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

Chapter 5 examines international trade, challenging conventional wisdom about trade deficits and exploring how modern monetary theory offers new perspectives on global economic relationships. 

Kelton watched with her son the 2015 Republican primary debates, during which Donald Trump criticized trade relationships with countries like Mexico, China, and Japan. This personal anecdote introduces the chapter’s central tension: the widespread belief that trade deficits indicate economic failure.

Kelton disputes the notion that trade deficits automatically signal economic weakness. She explains that imports represent real benefits to a nation, while exports represent costs in terms of resources and labor. This paradigm shift suggests that trade surpluses might actually indicate economic loss rather than gain. The author notes that public anxiety about trade deficits stems primarily from job losses when companies move production overseas.

The chapter focuses on the concept of monetary sovereignty, explaining how different nations possess varying degrees of control over their economic destinies. Countries with high monetary sovereignty, such as the United States, Japan, and Canada, issue their own currencies and avoid borrowing in foreign denominations. In contrast, nations with lower monetary sovereignty often struggle with currency pegs, foreign-denominated debt, or membership in currency unions like the eurozone.