Stephanie Kelton, Ph.D. is Associate Professor and Chair of the Department of Economics at the University of Missouri-Kansas City. She is also Editor-in-Chief of the top-ranked blog New Economic Perspectives and a member of the TopWonks network of the nation’s best thinkers. Her book, The State, The Market and The Euro (2001) predicted the debt crisis in the Eurozone, and her subsequent work correctly predicted that: (1) Quantitative Easing (QE) wouldn’t lead to high inflation; (2) government deficits wouldn’t cause a spike in U.S. interest rates; (3) the S&P downgrade wouldn’t cause investors to flee Treasuries; (4) the U.S. would not experience a European-style debt crisis.
Professor Kelton discusses the fundamentals of Modern Monetary Theory, and the capitalism's sustainability. An excerpt:
GP: I’ve heard you talk on your excellent shows with Jay Ackroyd and I’ve heard you talk about how money gets created by the government. Would you retell that for our listeners? What does the state do to create money?
SK: Well it makes the most sense to do it by way of example. This is the age of modern money and you used the term fiat money earlier and you know most of the money that is created today is created electronically. We’re not talking about government using a printing press and sending paper bills off to make payments for these things, for the things that are purchases. So let’s say I’ve retired and I’m drawing Social Security. I’m sitting at home in front of my computer screen and I have my bank deposit screen in front of me and I see a thousand dollars in my account and I wait and I wait and I say, “Well, I know today’s the day they deposit my check and then bloop, bloop, bloop there (are) keystrokes taking place somewhere and all of sudden the balance in my account goes up to 3200 dollars.
Well I just got my 2200 dollars social security payment. How did that happen? Well it happened because the federal government gave instructions to its bank, the Federal Reserve, to make a credit to my account in the amount of 2200 dollars. That’s what I get every month. The question is how did they create the money? Well, they use a keyboard and it sounds kinda shocking to a lotta people who don’t really understand how money is created, but the fed is actually pretty candid when it goes about describing how it is creating money, on behalf of the US Government. For example when Ben Bernanke was sitting down with Scott Kelly in an interview on 60 Minutes, Scott Kelly said to him, “You know the Fed, there’s all this money being spent and created and what is that? Taxpayer money? What’s going on here?” And then Bernanke said, “It’s not taxpayer money. Banks just have accounts with the Fed and when we spend we use the computer to markup the size of their account.” And that’s exactly how he described it.
So, it’s not much more difficult than that. The government spends by giving instructions to its bank to credit somebody’s account.
GP: So, that can happen through an entitlement payment or some kind of money is owed to a person . You used the example of Social Security payments, the monthly payments. It could also happen through procurement , right, if the government says I need x amount of jeeps for the Army it will credit the account of the jeep manufacturer.
SK: Exactly right. It could be Lockheed Martin, it could be Halliburton, any of these contractors just say,. you know, it’s a 200 million dollar payment and the payment is made via instructions from Congress. Instructions to spend and the credits show up in the bank accounts of the recipient.