Yves here. To underscore the argument that Richard Murphy makes, it is excessive private debt that causes financial crises. Private debt in the US and China both approach 200% of GDP. PlutoniumKun has pointed out that China’s private debt is widely believed to be understated and his take is that it is higher relative to its GDP than Japan’s was at its real estate/stock market peak at the end of the 1980s.
The other source of financial crises is when governments and businesses borrow in foreign currencies. Jomo has been warning for over a year that many countries in the Global South are at risk of debt crises.
By Richard Murphy, Emeritus Professor of Accounting Practice at Sheffield University Management School and a director of Tax Research LLP. Originally published at Funding the Future
John Plender, in the Financial Times today, has asked whether public debt in the developed world has become “fundamentally unmanageable”. The argument runs as follows:
- Debt is rising.
- Growth is weak.
- Interest rates are higher.
- Demographics are unfavourable, and
- Inflation can no longer be relied upon to erode liabilities.
Therefore, harsh bond-market discipline awaits.
That conclusion, however, is not just wrong: the article itself supplies the evidence for why it is wrong, but then draws exactly the opposite lesson.
Firstly, the article describes a savings glut and then blames governments for absorbing it. Plender notes persistently weak growth, excess savings, demand shortfalls, and rising reliance on public deficits. What it never acknowledges is the obvious implication, which is that the private sector is not investing enough.
Corporations are hoarding cash. Wealthy households are accumulating financial assets. Pension and insurance funds demand “safe” stores of value. There is a savings glut, and, as sectoral balance analysis shows, the excess private saving must be offset by deficits elsewhere. If households and firms will not spend, the government must. Public debt is therefore not evidence of irresponsibility. It is the mechanism by which the system avoids collapse. Wynne Godley demonstrated this in the 19900s. It seems that FT writers have not noticed, or used his economic identities to show what the problem is. The article treats the resulting growing government debt arising from savings as a problem. In fact, it is the only solution to a failure that the private sector refuses to correct.
Secondly, what Plender does not note is that the savings glut is inequality made visible. He talks about demographics and politics, but avoids the central issue, which is, of course, inequality.
When income and wealth concentrate at the top:
- Money stops circulating.
- Consumption falls relative to output.
- Investment becomes speculative rather than productive.
- Demand weakens, and then
- Governments must intervene to stabilise the economy.
Governments are then accused of burdening future generations, as Plender does (relying on the household analogy to do so, of course). This, however, reverses causality. Public debt is not the cause of stagnation. It is the consequence of an economy organised to funnel income upwards and leave it there. Debt is not the burden. Inequality is the burden. Debt is how its macroeconomic consequences are temporarily managed.
Thirdly, in this situation, the interest payments reward inaction and entrench the problem. Plender laments rising interest costs as if they were an external imposition. They are not. Interest is paid to those with surplus wealth because they choose not to invest productively, putting their money at risk as a result, in the hope of profit. The alternative, arising from their chosen inaction, is that under current conventions the state rewards them for holding inactive financial claims rather than building housing, energy systems, transport or productive capacity.
This is the deepest contradiction in Plkender’s argument. Governments are criticised for rising debt while being required to pay income to the very actors whose failure to invest made that debt necessary. He fails to note that interest payments are not neutral. They are a transfer to wealth, enlarging the savings glut, increasing inequality, and ensuring future debt rises further. This is a massive error on his part.
In part, that is because Plender assumes markets dictate interest rates. They do not. His conclusion depends on the claim that markets ultimately impose discipline through yields. But this only holds if central banks choose not to act. Policies set:
- central bank base rates,
- central bank reserve account remuneration,
- bond market interventions, and
- regulatory frameworks.
The aim is to anchor yields. QE proved this. Yield-curve control proves it daily in Japan. Rising yields are not market verdicts; they are policy decisions dressed up as inevitability. Calling this “discipline” is a political choice, not an economic law.
Somewhat bizarrely, Plener cites Britain’s post-1945 debt reduction as evidence for discipline. But its own account shows otherwise. Debt fell because:
- Growth resumed.
- Inflation reduced real liabilities.
- Interest rates were kept low by institutional design.
The welfare state did not obstruct this. It stabilised it. The lesson is not that markets must rule, but that governments can choose the rules under which debt evolves. Plender ignored that.
The real conclusion in that case is not that public debt has not become unmanageable. What has become unsustainable is an economic system in which:
- Excess private saving is treated as virtuous.
- Inequality is ignored as a macroeconomic force.
- Excessive hoarding (matched by underinvestment in real economic activity) is rewarded with interest, and
- Democratic governments are told they must appease markets.
The FT article does not describe a crisis of public finance. Instead, it reveals a crisis in our economic narratives, which insist that governments are the problem, whilst carefully avoiding the evidence that makes clear that government intervention is unavoidable.
Plender ends with. warning that we might be facing a 1929-level crisis because of government debt. I agree that we might be facing a crisis, but he has all his causations wrong. We are facing a crisis because antisocial neoliberalcapitalism is coming to the end of its road and has no answers left to offer, just as Plender has none to provide. The reality is that until the economic narrative changes, and we understand the crisis neoliberalism is creating, debt will keep rising, not because states are reckless, but because we refuse to confront the causes Plender so clearly describes, but fails to recognise.
Isn’t the issue here that public debt in sovereign currency is manageable, but high levels indicate that it is using up resource capacity in government’s endeavours rather than that of the private sector. To the extent that government endeavours are productive in a long-term sense (education, health care, infrastructure etc), that works. But if it goes into imports (military spending, energy, etc) or unproductive investment (bailing out banks), then that does not result in any real growth for the economy, but rather inflation and currency depreciation.
Good one by Murphy.
Ventzu: you are sort of on the right track. I cannot speak to the British budget but in the case of the USA the joke is that government consists of a military with an attached welfare system. The Federal government doesn’t “invest”; bailing out banks is not an investment (most of the bail-out after the GFC was done by the Fed, anyway, not the Treasury–meaning no “spending” occurred). Transfer payments net of taxes increase private sector income and what Murphy is arguing is that given the gross inequality in the modern capitalist economy, far too much of the income goes to high income households and much of that is “saved” in a wide variety of forms. (In the USA high income households now account for half of all consumption–so not all of it is saved!) What is going on in financial markets, stock markets, and crypto is just shifting savings about and creating financial capital gains. It is not investment. In the US the driver of investment is now data centers, most of which are never going to be used.
Yes, spot on
Cullen Roach has a lot to say about good debt vs bad debt. While he is not an MMT accolade, he us in general agreement but calls his own research monetary reality. Basically good debt is future productive like providing well engineered infrastructure and bad debt is throwing money down a rat hole like blowing up well engineered infrastructure with expensive missiles. He also views the concept of money as a spectrum of moneyness. Well worth reading
No, Cullen Roach is off base. Please do not depict him as a good guide.
I thought he gave a good cursory run down but I’m willing to learn. Could you be more specific?
I think the point is that the govt. spending has to occur to balance the private savings levels, so all public debt is necessary debt. I think we can certainly distinguish productive spending from corrupt or wasteful spending, and find numerous examples of the latter, but financial instability is not the result of ‘bad’ debt. Rather public debt is the result of a system that is supporting massive inequality while resisting financial instability.
P.S. an “MMT Accolade” is something like “MMT is an empirical explanation of the economics of a sovereign currency issuer, that exposes fallacies about budgets used to further inequality”, whereas I might be referred to as an MMT Accolyte, as I’m thrilled to be in a thread adjacent to L. Randall Wray.
You did not respond so let me guess. Roach does not support what he calls the political elements of MMT. Specifically the call for govt. financed full employment. He is also a market cheerleader; not perfect but the best system ever bla bla. I also do not subscribe to his investment advice because it assumes the next 40 years will largely resemble the last 100. Never the less I think his general overview of the nature of money and debt is pretty correct.
Political? vs the whole ideological edifice of orthodox economics over the neoliberal period?
“MMT accolade” is an rhetorical identifier of someone with an ideological ax too sharpen.
Roach is just being cute but, would never accept a labour reality that was not top down e.g. full employment, i.e. NARIU.
Gasp … all MMT did was say this is how it works and then some go pop because shows decades of ideological economics was a farce. Better yet that it has no ideological agenda save a space for a rational framework to discuss policy options and social outcomes. Naw cant have that an left to Trumps economic utopia any day now.
Here’s a Michael Hudson column and utube from April of this year that adds some information that’s relevant to Richard Murphy’s post, imo.
How Private Banking Replaced Public Money
https://michael-hudson.com/2025/04/how-private-banking-replaced-public-money/
Murphy is definitely right if he were talking about the US but he is not right if he is talking about the UK. Low interest rates in Uk would cause capital moving out UK’s bond market and there will be huge pressure on the pound. What is really the difference between UK and, say, Turkey?
No, the UK does not need foreign capital to deficit spend. This is a myth.
The impact of foreign capital retreating could be to lower the value of sterling v. other currencies. Is that a big deal? Thanks to Trump, it has gotten stronger v. the dollar.
And with Europeans scheming to seize Russian assets, Europe may not look so hat as a place to park money. The UK may be the less dirty shirt in that laundry.
If you are correct would increase inflation but make exports more competitive and increase tourism.
The problem is that it takes time to increase competitiveness in the economy where currency adjustment can be rather swift.
It would be difficult to repress the financial capital in one country alone. Finance capital wants its share of the surplus and to get it, it will destabilize your currency and if that’s not possible, it will destabilizing your equity and real estate markets.
MMT’s concept of monetary sovereignty applies if you have a flexible exchange rate AND (this is the part the MMT advocates never emphasize) you are willing to see the exchange rate go to wherever your domestic fiscal and monetary policy decisions brings it.
If you don’t have US-style exorbitant privilege, you have to think hard and long about the likelihood of a sudden stop and a currency crash. The share of foreign ownership of gilts is 25-30%. And local investors aren’t necessarily going to be patriotic in the face of a currency crash, as already evidenced in the British Pound’s post-WW2 history. Better export competitiveness isn’t going to help that much when your biggest export industry is financial services.
Exactly. The UK, for example, import a lot of production inputs, a severe currency depreciation would hike costs significantly. Export would gain in competitiveness but you always need to look at the other side of the ledger.
That it is private debt levels which are dangerous, and NOT public debt levels is comprehensively demonstrated empirically in Richard Vague’s A Brief History of Doom: Two Hundred Years of Financial Crises
https://www.goodreads.com/book/show/43984870-a-brief-history-of-doom?ref=nav_sb_ss_1_13
The contrary is constantly claimed by the usual suspects in the neoclassical economic orthodoxy, but despite their self-serving claims, they are NOT engaged in an epistemological project remotely adjacent to “science.” They are engaged rather in priestcraft — creating and sustaining justifications for current economic arrangements on behalf of those who benefit most from them.
Their reign of error must be overthrown if the general public welfare is ever to be served.
Thanks Randall for the response.
I guess what I am searching for is a limit to the ability of government to print money to pursue military adventurism. My understanding from Michael Hudson is that because the USD is the global trading / reserve currency, it does not suffer the risk of inflation / depreciation from such unproductive spending. Though that is now being challenged.
For a country like the UK, it does not have such a get-out clause. So, as misguided as it may be, a public debt : GDP ratio provides a crude indication – over the long-term – of the effectiveness of government spending / investment decisions: if it is wisely investing in infrastructure then the returns will be there to reduce the numerator and / or increase the denominator. If it is simply spending to pursue wars, then that ratio can only increase (unless it manages to win and plunder).
Given our governments are hell-bent on building up the military to retain western hegemony, having them worry about public debt levels may not be such a bad thing!
> limit to the ability of government to print money to pursue military adventurism
The limit on a monetary sovereign government’s ability to purchase things using the currency the government controls is the availability of things to purchase.
IOW, the constraint is real-world productive capacity. Spending in excess of capacity constraints will simply drive up prices for the goods sought. (And also, spending even on things that have elastic supply will probably have some inflationary effect by increasing private sector incomes and demand for other things, some of which will have less elastic supply.)
So there are definitely constraints, it’s just that the constraints are not about “where will the money come from?”, but rather “where will the real goods and services come from?”
(this summary assumes purchases of things produced within the country the government governs, for sale in the currency the government controls. If the goods/services sought are produced externally, there is the additional issue of exchange rates and how government money creation to fund external purchases would affect those)
Thank you! I was going to say the same thing. We happen to have a real world example in the price of 152mm artillery shells from Rheinmetall. The German gov’t needed a bunch, pronto, to face down Ivan, and appropriated a ton of money. The price of the things quadrupled.
I think we misunderestimate the Military Infotainment Complex if we think they can’t absorb all the spending that can be thrown their way, regardless of real productive capacity. And then there are the maintenance agreements….
Excess private saving? But a system that expects the top ~70% of employees to fund pensions to cover around 30 years of retirement life ipso facto encourages private saving. Pension fund calculations need to budget some real positive return so that required annual contributions are not too great a portion of salary. But the real yield of goverment bonds (including inflation-linked ones) being as low as they are means that private savings have to look ‘excessive’.
The real issue then is the rate at which capital can be turned into index-linked annuities at retirement; this is low partly because there is a parallel real-resources issue in all developped economies including China due to the declining ratio of workers vs retirees and benefit recipients. I fear that no amount of tinkering with goverment deficits can paper over this basic issue…
Private pensions are entirely unnecessary. Fiat governments can create as many pensions as they wish – along with health-care, education and employment. Oh, and military too, of course. This is the basic postulate of MMT. As you say, providing the real resources to prevent inflation is the key. And, as you say, this is the case whether pensions are private or public.
Whether we can ‘afford’ population booms is another issue. When the boomers were born we needed more school-resources then university-resources then housing-resources and road resources and everything-else-resources – and were able to provide them. I see no reason to believe that we can’t do the same for aging boomers as they depart over the next 25 years.
Demographics seems to be a tricky issue – we feel the need to build permanent capacity for temporary demand. We built ‘portables’ in schools that parents hated – they wanted ‘real’ classrooms – and we built out universities and colleges that now sit empty save for foreign students. And we’re now building long-term care homes that will be sitting empty in 25 years time.
Of course, private-equity that sees all of this as a means for short term profit exacerbates the problem.
So the recent turmoil in the Japanese bond market is daijôbu … ?
Not snark — just wondering/slightly bewildered.
I appreciate Murphy’s article because it names inequality for what it is: one of our existential economic problems, alongside climate change. Too often public debt debates avoid this reality altogether.
Economist Blair Fix recently put concrete numbers on what inequality now means. The share of workers earning less than five per cent of the price of an average home has tripled and now represents roughly one-third of the workforce. Those earning less than one per cent of the average home price – the extremely house-poor – have increased more than tenfold. Among renters, the number earning less than one-fifth of median rent has risen by a factor of twelve. In practical terms, this implies that roughly 20 per cent of the workforce can no longer participate meaningfully in today’s economy.
What remains largely unexamined is why governments continue to issue public “debt” primarily as savings instruments rather than leaving money in circulation. One reason is institutional: bank deposits are only partially guaranteed, while Treasuries and bonds are fully guaranteed. But that is a policy choice, not a law of nature and it could be changed.
While Modern Monetary Theory has broadly accepted fixing interest rates as a policy option, it has been far less willing to question the routine issuance of what are effectively state-guaranteed wealth tokens. There is room – and need – for this conversation to go much further.
Typo: “Wynne Godley demonstrated this in the 19900s”
I think that’s supposed to be 1990s.