Steve Keen wrote this on Substack yesterday:
YouTube popped a video into my feed of Niall Ferguson (the author of The Ascent of Money: a financial history of the world) being interviewed on the TRIGGERnometry show. He was asked the inevitable question about governments “living beyond their means”, and gave the standard answer that governments which spent more than they collected in taxation are on the road to ruin.
This argument is wrong, but it's believed by people who, in another guise, are experts on money. Ferguson is an expert on the history of money; I prefer the work of Graeber, Martin and Gleeson-White, but his work on this front is scholarly. And yet he is entirely wrong about government finances, as were his interlocutors on the show, because they are all ignorant of the double-entry bookkeeping by which money is created.
Ferguson quipped that he had invented “Ferguson's Law” recently: “any great power that spends more on interest payments than on defence won't be great for much longer”. That led me to invent “Keen's Law”: that “virtually everyone who claims to be an expert on money doesn't understand double-entry bookkeeping”. The only exceptions—and I'm only being partially tongue-in-cheek here—are myself and Richard Murphy.
I was amused.
But Steve is also right: unless you get double-entry, you cannot understand money or the economy. It really is that straightforward.
The rest of Steve's Substack explores the double entry that shows Ferguson is wrong. Some will find it hard work, I admit. It is worth the effort.
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Once most people believed the earth was flattish, but navigators still set sail for the horizon. We need news of the Leif Eriksen and John Cabot of double-entry bookkeeping and joined-up economic thinking to be loudly proclaimed. If the ‘experts’ are pushing back, they must be feeling the pressure? An informed public will amplify the signal. My MP is going to get another letter.
Thanks, Anne.
I don’t see anything in double entry book-keeping which says that deficits should always increase. Someone has taken an accounting identity and imposed it on their fiscal view that deficits should never be cut in order to give their view some kind of intellectual support. This is an error.
For heaven’s sake: engage your brain before commenting and stop making a fool of yourself.
Sir (which he is now) Niall Ferguson has had quite an elevated view of himself for sometime now.
Agreed
My God being technically inept at “following the money” gets you a knighthood! They’ll soon be giving them away with dish washing liquid!
I thoroughly agree with the main point on double-entry bookkeeping. Where I have difficulty with it is how it copes with new engineering/scientific/technological ideas. In my experience, these can occur in any situation, not necessarily even at work. Maybe when driving and musing on a problem, in the shower, out walking . . These ideas can potentially have great value, may fail (usually) or succeed. How can double-entry cope with this kind of novelty? Patents? very expensive, and worthless unless there’s the money to defend them. Likewise commercial confidentiality. I can give more concrete examples if anyone is interested.
Double entry cannot cope with that. It copes with money – but if we get money wrong we have no foundation for the rest of the way we think about the economy. It is an essential building block – not the answer to everything.
I like Nial Ferguson’s take on history up to a point, but he is unapologetically anti- socialist in his political views which makes him a neoliberal from head to toe. It must be his upbringing, which is very similar to that of Andrew Neill. Both are from well-off middle class families in Scotland, both privately educated.
Being a canny Scot, it’s a pity he didn’t familiarise himself with double entry bookkeeping at some point. It’s not too late for him to do it. It’s not too difficult and very historic, going back to the renaissance.
I read his ‘The Pity of War’ in which in my view he seemed to blame the World War 1 generation for their blood lust and loss of life and thus getting the establishment off the hook. In Ferguson’s world the fallen are fallen because it was their fault – nothing to do with the politicians or the government – the people should have known better apparently than to fall for Kitchener’s posters, raising you own regiments with your mates to fight the Hun and being scared of white feathers. There was no pity in his book – just a sneer at brave people badly used in a war that was a bad mistake by those in charge, and I threw it away when I read it right to the end in disgust.
Ferguson is either an apologist or just a contrarian and probably both. His dirty secret is that he looks down on those who suffer in history and looks up at those who create the suffering. He has the tools to be a excellent historian but uses them badly and for vested self interest. He is firmly on the side of the establishment and like all those who side with them he will be looked after.
Thanks
Well said PSR. I thought Ferguson was a great historian after watching his Channel 4 series Empire, Colossus and Is the West History? Since then I’ve read a great deal more about these subjects and no longer rate him at all. I’ve also thrown his books away (disposing of books is usually anathema to me). Apologist it is, I believe. He doesn’t seem to be much of an accountant either it seems.
@ Alan Surtees “Nial Ferguson, Andrew Neill. Both are from well-off middle class families in Scotland, both privately educated.”
Andrew Neill (father an electrician & mother a cotton Mill worker in WWII then Housewife?, lived in a Paisley suburb) went to the local state primary school, passed the 11 plus and so went to Paisley grammar.
Niall Ferguson (parents: father a doctor & mother a physics teacher, lived in Ibrox) went to ‘The Glasgow Academy’, a private school
Despite what you like to claim, ‘double entry’ doesn’t prevent governments from having to live within their means – in a global economy and in a country reliant on imports for essentials like energy and food, as well as materials for manufacturing, it is essential that the government spending in the economy can be supported by government income I.e. taxation.
Of course this is required over the long term, it in every year, but to suggest otherwise is a denial of economic reality. That is the key.
Oh dear.
You do know all money is created by government spending, don’t you?
And you do know that tax only exists to take it out of circulation – and not to fund anything?
And that unless a government runs a deficit there is no money supply?
Now try explaining how I am wrong – because I can guarantee I am not.
You do realise that the UK doesn’t exist in isolation and that many things are not priced in GDP – things like energy are priced in USD, for example.
So please explain what will happen to the value of our currency (and hence the cost of imports) if the government keeps spending money beyond what it takes in tax, requiring it to borrow more and more (or print more and more)?
The economy grows.
GDP rises.
Markets grow.
The value if the currency rises as we are less import dependent.
But don’t reply. You are very obviously trolling.
All money? I thought money was also created by the private banks when they loan?
Only under government licence
At risk of exposing my ignorance once again… I feel worried about how much of the UK’s GDP is based on the financial and insurances sector … 8.8% of total economic output in 2023 according to the House of Commons library website. Is this sector vulnerable to a crash in the value of Sterling? Is that irrelevant? Let’s say we get a UK government that pursues policies that reduce rent extraction domestically and reorient our economy towards investing in domestic industry and food and energy production. Are we vulnerable to punishment from investors holding sterling who could sell large amounts of Sterling and crash the currency value? In order to make money in some kind of shady ‘short’ betting? Does the Shadow Banking sector hold large amounts of Sterling that it could sell in an attack on Sterling? Does anybody actually know how much Sterling exists globally? I have a nagging feeling that the UK should be spending Sterling on productive capital, like hydroelectric schemes on the plan of Ben Cruachan, like green-housed climate resilient food production such as they have in the Netherlands, perhaps on mines if we have any potential for critical minerals in the UK. And I have a panicky feeling that we should buy this productive capital while the currency is still valuable as I am increasingly concerned about Sterling losing it’s purchasing power internationally. Is any of this relevant? Have I been watching too many ‘Gold Investment Adverts’ disguised as economic history? There is a lot of stuff online claiming that Japan has stopped buying dollars, that the bank of China is hoarding gold and planning to replace the dollar as anchor currency and to replace the SWIFT payment system. This is the kind of thing I feel I would like to be able to discuss confidently when trying to persuade people that our government can safely spend to change direction politically away from austerity and towards domestic productive resilience. If these kind of currency attacks are a predictable price we may have to pay for a positive change in political direction it would be more persuasive and plausible politically to be prepared for them and to consciously decide that the longer term goal is worth the short term cost of weathering these attacks. Have I lost my way in a paranoid internet rabbit hole?
You’re not being paranoid. You’re doing something most people avoid: you’re trying to connect the monetary story to the real world story about power, imports, exchange rates and political transition. That’s appropriate.
Let me frame this. The UK has built a large part of its economy around finance and insurance. You quote 8.8% of output for 2023, which is about right. That matters, but not because “the City will collapse if sterling falls”. Finance is usually resilient to volatility as it often profits from it. The more important issue is that a sterling fall hits the cost of imports such as energy, food, manufactured components, and it is imported inflation that becomes politically destabilising.
So yes, a progressive government that seriously reduced rent extraction, regulated finance, and shifted resources into domestic renewal could face what you call “punishment” in the form a sell-off of sterling assets, negative commentary, speculative positioning, and a falling exchange rate, although “could” is the key word there.
And we must be precise about what that means. It is not that Britain would “run out of money”, or that we would become insolvent. A currency-issuing state can always pay in its own currency. The risk is entirely different: the exchange rate becomes the transmission mechanism of political conflict. The adjustment appears as higher import prices and inflation pressure. In other words, the real vulnerability is not “debt markets”. It is import dependence.
And that takes you to your most important point: spending sterling on productive, capacity-raising investment such as energy security, insulation, public transport, green industry, domestic food systems, skills is not some reckless. It is the cure for our problems. Those investments reduce the capacity for any future exchange-rate fall to harm living standards, because they reduce our exposure to foreign supply chains and commodity pricing.
So you’re right that resilience means building domestic productive capacity. But the reason is not to “spend while sterling is strong” as if this were a run on a household bank account. It is to make the UK less vulnerable to imported inflation and external leverage. That is a sovereignty project in the real sense. This is our need and how we stop “market risk” threatening the UK.
As for the gold rabbit hole: there’s plenty of geopolitical risk, but gold adverts use these to suggest an imminent monetary apocalypse. That is not serious analysis.
@Richard: Sorry if this is either wrong or too simplistic. Please delete if you feel so.
@ Karen Brice: Personally, I found the use of double entry bookkeeping as a starting point incredibly helpful. I was shown it as a teenager, but struggled with the numbers, being dyscalculic. That doesn’t stop me from grasping the principles though.
As I understand it, the point was that if money was in the ‘out’ column, it would appear in somebody else’s ‘in’ column and vice versa. This being especially true of bank statements. In Ye Olden Days cash changed hands (like in Thatcher’s housekeeping purse) but it doesn’t now. So the analogy doesn’t work any more, because d-e bookkeeping is no longer a record of a physical transaction.
Nowadays, in MODERN monetary practice, I make an electronic transfer and a figure immediately moves to my ‘out’ and appears in somebody else’s ‘in’. The bit I couldn’t get my head around at first is that there IS NO ‘REAL’ MONEY anymore.
I think you’re partially correct about governments having to live within their means, because in the UK the DEVOLVED governments do have to. I think of it as a Victorian wife getting a housekeeping allowance from the pater familias and having to show how she spent every penny. Overspending isn’t allowed.
But Westminster OWNS THE BANK. The govt doesn’t go cap in hand to the BofE, ask for money and have the stern Bank Manager suck his teeth and say, “Sorry, you haven’t enough tax payments in your account. Try again next month.” It creates the money by sticking a large figure in their ‘in’ column, so the govt can’t run out of money.
It can, however create too much money as it spends it into personal, business, public ‘in’ columns. So, to prevent flooding the country with cash, it claws excess money back via tax to prevent inflation. To “balance the books” (where’ve I heard that phrase recently?)
Overly simplified, but I’m a simple person.
It’s good.
iusedtobeenglish,
I like your explanation and the way it’s put together. When you say, “But Westminster OWNS THE BANK,” it really highlights what was wrong with the argument that the money supply is like a housewife on a budget.
What a pointless post since you never define “means”! What are they Karen – money, things, people, solar or wind energy, laws, etc. ?
Karen, you failed to define “living within yor means”.
Simple illustration…
Treasury civil servants decide that they will increase the allowance for Rich Tea Biscuits – each civil servant in the Treasury is now allowed two packets per day.
Paying for them is not a problem, the change was allowed for in the Finance Bill (Civil Service biscuit dunking allowances, Section 4:9, as amended, 2026) parliament increases government budget and the finance for biscuits in the budget, BoE creates the money via the Ways and Biscuit account, and the intern toddles down to the local shop with a suitcase (last used during Covid to buy Downing Street booze for “work events”). Back in the Treasury, an accountant does the double entry on the financial transactions so far.
Intern comes back – problem – the shop doesn’t have 500 packets of Rich Tea on the shelf. (They already got sold to the MOD intern earlier that day as Defence is the current priority and they have more spare biscuit buying interns – the early intern gets the worm, as they say).
The Treasury has the MEANS to buy the extra biscuits but the shop can’t supply them. The government is running out of biscuits, not money. It is living beyond its means, yes, but not by spending too much. The problem is one of biscuit supply, not debt.
That, in a nutshell (or a teacup) is MMT. Your comment is imprecise, and holds together no better than an overdunked rich tea biscuit.
You are confusing accounting with biscuit manufacture, and confusing economics with politics. MMT keeps them separate.
Very, very good…..
@ Karen Brice: “doesn’t prevent governments from having to live within their means” is your assumption, and nothing else you write is evidence for that.
However, the fact that economies have persistent “debt” is evidence to the contrary to your assumption : The UK for ~332 years and the US for ~190 years. The US paid off all its debt in 1835, soon followed by a major crash and currency crisis, it’s been in debt ever since and was every year before and has only run surpluses on about seven brief occasions, each followed by a depression. Between 1930 and 2023, the US government ran fiscal deficits in 81 of the 95 years, 85.2% of that period.
In the UK in the 1950s, a period of increasing real disposable income and decreasing National debt and increasing public spending, often portrayed as an ‘economic golden age’, the UK ran a deficit in most years, in the region of 2-3% of GDP after 1953.
There is also clear evidence that, major functioning, economies at least, can run long term trade deficits in a fiat currency because they have, I doubt anyone would claim there are no economic consequences of doing so, however economic collapse has not been one of them thus far. The US has been running consistent trade deficits since 1976 and the UK only had a trade surplus in those “golden 1950s” in 1956-58. From 1948 to 2019 the UK only recorded a trade surplus in 18 out of the 71 years.
The evidence says “live within their means” in any simplistic monetary or trade balance sense is nonsense.
Totally agreed.
Yes, and also true that Ferguson’s attempts at economic history are vitiated by selecting and bending episodes to fit his not specially shaded micro propositions. The opposite of how historical investigations are normally mined to refine abstract propositions especially by qualifying their applicability in particular contexts. Always astonished me that he nevertheless obtained a prestigious academic appointment in the States . A preferment which remains highly suspect.
Tim Putnam,
I think that’s precisely WHY Ferguson got a prestigious academic appointment in the US.
Gemini AI notes: Philip Tetlock analysed two decades of predictions from hundreds of experts on economic and political trends, including GDP growth, inflation, and market shifts. His core finding was humbling: the average expert’s forecasting accuracy was roughly equal to a “dart-throwing chimp” or simple statistical algorithms.
Source: Expert Political Judgment: How Good Is It? How Can We Know?
https://www.jstor.org/stable/j.ctt1pk86s8
🙂
Thanks for a reassuring answer Richard. I try to read some right-wing press to balance my left wing perspective and I feel like the kind of capitalists who read The Economist would be happy with UK investment in productive capacity. They always seem to present themselves a rational people looking for productive places to put their money. I feel that tackling rent extraction is likely to be what attracts most ‘punishment’ should we ever elect a government with the will to do so. I feel like those same apparently ‘rational’ Economist reading investors would be on the side of fighting any attempt to rebalance away from rent extraction towards better wages and higher consumption for workers. It’s like they want the government to invest in R&D and energy and transport infrastructure that creates productive investment opportunities for some of their capital and at the same time they want private citizens to pay as much of their wages as possible in rents for assets that same investor class owns.
Richard – is there really no hope for someone wishing to educate themselves formally in economics at degree level ? Do *all* universities teach the standard neoclassical model, or are there some departments, at some universities, somewhere in the world, that teach the more enlightened “real economics” espoused by yourself, Steve Keen et al? Thanks
There is no university in the UK that I know of at present that is offering what I would consider to be a course worth studying. MMT is unlikely to be mentioned anywhere. Steve Keen’sthinking is considered beyond the pale, and I would most certainly never get a mention.
If anyone is looking for a course, look for political economy.
Alternatively, I now think sociology offers a better choice, by providing a means to do an SA based study of serious thinkers, whilst human geography might well provide a better option for studying what is, in reality, real world micro economics.
I was thinking of taking this course in the Open University in September:
‘Economics In Context’
The blurb says: ‘Why are markets so powerful in most economies today? What is the role of the government in different economies, and how does this role shape opportunities for different people and firms? What explains global inequalities? Why is economic growth such a key economic goal in most countries today? Are there other goals economies could pursue? You’ll unravel these and similar questions using insights from recent history and key economic thinkers and by drawing on economic perspectives and examples. This module is a building block towards a critical perspective on economics and economic choices for our daily lives.’ Has anyone taken this course or does anyone have any knowledge of whether this course is any good?
I don’t know about it.
I would ask for the lecture list and reading lists to get a flavour of what is going to be talked about.
Thanks Richard that’s a good idea. I have another thought related to the threat of imported inflation…. We want the government to spend money into circulation through essential public works and services….. and to tax out enough of that money to keep inflation at reasonable levels. So would it make sense to say that even though we don’t ‘need’ the money from tax havens for public spending …. By undermining the government’s ability to control inflation and the value of its currency by controlling the total volume of the money supply through taxes, these secrecy jurisdictions are still undermining currency stability and therefore economic stability and resilience and the government’s ability to plan their national economy? This, on top of the problems that extreme wealth causes via asset price inflation, asset hoarding and rent gouging, stock market bubbles etc…. ? Apologies again I feel like I take up a lot of your time with these questions……
Perfectly good idea here…
Thanks again Richard, as always I have more questions…… I realise this is an old thread so I will stop posting here if its disruptive, please say… Are gilts and higher interest rates essentially both ant-inflationary instruments in the same way as tax? Even though the way it’s presented is that the gilts are ‘paying for public spending’ and only the interest rates are anti inflationary? And if so, do you think most people on the right and in neoliberal thinking truly believe that we are taxing and borrowing to pay for state spending in the household way? Also, how could I try to calculate a ratio for any given year between money ‘spent into circulation’ by the government versus money ‘lent into circulation’ by private banks? Would that be the total of government spending (including on interest for deposits at the Bank of England and interest payments on gilts?) minus taxes collected for ‘government created’ money that year? And the total of private bank loans for ‘privately created’ money? Or would you exclude tax completely and and regard tax money as ‘destroyed’? My motivation here is partly for my own understanding and partly because I don’t want to give misleading explanations to people I talk to…..Thanks again so much for you brilliant blog and help in trying to demystify finance.
Tax is the cleanest anti-inflation instrument because it directly withdraws spending power. When tax is paid, bank deposits and reserves fall.
Gilts and interest rates can also dampen demand, but more indirectly. Selling gilts encourages people and institutions to swap spendable money for a safe savings asset. That can reduce spending pressure, but it depends on who buys them and what they would otherwise have done.
Higher interest rates work mainly by discouraging borrowing and raising the reward for holding financial assets, but they are blunt, often regressive, and can transfer income to the already wealthy.
On whether neoliberals truly believe “tax and borrow to spend”, the truth is hard to tell. Many repeat it because it is politically useful. Some economists know it is wrong but treat it as a disciplining narrative.
To compare “government money” and “bank money”, focus on net creation. Government net injection is roughly the deficit i.e. spending minus tax (tax destroys money). Bank net creation is new lending minus repayments. That is the ratio you want: the state’s net spending into the economy versus the banking sector’s net credit creation.
Thank you.
Sorry, another question…
Was it like this even when we were on the gold standard?
The government did not stop spending money when it no longer had enough gold in its vaults to convert all the Sterling in circulation?
Even as I write this I have absurd visions of ever increasing amounts of gold in the vaults of every central bank! I suppose the conversion rate could fall through currency devaluations and therefore we did not ‘run out of money’ because we had dug up all the gold on the planet and put it in central bank vaults.
Also…. even when we devalued…. if I am imagining this right, we didn’t do it to achieve a 1:1 ratio of gold in the central bank vault to Sterling in circulation….. as that would have devalued the currency too much? What would have happened had we ever done that? Would citizens have have ended up using foreign currencies in a black market scenario like in the former Soviet block? And is the gap between a realistic value for a pegged currency and the policy determined peg governments might try to maintain the vulnerability that currency speculators exploit to make money when they attack the value of a currency by selling it to cash in on some kind of ‘short bet’? I’m not sure if I’m getting confused here….. I really think I will have to enrol in some kind of economics course and stop exploiting your blog and your time as a free course in economics. Every answer I get poses more questions… its a fascinating subject. Perhaps you could just post my questions and see if anyone else wants to answer them so that you can get on with your other work.
Under the gold standard it was not like now. Sterling was a promise: the Bank of England aid it would convert pounds into gold at a fixed price so, in principle, the government could not expand spending without worrying about confidence. If people (or foreign holders) demanded conversion, gold reserves could be drained. Of course, most people never asked.
In reality, the state did not instantly run out of money in a mechanical way. Instead, the gold constraint forced policy responses: interest rates up, spending cuts, wage restraint and credit tightening usually resulting in deflation to defend the peg, which sometimes continued for decades.
There was never a 1:1 relationship between gold in vaults and sterling in circulation. If governments had tried to impose that, the money supply would have had to shrink drastically, causing depression-scale unemployment and likely black markets. View the gold standard promise as idealistic then, and not real, but devaluation was the escape route: it reset the conversion rate, restoring credibility without requiring infinite gold.
Hi
I feel that for managing the UK economy with the use of double entry book-keeping and MMT is an understandable concept.
I was thinking recently about the fact we are just one economy in a panolopy of them.
I assume this places some limits as to our proposed use of MMT in the UK, unless the whole world goes ‘MMT’?
Cheers. Andrew.
The world does not go MMT.
MMT describes what the world does. I think I need to do another video on this. I will record one this morning. The misunderstanding you display is commonplace.