Stephanie Kelton — The Deficit Myth (Book)

Stephanie's new book is available for preorder. It should be a game-changer.

The blurb reads, "Deficits can be used for good or evil." "Evil?" Probably few people know that German economic development post Weimar and rearmament in preparation for WWII was engineered under Adolph Hitler by Hjalmar Schacht, head of the Reichsbank (German central bank). Hitler is often associated with the Weimar Republic that destroyed the Deutsche mark (DM). Nothing could be further from the truth. 

Under Hitler Germany rose from the ashes of WWI and the draconian settlement involving reparations that were designed to prevent the rise of another strong Germany in the center of Europe, ostensibly because Germany had caused the conflict (which history shows to be false). The retaliatory Treaty of Versailles led to German post-war collapse and the rise of Hitler and the Nazi Party. Hjalmar Schacht was instrumental in making this possible using his position and financial knowledge.

Schacht left the Reichsbank 1939, but remained a minister without portfolio until 1943. Nevertheless, he was tried and convicted at Nuremberg, and he served time for his contributions to German resurgence under Hitler and the Nazis along with his Nazi sympathies. The link provides a detailed summary of Schacht's operations while heading the Reichsbank.

The financial-economic plan that Schacht devised did not rely on deficits, since this would include bond issuance and be transparent to the world. Instead, he used a variety of financial techniques including overt money financing (OMF) without fiscal offsets, that is, direct payments by the central bank for government purchases to conceal what was really taking place.

While Schacht's plan was used to fund what the world considers as "evil," it demonstrated that as long as real resources are available, financing is no problem for a government whose central bank issues the currency. Such a government is self-funding. What this shows is that the "money power" can be used for good or for ill, wisely or foolishly.

As a result, some argue that the government must be prevented from self-funding because it may result in ill. That is to say, policy space must be restricted voluntarily in the case of a floating rate system or operationally by imposing a fixed rate system. It is an objection that needs to be addressed.

The Deficit Myth
The Deficit Myth
Stephanie Kelton | Professor of Public Policy and Economics at Stony Brook University, formerly Democrats' chief economist on the staff of the U.S. Senate Budget Committee, and an economic adviser to the 2016 presidential campaign of Senator Bernie Sanders