• Daniel Lee

5 Key Lessons from: The Deficit Myth

The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy is written by Stephanie Kelton. The book introduces the concept of Modern Monetary Theory and explains to the readers why we should change the way we perceive and approach government budgets.


Key Lessons from the Book

A currency issuer will never run out of the currency that they issue.

The key message that Stephanie was trying to drive across is that governments who issues currency can never run out of the very currency that they issue in the first place.


As such, governments should not manage their budget as a household would as they are the only entity in the world that can spend first and then create later.


Focus on the outcome of government spending rather than worrying about government debts.

For a currency issuer, debt was never and should never be a concern.


Government debt – a.k.a. treasuries – should be viewed as another form of currency – one that yields an interest return. Should the government choose to pay off all the “debts” owed, they could simply issue non-interest-bearing currency to replace the treasuries.


At the end of the day, a currency is simply just a form of scorekeeping that the government uses to achieve the outcome that they desire. A currency issuer does not need the currency that they issue but they need the votes of the people who use the currency to gain the legal authority to spend the currency that they issue.


The only issue of overspending is inflation.

When a government goes BRRRRRRRRR the only thing that matters is whether their action would result in undesirable inflation. Stephanie believes that if the deficit did not push inflation higher, it should not be labeled as overspending. As long as inflation is well managed, the government can and should spend to spur on economic growth and improve the quality of lives of its people.


Monetary Sovereignty is key to economic survival during times of crisis

A country that compromises its currency sovereignty - heavy reliance on the currency of another country (i.e. via pegging or debt) – will face difficulty in navigating through a crisis as the government is unable to use and issue their currency to help spur on economic activity in times of crisis.


When a country sacrifices their monetary sovereignty, they become very vulnerable against any trade imbalances, interest rate, etc of the country whose currency they rely on.


As a result, the economy of such countries tends to be more fragile and can be easily affected by external forces from which the government has no means of navigating.


Examples of such countries:

  • Emerging markets and their reliance on USD

  • European Union and the use of the Euro a common currency among different countries

What matters is the economy’s real productive capacity

Countries with monetary sovereignty should not worry about where is the money going to come from but instead focus on addressing the question of how the economy will absorb these dollars.


We should stop asking the question of “How will we pay for it?” and start asking “How will we resource it?”. Our big challenge is not cost. Our biggest challenge is making sure that our economy is producing the right output mix over the coming decades while managing any inflationary pressure that might arise as the money gets spent in the real economy.


Doing so allows a country to spend on things that matter which will help spur economic activity and improve the quality of the lives of its people.


My opinion as a currency user and an investor

Initially, when I picked up the book, I was skeptical about the idea that the budget deficit does not matter. However, the more I read and the more I relate it to what was going on today – especially in 2020 – the Modern Monetary Theory does make a lot of sense.


As an investor AND a currency user, this book had reinforced my beliefs that:

  1. As currency users, fiat currency is not an asset we should be accumulating

  2. As investors, we should focus on real assets and the productive capacity of the company, industry, country, or region that we invest in


At the same time, the book had reduced some of the concerns I previously had regarding the US’s budget deficit whilst changing my perspective towards the way Asian countries manage their government budget and their reliance on the USD.


While there are parts of the book that I do not agree with, the general idea that the author was trying to communicate is logical and definitely refreshing to read. That being said, there is a huge difference between theory and reality. While MMT sounds good in theory, in reality, it may not be possible to implement it smoothly without misallocating resources resulting in more harm than good.


Overall, I would recommend you to pick up the book if you’re looking to understand the idea of Modern Monetary Theory as well as the current stance and developments that many government bodies are adopting to tackle the economic issue caused by COVID-19.


Self Plug (Engage me thx)

Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner that provides advice in the following areas:

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Disclaimer:

  • This article is meant to be the opinion of the author and is for information purposes only.

  • This article should not be seen as financial advice

  • This advertisement has not been reviewed by the Monetary Authority of Singapore

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