The FT included an article this morning that demonstrates very clearly why MMT thinking is so important.
This was an opinion piece by a person named Tim Leunig, who was, apparently, a senior adviser to both Sajid Javid and Rishi Sunak when they were Chancellors of the Exchequer, taking time out to do so from his work as an economic historian at the LSE.
His piece claims to provide a solution to the increasing costs of UK government borrowing. His claim is that this cost is inflated for two reasons. One is because of inflation risk, and the second is because of exchange rate risk, when maybe one-quarter of UK government bonds are owned outside the UK, which is a characteristic associated with the fact that sterling does remain a reserve currency for some trade purposes.
His bizarre suggestion is that, to overcome these supposed problems, the UK should issue bonds denominated in euros.
His claim is that we would then pay the lower interest rates now enjoyed by countries like France and Italy. At the same time, those wanting to lend the UK government money, on which source of finance he implies that the UK government is dependent, would be protected from foreign exchange risk, although, as he acknowledges, that risk would, as a consequence, pass to the UK government, and no saving in cost would arise as a result.
So many of the characteristics of arguments presented by those who claim to be macroeconomically competent, but who actually have not the slightest idea as to how money, government, the government financing cycle, and the role of monetary sovereignty work, are built into this article that it really must be used as a case study on how to get everything in macroeconomic thinking wrong.
First, Leunig very obviously believes in the household analogy. It is obvious that he believes that the government must replenish its bank accounts, either through taxation or borrowing, before it can spend. That is what this analogy claims. In doing so, he completely ignores the fact that, in a fiat currency system, which we have had in this country since 1971, (which I happen to note was the year of his birth), the government is the sole creator of our money and it can, in principle, create any sum that it requires to meet its obligations as they fall due, without constraint, although, of course, in practice physical realities do exist, limiting this ability, but not in the ways that Leunig suggests. The government is not then required to tax or borrow before spending, and does not, as a matter of fact, do so.
Second, what this also makes clear is that Leunig has no comprehension of the nature of money itself. He treats it as an exogenous variable in his thinking when, as far as the government is concerned, it is not that. As such, he reveals his inability to understand the subject of macroeconomics altogether. He thinks that the government is a microeconomic entity when it is not.
Third, he reveals how little he understands the appeal of saving with the government, the greatest benefit of which is the fact that repayment can always be guaranteed. If a government borrows in a currency other than its own, this guarantee disappears, and that would actually increase the cost of borrowing rather than reduce it, as he claims.
By implication, he would also increase the fragility of UK government finances, but I would rather suspect that this is a desired feature of his proposal rather than a limitation. A quick review of his work suggests that he would like to maintain the pretence that the government should live in fear of the markets when, in fact, there is no reason for it to be so. when it creates the money that markets desire, and the savings facility in the form of government bonds that markets cannot do without. Reading between the lines of what Leunig says is, therefore, very important. He ignores reality to seek to impose his desired constraint on the role of government in society.
Fourth, Leunig reveals his lack of understanding of a reserve currency. Just as the USA has, necessarily, to have foreign owners of its debt because the dollar acts as a reserve currency, so too must the UK government's sterling debt be held by people outside the UK because this is the way in which they can hold sterling balances in this country in the way that is essential to make our sectoral balances make sense, and to permit trade. It would appear that Leunig has no comprehension of this and would seek to undermine our economy as a consequence of not doing so.
His potentially catastrophic policy proposal would not have been made by someone who had actually used MMT insights to understand the macroeconomy, the role of government, what money is, how governments create it, how they are not dependent on borrowing, and how they can control the interest rates they pay. But he understands none of those things and so made a proposal so economically incoherent that I feel desperately sorry for those who must suffer his teaching.
Next time somebody says to you, “What difference would MMT make?”, suggest that it would save Tim Leunig the embarrassment of writing the sort of nonsense that he had published in the FT this morning and prevent anyone from having to consider this sort of economic incoherence, which supposedly passes for an economic policy proposal.
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I’ll add a 5th.
“The UK should issue bonds denominated in euros”. During WW1, Germany issued bonds to fund the war in various foreign currencies. End of war – pay back time. Problem – reparations and loss of industrial capacity (French sitting on the left bank of the Rhine). Consequence, DE gov prints more Reichmarks to payback the foreign loans – result – hyper-inflation. We can’t known why Leunig wrote what he did – but what becomes clear is that as an “economic historian @ the LSE” he does not know his history. Sad.
If the UK borrows Euro they have to be converted into GB£ before HMG can spend them. That means giving them to the BoE who would deposit them into their reserve account at the ECB. The BoE would create new GB£ and deposit those to the Consolidated Fund. So all that happens is the Euro added to our FX reserves at the cost of interest, but the BoE created pounds. In the latter process the Euro were entirely unnecessary.
Thank you
That the household analogy does not describe government finances is well evidenced:
Crisis and Myth: Why Politicians Must Stop Comparing the UK Economy to ‘Running a Household’, by Jack Mosse, in Byline Times, 1 September 2022. https://bylinetimes.com/2022/09/01/politics-has-been-captured-by-economic-fallacies/
“The household fallacy“, Roger Farmer and Pawel Zabczyk, Economics Letters, 2018, vol. 169, issue C, 83-86. Full text: http://wrap.warwick.ac.uk/102451/7/WRAP-household-fallacy-Farmer-2018.pdf
“Governments Are Nothing Like Households“, Frances Coppola, Forbes, Apr 30, 2018. https://www.forbes.com/sites/francescoppola/2018/04/30/governments-are-nothing-like-households/
Does the FT know this, or is it a deliberate ploy to mislead? FT correspondents can read as well as everyone else, suggesting that their stance is a deliberate ploy to mislead.
Follow the money.
Thanks
Just a note that your new post editor lets you format text as “lists” (bulleted and numeric), but does not display them in this format; it would be useful if the display format matched the edited format.
Can you send me an example?
This is formatting test example.
This is bullet point one
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Same with numeric points
This is bullet point one
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Original edited text: https://postimg.cc/JGhZT9Y5
I have sent to Andy Moyle
There is genuine and reasonable concern about the interest paid on government bonds. I think we do pay far to much to those who are wealthy enough to wish to deposit money with the government for safekeeping.
But why is it that nobody seems to realise or note that the government has unlimited borrowing facilities, interest free, at it’s own bank, the Bank of England?
Instead we get this kind of nonsense from people suggesting we might “borrow” in Euros. Why would we do that when we can “borrow” for free? Come to that, why do we pay so much for our “borrowing” in sterling? What’s wrong with these people?
Good questions
Tim – I often wonder why the government doesn’t just borrow from itself, interest free, so I put the question to Chat GBT which says: “The UK government could finance more of its spending directly through the Bank of England, but modern monetary systems are deliberately designed so that governments normally borrow from markets instead. Gilts exist because of monetary-policy design, inflation control, financial stability, and political credibility — not because the state literally “needs” private money in the same way a household does”.
It goes on to say the government could stop issuing gilts but the consequences could include:
higher inflation,
weaker confidence in sterling,
capital flight,
falling currency value,
and loss of central-bank credibility.
I would be interested to know how valid the above risks might be in reality? I often hear commentators say “we don’t want to spook the markets” and it just seems they have so much power and influence. I wonder whether it has to be this way or whether it comes down to decades of entrenched economic and political thinking that is very hard to dislodge?
The UK government already does, in effect, “borrow from itself” at times because the Bank of England is part of the state. Quantitative easing demonstrated that very clearly.
The key point is that a government issuing its own currency does not need private markets in order to spend. Gilts are not operationally required in the way household borrowing is required.
That said, gilts do currently serve several functions:
* they provide safe savings assets for pension funds and banks,
* they assist monetary policy operations,
* and they help manage liquidity in the financial system.
Could the government stop issuing them entirely? In theory, yes. Would that create risks? Potentially, yes.
But many of those risks are political and institutional, not mechanical.
If markets believed government spending was excessive relative to real productive capacity, then inflationary pressure and currency weakness could result. But that would depend on the state of the economy and what the spending was for.
Equally, much talk of “market confidence” reflects decades of entrenched ideology that treats financial markets as disciplinarians of elected governments. That power is not wholly imaginary, but it is also often exaggerated.
The Bank of England could always stabilise gilt markets if required. We saw exactly that after the Truss episode.
So the real issue is not whether markets have influence. They do. The issue is whether governments choose to behave as though markets are sovereign and democratic politics is subordinate to them.
That is as much a political question as an economic one.
Thanks to Richard for a lucid explanation.
I would like to add that asking an AI about such issues is likely to result in the conventional explanation. That’s because AIs are trained on much readily available text such as the web. This training material is dominated by conventional and neoliberal economics. So it is not surprising the AI gave the answers it did. Note that AIs are not intelligent, they do not reason, they know nothing about truth and falsehood. They can be useful but their comments need to be treated with caution. In this case the AI asserted the comments it most often found in its training material; it does not mean they are true.
When it comes to “sectoral balances”, my non-economic brain begins to make creaking noises (must go back and wrestle with the glossary entry!) – but even I, Homo-non economicus, still a knuckle-dragger when it comes to the finer points of high-finance, found myself asking, “if the interest rate on UK government bonds and borrowing is too high, why not reduce it?”. Isn’t it the ECB that has differing interest rates for different types of deposits? And isn’t it the institutions that need the bonds, rather than the government that needs the cash?
Oh well, I must go now, got to go out and club something over the head, or there’ll be no supper. I’ll leave high finance to Cro-Magnon man Tim, over there at the FT.
We could cut base rates
We should cut base rates
We won’t but base rates
That is the problem
We have excessive onflation as a result
That is what happens when you increase the price of money
This should be a bulleted bold italic underlined sentence.
This the second bullet
This is a numbered list
So is this.
I never see formatting in any published posts, only in my own compose box.
This is my system:
Firefox 150
Android 13
One UI 5.1
Samsung Galaxy A32 5G
I use noscript, but allowed all scripts xc Facebook for this post.
Re: https://www.taxresearch.org.uk/Blog/2026/05/11/what-happens-when-you-do-not-understand-mmt/comment-page-1/#comment-1078634
I have sent to Andy Moyle to look at..
Testing bulleted list
Testing ordered list
The issue is that WordPress is more aggressive for non-logged in users.
Trying as not logged in user
first bullet
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And ordered
first item
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It seems extremely embarrassing (to them) that the FT publishes such rubbish.
The ‘power’ of bond markets does need putting to bed at some point.
It’s taking over all mainstream decisions over what we can and can’t do leaving us stuck with no progress.
The Truss debacle has become over simplified and amplified in its relevance as to why we can’t do good things.
Richard have you done a Truss break-down video ? As to what actually happend?
I have done this many times in various ways, yes, including at the time.
Richard, have you thought of inviting some of these ‘experts’ onto a video discussion?
Love to see Faisal explaining his expertise. He seems to simply trot out the standard tripe.
I’ve lost count how many slippers I’ve thrown at him.
I think it very unlikely they would agree
I do know him
We spoke not long ago