On September 19, 2025, the Bank of Japan issued its latest - Statement on Monetary…
What does it mean for a nation to become bankrupt?
The reason I ask that question is because I read in the UK Guardian article yesterday (published August 11, 2025) – As dark financial clouds gather, Labour has to heed its past: when it chooses austerity, it loses elections – that “Britain is in danger of going bankrupt. It may happen slowly or quickly, but since Labour took office this possibility has increasingly been promoted and discussed in the press, by opposition parties and in the City of London”. And when the author of that article poses his own question: “What exact form will this bankruptcy take?” – he offers the rather tepid response that it will happen because the government is “spending too much, generally on people who have little”, which offers nothing by way of clarification or definitiveness. So it is useful to interrogate the notion of a nation going broke. Can it happen? Can Britain become insolvent?
The Guardian author was seemingly motivated by an increasing chorus of British journalists and commentators who are whipping up fears that the nation is going broke.
He cites one article that uses this sort of fear to rehearse one of the usual demands (that are related to the ‘going broke’ narrative) – that the welfare system needs to be significantly retrenched and there are too many non-contributors in British society.
There are, of course, but rather than seek out these characters in the council estates of the big cities (for example), I would head over to the House of Lords or down to around 51.5130° N, 0.0895° W and walk around there and you will find non-productive hangers on all over the place.
The author is somewhat aligned with that sentiment and notes that:
When journalists, economists and politicians say sternly that Britain “can’t afford” certain things, they rarely mean nuclear weapons that will probably never be used, or bailouts for reckless banks, or the rapidly growing grant for a royal family that already has highly profitable estates. When sweeping austerity is called for, the most entrenched establishment interests are usually exempt.
Nor do these supposed tellers of hard financial truths often consider whether the UK can afford low taxes on the rich, by international and historic standards, or the deterioration in public services already caused by cuts, with all its damaging consequences for productivity, social relations and public health.
But the alignment only goes so far.
Yes, the author thinks that whenever austerity is proposed it is the:
… more progressive policies and poorer people’s living standards …. [that] … are the first things that should be sacrificed in hard times.
But, no, he doesn’t challenge the bankruptcy narrative and the resulting austerity that is called for to avert it.
He just wants the Labour Party in government to be able to shift the burden of the (necessary) austerity onto the rich.
And that offers the Labour Party nothing useful.
The damage – as far as reinforcing the fictional world of mainstream macroeconomics – is done in his opening line – “Britain is in danger of going bankrupt”.
Beginning with that framing makes it impossible for him to engage the readership with any narrative other than gloom and defeat.
The author concludes by stating that the progressive side of politics, which he mistakenly places the British Labour Party:
… would have to set out an alternative: a centre-left politics that can survive financial crises – or avoid them altogether. After so many fearful retreats, that work has barely begun.
The work has been done – but the British Labour party in both opposition and government refuses to embrace it.
According to the Oxford Dictionary, the etymons of the English word bankrupt come from French (bancque roupte) and the Italian (banca rotta) and the “earliest known use of the noun bankrupt is in the mid 1500s” when in 1533 Thomas More who was the lord chancellor used the word (Source).
It is not a word that should be used in relation to any currency-issuing government.
We know categorically that the British government can never go broke for lack of financial capacity.
The reality for the UK is clear.
1. The British government does not issue debt instruments that are denominated in foreign currencies.
There were some legacy borrowings in other currencies dating back decades but the modern practice is to avoid denominating the bonds in anything other than sterling.
That means one thing above all: that the British government can always meet the terms of its outstanding liabilities at all times – without exception.
It could, in the most extreme circumstances decide as a political act to not repay a debt but that is a different matter to not having the financial capacity to do so, which is what bankruptcy refers to.
2. While strict application of the meaning of the word ‘borrowing’ means that it is correct to say that the British government borrows sterling from the non-government sector in exchange for financial promises to pay an interest for the term of the promise and then repay the principal upon maturity.
But if one thinks about it clearly, the term is a misnomer.
The British government always has the capacity to instruct the Bank of England to credit private bank accounts or issue cheques to the non-government sector to match the spending decisions it takes.
Once the Bank credits the relevant account, the spending is ‘funded’ irrespective of what is happening in the bond market or the British tax office.
There are legal processes that the Government must abide by but they just abstract from the reality – that it is the government via the Bank of England that issues sterling and the Treasury does not need to borrow from the non-government sector in order to spend sterling.
3. It is more meaningful to think of the British government’s debt issuing behaviour as being an exercise in providing the non-government sector with a financial asset that carries zero credit risk that allows the non-government wealth portfolios to diversity into different risk exposures.
In other words, so-called government borrowing is really not about ‘funding’ government, but, rather providing instruments to satisfy the risk-return desires of the wealth holders.
4. Think about the following situation.
If (G – T) > 0 then government spending (G) exceeds the taxation revenue (T) it receives and a fiscal deficit is recorded.
There is more currency flowing into the non-government sector (via G) than is flowing out (via T).
That state would be essential if the non-government sector was withholding some of its income (received from offering inputs to the production process) in the form of saving and if the nation was importing more than it was exporting (or some combination of the two).
In other words, if income that is being produced in any period is not being re-spent in the next period, firms would start to accumulate inventories and cut back on production.
The spending gap would thus lead to a recession.
The solution that was understood back in the 1930s, was that to avoid such a recession, the government should fill the non-government spending gap (the difference between non-government income and its spending) by spending more into the economy via G than it took out via T.
That is, the role of the fiscal deficit.
In the rare case, that the non-government sector spending is so strong that it comes up against the supply capacity of the economy – for example, when a nation has massive export potential – then a fiscal surplus is required once the economy is at full capacity.
Otherwise, total nominal (money) spending would exceed the supply capacity and inflationary pressures would develop.
But one should understand that the wherewithal that allows the non-government sector to purchase the government debt comes from these past fiscal deficits.
In other words, the decision of the government to leave some of its spending untaxed (that is, run a deficit) creates the stocks of wealth that the non-government sector can then prorate across a range of financial assets including government bonds.
So it is always better to think of the practice of government debt issuance as being a provision of a risk free financial asset that delivers a positive return to the non-government sector which anchors its wealth portfolio and provides a safe haven when there is uncertainty and the appetite for risk declines.
Government debt is thus like a risk-free piggy bank for the non-government sector and there is no other financial asset that is available that provides that capacity.
5. Should the City of London decide that it didn’t want to buy any of the debt that the Government was offering to it – then so what?
Under current institutional processes such a decline would drive up yields in the auction process until some investors would buy in.
But those processes are not like the laws of physics.
They are voluntary and as we saw during the GFC and later the early years of the pandemic, the Bank of England (as did other central banks) provided all the ‘funding’ for the significant increases in government spending that occurred during those periods.
No City investment was needed – and nor is it ever needed.
Which means the British government can never become bankrupt.
One or more of the 20 Eurozone nations can clearly become bankrupt – and several nearly did during the GFC.
This is because they use a foreign currency – the euro – and in order to spend it they have to get tax revenue or sell debt if they wish to spend more than the available tax revenue.
And the debt that is issued by a Eurozone nation is not risk free (in terms of risk of default).
If bond investors stop buying that debt, then insolvency becomes a very real prospect for such a nation.
No such risk is applicable to the British government.
Credit risk (that is, risk of default) is, of course, only one source of risk exposure that investors face when buying financial assets denominated in a certain currency.
In relation to the UK, exchange rate risk is usually at the centre of the fear mongering.
We are constantly being assailed with stories of financial types selling off sterling because they don’t like the direction of government policy.
This is the principle reason given by Labour Party types for their fiscal reticence and obsequiousness towards the financial institutions.
I have dealt with that issue many times before.
I invite you to browse the extensive array of blog posts under the – Britain – category for further discussion.
Our 2017 book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017) – also considered that issue in depth.
Conclusion
It is unfortunate that I keep reading these sorts of articles in the UK Guardian.
The framing is terrible.
The facts are wrong.
And the message is self-destructive for progressive causes.
But then history is just repeating.
It is a pity that the Guardian doesn’t allow more balance in its economic commentary.
But then I guess that is what happens when an institution is part of the establishment.
PS: Australia announced today it will next month recognise a State of Palestine.
It’s next step should be to stop supplying weapon components to the murderous Netanyahu government and impose bans on all trade with Israel.
That is enough for today!
(c) Copyright 2025 William Mitchell. All Rights Reserved.
“It could, in the most extreme circumstances decide as a political act to not repay a debt”
Strictly speaking the UK government cannot decide to do that.
Only Parliament can decide to do that, which would require the acquiescence of the current corral of Labour MPs and, because it would require an alteration to the National Loans Act, the agreement of the House of Lords, or a delay of eighteen months and use of the Parliament Act.
As it stands if HM Treasury refused to redeem a gilt, under instructions from a deluded minister, the creditor could go to court and the court would order HM Treasury to redeem the gilt. As both the civil service and the court bailiffs technically work for the Crown, not the government, there is no way for minsters to stop the enforcement mechanisms kicking in (unlike in the US, where the President has greater say).
All this derives from the misconception of classifying as journalists those who are propaganda peddlers.
In fact, I doubt that there are any journalists left in the western world (I guess that elsewhere things are not that different, but I can only talk of what I see).
The TINA trope must be continually fed to the masses, so they don’t start questioning.
And that propaganda needs money to “turn” it into “news”.
Just look at how much the EU is spending on this subject: 80.000.000€ per year on “media projects” (read Thomas Fazi’s post “Brussels’s media machine: EU media funding and the shaping of public discourse.”).
Now, tell me this: how can such corrupt system even talk about corruption?
Under UK law, only an individual can become bankrupt
“Bankruptcy is one way for individuals to deal with debts they cannot pay. It does not apply to companies or partnerships.”
– https://www.gov.uk/government/publications/guide-to-bankruptcy/guide-to-bankruptcy
and certainly doesn’t apply to a country.
As soon as someone uses that word in relation to the UK, other than to dismiss it, then they’re invoking the “household analogy” and loading the argument with that .
Any serious discussion has to use a term such as “insolvent” as in this article.
I will be attending a conference in Melbourne on the 15th August, organised by a group called ‘Public Money. Public Good’, with discussion under the heading ‘Unionists for a Job Guarantee’.
I note at least one of the prospective speakers thinks government must fund itself via ‘taxpayer’ money.
I see the very title of group organising the event: ‘Public Money (for) Public Good’, as containing the key to understanding the disastrous mainstream ‘taxpayer-money’ narrative, and its hold on the electorate.
ie, denyng the truth that ‘public money’ is free for a currency-issuing government acting on behalf of the public sector (which is faced with a resource constraint, not a money constraint) to achieve the public good; compared with money created in the self-interest based private sector which must be earned or borrowed and repaid with interest (ie, it’s not “free”) with individuals competing for private wealth. in the private sector.
That’s the distinction we need the mainstream to comprehend.
Re the Job Guarantee: Neil Wilson claimed (some time back) the JG (in MMT) IS the price anchor (inflation control), but some workers will resent being tipped into a ( lower-paying) *temporary* public service job if inflation is caused eg, by supply disruptions, or if they are not working in the inflating sector.
And some MMTers have postulated taxation as an inflation control tool, but Jim Chalmers pointed out to me in an email that low income workers won’t accept higher taxes to control inflation in a cost-of-living crisis.
And the lead-educator at the (online) Torrens “Modern Money” course insisted to me central banks might have to raise interest rates sometimes – which contradicts a highly desirable ZIRP: desirable, because interest rates are a very blunt tool whch are just as likely to increase inflation, and/or risk causing a recession, while hurting debtors.
(Hence ridiculous contradictory mainstream narratives that an inflation readout which is too high or in the current global environment are both bad news for the stock market….)
Plenty of loose ends there: and meanwhile Harvard-trained Neoclassical economist Andrew Leigh – inter alia, Minister for Charities (necessary since the government is always “broke”, you see ….,), insisted that lack of a fully developed inflation-control narrative is THE reason the mainstream rejects MMT.
In this regard, Isabella Weber’s in-depth study of the causes if inflation, and its remedies, is apposite; but she of course isn’t afraid to stray into “central planning” territory…..eg price controls, wages and income agreements. etc.
Highly offensive to ‘liberal free-market devotees…
That was a great postscript.
I hope genocide disappears from the world.
Bill I have listened to the same lecture many times over the past couple of decades.
It all made good sense the first time, in fact it was always taken to be the way things work from that point on, and I haven’t seen anything happening anywhere to change my mind. The data in favor just continues to pile on.
I can only wonder at the force of human nature that keeps most people from seeing what seems so clear.
Stephen Miran’s “other” paper proposes nationalization of the Reserve Banks that constitute the Federal Reserve system, having all Reserve Board members serve at the will of the U.S. president, and selection of the boards of Federal Reserve banks by state governors. All these moves are consistent with MMT, no?
Miran’s recent appointment to the Fed’s Board of Governors may be a precursor to his elevation to chair. Should that elevation occur next year, any notion that the Treasury must fund its operations through taxes will quickly disappear (“Reform the Federal Reserve’s Governance to Deliver Better Monetary Outcomes”, Katz and Miran, 2024).
@John
Wouldn’t it be better for the Fed to be under the control of the Congress rather than the President?
Or you can have a semi autonomous fed controlled by the Congress with reps from legislature and executive for setting interest rates and yields.
I do wonder what Trump admin wants the Fed to do. Obvious one is to lower interest rates but other than that?
The speaker next to Bill at the “Unionists for a Job Guarantee” conference yesterday revealed her Neoclassical grounding, arguing that “humans are naturally altruistic” – presumably to support higher taxes on wealth to raise government revenue, but she forgot that humans are also self-interested, which is why (as Alan Kohler noted recently), governments have to reduce taxes to get elected.
She was also at pains to mention that Menzies, unlike Chifley, actually promoted private home ownership, but she forgot Menzies governed during the post war Keynesian ‘welfare state’/deficit spending era, in which REAL full employment (ie, with un + under employment less than 2%) enabled most breadwinners on the average wage to buy a house, unlike the situation tday in an over-priced housing market, caused by private sector policies (eg housing as investment), and government abandoning public housing.
Neoclassicism/classical-liberalism dies hard….
More reflections on the mainstream’s rejection of the ‘public money for public good’ concept (following the ‘Unionists for a JG’ conference}:
‘Public money’ created to be spent by government for the public sector, has a different *utility* to ‘private money’ created to be spent in the private sector.
The former is NOT available to be spent by citizens.
I’ve been told Warren Mosler said all money is debt, whereas in fact money created to be spent by government on behalf of the public good is NOT debt owed to anyone, but a call on the nation’s resources (other than private wealth).
Therefore it follows private money’s double-entry book-keeping rules (balancing liabilities and assets) don’t apply to public money.
Hence the need for public sector inflation control methods overseen by government, other than by an independent central bank – which is in effect, a private-sector bank, given current monetary policy-setting arrangements.
@ Bill,
“….the spending is ‘funded’ irrespective of what is happening in the bond market or the British tax office.”
Does what is happening in the bond market or the tax office have any bearing at all on the UK government’s ability to spend?
How can that affect the value of the pound on the forex markets, for example?
Neil I will try to give my take on some of your questions.
Q1. Re the Job Guarantee: Neil Wilson claimed (some time back) the JG (in MMT) IS the price anchor (inflation control), but some workers will resent being tipped into a ( lower-paying) *temporary* public service job if inflation is caused eg, by supply disruptions, or if they are not working in the inflating sector.
With the current system during an economic downturn many workers will find themselves unemployed or scrounging around for whatever crap job they can find. In addition the RBA raises the cash rate to achieve a target rate of unemployment usually 4 to 5% because they see unemployment as the primary means of keeping inflation low – that is called NAIRU.
https://en.wikipedia.org/wiki/NAIRU
The MMT economists replace that disaster with a Job Guarantee program that promises to provide a liveable wage plus conditions for anyone that wants to work. The JG expands and contracts counter cyclically with economic conditions. A JG enables the economy to run with full employment. An economy with full employment also provides more fiscal space to the national government for spending on whatever it feels is important, so many more jobs are created in the wider economy and it would be a rare event for a recession to occur with a JG in operation that would be so severe that those currently working in the wider economy (pre JG) would become unemployed and need to join the JG. This inflation control mechanism is called NAIBER.
https://en.wikipedia.org/wiki/NAIBER
Q2. And some MMTers have postulated taxation as an inflation control tool, but Jim Chalmers pointed out to me in an email that low income workers won’t accept higher taxes to control inflation in a cost-of-living crisis.
The Job Guarantee expands and contracts counter cyclically with economic cycles and performs the function of modulating the level of the national government’s fiscal deficit so as to maintain full employment. This is the primary inflation moderating mechanism.
For supply side inflation the best approach is direct action by the national government. For example if world oil and gas prices increase substantially then the government can incentivise improved energy efficiency and the transition to other energy sources such as renewables, more EV’s to replace IC engine vehicles, nuclear power and even use more coal for a short period. Or more wisely remove world pricing for Australian gas or at least regulate a lower price. Corporate price gouging was also a recent source of inflation and better regulation, introducing more genuine market competition and increasing taxes on windfall corporate profits can help here. Centralised wage arbitration could potentially limit excessive wage increases that may arise from supply shock inflation but with weaker unions this has not been a recent issue.
Some of these counter inflationary measures may take some time to do their work but a period of moderate to high inflation is hardly disastrous and is far preferable than an induced recession that may arise from tight fiscal policy and excessive monetary policy (very high interest rates) that will cause unemployment, bankruptcies and degraded government services.
The rapid global economic recovery that occurred after the worst of the recent pandemic arose mainly from the substantial fiscal stimulus in the US, China and eventually the EU and this increased the global cost of many goods and services – this inflation would have eased in any case as global production especially in China caught up with demand.
Once you consider what I just wrote, Australia would not have had an ongoing inflation problem during the term of the current Labor government. Japan faced the same global inflationary pressures at the time and did not cut spending or raise interest rates, in fact they provided increased income support for those in economic hardship and inflation remained low. Bill has written about this.
The MMT economists as far as I know do not recommend tax increases for individuals as a primary means of reducing inflation as although increasing taxes may act to reduce consumption and inflation for a while, it will also increase unemployment and if a JG is in operation the JG will expand and provide a countervailing fiscal stimulus.
Q3. And the lead-educator at the (online) Torrens “Modern Money” course insisted to me central banks might have to raise interest rates sometimes. Would that be the brilliant Steven Hail or Phil Lawn?
If all else failed and inflation was so high and for so long then maybe you could be a mad monetarist for a while and crash the economy to kill inflation – but this is bordering on the never going to happen category for any sane MMT proficient government.
Q4. Andrew Leigh – insisted that lack of a fully developed inflation-control narrative is THE reason the mainstream rejects MMT.
As far as I know Andrew Leigh has put some time into learning MMT but he has probably been read the riot act from the ALP minders – keep your head in or else, hence his apparent willingness to tell fibs.
Q5. ‘Public money’ created to be spent by government for the public sector, has a different *utility* to ‘private money’ created to be spent in the private sector. The former is NOT available to be spent by citizens.
Both spending by the national government and money created by commercial banks when they issue a loan enter the economy and increase consumption or aggregate demand so all citizens benefit from this increased money supply. But as you have already pointed out bank loans must be repaid with interest so over the entire term of the loan the initial stimulus is counteracted by the contractionary effect of the repayments. Also if the sum total of new loaned funds exceeds the total of all loan repayments for a period this will be economically stimulatory but when the converse applies this will be economically contractionary.
Q6. Warren Mosler said all money is debt.
Paraphrasing Warren Mosler he said something equivalent to – The government’s debt is the same as the money supply which is the same as the money spent by the government that hasn’t yet been used to pay taxes.
Now Warren clearly knows that national governments are currency issuers and do not borrow from the markets so his term ‘government’s debt’ is I assume referring to the general mainstream terminology for the sum of the face value of all government bonds that have not yet reached their maturity date, held by banks and financial institutions denominated in the national currency? I also think the total ‘government debt’ (or money supply) is the sum of the face value of all government bonds plus the sum of the reserves held by banks and financial institutions denominated in the national currency?
Q7. Therefore it follows private money’s double-entry book-keeping rules (balancing liabilities and assets) don’t apply to public money.
No, double-entry book keeping can be applied to government spending and transactions and to the private sectors transactions. Steve Keen has modelled a modern economy using his system dynamics software called Minsky which incorporates double-entry book keeping.
Hi Bill, all,
As the debate is heating up in the the UK, US with 10yrs and 30yrs bonds yield under pressure, i think it would be interesting to discuss what actually happens under MMT framework when bonds yield shoot up as the general narrative focuses on government bankruptcy risk. It could lead central banks to entertain QE infinity or other unconventional measure which will contribute to push inflation higher – so indeed US or UK central banks can print forever under MMT framework but then ultimately is the currency the adjustment variable ? if so, currencies devaluation should contribute to more inflation… so i m a wrong somewhere or we would enter a sort of vicious circle which represent the limit of MMT approach ?
Thanks, Andreas Bimba.
You wrote ” double-entry book keeping can be applied to government spending….”.
Indeed it can, but does it NEED to be applied in the case of a currency-issuer who can (by decree/central planning) nominate a necessary part of the nation’s available resources, to be used for essential public purposes (eg ensuring housing for all at no *monetary* cost to individual ‘taxpayers’) while avoiding inflation?
btw I think Keen’s work modelling a modern economy with his Minsky sofware is brilliant – but my eyes begin to glaze over, at times. with those complex diagrams…..and likely I’m not the only one…
btw, in a debate on ‘Ozpolitic.com’ re money creation and whether banks are mere financial intermediaries between savers and borrowers – the mainstream view – I found this article, by Richard Wener, entitled:
Can Banks Individually Create Money Out of Nothing? – The Theories and the Empirical Evidence.
“This paper presents the first empirical evidence in the history of banking on the question whether banks can create money out of nothing. The banking crisis has revived interest in this issue, but it remains unsettled. Three hypotheses are recognised in the literature. According to the financial intermediation theory of banking, banks are merely intermediaries like other non-bank financial institutions, collecting deposits that are then lent out. According to the fractional reserve theory of banking, individual banks are mere financial intermediaries that cannot create money, but collectively they end up creating money through systemic interaction. A third theory maintains that each individual bank has the power to create money ‘out of nothing’ and does so when it extends credit (the credit creation theory of banking). The question which of the hypotheses is correct has *far-reaching implications* for research and policy. Surprisingly, despite the longstanding controversy, until now no empirical study has attempted to do so. This is the contribution of the present paper. An empirical test is conducted, whereby money is borrowed from a cooperating bank, while its internal records are being monitored, to establish whether in the process of making the loan available to the borrower, the bank transfers these funds from other accounts within or outside the bank, or whether they are newly created. This study establishes for the first time empirically that banks individually create money out of nothing.”
‘Far-reaching implications’, indeed…..
Neil Halliday: You don’t have to read Richard Wener’s article – probably written and researched without leaving his university office – to prove whether banks create (credit) money out of nothing. Just go to your local bank branch and speak to the 20-something year-old bank clerk who credits banks accounts when ‘loans’ – more accurately, ‘advances’ – are approved. Wener hasn’t established anything empirically for the very first time.