There’s a myth in the USA that just won’t go away. It’s this idea that a household balance sheet is somehow comparable to that of the federal government’s. Few myths are more destructive and lead to greater confusion and/or misguided government policy. In recent months this has become a particularly public subject as the debt ceiling debates have raged and the European debt crisis continues. The problem is, the analogy between a sovereign government’s balance sheet and a household’s balance sheet is never accurate. The reason this analogy always fails is due to the difference between being a currency issuer and a currency user.

In the following video I explain briefly why this is such a destructive myth and why this country desperately needs to learn that the burden we leave our children is not a debt burden, but a certain living standard. It’s true that spending money at the government level could reduce this living standard and we could certainly leave our children with a standard of living that is below our own, but what we won’t leave them with is a bill that they need to pay off in the form of some debt burden.

See the following video for more and read the following links if you’re still confused:

Understanding the burden we leave our grandchildren:

Why government debt matters:

Understanding the modern monetary system:


Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. I received an e-mail from my 30 something daughter today and it was a forward going around her work site . I singled out #3 and replied with the link to this article today as a means to provide a different point of view

    3. The government cannot give to anybody anything that the government does not first take from somebody else.

    I talked to her later and was surprised that she was not more interested.
    I have made progress towards MR but over the years my rants on uncontrolled debt has rubbed off.
    Keep making those videos and we will see if you can turn her around. Then I will know that they are clear as she is a smart lady!!

  2. Speaking of aggregate demand and printing: the next ECB LTRO could hit 1.5 trillion euro; maybe much more. That means either the Germans have surrendered and it’s party on again in Europe via keystroke euros, or that Greece and Portugal have been written off and the LTRO is actually the bank mega-recap of all TARPs to build a banking firewall against default by Greece and Portugal.

    The Germans are thinking that Greece is a bottomless pit; and so, we might as well get it over with. The Italians, via Draghi, might be cynical enough to sacrifice Greece and Portugal to win the bank mega-recap via the LTRO that will save Italy and Spain.

    MMT (or I should say MR, because MMT has an ax to grind, as we have learned) has a fine track record for predictive capacity since I have been following it, because fiscal, monetary and banking variables are all accounted for in a heterodox and nonideological approach that “gets” the essentials of fiat money in the US and the world. There could be a huge buying opportunity in March or April if Greece and Portugal get thrown into the fire and markets tank big time worldwide, only to rally big time as investors figure out that the LTROs firewalled the European banking sector and TARP and $1 trillion in basically free reserves covered the USA banking sector.

    What do all of the smart people on this site think about this scenario? Any bankers from the City out there?

  3. A film crew and some polished, smooth videos, funny videos, are in order.

    The fact of the matter is that most people – say 95-99.9% – don’t care about economics enough to budget it in alongside parenthood, work, a girlfriend, and fixing up that old jeep. That would include probably 95% of the senate, probably 95% of the senate has no real idea how economics works or any real idea about sectoral balances or any real idea that eliminating the government debt is an impossibility as attempting to do so would cause a heinous recession and call for deficits, etc.

    A message needs to be created that attempts to interact with people not already or intrinsically interested in economics. The video above has polish, it was clearly professionally made, and that results in alot of people being willing to watch it that would turn away from a video like the one posted above.

    A fundamental challenge of marketing MR is that its basically selling hope. The debt hawks are selling fear. Two people walk up to your door and one says “its gonna be allllllright”, the ohter says the russians are coming and we’re all going to die… everybody remembers the fear salesman. Its easy to sell fear, look at the evening news sometime.

    That is a formidable challenge. Tell somebody there is no government debt problem and, in fact, they could mint a 50 quadrillion dollar coin tomorrow, give it to themselves, and ahve 50 quadrillion dollars… that almost sounds too easy, doesn’t it? And we already have an enormous outcry against the fed “printing money” and even very intelligent people are kind of predisposed to oppose that (again, they don’t have a great deal of spare time to devote to studying econ).

    While I fully realize that this is a case of “well, its just not that simple”, exceedingly simple messages could really help reach some minds that are right now convinced that the gov’t is broke, a youtube channel showing some vid’s with some spit and polish. If Ed Burns can make “The Brothers McMullen” for $28k…

  4. To sell the world at large the idea that the US Govt has an unlimited budget in dollars will absolutely require a credible, and prominently presented, discussion of how to control inflation.

    So implanted in minds right now is contempt for “money printing” and hate of inflation that you simply cannot be cavalier about it and hope to win over the masses. Or congress.

    A discussion of what causes inflation is sorely lacking from the general blogosphere, at least that I’ve ever seen.

    Whether or not inflation right now is high is not relevant to the debate with the general public – those 95-99.9% of people who really don’t care enough to read deeply into things but who catch tidbits on the news here and there. You know, like congress. – the general public is so obsessed and concerned with inflation and “money printing” that they simply won’t take anything seriously unless it addresses it.

    MR would benefit from a discussion of how to control inflation, what causes it, etc.

    Think of it as a way of saying, to the world at large, “look, you’re right, inflation is important, we’re on it like bonnet”. Its far easier to win a negotiation when the other party realizes you understand their position and are concenred about it.

  5. autographs!

    a video about Pete Rose’s autograph being the currency. some folks running around shopping, spending their Peties… saving their Peties, talking about how many Peties they need to get the kids through college.

    Then show pete rose walk in and just sign. That’d be cool. People would watch it.

    And it makes the point accurately enough, I think. I wonder what it costs to get Pete Rose to make a short film?

    • But then Pete’s card isn’t worth so much and we start buying things with Joe Dimaggio’s card instead, because he’s dead.

  6. Cullen, it’s hard to understand these days where you stand on Fed policy. You used to be more critical, but now have turned toward what seems to be a more supportive position, without really saying it?? Maybe I’ve missed some of your articles.
    It seems like everyone had confidence in Greenspan until it blew up in our faces. Greenspan’s Fed was a bubble ship and he was the captain. There was very little criticism at the time. Now, it seems like Bernanke’s slaughter of the savers until risk improves policy will also end with an enormous correction of some type. It’s just a strong instinct I have, but something is very very wrong with Fed policy. I’m afraid Mr. Bernanke’s next book will be “What I Didn’t Learn from the Great Depression” (and how it made the Great Recession worse).

  7. Don’t US bonds serve as an investment vehicle which “sterilizes” US over-spending and props up the exchange-rate value of the dollar, whilst allowing the govt to spend money to its heart’s content? If the US were to deficit spend without issuing bonds, wouldn’t the US eventually have to settle into a non-reserve-currency status and achieve a more realistic balance of trade?

  8. Isn’t there another way of controlling interest rates within MMT/MR, other than paying interest on reserves? The idea of paying interest on bank reserves at the Fed seems highly suspect to me – as if the govt is shelling out money to pay interest to the banks for reserves that serve no real purpose to the govt. Could raising reserve ratios be an alternative, possibly along with other measures?

  9. I think you use semantics to mislead everyone here. I won’t fall for that.

    Yes, technically the US government can print as much money as it wants. We have a fiat currency backed by nothing but “trust” and history. This is not free money even though it is issued without any collateral (printing money is unsecured). The “US government” issues a debt obligation to “US citizens” and “foreign citizens” in the form of treasury notes and bonds. The US government then pays that off with printing money and/or turning around the revenue it receives. When rates are low this is easy to do. Not all debt is bad but when the amount of debt exceeds a threshold of reliable payment (ie 100%+ of GDP), a currency default is possible and likely. As you explain in the video, this is achieved by massive devaluation of the currency (inflation). However, inflation is also dispersed among other nations and asset classes over time. Children of the future will have a devalued currency in a nation that produces very little. Real money comes from production not consumption. So again, you are correct that we may not “run out of money” but neither would a household if dumb lenders keep giving money. The US has a unique advantage of the dollar as a reserve currency for important international trade. If this dollar reserve is abandoned, we will face a terrible burden and children will suffer for decades.

    • Luis, living stds do not decline because of inflation alone. If that were true then why have living stds increased since 1913? Why has the USD fallen 95% while the CPI has soared since 1913? Or are you saying that people today have lower living stds than 100 years ago? Please read the links for more. It seems that you aren’t quite understanding my point. Thanks.

  10. What have you been smoking lately?

    You will need to find another sucker to drink your misleading Krugmanite Kool-Aid.

    Weimar Republic geniuses used similar to yours bizarre logic to rationalize money printing as a solution to high government debt (that resulted from funding the war entirely by borrowing).

    This was the outcome (initially inflation was “under control” until the parabolic spike).

  11. I was using Weimar’s hyperinflation (external vs domestic debt is irrelevant) to illustrate limits to government money printing — there are limits as to how much the government can print (but you are misleading your readers as if there is no limit to money printing and therefore according to your bizarre logic “the government can never run out of money”).

    • No, I very specifically say that printing in excess of productive capacity can lead to disastrous outcomes. Read the links I provided. All of these topics are covered in detail.

  12. You need to listen to your video again, you are repeating multiple times that “the government can never run out of money”.

    This is not true and misleading Krugmanite-like propaganda.

    There is a limit to goverment money printing (therefore, the government can run out of money) and nobody knows where this limit is — 17 academics (aka the Fed), who never had a real job and did not see the housing crisis two months away, do not have any clue where the limit is either).

    • You’re conflating the point. Even in a hyperinflation the country does not “run out of money”. In fact, they generally create more money. There’s no such thing as a sovereign currency issuer running out of money due to some debt constraint. A nation with a printing press does not run out of money. They could kill the currency by creating hyperinflation. But that’s not “running out of money”.

  13. If tomorrow (for what ever reason) nobody believes that the paper the government prints is money, the government “runs out of money”.

    Your statement that “the government can never run out of money” is not true and misleading Krugmanite-like propaganda.

    The government can run out of money.

    • Not true. Govts don’t “run out of money” in a hyperinflation. You think Weimar ran out of money? No, they printed too much money. The fact that they couldn’t run out of money ultimately did them in. I am fully aware of the fact that abusing the privilege to print can destroy the currency. In fact, that’s my whole point here.

  14. Couple of questions:
    Are we, in fact, printing money right now? Is QE2 a matter of taking back bonds that we will quietly tear up later and electronically crediting the accounts of bondholders?
    What would happen if the markets became aware that this is happening, or, that we plan to begin printing money at some time? My understanding is that inflation can be an overnight event.
    Has there been any (positive) examples of governments that printed money either to pay down debt or finance operations?

    • Johnny, QE is never “money printing”. It is the Fed swapping reserves for tsys. They’re not adding net new financial assets. They’re just exchanging assets. I have a full section on the website dedicated to QE.

      We are printing money through the deficit spending. And because we’re in a de-leveraging cycle it’s the only thing propping the economy up. If you read my headline post today you’ll see how the sector balances add up. For instance, if we rearrange the GDP equation you get this:

      (I – S) + (G – T) + (X – M) = 0

      (I – S) = private sector balance

      (G – T) = public sector balance

      (X – M) = foreign sector balance

      All the sectors have to sum to zero.

      So the best way to think of this is to think of the govt’s deficit as the non-govt’s surplus. If the country has a trade deficit then think of that as a demand leakage out of country. If the govt doesn’t run a budget deficit to offset this demand leakage then the pvt sector doesn’t have the net financial assets to continue growing without going into debt. So, with a 3.5% CAD, the 10% budget deficit is allowing the pvt sector to save quite a bit today and repair their balance sheets. It’s also leading to growth.

      Make sense?

      • THanks. I’ll have to think on that for a while.

        One question:
        If the $1.5 trillion deficit is the ‘non-government surplus’, it seems that you are defining the latter by the former. If we decided to have a $1 trillion deficit, then that would be the non-government surplus. If we balanced the budget, then the non-government surplus would be zero.

        I do understand the aim of the QE2 is to repair the banks’ balance sheets.

          • OK, I thought the ‘nongovernment surplus = the slack in the economy and that deficit spending made up the slack in the economy.
            But you could run a $1 trillion deficit in a rip-roaring, full employment economy and still call it the non-government surplus.
            By balancing your equation you create the impression the deficits don’t matter, or that the deficit is meant to restore the economy to equilibrium, which I don’t think is what you mean to say.

            Listened to the video. When you say that government is a currency ‘issuer’ not a user, I see some problems with that as a theory. For example, when the Defense Department buys a new tank, it spends money that it either borrowed or received in taxes. The money is issued by the Federal Reserve, which to my understanding is an independent entity that is technically not even part of the government.

            At any rate, I think I now understand that yes, the government is not like me because it can print money, but if that’s the message the public grasps, it is going to horrify them even more than their current fears about having to pay it back. We know that if we had a printing press, we would certainly use it, just as the federal government will, and we suspect it won’t have a positive ending.

              • Thanks for responding. I don’t want to take up more of your time, appreciate the answers you have provided.
                I took an hour and read through your article; can’t say I quite understand it, but I grasp the outline and the general concept.
                I think what irritated me initially is that your video gave me the impression that ‘Deficits don’t matter, idiot’ when most of us are not idiots, we just want to be able to translate concepts into things that are familiar to us.
                The idea that I work my ass off to earn a dollar and the Federal government can just — poof — give a dollar to somebody who doesn’t work without consulting me drives a lot of us crazy. The idea that the Fed is electronically sending money to my bank’s account and my bank is squeezing me on my mortgage drives me crazy.
                I get what you said that money is just a means to circulate and grease the economy. True wealth is property or shares in a company (or, sorry, gold) or even a promise from a loved one that they will take care of us when we are old; however, for most Americans who have maybe $100k in assets that must be invested conservatively and must be held in cash the idea that cash is essentially very fragile is going to be a great shock to them. The fact that inflation benefits wealth holders and destroys savers is going to create societal turmoil if people grasp what is going on.

                • Yeah, there’s a balance between production and spending. I would even argue that our production is being watered down by things like the financial services industry. So the margin for error in the USA growing thinner with time as we increasingly become a nation of rentiers producing less of real value and consuming everything in sight. That’s why I always like to emphasize the importance of production, making goods and services of real value and not allowing our govt to just paper over our problems with deficit spending. Govt spending can be good though. We have to remember that deficits are not always bad. They don’t always lead to a decline in our living stds.

                  Let me know if I can help with the concepts more.

              • I’ve been trying to wrap my head around the implications of MMT for MONTHS now. Maybe I’m dense or too old to learn new tricks or both. One thing, I’ve never been able to understand is how the system works where the vertical and horizontal views intersect. For instance, it sounds like a bank’s own capital and it’s reserves are in “separate” accounts. And if banks are lending and maintaining capital levels based on their judgement of credit risk and this deviates from the reserve requirment ratio, does this mean for instance that they could possibly obtain more funds from the government to maintain reserve requirements as a simple automatic mecahnical process even though the banks capital levels could very well be lower than that reserve requirment? So a way to think about it would be that the bank is basically operating around this core reserve that does not belong to them and that they don’t actually ever “touch” – its just there to instill confidence in the system and provide a tool for the fed to maintain a target rate? And that being said, would it be right to think that in terms of the banks operations, it has 0 reserve assets and all decisions are made without taking the reserves into consideration, they are merely there because it is law? And instead of thinking about the banks as “leveraging government money” (which implies the fractional reserve system is real in some people’s perceptions of the statement), is it correct to think that in a theoretical world in the beginning of the monetary system where there was no money in the system, that the treasury spends, money makes it’s way through the economy and ends up as cash on the balance sheets of banks which they use for operations as stated in the first portion of this long winded question and THAT is how banks obtain cash for operations, NOT the reserve rqmt? sorry so long :0) thank you so much for the great research

                • Reserves are an asset. Capital is equity. So banks are constrained by their solvency essentially and not by their reserve balances. Does that help?

  15. Sorry to display my ignorance, but I am trying to learn. So, what are JG’s and CAD’s? If these acronyms were defined in the thread, I missed it. Thanks.

    • Job Guarantee, a program MMTers believe in, and current account deficit. Sorry. I shouldn’t speak in code. Not a good way to teach.

  16. P.S. I agree about the most destructive monetary myth in the USA — it’s been driving me NUTS. Thank you, Cullen Roche, for your clear explanation.

  17. I think we should all chip in and get Morgan Freeman to do a series of MMR videos!