The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy

Imagine a world where the rules you live by suddenly don’t apply to someone else. You balance your family checkbook, watching your income and expenses carefully. But what if the government, unlike you, holds a magic pen that can write money into existence? This isn’t fantasy—it’s the reality of how a sovereign currency issuer operates. The government is the only entity that can create US dollars out of thin air. It’s a unique privilege, granted by the Constitution, that sets it apart from households and businesses that must earn or borrow before they can spend.

Think of Uncle Sam as the sole manufacturer of dollars, with a monopoly on issuing currency. This means the government doesn’t need to collect taxes or borrow before it spends. Instead, it spends first, putting dollars into the economy, and then collects taxes later to create demand for those dollars. Taxes don’t fund spending; they sustain the currency’s value.

Consider a story of a father who wanted his children to do chores around the house. He created his own currency—business cards—and imposed a tax payable only in those cards. Suddenly, the cards had value because the children needed them to avoid losing privileges. They worked to earn the cards, which the father then collected to maintain demand. This story illustrates how taxes compel people to seek work and accept the currency, not to fund government spending.

Government borrowing is another misunderstood concept. When the government runs a deficit, it issues bonds—interest-bearing dollars. But these bonds are bought with dollars the government already created by spending. They are not loans from the public but a way for the government to manage interest rates and provide safe assets for savers. Borrowing is a monetary operation, not a financing necessity.

Yet, many think the government must find money before spending, like a household budgeting its income and expenses. This household budget myth leads to self-imposed constraints like PAYGO, which force lawmakers to balance budgets unnecessarily, limiting investments in public goods.

Understanding these distinctions is the first step toward reimagining fiscal policy. The government’s ability to issue currency means it can invest in the economy without the artificial limits of tax revenue or borrowing. But with great power comes great responsibility. Managing inflation and real resources remains essential.

As we move forward, we will explore how inflation—not deficits—is the true constraint on government spending, and how this insight can transform our economy and society.

Now, let’s dive deeper into the nature of inflation and why it matters more than deficits.