On September 28, 1976, then British PM gave an historic speech at the Annual Labour…
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.
Why, it almost reminds one of another causal pattern, another “logic train” that loops endlessly:
1. There’s a problem! (Let’s call the problem “human overshoot,” and discuss the Sixth Extinction as a symptom.)
2. If you spend money, you can do something about it! (Why, you can create “clean” energy sources and then use the clean energy to do things!)
3. Spending money (using energy to do things) is the cause of the problem. (Energy expenditure destroys the natural world, regardless of the source of the energy. The Sixth Extinction is made worse as spending increases.)
4. Return to Step 1.
JB: Spending money per se is not the problem. So long as the throughput of matter-energy (input of natural resources/output of wastes) mobilised by aggregate spending remains within the planet’s regenerative and waste assimilative capacities, it is ecologically sustainable. Unfortunately, at the planetary level, the rate of throughput (Ecological Footprint or EF) currently exceeds Biocapacity (BC) by about 80%, which is unsustainable. Bringing the EF back within the Earth’s BC is humankind’s greatest challenge.
There are nine planetary boundaries associated with the Earth’s Biocapacity. Because EF is 1.8 times BC, humankind has exceeded seven of these boundaries. One of the boundaries we have crossed is the ‘safe’ atmospheric concentration of CO2. There is a United Nations Framework Convention on Climate Change (UNFCCC) to deal with GHG emissions. It is failing because the countries of the world are not serious enough about addressing the issue. Whilst this attitude continues, the CC problem will not be solved, regardless of any international institutional framework or any other approach. That said, the UNFCCC is an excellent institutional framework should countries get serious about solving the problem. I sometimes think the UNFCCC was devised as a smokescreen to give everyone the impression that some serious attempt is being made to deal with CC. No different to two bickering partners giving the impression that their relationship is fine by getting married (signing a marriage contract).
Despite the UNFCCC’s failure to date to deal adequately with CC, I believe the UNFCCC concept should be extended to all nine planetary boundaries. It would mean having a United Nations Framework Convention on Planetary Boundaries (UNFCPB) with nine sub-frameworks for each PB (one already exists with regards to CC). I see it as the only way to globally operate within the nine PBs (EF no greater than BC) in a conciliatory, equitable, and managed way.
Once EF was brought within BC, aggregate spending at the global level beyond sustainable carrying capacity would simply be inflationary. We’d have to learn how to solve all our pressing social problems (e.g., income inequality and unemployment) with a much lower level of aggregate spending (and lower Gross World Product). Doing something about excessive population numbers would be a good start.
Think tanks funded by private capital elites all are behind the narrative that deficits must be paid by issuing treasury bonds. Who gains? Money markets aka Wall St.
Do people actually believe that politicians know what they are signing off as legislation? I say no. Or that they really know what goes on? I say no,
I suggest they are all politically captured by funders of think tanks, lobby groups etc,
At this point in economics, surely its blatantly true.
Political will is in the hands of the wealthy unelected.
Very sad.
Bill,
I agree with nearly everything you’ve said in your OP.
You haven’t, though, mentioned the possible effect of a ZIRP on the exchange rate. I would imagine that all governments in the UK would be more concerned about that than you, or I would like them to be or
cont /
……to be about that.
Of course if everyone ran a ZIRP or close to it it wouldn’t be an issue. So, my question is to ask if it is politically realistic to expect the Governments of minor economies to run a monetary policy which is out of line with what everyone else is doing?
Dear Peter Martin (at 2026/08/30 at 5:45 am)
Thanks for continued contributions.
While it is not a complete answer to your query about the effect of a ZIRP on the exchange rate, why not think about the history of the Japanese yen since the property market collapse in 1991 and the subsequent monetary policy response that ran for nearly two decades, to question what impact zero and even negative short-run interest rates have on exchange rates?
Answer: not a significant impact.
The recent depreciation in the yen is being driven by other factors.
Economists have always struggled to accurately connect (in robust empirical research) the relationship and just prefer to assert theoretical connections.
best wishes
bill
I feel like ai have read this kind of article now for about 10 years. Over and over again. The same truth is repeated by Bill. Yet everywhere the spectre of public debt haunts all public discourse around macroeconomics. Child poverty. Homelessness. Unemployment. Nothing can be done. Doing things means public debt increases. So nothing can be done. Why do intelligent people persist in this mass delusion? All this unnecessary suffering. This self-inflicted degradation of our societies. It is tragic.
the mainstream media test my patience with the nonsense you allude to, im amazed my tv is still in one piece
it might be an exercise in futility, but have you ever been asked to address the national press club?
also , sorry to labour the point, but another example of mainstream hysteria , any chance you can talk about the recent hysteria surrounding the Japanese bond and currency markets ?
Dear Bill,
Thanks for your reply. I learned my Economics through MMT, and mainly through doing your quizzes every week, so I’m nearly always in agreement with you. I’m a Physicist by background so perhaps you’ll excuse me for asking awkward questions. The motto of the Royal Society is “Nullius in verba”, which translates as “take no-one’s word for it”.
I’m not convinced by arguments, even though they might be politically appealing to me, that all politicians want to have interest rates higher than they need be because somehow they are in the pay of the ruling class. So we need to address the question of why they do what they do. They think, or at least the ones who understand how the system works, they are helping prevent the exchange rate from falling. Whether it would, and how much it would, is a matter of opinion. I wouldn’t favour a sudden move to ZIRP. It should be done gradually to see how it went. I’d like to see a lower pound in the UK, in any case, to help balance imports and exports.
The voters probably wouldn’t like it though! People in the UK like their cheap foreign holidays. So we’d need to tread carefully.
We’ve run a trade deficit for far too long. It has put too many ££ into the hands of foreign hands. They used those to buy up our infrastructure – such as our utilities. It’s not been a success. For example, the poor state of our rivers and coastal seas needs fixing fast but we’ve ended up relying on foreign owners of our water and sewerage systems. Their main concern is to extract profits so getting them to do their job properly is politically difficult.
Dear CS,
“Doing things means public debt increases. So nothing can be done. Why do intelligent people persist in this mass delusion? ”
It doesn’t actually mean that. Public debt can only increase if everyone decides to save more. If you or I decide to buy a treasury bond or even save some money in a safe, the public debt will increase. This is actually counter inflationary so a rising public debt, in itself, could be a sign that the Government needs to spend more or tax less. It depends on the “temperature” of the economy. Is it running too hot or too cold? On the other hand a falling public debt could be inflationary. It could mean that everyone is wanting to spend too much on limited resources.
The mainstream gets this the wrong way around.
It could be argued that the public debt level can only fall if it is allowed to increase in the first place! 🙂 But it’s not good economics to try to prevent people from saving by making them poor and unable to.
My concern about the government debt is not an economic issue. The U.S. debt held by the pubic is well over $30 trillion. All that financial wealth concentrated in the hands of fewer and fewer people cannot be a good thing. It allows them to buy political influence, buy up the media and control the narrative. With so much financial wealth they can buy and control the housing market and manipulate commodities markets. I am sure there is some more malfeasance to add to the list.
This has been a long slow process that started with the Reagan tax cuts, but my guess is this has been the end game goal of the wealthy.
As a subscriber to The Guardian I think we deserve better as far as economics goes. I have written the following to The Guardian economics editor:-
“Dear Ms Stewart
I write with reference to these three clearly inaccurate articles published recently.
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.
Are you able to tell me why Professor Bill Mitchell from University of Newcastle, NSW has not been given the opportunity to give an alternative perspective on this despite his requests on this issue?
Kind Regards
David
Hi Bill,
“I wrote to the {UK Guardian} requesting space to respond – silence.
Have you tried the Morning Star? I’m a paid subscriber and I’d be happy to vouch for your socialist credentials.
Regards
Peter
Very interesting article but AppliedMMT documenting
“Two Centuries of Warning About the National Debt”
https://appliedmmt.com/debt-warnings/
It documents with references this debt doom statement since 1861 when US deficit was 1.9%:
238years of federal borrowing
1.9%debt-to-GDP when Congress was warned of national destruction, 1861
106%the all-time peak, 1946, then 28 years of decline
101%where the ratio stands today.
Very useful evidence.
Donald Smith: Simply evidence that the currency-using sector cannot possess net financial assets (i.e., stored financial claims on real wealth, and thus ‘spending in waiting’) unless the currency-issuer creates and spends more of the currency into existence than it destroys with taxation. It’s what is commonly but misleadingly referred to as a ‘budget deficit’ when it is really a ‘net fiscal injection’.
Some of the non-interest-bearing financial assets (e.g., the currency-issuer’s base money) held by the currency-using sector is later swapped for interest-bearing govt bonds. From the currency-issuer’s perspective, the issued bonds are just an alternative financial liability it now has on its books which it can extinguish with computer keystrokes. Thus, it can extinguish these alternative financial liabilities without having to give up any of the real resources it has previously obtained from spending the currency into existence in the first instance (100% seigniorage).
The real issue is not whether the currency-issuer has the capacity to keep doing what it has done for centuries (your evidence shows that it clearly does have the capacity), but whether the currency-issuer needs to or ought to issue govt bonds, which provides currency-using holders of the bonds with an interest-bearing and risk-free financial asset. Since the holders of these bonds usually have an excessively large storage of financial claims on real wealth and many of them conveniently park their money in risk-free bonds in between engaging in rent-seeking/speculative activities (note: they need to periodically sell their price-inflated speculative assets to realise the economic rents), I believe currency-issuing govts should stop issuing bonds and dismantle the institutional mechanism that requires govt bonds to be issued to enable central banks to regulate interest rates. Having the central bank pay its target interest rate on the private banks’ excess reserves, which, when the currency-issuer is operating a net fiscal injection, would allow the interbank lending rate to naturally fall to the target rate without the need to issue bonds, is a simple alternative.
Overall, I’d rather there be a govt-owned bank that offers a variable interest rate on bank accounts equal to the prevailing inflation rate to maintain the spending power of people’s savings, including the wealthy. Modern money is a store of nominal exchange value, not a store of real exchange value, and maintaining the real exchange value of people’s savings in the face of inflation is necessary to encourage saving (i.e., the accumulation of net financial assets), which reduces the fragility of the financial system. Thus, I would argue that the natural rate of ‘real’ interest (nominal interest rate minus the inflation rate) is zero, not the natural rate of ‘nominal’ interest, unless the natural rate of inflation is zero, which it may well be but not likely in a system where the various factors of production are forever seeking to maintain their share of (financial claims on) the national product, and especially while the rate of resource throughput exceeds the ecologically sustainable rate (should resource prices better reflect the cost of resource extraction and transformation into final goods and services).
Of course, the ability of the currency-using sector to net-save is still contingent on the currency-issuer operating a net fiscal injection to accommodate the net-saving desires of currency-users. Taxation should be used to even up the distribution of financial claims on real wealth. Govt bonds that protect and reward the excessive financial claims of the super-rich should be dispensed with.
I saw something on the GMO website “Triple Mandate
A credit-allocation problem the Fed never asked for, and the two-act show investors must position for. By Henry Peabody”, that I thought was interesting to view through a MMT framing. It was saying that there is now a lot of non-bank private credit lending. Am I right that would not be following the “loans create deposits” mechanism of bank (or even shadow bank) lending? Instead it would be a creditor who had huge bank deposits transferring those en masse to a business borrower? Is it the case that post-QE build up of bank reserves (mirrored as bank deposits) enabled that? So perhaps QE did increase lending but with a 17year lag that rendered it just a headache for the central bankers? That essay also suggested “fiscal dominance” (ie not ripping off the public purse) may inevitably play a role in future monetary policy, as I guess we’d hope for sooner rather than later.
@ Donald, @ Philip,
“Two Centuries of Warning About the National Debt”
“Simply evidence that the currency-using sector cannot possess net financial assets (i.e., stored financial claims on real wealth….”
We shouldn’t go back to the time of the gold standard, which only came to an end in the early 70s for the USA.
So if a currency is backed by gold, or gold coins are issued, then it is possible for users to hold net financial assets. If the issued currency is backed by gold then it does make sense for it to be not included in the “National Debt” whereas it should be, but usually isn’t, included in official definitions of “National Debt” even though fiat currencies are now used everywhere.
Can I recomend a read of the UK Commons Treasury Select Committee (March 2000).
https://publications.parliament.uk/pa/cm199900/cmselect/cmtreasy/154/154ap08.htm
Search for the phrase “full funding”. Start at the first paragraph it appears in.
This is where the current mess originated and created the now much feared Bond Vigilanties. The full funding rule was concocted by a handful of civil servants in the Treasury in the mid-1980s; it had appeared in no earlier recognised manual of public finance and had no historical precedent in British debt management praxis The UK Treasury then proceeded to give it to the rest of the World.
Let’s try shutting down the full funding rule for a while. Shut down the issue department of the UK Debt Managent Office. Then watch the Bond Market junkies scrabling for their next fix.