James Meadway, the person who became John McDonnell's chief economics adviser when I declined the job because I would not support the austerity and fiscal rules analysis that John signed up to, has written this in The Guardian:
Supporters of modern monetary theory take this truth and use it to talk up the ability of the British government to issue money or ignore its debt. Monetary constraints, they argue, are ultimately not a real constraint on economic activity, and at least in principle, it is possible to imagine a world in which the UK agrees to renegotiate its various debts with everyone else and so reduces this overwhelming external exposure.
I know only one person who is more obsessed with their hatred of modern monetary theory than James Meadway is, and that is Ann Pettifor. She thinks modern monetary theory is all about helicopter money and the Positive Money agenda, when neither claim is remotely true, and all she reveals is her lack of reading or comprehension. Unfortunately (and I wish this were otherwise), James is in the same place. Let me explain what he gets wrong:
1 - The significance of debt
Firstly, he implies that MMT supporters argue that governments can simply ignore their debt. This is not an MMT argument. What MMT actually says is something quite different. It says:
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A government that issues its own sovereign currency (like the UK with sterling) cannot be forced into default on debt denominated in that currency.
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That is because the government can always ensure that the central bank creates the reserves needed to settle payments.
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Government bonds are therefore not operationally necessary to finance spending.
- Debt is not then the issue others claim it to be, because this "debt" does in fact represent voluntary deposits with the government, on average, not repayable, in the UK's case, for more than 15 years.
But this does not mean debt can be ignored. Debt still matters because:
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Interest payments affect income distribution.
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Bond issuance influences monetary policy operations.
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Debt levels may have political and inflationary implications.
So MMT does not say debt is irrelevant. It says default risk is different for currency-issuing governments. That is, as a matter of fact, true. An economist who does not understand that has really not mastered their subject.
2 - Money printing
Secondly, James claims that MMT says governments can simply “issue money”. This is implicit in his claim that supporters of MMT "talk up the ability of the British government to issue money." This wholly misrepresents MMT as advocating money printing as a policy tool. That is simply untrue, not least because MMT's core point is descriptive, not promotional. It says:
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In modern monetary systems, government spending already creates money. That is factually correct.
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When the Treasury spends, the Bank of England credits bank reserves.
So MMT is explaining how the system already works. It is not proposing a new mechanism. What it says is that spending precedes taxation and bond sales operationally. This is an accounting fact, not a political slogan. And as a matter of fact, no serious MMT economist "talks up the ability of the British government to issue money." Instead, they recognise reality, and that reality is that the UK government creates every pound that it spends
3 - Monetary constraints
Thirdly, James suggests that MMT denies constraints. He says MMT suggests that:
Monetary constraints … are ultimately not a real constraint on economic activity.
This is a major misrepresentation.
MMT is explicit that constraints absolutely exist, but they are not financial. The real constraints are:
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Real resources – labour, skills, materials, energy.
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Productive capacity.
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Inflation risk when spending exceeds capacity.
- The need to protect the environment
MMT repeatedly emphasises that the real limits to government spending are these things and inflation, with which it is obsessed.
So MMT does not in any way say there are no constraints. Instead, it redefines them correctly, in economic reality, which is what matters.
4 - Renegotiating or cancelling external debt
Fourth, James suggests that MMT leads to:
imagining a world in which the UK renegotiates its debts with everyone else.
This claim is simply unrelated to MMT. MMT does not require debt renegotiation, nor does it depend on it. At most, it says we need floating exchange rates. which is hardly contentious. It does so recognising two important issues:
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Most UK government debt is sterling-denominated. That means the UK can always service it. In fact, it can never fail to do so, which makes it very hard to imagine why renegotiation might ever be needed.
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Foreign holdings of gilts are not external debts in foreign currency. They are still sterling liabilities. There is then no default risk in such holdings.
MMT, therefore, does not need debt restructuring to function. Instead, it recognises that the issue is never likely to exist, because it does not. This is economics rooted in reality, again.
The comment made confuses sovereign currency debt with foreign-currency debts, which are fundamentally different. That is a category error, and a very basic one.
5 - External exposure threatens the UK government's ability to spend
Fifth, James suggests the UK government faces:
overwhelming external exposure.
This reflects another common misunderstanding. For a currency-issuing government like the UK:
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Foreign holders of gilts cannot force default, ever.
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Those foreigners hold sterling assets.
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The UK government creates sterling.
- It follows that there is no external pressure.
The real issue with external balances is exchange rate pressure, not solvency. MMT acknowledges this. But again, that is a macroeconomic management issue, not a financial constraint in the household sense, as James wholly incorrectly implies.
6 - The deeper misunderstanding
The fact is that James' comments all ultimately assume the household analogy or household budget myth is real. This suggests that a government must finance spending by borrowing from others. MMT's core challenge is that this is entirely inaccurate.
In reality:
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Governments spend first.
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Taxes withdraw the money the government creates with its spending from the economy.
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Bonds support interest rate policy and provide a safe asset deposit facility.
James' misunderstanding stems from his assumption of a pre-modern view of public finance.
7 - In summary
James falsely attributes several positions to MMT:
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That governments can ignore their debt.
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That MMT advocates printing money freely.
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That MMT claims there are no constraints on spending.
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That MMT depends on renegotiating debt.
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That foreign holders of government debt create solvency risk.
None of these claims is to be found in MMT. MMT says they are all untrue. To that extent, I agree with James. He is arguing with a straw man.
MMT's actual argument is far simpler:
A currency-issuing government cannot run out of its own money. The real constraint on spending is inflation caused by resource limits.
If only James would stop pretending MMT says things it does not, we could then have a serious debate. I think that would be useful. Making false claims about MMT is not.
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Thank you, helpful
Similarly when I tried to explain MMT to a local group E Maggiori’s letter in the Royal Economic Society Economics publication debunking MMT it’s the same narrative.
Very annoying having to battle “strawmen”….. but glad you have taken the time to do so. However, is there any chance Meadway (and Labour) might change the mind?
Measdway is now a Green
He argues there is no environmental policy in MMT as he also argues there is no class theory in it.
That is like arguing gravity is wrong because there is no theory on the environment or class in it. It just describes what is. Policy is laid over it.
point 6.3
Bonds support interest rate policy and provide a safe asset despite facilities.
should be?
safe asset deposit facility.
Edited. Thanks.
Is Meadway’s Verdant thinktank desperate for donors?
Or is he finding the Green Party hierarchy is rather disinclined to listen to his arguments *because they do understand* MMT?
More importantly, why is the G giving space to him?
I dont know
I am just dealing with his arguments
In point 6/3: “safe asset despite facilities” should presumably read “… deposit …” ?
Edited. Thanks.
Meadway……………Mediocreway?
Sounds like it to me.
The ‘debt’ is surely just money on a ledger line that has been issued into the economy? The issue here is that there is not enough.
This seems like the nub of it to me.
As for bonds/gilts, as I think Clive made clear in Cambridge these are deposits with the government that stay in the government – nor are they used to finance spending – they’re not debts. It’s safe keeping.
Thanks
Also, surely the “550% of UK GDP Britain owes to the rest of the world” he cites apropos of his MMT gibe, is overwhelmingly PRIVATE debt? (since govt debt is 95% of GDP, less than a third of which is owed outside UK).
He recently did an MMT hit piece on his podcast which was almost entirely made up sh*t – certainly nothing from the MMT lit. He’s starting to sound like Mad Paul Mason.
You are right to be cautious about that claim.
The figure sometimes quoted, that the UK “owes the rest of the world around 550% of GDP”, refers to the UK’s gross international investment position. That is a measure of all financial claims between the UK and the rest of the world: bank lending, portfolio investment, derivatives, direct investment, and so on.
Crucially, the overwhelming majority of those positions are private sector assets and liabilities, particularly those of the banking and financial sectors operating through the City of London. London functions as a global financial hub, so large cross-border balance sheets are inevitable. The numbers look dramatic, but they are largely the result of financial intermediation.
They are not the same thing as government debt.
UK government debt is around the size you suggest, roughly comparable to GDP, with a minority held overseas. More importantly, that debt is denominated in sterling, a currency that the UK itself issues. That makes it fundamentally different from the foreign-currency debts that can create genuine solvency crises.
So presenting the 550% figure as if it were some kind of national debt burden is simply misleading. It conflates the balance sheets of global financial institutions with the position of the UK state.
Criticisms of MMT are perfectly legitimate and any economic framework should be open to challenge, but they should at least engage with what the literature actually says rather than attacking a caricature of it.
Perhaps the Gross International Investment Position needs a glossary entry of it’s own? Not sure I quite understand what it is still.
Too obscure.
Yes this is similar to other ‘arguments’ made when I have set out what MMT can achieve. People have brought up the cases of Zimbabwe, Argentina and Venezuela. They do not realise that they just printed money which is not what supporters of MMT agree with. As you clearly set out the constraints which have to be considered. Its fairly obvious really but opponents stick with the old, tried, tested and failed objections!
Thanks
He raises a valid point though. How do you deal with the current account deficit?
The UK can print GBP but it can’t print USD and given we run a large trade/current account deficit we are dependent on inflows.
Foreign holdings of UK assets do have a lot of similarities to external debts. If foreigners sell their gilt holdings or hedge their FX expose to their UK assets then they would have to sell GBP. So there is a risk to the external balance there.
So if during MMT the government prints money, which is inflationary, to spend more money, also inflationary, whilst keeping interest rates artificially low you could easily get an implicit default in Gilts – as the value of inflation and the currency both affect the real value of them.
Sure, the government can always repay the nominal amount owed but that is beside the point really.
So how do you propose dealing with the current account deficit?
You raise an important issue, but I think the framing needs adjusting.
First, the UK’s current account deficit does not mean the UK needs to “borrow foreign money” in the way a household or company would. What it means is that the rest of the world chooses to accumulate sterling claims in the form of bank deposits, bonds, shares, property and other assets — in exchange for the goods and services we import.
Those assets are the counterpart of the deficit. In accounting terms the current account deficit is matched by a capital account surplus. Foreign investors are choosing to hold UK assets.
Second, that does not create the same risk as foreign-currency debt. The UK government issues its debt in sterling. It does not promise to deliver dollars or euros. The Bank of England can always settle sterling liabilities. So there is no solvency risk of the type faced by countries that borrow in foreign currency.
Third, if overseas investors choose to sell UK assets they receive sterling. To exit sterling they must sell it to someone else. The price of the currency might fall — that is the exchange rate adjusting — but the currency itself cannot disappear. Someone must always hold it.
A falling exchange rate can, of course, raise import prices. That is a real issue. But the solution to that is not austerity or suppressing public spending. The real solution is improving the UK’s productive capacity: producing more energy, food, technology and manufactured goods at home so that reliance on imports falls.
In other words, the current account deficit is fundamentally a real economy problem, not a monetary one. The answer lies in industrial strategy, energy security and investment — not in pretending the government has run out of money.
In practical and accounting terms foreigners buying UK assets looks exactly like borrowing in a foreign currency when it comes to balance of trade.
If a government printed money, which is inflationary, suppressed interest rates, again inflationary in an effort to boost growth, also inflationary bond investors might take fright? The real value of those bonds will be declining just as the value of the GBP will be as printing debases it.
To those foreign investors it matters little if they get paid back fully in GBP terms when they’ve lost huge value in USD terms.
If you have a scenario where foreign investors lose confidence in government and the currency, the amount of selling could easily collapse the pound. Just look at the Truss moment if you don’t believe, which would be small in comparison to the reaction to MMT printing and the rejection of any sort of management of the budget deficit.
The current account deficit is a real economy problem in the long term, but in the short term it is a fiscal and monetary one. MMT has no answer for this and would cause a massive negative reaction from the markets which it simply has no answers for.
I think a number of different issues are being conflated here in a comment that is staggering in the amount you get wrong.
First, foreigners buying UK assets is not the same thing as the UK borrowing in a foreign currency. If an overseas investor buys a gilt, a share, or property in the UK they must first acquire sterling. The liability they hold is denominated in GBP, not in dollars or euros. The UK state does not promise to deliver foreign currency in repayment. That distinction matters enormously. Countries get into real solvency crises when they borrow in currencies they cannot issue. The UK does not do that. You are, therefpre, wrong.
Second, when overseas investors sell UK assets they receive sterling. If they want to exit sterling they must sell it to someone else. The exchange rate may fall, which is the market adjusting, but the currency itself cannot disappear. Someone must always hold it. You ignore that.
Third, the idea that government spending is simply “printing money” that automatically causes inflation is not how the economy works. Inflation occurs when total spending exceeds the real capacity of the economy to produce goods and services. If there is spare capacity, public spending can increase output rather than prices. That is why the real constraint on fiscal policy is resources, not an arbitrary financial limit. You are entirely wrong again.
Fourth, the “Truss moment” was not a case of markets rejecting fiscal expansion in general. It was a reaction to an unfunded tax-cut package combined with the collapse of the Bank of England’s gilt-market stability mechanisms and the fragility of liability-driven pension funds. It was a specific financial market structure problem. Please get your facts right.
Finally, the current account deficit is fundamentally about what the UK produces relative to what it imports. That is determined by energy policy, industrial capacity, productivity and trade patterns. Monetary policy cannot fix that.
So the real issue is not whether markets might react to policy change, because markets always react, but whether the UK chooses to address its underlying economic weaknesses through investment, energy security and productive capacity. Those are the real determinants of long-term stability.
When you have learned some economics please call again.
You say:
“What it means is that the rest of the world chooses to accumulate sterling claims in the form of bank deposits, bonds, shares, property and other assets — in exchange for the goods and services we import.”
Is there not some imbalance though when UK entities have to buy foreign goods and services in non-Sterling funds, typically USD I suppose?
This is what the fereign exchange markets manage. And read my comments on how that equation balances, already made.
Foreigners buying Gilts and the UK government borrow in USD are functionally the same because they both fund the current account deficit and any redemption (foreigners selling Gilts or the government repaying USD debt) requires the UK to deliver USD.
There must always be a buyer for someone to sell, even with currencies. However then can lose most of their value. This could easily happen if the government debases the currency by printing money and if foreigners sell assets. You are trying to downplay any such adjustment as small, but with the UK holding only 125bn USD of reserves but foreigners holding 800bn of Gilts, on top of the current account deficit, it would take only a partial unwind of foreign holdings to exhaust reserves.
Which would collapse the GBP, not cause a small adjustment.
Inflation does not just occur when real capacity is exceeded. This is a fallacy MMT uses to hide it’s structural failings. In reality inflation can and does occur when excess capacity exists – like now for example.
The Truss moment had various actors in play, but fundamentally was due to concerns about the fiscal. MMT based spending increases funded by printed money would be an even more extreme policy of fiscal loosening.
Monetary policy does affect the current account deficit through the action of interest rates. Typically higher rates are needed to attract inflows to fund the deficit.
MMT formulations always require a closed system and ignore the current account deficit and other externalities. Once you take those into account it simply isn’t a valid or sensible “theory”. I was hoping for a more informed response but am once again disappointed. Much as with it’s treatment of inflation (MMT essentially pretends it doesn’t exist unless specific requirements are met) it also ignores the current account because of a mistaken belief in static accounting identities.
I have a PhD in economics from a university in my home country. I do not see why you need to be rude or cast aspersions as to my qualifications. Could I ask your qualifications to compare?
Luke
You claim a PhD, I presume in economics. I would not shout about it. In my experience it reveals ability to do dire maths, totally unrelated to reality. You prove it. This is so crass:
“Foreigners buying Gilts and the UK government borrow in USD are functionally the same because they both fund the current account deficit and any redemption (foreigners selling Gilts or the government repaying USD debt) requires the UK to deliver USD.”
The UK government never borrows, It takes deposits. And it only takes deposits in sterling. So your claim only reveals your incompetence. And all your other claims are as absurd, as you would know if you had read anything, which you clearly have not.
You ask my qualifications. Just Google them, and look at my Google Scholar record. When you can match my experience and achievements call again.
You are now blocked for incompetence.
I find this to and fro disheartening. Can you not take the issue forward by inviting James and, perhaps, Ann Pettifor to write a response to your points to be published in this blog.
The comment is in the public domain.
Both are as free as you to respond.
And why are you implying that I should not comment on economic nonsense?
The picture of MMT that I get from Mr Meadway, is that of the Chancellor and BoE Governor, driving lorryloads of freshly printed BoE notes to RAF Brize Norton, early every morning, loading the cash onto a Hercules transport aircraft, which then flies a grid pattern over the UK, tipping pallet loads of currency out the back (a bit like the big blue Wincanton bulk milk tankers that used to deliver milk from the cows in the South West to Lonon via the A303/A316.
But that’s really stupid…
I suppose if you self-identify as a class warrior, you need some form of austerity-preserving class-oriented economic theory to justify your ideology. (There are parallels in religious hierarchies, so this is familiar territory to me!)
That’s essentially Friedman’s ‘The optimum quantity of money’; the only way he could get ‘printing money causes inflation’ to work, now treated as fact as per Luke above.
Printing money is not inflationary; spending it, can be
Among many assumptions, Friedman assumed the economy was at full employment, that people had already satisfied any desire they had to save and the money supply was directly and completely controlled by the central bank
“let us suppose that one day a helicopter flies over this community and dropped an additional $1,000 in bills from the sky which is of course hastily
collected by the members of the community.”
The logic is since they have no desire to save, they immediately rush off and try to spend it all on goods and services that aren’t available and which the economy can’t create because it’s at full capacity, and hey presto, you get inflation.
Even in Friedman’s parable, it’s the spending of the helicopter money that causes inflation; if the helicopters had run out of fuel, then there’d be no inflation even though money had been printed.
Neat
And right
I hadn’t realised my stupid inflationary Hercules flying out of Brize Norton had been preceded by Milton Friedman’s stupid inflationary helicopter 45 years earlier. And here’s me without even an Oxford PPE degree.
Honest, I never knew!!!
My economics textbook will soon be taking the world by storm!
🙂
Please god keep JM away from Greens Economic Policy!
James Meadway standing as councilor in Tower Hamlets :
https://towerhamlets.greenparty.org.uk/2026/02/01/prominent-former-labour-economist-to-stand-for-green-party-in-tower-hamlets/
It’s interesting how we didn’t hear a peep out of the household analogists during the great Covid furlowing.
None so stupid as those that don’t (or won’t) listen. Meadway is in one of those classes.
He’s trying to big himself up “look at meeeee” – I am mate and you are a moron.
Concluding, given what he says, it is posible that his idea of mental exercise is head down and run full tilt @ a brick wall.
I do hope the Greens are not listening to this wazzock.
Interesting that the Graun hasn’t opened up the comments for Medways piece……….
It’s interesting because Meadway says the following after his little MMT dig:
“Unfortunately, this hideously complex problem is the easy part of Britain’s external dependency. The hard part, the one that Thompson zeroes in on, is something approaching an intractable issue. The UK is not only dependent on financing from the rest of the world (*WRONG*); fundamentally, it is dependent on material resources from other countries to keep people fed, warm and with the lights on. (*more interesting*)”
On his second point I think we would agree. We have an energy dependence issue today and our food dependency could become a big problem if the Politics of Hate and Destruction keep having their way.
It’s like he almost gets it, especially on the material side, but is terrified by the debt. If you read his conclusions, he really does seem to think that taxes have to come first.
I believe James wants a Politics of Care just like us, but he has tied his colours to the mast of a sinking galleon, and for some reason is firing shots our way.
How to get a man like James to understand that the spending of new money comes first? Is he too wedded to his anti-MMT stance or is he humble enough that he could jump ship? If he want’s to sink, we need to make sure our ideas win out. I think the Greens / progressive left generally are going to win sooner or later, but if they follow James’ advice, they are going to be as impotent as Starmer and Reeves.
Thanks
This doesn’t make any sense to me. Why can’t he accept the mechanics and just debate policy? Just because the government issues its own money doesn’t mean we all have to be tax and spend profligates like Antony Barber. Usually those that do deny this basic truth are incapable of arguing against state spending and use it as a lame excuse not trained Economists like Meadway
I find it Interesting that critics of MMT so often give the impression that they are resisting the threat of a new system being imposed when in reality that very system has been in operation since Nixon took the US off the gold standard.
Surely if MMT was so devastatingly bad/wrong the entire global financial system would have collapsed by now? 🙂
🙂
In addition to J Meadway’s views on MMT he also seems to think the current illegal war in Iran has “left the UK uniquely vulnerable to the kinds of pressures today being exploited so mercilessly by Iran.” This would seem to indicate he seems think this has nothing to do with either Israel and US and the blame lies with a state that has faced economic sanctions for decades. Does he really think the UK is “uniquely vulnerable”? The opinion that our food system, which certainly needs changing, can be done by “making greater use of new farming techniques – from drones to vertical farming – and encouraging more home and allotment use.” Really? Has he done any real research to back this ? The brilliant essay he provides a links to is behind a paywall. Not so long ago he suggested that Trump’s economic plans might work https://www.theguardian.com/commentisfree/2025/apr/07/donald-trump-world-economy-shock-us. Perhaps Meadway has introduced an alternative definition of MMT to Massively Muddled Thinking? Just have to hope he does not have much sway in the Green Party going into the future.
@Luke
https://www.taxresearch.org.uk/Blog/2026/03/06/making-false-claims-about-mmt-is-not-useful/comment-page-1/#comment-1070805
I am a bear of little brain, and only at Key Stage 1 with regard to bonds, and dumber still on the mysteries of Forex long distance forecasting, but I did wonder, when a foreign trader buys a BoE bond, are they REALLY doing sums on the likely exchange rate AT MATURITY, between sterling and the currency they sold, to get the sterling to buy the bond in the first place? I’d love to see the working for that formula.
Perhaps you could help me Luke? If I sell UAE dirham to buy sterling, to buy BoE 15yr bonds, today, what is the calculation I make to work out the number of UAE dirham I will get for the sterling redemption value of my bonds when they mature in 15 years time?
Surely the only thing I am betting on is
a) whether the bond will go up or down in trading value in the meantime
b) whether I, and anyone I sell the bond to, think the UK will still exist in 15 years and will redeem the bond and pay me its face value in £s (and interest in the meantime)?
c) whether the yield on the bond NOW is attractive compared with what I could get elsewhere (say by buying some metal, or cryptocurrency off grifter Nigel Fa***e?)
d) whether I think the 2nd hand value of the bond is going up or down, and when, and could I make a profit on the deal?
I think I’d rather bet now on the winner of the Grand National in 2041 (a horse that hasn’t been bred yet), than take a punt on the AED/£ exchange rate in the same year.
As I said I’m a beginner in these things.
Very good question.