Why 'Deficits Are Private Surpluses' Misses the Point

I get why the line lands. “Government deficits are private surpluses.” It sounds like permission to relax about red ink. It also maps to a real accounting identity. But treating that identity like a policy North Star is how you end up confusing nominal paper gains with real wealth, and mistaking a temporary boost for a durable foundation. If you care about actual living standards and long term stability, you have to ask a more annoying question: what kind of surplus, in whose hands, backed by what real resources, and at what cost tomorrow?

The identity is true. The interpretation is doing too much work.

Start with the part I agree with. In the three sector framework, the government balance, private domestic balance, and external balance sum to zero. Rearranged, a government deficit adds a net financial asset to the non government side. That is correct as accounting. It is the Wynne Godley lens and it is useful. But accounting tells you where numbers go, not whether you got richer in any real sense. You can print more scoreboards and everyone looks like they are winning. That does not create more food, energy, housing, or productive capacity.

“Private surplus” can mean IOUs that do not buy much later

When MMT folks say “deficits are private surpluses,” they often imply that the private sector is healthier as a result. Sometimes that is true, especially when the deficit fills a collapse in private demand during a crisis. Other times, you just created a pile of nominal claims that chase the same or fewer goods later. If real output does not keep pace, the surplus is diluted. The identity still balances, but the purchasing power embedded in that surplus shifts. The problem is not the math. The problem is pretending the math guarantees welfare.

There is a second geometry issue. The non government side includes the foreign sector. So your “private surplus” can be the rest of the world’s surplus, as when deficits pair with trade deficits. That can be fine if you imported real capital and skills. It can be fragile if you imported consumables while hollowing out domestic production, then try to tax later to cool inflation. The identity will not rescue you from the politics of raising taxes into a downturn.

Inflation and regime risk are not optional footnotes

MMT’s clean story is that the real constraint is inflation, and taxes are the thermostat. In practice, the thermostat sticks. Congress does not pass fast, surgical tax hikes on a dime. Households and firms plan around laggy, negotiated politics, not whiteboard controls. Empirically, whether deficits end up inflationary depends on the regime you are in, the credibility of the fiscal authority, and whether the central bank is subordinated. When fiscal takes the driver’s seat and markets believe monetary will accommodate, you step toward fiscal dominance and persistent price pressure. That is not a Twitter scare word. It is a live macro regime documented across advanced economies.

Now layer in supply geometry. If the deficit arrives in a supply constrained economy, the added nominal demand bumps into hard walls. You get more price than quantity. If it arrives in a slack, high unemployment economy, you get quantity first, then price later. MMT acknowledges the real resource constraint, but the policy sales pitch often treats that constraint like an afterthought that can be toggled with a future tax bill. The timing gap is where a lot of damage happens.

The consolidated balance sheet trick and the real world

Another move in MMT is to consolidate the treasury and central bank. On a chalkboard that clarifies that a currency issuer does not “run out of money.” In the legal and institutional world we live in, the consolidation is bounded. The central bank has its own mandate, its own credibility constraints, and its own balance sheet hygiene to defend. If it backstops fiscal expansion too aggressively, inflation risk premia show up in rates and the currency. You can call that a political failure rather than a theoretical one, but if your theory’s policy guidance depends on politics working better than observed history, that is not a small caveat.

The jobs guarantee and the composition problem

A lot of MMT’s heart is in the Job Guarantee. My gripe is compositional. If the deficit channels into low productivity placements, or into politically steered projects with weak multipliers, then the private surplus you just created is heavy on deposits and light on productive capacity. Cool optics now, weaker growth path later. You can reply with carefully designed JG proposals. I can reply with congressional reality and capture. That tug-of-war is the whole point. The macro identity will not adjudicate it for you. Even sympathetic academics concede the operational challenges in turning this into a stable, scalable program.

There's rarely debt without tears

There is a popularized MMT line that a sovereign can run deficits without issuing debt, or that issuing debt is optional window dressing on money printing. Again, operationally true for a currency issuer in its own unit. The cost shows up in a different place: the value of the unit, the term structure, and the credibility account you draw down. You can call that a communications problem. Markets call it a spread. And if inflation pops while growth slows, politicians tend to prefer more deficit over faster taxes. That is the slope into fiscal dominance. The historical record on how that regime ends is not kind.

So what changes if the base money cannot be expanded at will?

Enter Bitcoin, not as a talisman, but as a thought experiment in budget constraint clarity. Bitcoin’s monetary base has a known terminal supply. No committee, no emergency meeting, no clever new facility. Halvings are scheduled, and the network enforces the rules flatly. The 21 million cap is not a promise by an issuer. It is the rule that every validating node insists on. You can imagine political coalitions to change it. You cannot compel the holders who care about the cap to run your new rules. That social reality is the defense.

With that base, the MMT story collapses back into something closer to classical discipline. A government cannot manufacture a private surplus by keystroke. If it wants to spend more than it taxes, it must borrow in a unit it does not control, or it must tax in that hard unit. That forces a conversation about prioritization and return on investment, not just accounting accommodation. It also moves the “thermostat” from after the fact tax hikes to before the fact budgeting. Painful, maybe, relative to what the system is accustom to. But also clear.

Real surplus vs nominal surplus

This is the crux. MMT’s best insight is that we over mystify the alchemy of government finance in a fiat system. Agree. Its worst habit is to smuggle a welfare claim into an accounting claim. A real private surplus is rising productivity, stronger balance sheets that can service private investment, better energy systems, more housing where people need to live, and higher quality public capital that lowers private costs. A nominal private surplus is bigger numbers in bank accounts that buy less next year. MMT blurs that line when it treats the sectoral identity as a green light. The identity is a dashboard, not a destination.

But what about recessions and crises?

Deficits in crises are not just fine, they are necessary. If the private sector is deleveraging and the external sector is in surplus, the government cannot all tighten at once without a depression. The objection here is not to countercyclical fiscal action. It is to the idea that any deficit is by definition adding a healthy private surplus. Timing, composition, and supply conditions matter. Use the tool, but do not pretend the tool rewrites constraints.

The politics you cannot abstract away

MMT’s cleanest formulations often assume that after you run the deficit to hit full employment, you can cool things by raising taxes. That is exactly the move voters punish, and exactly the move politicians delay. You can say that is a failure of will. I will say it is a feature of human systems. If your macro framework depends on high frequency, unpopular tax adjustments to control inflation, your framework is fragile in the world we actually live in. That is why the regime literature keeps warning about fiscal dominance. The constraint is not just resources. It is also institutions.

Where this leaves me

1. Use sectoral balances as a map. Treat them as accounting, not as a welfare claim. They are true, and they are not enough.
2. Assume politics will be slow and messy. Design policy that does not require surgical, unpopular tweaks to avoid runaway dynamics.
3. Prefer deficits that expand supply, not just demand. If you are going to claim a private surplus, build the real capacity that makes it so.
4. Recognize that money with no hard supply constraint invites moral hazard. This means every fiat deficit has this structural temptation.
5. Consider what a hard cap base forces. Bitcoin pushes the costs of policy back to the budget table. There is no spreadsheet trick to conjure a real surplus. The cap constrains, but it also clarifies.

Closing it out

It's not that MMT is complete nonsense. I think it is a narrow truth that got inflated into a worldview. Deficits can be private surpluses. They can also be misallocated time bombs that show up as higher prices, weaker currencies, and political bitterness when the thermostat fails. If you want a world where the scoreboard cannot be rewritten at will, you look for money that refuses to move with the moment. Bitcoin is not a policy. It is a constraint. Constraints are how complex systems avoid flying apart.

MMT’s best contribution is demystifying keystrokes. Bitcoin’s best contribution is making keystrokes irrelevant to supply. If you want real surpluses, build real things, measure them honestly, and stop pretending that the balance sheet identity answers the only question that matters.