Yves here. To clarify Richard Murphy’s headline, he is not referring to all levels of government in the UK, but “Government” which in US-speak would be “Administration”. His point is that the UK and US national governments will never run out of currency and do not need bond markets to fund budget deficits. Bond issuance is a political holdover from the gold standard era as opposed to an operational necessity. Looks at how Japan ran absolutely ginormous government deficits for decades.
Too much net spending that does not sufficiently (or at all) boost productive capacity generates inflation. That is the constraint on spending. Or in MMT-speak, “real resources”. Increasing demand (which is what net spending does) in the absence of there being enough slack in the economy will raise prices. But investors really do not like inflation beyond modest levels (2% to 4%). So the likely level of inflation will depress asset prices, particularly risky ones like stocks and private equity, as well as investment, as the 1970s stagflation demonstrated.
Note that the US will not default involuntarily. But it can always stiff its creditors, such as by forced extension of Treasury bond maturities.
By Richard Murphy, Professor of Accounting Practice at Sheffield University Management School and a director of the Corporate Accountability Network. Originally published at Funding the Future.
There’s a persistent myth that our government is somehow at the mercy of the financial markets and that it has to dance to their tune. This is most definitely doing the rounds this week, mainly as a result of Labour’s mismanagement of its own party, and Rachel Reeves’ subsequent very public tears.
It’s a myth I have been challenging for years, so let me summarise why.
1. The government creates the money
The UK government is the monopoly issuer of the pound. It spends all of that money into existence. Every pound of government spending creates a matching financial asset for someone else. It is only afterwards that the government issues bonds, not because it needs the money, but to provide a safe place for savers to deposit their funds when banks cannot provide this service.
This point is critical. The government does not need the markets to ‘fund’ its spending. It is simply swapping one form of money (reserves) for another (gilts). Bizarrely, it pays interest to those to whom it provides this service.
2. Gilts are a choice, not a necessity
The sale of government bonds, gilts in the UK, is presented as if the government is dependent on the markets to keep spending. This is nonsense. The government issues gilts largely because:
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It wants to drain reserves from the banking system to help the Bank of England hit its (currently too high) interest rate target.
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It wants to give pension funds and insurance companies a safe deposit facility to underpin their promises to those who use their services.
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It believes it must maintain an outdated and now unnecessary City-based financial architecture.
None of this means it needs the markets to spend. If no one bought gilts, the government could continue to spend. In fact, as quantitative easing and now quantitative tightening prove, there is no relationship between bond issues and Bank of England market interventions and the capacity of the government to spend: the evidence is all there for anyone to see.
3. The central bank is always the buyer of last resort
When financial markets are in turmoil, as happened in the mini-budget fiasco under Liz Truss, the Bank of England steps in. Its role is to stabilise prices and yields. This is not optional. It is a fundamental part of having a sovereign currency and a central bank that acts as the lender of last resort. This means the financial markets are, in fact, dependent on the government and its central bank. Not the other way around.
4. Interest rates are a policy choice
People say, “but the markets set interest rates, and so they can discipline the government.” Again, this misunderstands monetary operations. The Bank of England sets the base rate. It can cap or control longer-term rates by buying or selling bonds as it chooses. The so-called market rates are policy-contingent.When push comes to shove, the central bank can always enforce the interest rate it wants.
5. What markets really influence is ideology
So why the obsession with ‘market confidence’? The reality is, politicians and economists often invoke markets to justify austerity. It is easier to say “the markets demand it” than to admit their own ideological choice, which would otherwise be unpalatable to the electorate. Financial markets do, in that case, play a political role, but they do not hold the government hostage. They operate within the monetary framework that the government and its central bank set. We could just as easily choose to run the economy with other priorities, but it does not suit neoliberal politicians to do so. That is because they view politics as the City does, at cost to us all.
Summary
I keep returning to this issue because it is so fundamental: the UK government is a currency creator, not a currency user. It is not like a household. It does not need to beg or borrow from the markets to spend. Financial markets are accommodated by the government, not the other way around.
Understanding this changes everything. It means that economic policy decisions — on public services, investment, climate action, and inequality — are political choices, not technical constraints imposed by bond traders. That is why misinformation on this issue matters so much, and the fact that it is so widespread shows just how strong are the forces that wish to deny that democratic choices can still be made in the UK.
In recent weeks, Alexander Mercouris has been forecasting that Keir Starmer’s tenure as Prime Minister is approaching its end, with the proximate cause of his troubles being a fiscal crisis. Mercouris (and also Alex Christoforou; this was also discussed in a recent The Duran episode; both of the Alexes appear to discount MMT) embraces the “UK government is income-constrained” myth, but I can’t believe that no-one in the Labour Party does not know better.
It would be in the political interest of the Labour Party, and in Keir Starmer’s interest in prolonging his tenure as Prime Minister, to have the Bank of England fund a deficit sufficient to maintain social services (they could even throw in money for Ukraine; huzzah!).
I have the impression that Bank of England governors understand MMT.
What is constraining the Labour government to pursue self-injuring policies that it doesn’t have to pursue, and that are damaging its relationship with its mass constituency? I ‘get’ that there is also a smaller moneyed constituency; are Labour Party “leaders” merely agency-less pawns of moneyed interests?
Oh, I believe it. Starmer and the Blair heirs are neoliberals. The only people in Labour who might buy MMT would be Corbyn and his allies, and they were stomped on even more ferociously than Sanders.
And remember, Sanders has Stephanie Kelton as the Chief Economist of the Senate Budget Committee, and he acts like he does NOT believe in MMT. These guys are badly indoctrinated and/or not willing to buck orthodoxy.
It’s not limited to the west, either. Putin and his inner-circle are still very orthodox in their thinking about economic policy. Look how high they insist on keeping interest rates!
I think for lefty-inclined thinkers, they feel like MMT takes away their argument for raising taxes on high earners and corporations, and recoil at that.
The reason for raising rates on those top earners should be more straight-forward: they have too much money and power and need to be constrained, not because we have “budgetary realities”.
Most leftists are still far too fond of Marxist economics, which is of course Classical Economics, which has no room for MMT.
The only area where MMT type ideas seem to be acceptable within the mainstream is in some sections of financial economics, where they are more tied to real analyses of money flows without the underlying assumptions of classical, neoclassical or ordoliberal economics. Even then, they rarely say the words, they just dance around the concepts. As Yves suggests, those who have made a deep study of Japan in the last few years knows the whole notion that spending is funded by bonds plus taxes is an easily falsifiable hypothesis, but MMT is so far outside the Overton window, its just not something that can be talked about in polite company.
Reeves has a highly conventional Oxford PPE then an LSE Masters, plus relatively minor BoE career, and is totally welded to this economic orthodoxy.
Her ‘fiscal rules’, though an unecessary artifice, are her security blanket in retaining crediblity with the finance sector.
Starmer, lacking any interest or experience in economics, has mostly entrusted UK macroeconomics policy and practice to his Chancellor.
Bailey at the BoE is a down the line bankster, and owes his allegiance to the City, not the country.
That is why Labour are pursuing this version of quasi-neoliberal dogma.
Reeves does want to avoid an austerity tag, but has had an endorsement from Cameron’s erstwhile financial capo Osborne, which tells where her policy instincts are.
Of course Blairism and his 3rd Way is/was centre right corporate liberalism in the Clinton mould, and Starmer’s inner circle are heavily Blairite.
So UK Labour are almost on a parallel course to your Corporate Dems – which many on the left in the UK would classify as veering increasingly to the right of centre-right in serving corporate and especially financial interests, but most certainly not the working class.
Starmer purged the Left in the Labour party after his election, so there are few or no countervailing voices within the party – they’ve all been expelled or deselected, or are too fearful to stick their heads above the parapet.
“Old” centre left Labour would never have cut the social safety net in terms of benefits as both Blair and now Starmer have done.
Nicely covered in yesterday’s Links
Remuneration of Reserves: The Planned End of Government Securities? MMT France
Soooo, I skipped that yesterday but read it now. Amazing clarification on prior readings of Mosler, Mitchell, Norman, Neil W and the many who wrote at New Economic Perspectives. Thank you pmp.
Yes of course money is created by debt, not the other way round. But in a fiat currency mechanism government spending will always increase debt to overcome increases in savings and/or debt repayment as long as economic growth is the target. So national debt increases, always ,irrespective of the hue of the government.
The downside is the interest repayment on that debt and the devaluation of the currency due to inflation, which is the same as an increasing tax on the populace.
Eventually this engine will splutter and stop , its not an endless virtuous circuit.
What happens after that is anyone’s guess, but its not likely to be pleasant.
…as long as economic growth is the target. What is economic growth is not the target? What if the aim is equilibrium? Would that mean an economic system other than capitalist? Would it men just enough growth to accommodate population increase? What about population decrease? I have other questions. I have no answers. The article seems to me to call into question most of the rhetoric surrounding what I shall characterize as “government and market talk.” One last thing: I fully realize my ignorance of these matters.
If you have time, you may find Randall Wray’s “MMT Primer” to be helpful.
To JMH’s statement:
> “government spending will always increase debt to overcome increases in savings and/or debt repayment as long as economic growth is the target.”,
I think the connection is more fundamental than that. The government deficit is the mirror image of the non-government surplus, regardless of whether the policy goal is “growth” or something else. Prof. Wray’s Primer argues, persuasively IMO, that the direction of causation is more nearly “non-government savings determines the size of the government deficit” than “government deficit permits non-government savings”.
Non-government savings preferences will compel a government deficit (in the absence of a sufficiently large trade surplus; of course that vanished for US long ago); the policy concern ought to be not “how large is the resulting deficit?” but “what real world things are being funded by the resulting deficit?” The policy debate in UK seems to be (taking my lead from the Alexes) along the lines of the necessity of defunding domestic population well-being in the interest of funding the prolongation of Ukraine’s resistance in its conflict with Russian Federation.
#TYVM … It’s amazing to me that we’re a dozen or so years since Professor Wray essentially used that blog at NEP to lay out the contents and framework of his book, and yet we’re still having to explain … :) But it’s good to see these points being reiterated and still relevant!
What is happening in the UK is crazy. They are actually cannibalizing the whole county so it seems that the government is wrapped up in its Neoliberal ideology. Being sovereign, they could print the money needed as they never signed up for the Euro when they were in the EU. But instead they have to cut pensions and healthcare while at the same time they decide to send off $5 billion to the Ukraine each and every year because There Is No Alternative.
Labour certainly are following some neoliberal principles, though not with quite the same zealotry as 47.
The proposed benefit cuts, shelved this last week, were going to be about £5.5bn for disabled social benefits and you can add in £2.5bn for the 2 child benefit cap which Labour are keeping. These are actually tiny given total UK government spending at £1.25 trillion+. It is about 0.6%.
Yet this is enough to send our right wing MSM into paroxysms over meaningless discussions on ‘budget headroom’ and debt levels.
We’ve also had the usual shite from several economics correspondents that the Bond market limits government.
And then, if you govern by making Pavlovian responses to adverse media, you are not going to react cannily.
Rather than a decent sized hill, it’s a very small pimple to die on for a party supposedly committed to supporting the most deprived in society. Child poverty is 35% in London. No wonder over 100 back bench MPs rebelled. The lasting damage to Starmer’s and Reeves’ credibility is still unknowable.
Actually English and Welsh healthcare budgets are increasing in real terms, but just not by a sufficiently large % to compensate for some of the infrastructure cuts and structural weaknesses created 10-15 years ago by the Tories, given demographic trends.
Here in Scotland we have a real terms health budget increase of about 2.5% and better social care provision than down south, but it is still not really enough to improve Primary care.
I do not understand Murphy. He seems to contradict himself. Let me give a simple sequence of events to explain what I find confusing.
From 1. The government spends too much money causing inflation. From 2. The BoE sets too low an interest rate on the gilts. This causes turmoil in the markets because pension funds and insurance companies are unable to meet their commitments. From 3. When financial markets are in turmoil, the Bank of England steps in. Its role is to stabilise prices and yields. This is not optional.
Thus it seems that contrary to 5 – Financial markets do not hold the government hostage – financial markets do force the government to act via forcing the BoE to step in. I’d imagine that things might not or could not unfold as I suggested in 1 and 2, but I’d think that the principle still holds if through different channels or different sequences.