the budget deficit, which makes more dollars available. Is there some necessary robust empirical relationship?

There isn't, no one has found that. You would think that let's say with QE... Here's another example, I have a huge expansion at the base, look again at Japan. What has happened? When I was there last year, the big concern from Japanese policymakers that I was talking to was the strong yen. They're worried that the yen is too strong. So there just isn't this neat and tidy relationship. For every dollar you decide to save, you say, "Oh, I'm robbing the marketplace somehow with dollars, and therefore, that should strengthen the value of the dollar."

For everybody who's out there doing that, somebody like me walks into a bank, sits down with a loan officer, borrows a few hundred thousand dollars, and I'm just more than wiped out. So what you're withholding, I can easily walk in to any bank and I'll walk out with newly created dollar in my account that I will then go out and spend.

Peter McCormack: Right, I think we're reaching the point of the discussion where I'm definitely at the limitations of my ability to even discuss something. Do you know one of the funny things that I'll put to you is that I'd speak to a lot of people who are very certain in their views of economics, whether it's Austrian economics, whether it's yourself, whether it's Keynesian and I drift between them all just trying to think there's so many people who are so certain in their world, and trying to understand it all is very, very complicated, but I do recognize where I'm at the limit of what I know.

I'm going to finish this with a final question. Could you be wrong? Are there par ... Because you said in your book that you were skeptic, and now obviously, you're not, and you're reading the book. Could you be wrong or are there aspects of MMT that you're unsure or concern you?

Stephanie Kelton: Well the biggest one is the one that we spent quite a bit of time talking about, which is how do you... Once everybody, let's suppose that we got 535 members of Congress to say, "Oh, I'm not worried about deficits anymore. I get it now, that's not the relevant constraint, it's inflation." How do we then begin the hard work of transforming the way that they actually behave? How do they take a vote? How should we evaluate this proposed funding?

So that's messy, that's politics. But do I think that I'm going to be wrong about core tenets of MMT, the idea that deficits don't absorb, eat up private savings, that they drive up interest rates and lead to crowding out and all this stuff? I don't think I'm wrong about that. Do I think that the government is going to bounce a check? Do I think that guys like Peter Schiff who say we're broke? Do I think that I'm going to be wrong and that one day we're going to wake up and the for sale sign is going to be hanging on the United States' government?

No, I don't think I'm going to be wrong about that. So there are core tenets, the accounting insights of MMT, the notion that the government is the issuer of the currency, that it can manage interest rates. I think we're watching all of that now. It's all of the people who were so sure that deficits drive interest rates up or that QE is inflationary. Those people that asserted those things with real fervour, I think, are demonstrably wrong, and I think MMT helps with understanding why they're wrong. I'll say it that way.

Peter McCormack: Okay, it was very useful. I have a couple of predictions. Once this is released, there's going to be some people who are going to want to debate you. They're going to say, "Let me debate her Pete!" Who would disagree fundamentally with what you say. I know there are some people I've spoken to privately who agree with the ideas behind MMT.

I guess the place I am in is that I just directionally wish we had smaller government, less government, less things that government felt they need to spend money on, which I don't think they need to do, deregulated markets, and directionally, we head to a world of less government and more individuality, but it's definitely been useful for me to listen to this. I will share it out in the show notes. I recommend you switch off Twitter for two days when this goes live because your mentions will be full of Bitcoiners telling you why you're wrong...

Stephanie Kelton: That's okay!

Peter McCormack: ... Ferociously attacking your arguments! But no, I do appreciate you coming on. I did enjoy the book. Whilst I didn't agree with everything, I did enjoy listening to it, and I commend you for narrating the whole thing over the three days.

Stephanie Kelton: Thanks Peter! It was nice to chat with you.

Peter McCormack: If people want to find you, and want to find your book, and they want to read it, where would they find it?

Stephanie Kelton: Well yeah, just Google "The Deficit Myth", and there's a website through the publisher, where we'll give you a variety of options. If you're someone who doesn't want to buy it from Amazon, there are other ways to get it. Of course, you can always get it through Amazon. There's lots of ways to get the book.

Peter McCormack: Well, thank you, and I wish you good luck and maybe we'll chat again at some point.

Stephanie Kelton: Okay, thanks very much. Take care!