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John D

My company just got a large 5 year contract with the military. I'm convinced it will be BAU, 'so far, so good!' until we smack into the pavement.

Kostas Kalevras

The US government is the sole issuer of a fiat currency called the US dollar. How can it be broke in the currency it is issuing is beyond my understanding! Greece is different because it does not issue the Euro, the ECB does. A household or a company is different because it USES the currency but does not issue it.

Bond issuing and taxation is not the source of government expenditure (and deficits), rather it is the outcome of it. The US (and any other country issuing it's own fiat currency) can never be broke. It can decide (politically) to not honor it's debts but it ALWAYS has the capacity to issue money. Bond issuing (and repayment) is just an accounting process of substituting a bond (a piece of paper actually) with a reserve account. The account can always be filled with any amount the US government pleases.

Eric Thurston

It occurs to me that if interest on the US debt is effectively zero, we could simply keep rolling over old debt for new debt. Of course that is one of those games that keeps working, until it doesn't.

Where I lived in Southern Appalachia for years the folks had an ironic expression, "I'd rather owe a man $10 than to beat him out of it." Defining the extremely thin line between borrowing and outright theft.

Then, as you point out, this debt scheme and the 'solutions' for it are merely mechanisms for impoverishing most of us and plowing the money to the elite.


Eventually the natural resources -and goods and services they allow us to create- that money lays claim to become scarce. Then it is quite besides the point -or sardonic- that a nation can print money and therefore claim it's impossible for it to be broke. This "we cannot go broke" argument illustrates our alienation from awareness of our dependence on the natural world. This rendezvous with reality is one of the consequences of peak oil.

Kostas Kalevras


You are quite right that the US (or any other government for that matter) can run out of resources to buy. In that case, depending on the demand created by government and private spending inflation can occur. But it cannot run out of money.

Peak Oil (peak energy actually), climate change, ore depletion are real problems and will create actual limits on production. But they are problems from a resource point of view, not a monetary point of view.

Dave Cohen

Of course it's true that the United States could simply print money to cover its debts.

However, no responsible government would do so. The hyperinflation resulting from turning the dollar into toilet paper would ruin us all.

Long before that actually happened, every other nation on Earth would lose all confidence in the United States. So printing our way out of this mess is not an option.

Ipso facto, we are broke.

Kostas Kalevras

@Dave Cohen

First of all let's get something straight. US Government first spends and then worries about taxes and bond issuing. The latter are just an outcome of government spending (a way to drain liquidity and excess reserves) not a requirement for the US budget.

Secondly, more money does not cause inflation per se. Demand exceeding production and labor capacity creates inflation. USA has double digit unemployment and a large percentage of it's capacity is siting idle. If the USA was in full employment an expansion in the money supply could indeed cause inflation.

Lastly, we should be aware of the fact that the budget deficit (or surplus) is just one side of a national accounts balance sheet. If the private sector wishes to net save and there's a current accounts deficit (as is the case with the US), government is required to run a deficit. In fact government surpluses are bad for the economy since they automatically require from the private sector to take on debt in order to finance it's investments (instead of net saving). They can only work in countries that run a high current accounts surplus (example is Norway).

Dave Cohen

Wow, Kostas.

You really know how to make a simple situation complicated. And so dogmatic about how inflation works! By the way, did you see the CPI today? How did it go up if we're not at "full" employment and so much of our capacity is sitting idle?

> required to run a deficit

At what august university did you drink your theoretical economic kool-aid?

If you think I'm ridiculing you, I am, I am!

Kostas Kalevras

Dave, i think i 've been trying to make an intelligent conversation so far. You haven't but it's your blog anyway.

I wasn't trying to make an argument that inflation can only happen during times of full employment. That would be ridiculous. My point is though that there isn't a straight causality between a government expanding it's deficit (and hence it's spending) and inflation (or even worse hyper-inflation). How could unemployed people and idle capacity, hence lower demand cause hyper-inflation? I would certainly like to see an argument on that route.

As for the 'kool-aid'. First of all a fiat currency means EXACTLY that. A US dollar is only convertible to another US dollar, there's no Gold Standard anymore. So how could the US Government face any problems in it's spending?

Let me outline it in a different way to make it clearer. Say a new nation is born somewhere which creates it's own fiat currency. Let us further assume that it wants to run a budget deficit on it's first year of existence (what are they thinking?!). So it will start collecting taxes and issuing bonds to 'finance' it's budget. Now, how could it receive taxes or sell bonds in it's new currency if it didn't spend FIRST? The obvious answer is that spending is required for the rest to happen. And the private sector could only hold net financial assets (that is not just have deposits equal with loans) if it's government ran a deficit.

As for the theoretical background it's called Modern Monetary Theory:

Dr. C.


Wait a minute, wait a minute... So if "how could the US government face any problems in its spending?" is the case, in effect the US's finances are in no worse shape today than they were during the Nixon or Carter administrations for example? I was already of voting age back then, and there is no way you're gonna convince me that that there's no difference between the bucks that the US had available for its caprices then (or even earlier in the 60's & 50's) and it's current financial straightjacket. To be sure boatloads of dollars are being thrown around, but always an increasing percentage of them dedicated to putting out fires (executed with about as much competency as those geniuses at Tokyo Electric Power are dealing with their fires these days). I don't pretend to know how it is where you live, but down here in my foxhole your arguments don't even pass a smell test.

Kostas Kalevras

@Dr. C.

Since you mentioned Japan, it's a wonderful example of a government's ability to service it's debt and run budget deficits. Japan already has government debt around 200% of it's GDP and runs large deficits every year. Nevertheless it somehow manages to have deflation or small inflation (no hyper-inflation in site!), low interest rates and small yields on the issued bonds.

Yes US, Japan, Australia, UK, China finances (in the sense of servicing their debts and committing as many financial resources as they see fit) are in the same shape as they were when the Gold standard was abandoned. The Eurozone (and Greece where i live) on the other hand is quite a different story running a fit currency which transforms to 'gold standard' for it's member countries.

The former countries actions have the ability to cause inflation. They may not have the hard real world resources available to meet their goals (peak oil, China putting a cap on coal production, Japan struggling to compensate for the GW's of installed nuclear capacity lost, etc). But they are in no way constrained in buying all the resources (either material or labor) that are available for sale in their local currencies.

Cyrus Rex

Wow, great dialogue for a change, yet no one has mentioned the principal reason that the U.S. is able to roll-over it's six-month to two-year debt so inexpensively. Could it be that it's all being purchased by the Federal Reserve? What happens when the Fed decides that it will not or can not any longer engage in Quanitative Easing to obscure the cost of credit from public view?


The main cause of the US Govt.'s debt is that the electorate refuses to tax those that have the income. This country has great wealth. The people choose to let their representatives in govt spend money they don't have, and prefer them to then get loans in the open market to pay the bills. The open market failing, they let the Central Bank buy the govt. debt.
The U.S. govt could be solvent if we just raised taxes on the rich and corporations, and stopped shoveling taxpayer money to "private" enterprise.

Kostas Kalevras

Ok there still seems to be a lot of confusion so i 'll give some more details. Government (Treasury) spending and taxation happens from an account in the central bank. The Treasury’s account, as a liability on the Fed’s balance sheet, lies outside the definitions of reserve balances or the money supply. Consequently, by definition, whenever government spends it CREATES money (out of thin air, increasing bank reserves) and when it taxes it DESTROYS money (again into thin air, decreasing bank reserves).

Moreover, this action is a vertical operation (just like open market transactions from the FED) with the asset created or destroyed in the banking sector while the liability remains on the government balance sheet (which has no value, it can be increased up to infinity less a cent). In contrast loan creation by banks is a horizontal operation creating both an asset (loan) and a liability (deposit) in the banking section. Vertical operations by definition increase or decrease excess bank reserves which can ONLY be altered by other vertical operations, since the Fed will accommodate any bank reserve requirements (in the loan creation process) through the discount window.

I think it's starting to become clear that taxation is just a way to remove liquidity (reserves) from the market. Moreover, a surplus by definition would create net negative financial assets for the private sector pushing it to borrow to finance it's investments.

Now for bond issuing. Since the Fed always sets a target rate and it pays a lower (or sometimes zero) support rate for excess reserves (and a much higher discount window rate for new reserves) it is logical that any excess reserves will drop the interbank rate to the support rate (since net reserves will be larger than zero and all reserve requirements will be met easily). So Fed is REQUIRED to drain these excess reserves through open operations (bond selling). Since taxation has already drained the rest of the reserves, bond issuing is just a tool to maintain monetary policy by removing these reserves. Bond auctions will not fail since the reserves are already there, bonds provide a rate larger than the interbank rate and interbank transactions can only happen on a rate larger than the support if those reserves are drained in the first place. Consequently, the long term rate of the government bonds will only depend on the projected long term interbank rate set by Fed.

Quite a nice document is here:

Read pages 11 - 26.


I've been reading your blog a while now in lurker mode and I must say its been an enjoyable read. Kostas here provides a very good explanation of MMT but I think you can see its short-comings as easily as I can in spite of the fact that its preventing disaster for now. As long as the USD is the reserve currency and China doesn't need to convert its reserves back into RMB things should be stable. This Pettis post explains why the status quo is likely to continue :


The sad thing is that there is a very high social cost to this strategy, such as unemployment and currency debasement and eventually you will be painted into a corner where the economy will enter long-term ossification.

Dr. C

No offense, but I repeat it doesn't pass a smell test. You say that the finances of a list of countries are the same now as they were at some point in the past, I can't speak for Greece, but I was in the US then and more recently, and I say 'no way Jose'. If what you argue holds any water, then back in 1913 at the creation of the Fed the human race invented the perpetual motion machine, at least with respect to economics and finances. Not.

Kostas Kalevras

@Dr C

Actually the gold standard was abandoned in 1971.

Apart from that, the fact that a score keeper cannot run out of points does not mean that the game will go on forever. A fiat currency just provides unlimited spending capacity to the government. It does not mean that it will combat inflation, peak resources/energy, currency devaluation, job outsourcing and so on.

The US government (and all the rest that use fiat currencies) cannot go broke. But it still needs to do a lot more in order to achieve full employment, lower energy usage, combat climate change etc. Fiat currency is not a solution to these problems, it just provides the means to finance the solutions.

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