Government debt hysteria relies on acceptance of a totally unnecessary administrative practice

As a followup on Monday’s blog post – Australian government debt approaching $A1 trillion – who cares? Everybody it seems but me (August 24, 2026) – there is an additional aspect of the hysteria around government debt levels that was implicit in that post but bears more detailed discussion. What I am writing today is nothing that I haven’t written before but as the debt hysteria comes in cycles and then becomes more subdued once the more ridiculous predictions fail as time passes, the counter has to be regularly repeated. I am studying the Japanese language at present and as it becomes more complex (for me), repetition is the only way I can ingrain the written language and sounds. The point today is that the mainstream commentary, even from so-called progressive sources, takes as given a major institutional feature of the modern system that is totally unnecessary in a fiat monetary system. Further, that feature just happens to be imposed to advance the ideological interests of the elites, while it masquerades as a non-negotiable and natural requirement of a sustainable system. The implications of abandoning that feature is what I am discussing here today.

Several articles in the last week have raised the proposition that the bond markets will defeat any attempts by government to prevent yields on government debt from rising to levels that will ultimately force the governments to engage in harsh austerity to ‘get the debt under control’ (whatever that means).

For example, the so-called progressive UK Guardian ran three days of misinformation without any offsetting balance:

1. UK Guardian (August 25, 2026) – US Treasury’s Scott Bessent ‘will lose’ battle with bond markets, former mentor warns.

2. UK Guardian (August 24, 2026) – The treasury bond mess: is this the demise of the US as a safe haven?.

3. UK Guardian (August 23, 2026) – Jumpy bond markets make it clear: Trump risks driving US into debt crisis.

I wrote to them requesting space to respond – silence.

The overwhelming feature of all these articles and the countless other commentaries that litter the global press publications of a similar ilk is the blind acceptance of the status quo.

We have a sort of causal pattern asserted akin to this logic train:

1. Start with a government that issues its own currency and has almost infinite capacity to introduce that currency into the economy.

2. Then impose on that government a rule that if it spends more than it receives in tax revenue, it has to sell debt to private investors on terms that are driven by the goals of those investors.

3. Encounter various disasters (climate, health, private sector malfeasance, etc) which require substantial net public spending to restore and maintain some semblance of social prosperity.

4. Interact with a media whose goal is to make large profits and achieves that goal by continually publishing lurid headlines about how the net public spending will send the nation broke.

5. Allow the media companies to give platforms to a group of ‘experts’ who know very little about what they are writing and talking about and who repeat predictions by academics that systematically fail to accord with reality.

6. Regularly publish articles in the press that claims that the bond markets have no choice but to keep pushing up bond yields, which flow into rising interest rates, unless the ‘debt mountain’ is reduced by government.

7. All of which creates a political millieu where the government deliberately forces a segment of the population into a state of unemployment and poverty and cuts essential public services under the guise of ‘fiscal sustainability’.

8. Normalise all this sequence as a sort of ‘natural’ constraint facing our governments and ratchet the logic harder each time (‘see what we told you’) to structurally attack government involvement in the economy, with the exception of standing by to bail out large financial corporations when their greed gets ahead of what is possible.

Question: What is missing?

Answer: A focus on why Step 2 is considered to be a reasonable imposition, given what would follow if we skipped it.

Which would mean by way of rewriting the sequence:

1. As before.

2. Not imposed.

3. As before.

4. Force the mainstream press to provide balanced commentary on economic matters and require the Treasurer or Minister of Finance to regularly appear on national media programs educating the public about the implications of Step 1.

5. As in 4.

6. Change institutional practices within government such that there is no accompanying government bond issued to the private investors, which matches the net spending shifts. This would mean that when the central bank credited private bank accounts as it facilitated the spending transactions of the government, there would be no offsetting financial asset created called a government bond.

7. Always target net public spending to ensure that anyone who wants to work can find employment and provide public services to advance national well-being.

Consequences:

None of the articles cited above and the countless others that rehearse the same line would be tenable any longer.

Instead, the media would be forced to focus on things that actually matter – such as poverty, food insecurity, climate change, public housing degradation – real things – and an increased focus on those issues would also bring out the self-serving lobby interests that continually rely on Step 2 (in the first list) to pursue their anti-government (except when it benefits them) agendas.

All those ‘celebrity’ economists who get paid a mozza to make stupid predictions about when the government will become insolvent and all the rest of the guff would cease to find a platform.

I could perhaps retire my blog (-:

We have already seen a glimpse of this sort of world courtesy of the large bond-buying programs during the Japanese crisis, the GFC and the Pandemic by central banks.

While those programs were not really what I was referring to in Step 6 of the second list above, they taught us the realities of who has the power in the financial markets.

By intervening in secondary bond markets and effectively signalling that it would demand as many bonds as was required to drive yields down to the ‘target’ level (low or something else), the central banks demonstrated that the private bond investors can only set yields if the government gives them the free rein.

If the central bank desires, it can always set whatever yield it desires on existing and new debt issuance.

In doing so, the transactions add reserves to the private banking system, which is no different to what would happen under Step 6 of the second list, except there would be no debt issued at all under that step.

There would still be a debate about whether the central bank should pay a competitive return on the excess reserves in the system, as most do under current practices.

I consider that to be another dimension of corporate welfare.

The better solution would be to pay nothing.

A consequence of that would be that competition in the interbank market (the market where banks make loans to each other with very short time horizons for settlement) between the banks to rid themselves of non interest-bearing reserves would drive the overnight interest rate down to zero.

Which is exactly what happened in Japan and was sustained for many years post their 1991 asset bubble crash.

Some might then say that this would prevent the central bank from maintaining a positive policy target rate of interest.

And my response would be that this would institutionalise zero short-term interest rates and free up skilled labour in the central bank, which is involved in liquidity management and open-market operations (buying and selling government bonds in the secondary market to add or drain excess reserves) etc., to take on more productive roles in society – such as, managing a Job Guarantee program.

The commercial banks could still make profits on their loan books but would not embellish those profits courtesy of public money being paid on the excess overnight reserves.

But, even better still – the government could just nationalise the private banks under the justification that the services they provide constitute essential services.

All of these changes would make us better off and sideline a bevy of financial market grifters who profit of the misery of others.

There are those who claim, following the mainstream macroeconomic theory taught in universities, that the bond issues reduce the risk of inflation that would follow under Step 6 list 2, which the mainstream characterise, erroneously, as ‘printing money’.

No such reduction of risk follows.

Why?

This sequence is important to understand:

1. The government spends the new currency into existence through public procurement processes, pension payments etc., which provides at the very least the financial capacity of the non-government sector to meet their tax obligations in the currency that the government issues.

2. So -> tax liability –> public spending –> tax payments.

3. When government spending is greater than the tax payments received – we call that a fiscal deficit – the non-government sector has a flow of saving (in the government’s currency) which accumulates as a stock of wealth.

4. That wealth component was only possible because the fiscal deficit occurred – that is, the government didn’t tax away all its spending injection.

5. If the government offered the non-government sector a portfolio choice: keep that liquid stock of wealth that earns no return or convert it into an interest-bearing bond (debt instrument), we would expect the non-government sector to purchase some of the interest-bearing bonds and the statistician would record an increase in national debt.

6. Where did the funds come from that allowed the non-government sector to purchase the government debt? Answer: Prior savings accumulated as currency wealth.

7. Where did that wealth come from? Answer: Prior fiscal deficits – government spending not fully taxed away.

8. But doesn’t soaking up this liquid wealth in the form of government bonds reduce the inflation risk arising from the government spending? Not at all.

9. Given we understand the decision to purchase the government debt is a portfolio choice on desired mix of different components of the wealth holdings in the non-government sector, it should be clear that the ‘funds’ were not going to be spent into the economy anyway.

10. And if the fiscal injection pushed total nominal expenditure beyond the capacity of the economy to respond (from the supply-side) by increasing production, then we would consider that an imprudent policy position, but, equally, one that is easy to change – cut the expansion.

Moreoever, bank reserves are created by public spending which, as we discussed above, present the central bank with some choices depending on its monetary policy stance.

The monetary operations conducted by the central bank are not ‘financing’ operations but rather they are correctly understood to be liquidity management operations.

Some mainstream commentators, who really don’t know how the system works, would argue that the banks will just loan out the excess reserves and create excess demand leading to inflation.

This claim is based on the flawed understanding that banks need reserves before they will lend.

Categorically, they do not and commercial banks do not loan out reserves in the retail space.

Mainstream macroeconomics textbooks are completely wrong in that regard.

Loans are initiated by the loan department of banks independent of the reserve position and loans create deposits in one transactional act.

End of story.

At any rate, it is essential to understand that the analysis of demand-pull inflation is related to the state of aggregate demand relative to productive capacity.

While credit growth manifests as increased spending, it is, in itself, not inflationary.

Nominal spending growth will stimulate real responses from firms – increased output and employment – if they have available productive capacity.

Firms will be reluctant to respond to increased demand for their goods and services by increasing prices because it is expensive to do so (catalogues have to be revised etc) and they want to retain market share and fear that their competitors would not follow suit.

So generalised inflation (as opposed to price bubbles in specific asset classes) is unlikely to become an issue while there is available productive capacity.

Even at times of high demand, firms typically have some spare capacity so that they can meet demand spikes.

It is only when the economy has been running at high pressure for a substantial period of time that inflationary pressures become evident and government policy to restrain demand are required (including government spending cutbacks, tax rises etc).

Further, spending growth can push the expansion of productive capacity ahead of the nominal demand growth.

Investment by firms in productive capacity is an example as is government spending on productive infrastructure (including human capital development).

So not all spending closes the gap between nominal spending growth and available productive capacity.

While all spending sources (household consumption, business investment, government spending, export income) carries an inflation risk, that risk only manifests into an actual inflationary episode when productive capacity is overwhelmed.

In other words, any inflationary effect that might arise comes from the spending side and is not intrinsic to whether public debt is issued or not.

For a more detailed (technical discussion) you might like to read – Building bank reserves is not inflationary (December 14, 2009).

Conclusion

If we could move to this type of world then we would all be better off and the journalists and commentators who peddle fiction on a daily basis masquerading as truth would have to find other things to lie about.

That is enough for today!

(c) Copyright 2026 William Mitchell. All Rights Reserved.