I promised a commentator here yesterday that I would explain the term 'borrower of last resort' by writing a new glossary entry on the issue. This is that glossary entry.
The term 'borrower of last resort' describes the role of the sovereign government as the destination for surplus savings when confidence in private borrowing and investment collapses.
In a monetary economy, money does not disappear when people become fearful. Instead, it seeks safety. When households and firms lose confidence, they cut spending, reduce risk, and increase savings. Bank lending slows, private investment stalls, and large pools of money look for a safe place to go.
At that point, the government becomes the borrower of last resort.
Because a currency-issuing government cannot default in its own currency, government debt is perceived as the safest financial asset in the economy. When private confidence fails, savings flow into government liabilities, most typically bonds or other deposits backed by the state. This is not a market failure. It is a stabilising response to uncertainty.
The government's role is to then accept and use those savings.
By increasing its borrowing and spending, the state absorbs excess private saving and recycles them back into the economy through wages, public services, income support, and investment. This prevents a collapse in demand and provides confidence that incomes and institutions will be maintained.
The Covid crisis illustrates this clearly. As private spending fell and precautionary savings surged, the UK government significantly expanded its deficit. In doing so, it did not “run out of money” or displace private activity. It provided the safe asset the private sector demanded and used the funds to sustain the economy, with the institutional support of the Bank of England.
Crucially, this role is both passive and active. Governments do not force savings to flow to them in crises; they receive those funds because no other borrower is trusted. Refusing to borrow in these conditions does not create confidence; it destroys it.
The borrower-of-last-resort function, therefore, explains why government deficits rise when fear rises, and why this is economically necessary. When confidence collapses elsewhere, the state is where money goes.
Vitally, those who argue that there is some sign of government weakness or mismanagement inherent in this process miss the whole point: by accepting this role, the government guarantees the wealth, stability, and durability of an economy. That is not an indication of weakness: it is a sign of a government's strength when facing economic adversity and its capacity to manage it.
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Borrower of last resort? Yes,
but in fact borrower of only resort.
Money spent into existence by government must either end up in a clearing bank’s Reserve Account (a deposit with the Central Bank) or as a purchase of a newly issued government bond.
Except for loan repayments, every other transaction is “cash neutral” – the buyer pays cash but the seller receives cash…. so, no change in the level of government borrowing.
I think you are missing the resulting spending issue, Clive.
Short term you are absolutely right. In a lasting crisis there is more to it than that.
I hint at it obliquely with “except for loan repayments”. In a panic private credit is not advanced but loans are still paid down (or defaulted on)…. thus destroying privately crested money….. which needs to be offset by greater government money (spending) if a depression is to be avoided.
I’m still pondering Steve Keen’s observations about government debt and money velocity and how that works in a panic.
Thanks, Clive. Steve’s work is very interesting on this.
Borrower of last resort may be an accepted term, but it does seems both confusing and to feed neoliberal tropes. I think an alternative term is needed.
I say that because, the word borrowing implies to most people that the borrower needs the money, which is why they pay interest. That, in turn, leads to the notion that the government needs the money to pay for goods and services (what else would it need the money for?). That’s the neoliberal myth.
But this is not what is happening. As borrower of last resort the government is providing a public service to allow people to store their savings. It doesn’t need the money and it doesn’t need to pay interest. I guess it does so because the alternative is, for people who are wary of other types of savings, to hord paper money or buy useless assets like gold, neither of which is beneficial.
As you say people want this service when they are fearful. And that’s usually when the economy is tanking. This is the Keynesian paradox of thrift, which can only be resolved by government spending. So, usually, when the borrower of last resort is required the government also needs to spend. But the crucial point is that the spending and borrowing are not linked (I would quibble with the idea of recycling savings). The government will likely need to spend more than it “borrows” and is not constrained from doing so.
Now I know that, of course, you, Richard, know this extremely well. I’m not trying to teach my grandmother to suck eggs. But I do think it is important to use appropriate terms; words matter. Otherwise we are continually arguing using neoliberal terms, which is fighting with one arm tied behind our back.
I can see why you use the term “borrower of last resort”. But is there a better term we can use? Perhaps your readers could suggest something? The best I can come up with is depository of last resort, but I readily confess that lacks zing.
I will be hinest, much to agree with.
I struggled with this one – the one I used was based on the third major version
Your points are good.
Actually, Tim makes a really good point. Whilst myself wrapped up in the role of the state in this instance, the label is very misleading (language is regularly abused in finance).
To me, the central bank acts as a ‘sentry’ on the system because quite frankly it has the sovereign ‘fiat’ function’. It is the ultimate borrower and lender with infinite power on debit and credit. And no one knows this and benefits more than the rich, who (depending on how they feel) see the state as a millstone around their neck but then as a safe haven when brought low by their own greed.
Using the term ‘borrower’ can be used to infer weakness and can be exploited – well, it IS exploited isn’t it?
Looks like I will need to revisit this.
Deposit taker of last resort?
Yes, deposit taker or depository of last resort captures things better. Borrower of last resort is the same thing but “borrower” is a loaded word in today’s world.
Agreed
How about simply “bank of last resort”? Encompasses both borrower and lender of last resort, and underscores the reality that the Bank of England is part of government and anything but independent?
Noted
‘The borrower of last resort’ is a factual that for me is the last ditch defence of sovereign money in any argument over who actually rules the financial system (Bagehot/Mehrling). The true sovereign power of sovereign money creation is reified as soon as the borrower is required to go into action in a crisis. But, it is always there (although the Eurozone does not seem to work like this anymore). Crisis is just a revelator.
Other narratives – from bond vigilantes to crypto-fans like to go out of their way to challenge this fact but there is also a tsunami of ignorance over these matters in the general public.
Part of the ignorance seems to me to overlap with the functional everyday role of sovereign money over the bail out role. The fact that the rich seem to be bailed out during crisis but the same apparatus is used to enforce austerity on everyone else confuses the issues significantly – as they said in the U.S. in 2008 – Wall Street was bailed – well, what happened to Main Street (the rest of us)? The effects of crises on austerity riddled economies are actually made worse and make the crises bigger.
The proven existence of bail out behaviour by central banks can be construed as a symptom of the lack of equality used in managing the financial system – an indicator of central bank capture by undemocratic capital through corrupt political systems. Bail outs/lender of last resort operations seem to diagnose this.
I’m always trying to see how the average member of the public looks at these concepts. The media will always try to twist everything around to the ‘gov as household’ approach, which we know is wrong. People do a lot of borrowing in their lives, but not much lending. Young people invariably confuse the verbs, to lend and to borrow. They say: can I lend your pen? Also, savers rarely think they are lending their money to a bank or building society.
So I’m glad you are having to think hard about describing the gov as a safe haven for savings.
It would be a lot easier if the gov came clean and explained how money really works. I cannot see the usual pile-on from the media or anyone else happening. If it did occur, it would be a great opportunity to kill the myths once and for all. Would economists risk being made to look foolish and would the gov risk being accused of running a racket for all these years?
Apologies for delay with this: I am still thinking how to revise this.
Richard,
The UK govt will struggle to move from a perceived “borrower” of funds to a “deposit taker”.
I do understand using neoliberal or simply orthodox terms makes definitions nevermind discussions difficult.
However actions as Clive and PSR were alluding to speak volumes. The way to achieve transition from received borrower to deposit taker.
Maybe Reeves or a reforming head of HMT could demonstrate who is in the driving seat by such things as:
1. Ordering the BoE to cancel QT?
2. Changing the full funding rule by say ordering a line of “credit” at the BoE for say defence & climate change purposes?
3. Order gilt auction holidays to calm the market.
4. Allowing national savings & gilts to be interchangeable. Help Savers.
5. Restrict gilts to oversees buyers to say 20%-15% of certain issues. To reduce seeking hot money from international investors.
These changes could be done quietly and would begin the process of people coming round to the idea that the govt is in charge not the financial markets.
These are just examples but such a combination of actions might help change the climate of opinion re govt borrowing.
No doubt Reeves or a reforming head of HMT could quietly demonstrate who is in the driving seat. Perhaps by way of some of your suggestions.
The problem is they won’t do that. They are caught in the depths of group think. As Upton Sinclair said, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” Both Reeves and head of HMT, and many others, jobs depend on them reiterating the household myth.
So we’re in a bit of a Catch 22 situation. The best way to show the truth of MMT would be a practical demonstration. But we won’t get a practical demonstration until many of the public understand they are being lied to. That is why the terminology is so important. There is a need to convince the public and we won’t do that using loaded terminology. That’s why Richard’s work is so important. Fortunately there are chinks of light; Zack Polanski seems to understand.