Recent academic and popular discussions of budget deficits rely on a simplistic, and largely false, conception of the effects of deficits. The effects depend on the source of the deficit and on private-sector responses to it. Also important are whether budget changes arise passively through the workings of the business cycle and whether deficit-inducing policy actions are permanent or transitory. The key expectations arising from the simple theories connecting interest rates and deficits are precisely opposite to what modern theory and evidence indicate.