What if the national debt is not a burden at all?
What if it is simply the nation's savings?
Any sensible analysis shows that this so-called debt is no such thing: it's just a massive savings bank operation.
That sounds like a contradiction, but it is not. In fact, understanding this point changes almost everything about how we think about government finance, public spending, austerity and economic policy.
In this video, I explain why every pound of government debt is also somebody else's financial asset. I show why government bonds are not like household debt, why they function as savings accounts with the state, and why the financial system depends upon them. Pension funds, insurance companies, banks and many of the world's largest investors all rely on UK government bonds as a safe place to hold wealth.
I also explain why governments that issue their own currency are fundamentally different from households, why the UK government cannot run out of pounds, and why the idea that Britain must one day “pay off the national debt” makes little economic sense. The national debt exists because people and institutions want somewhere secure to save their money, and the government has a duty to accept those savings.
Along the way, I challenge some of the most common myths in economics.
Are bond markets really in control of governments?
Do bond vigilantes dictate public policy?
Does rising government debt automatically create a crisis?
Or have politicians, economists and commentators misunderstood the role that government bonds actually play in a modern economy?
The answers matter because misunderstanding government debt has helped justify decades of unnecessary austerity, underinvestment, and fear about public spending. If we get the nature of government bonds wrong, we get much of economic policy wrong as well.
If the national debt is actually national savings, then the debate about government finance needs to start in a very different place.
This is the audio version:
The Debate Ammunition for this video is available here.
This is the transcript:
I'm not sure how many times I have to say this. Government bonds are not debt; they are savings held with the state. This is a simple, straightforward fact that the world needs to understand, and because it doesn't, we give the City power, and people are suffering. This misunderstanding does then have consequences, and that's why I'm worried about it.
The fact is that when anyone buys a government bond or a gilt, as we call them in the UK, they are simply placing money on deposit with the government. The government is not borrowing their money. It is holding their savings in the safest possible place anyone can choose to deposit them. The reality is that the bond is no different in principle from a national savings account, and in fact, that is what they should be called. And although they're almost universally described as debt, that description is misleading and creates unnecessary fear. Let's talk about it.
Calling government bonds ‘debt' is a category error that distorts the whole debate on this issue. All savings deposits are liabilities of whoever holds them. That is just an accounting fact. Bank deposits on a bank's balance sheet are, for example, a liability, and that is true for the government as well, but we don't say a bank is having a crisis because it owes the money back to its depositors. And I don't understand why we say the government is in crisis then, because it too owes savers' money back to them.
And government bonds are just savings instruments. They are nothing more than that. They are a liability of the government. That is indisputable. They are on the balance sheet. But if you look at a bank's balance sheet, the major liabilities on that balance sheet are made up of two sorts. One is loan finance, and that is the money that is lent to the bank to undertake its business. And the other is deposit accounts. And these are not money raised by the bank to let it undertake its business.
In fact, we know it does not need deposits to undertake its business. That is not necessary because banks can lend without ever having a deposit. So that is the fact of life.
The government also takes deposits. It does not need them, but it does provide the world with a favour by taking their money.
But there's a twist. Banks can fail, and the UK government has never once failed to repay a gilt. The simple fact is that the UK government cannot run out of money to repay its bonds, ever. The UK issues its own currency, and it has its own central bank. It can then always create the money it needs to settle bond repayments as they fall due, and it doesn't also need to borrow money as a consequence. Why does it need to borrow money when it can create its own whenever it likes?
The fact is that a currency-issuing government is not, as a result, in any way like a household or even a bank that can go broke. Treating gilts like a household mortgage is, in that case, a fundamental mistake. And yet, because of the household analogy, which means that most economists and most politicians cannot think beyond the limits of their own household, that is what we do.
So why do bonds actually exist, and what are they for? Bonds exist in the modern economy for one reason, and that is because large institutions like banks themselves, or pension funds or life assurance companies and other major financial organisations, including foreign governments, I should add, need somewhere safe to hold very large sums of money.
Now, I agree that when we were on the gold standard, governments had to borrow, but since 1971, we've been nowhere near that condition. Since then, and that's a long time ago. I was 13 at the time, and I'm now 68. Governments have created all their own money. That is, for example, how they can provide a £120,000 bank deposit guarantee, which most of us rely upon if we have any money in a bank, because we know as a consequence that bank will be able to repay us. And how do we know that? It is because we implicitly know that the government can create the money to repay us even if the bank in question cannot. So, let's not pretend we do not know that governments cannot create money. We all rely upon the fact that they do.
And that bank guarantee is of relevance when we're talking about bonds. If the government only guarantees a deposit of £120,000 in a bank and a business wishes to place £1,000,000,000 on deposit tonight, and that is what they might do, that guarantee is worthless. As a result, the government provides bonds so that the business can own those bonds as a place of safe deposit instead.
The national debt is then simply the accumulated private sector savings held with the government. In fact, around £250 billion of it at present is National Savings and Investment balances held by ordinary people.
And as a matter of fact, without bonds, the banks in the UK, our money markets in the City of London and all of our life assurance and pension funds would not be able to function. They are all critically dependent upon bonds to provide them with an essential tool for use in their commercial operations.
The national debt is then the nation's savings, nothing more and nothing less than that. It is not money lent to the government because it is always available to be repaid. You can trade it and get your money back. And the fact is that every pound of national debt represents a pound someone chose to save with the government at some point in time.
Paying off the national debt would then mean that these savings would be forced to go elsewhere, somewhere not as safe, somewhere potentially outside the UK, somewhere where risk would be much higher, somewhere that would undermine the effective operation of banks, the City money markets and our life assurance and pension companies, and although I sometimes criticise those organisations, we can't do without them.
So this idea that we must repay the national debt is absolutely absurd. And what is more, those in the City of London who quietly nod their heads when that claim is made by unknowing politicians and media commentators actually know they cannot do without government debt. We need that debt, and the government has provided it for that reason, for centuries, and without crisis.
The idea that bond vigilantes then hold the government to account is total nonsense. These people at pension funds, banks and hedge funds are not guardians of government discipline. They're simply people who trade in government debt to make a profit. That's it. Let's not pretend they are very worried about what the government does. They are only worried about the opportunity to buy and sell bonds at a profit to them. That's what they do, they don't enforce sound economic management as they see it, and no one should pretend otherwise.
But right-wing politicians, including those in the Labour Party who now live in fear of the City and most of the media, do just that. And they're all telling us lies, and I use the word advisedly because if they truly understood what bonds were, they would not be making the claims that they do.
The truth is that the Bank of England sets the base rate in this country, and as all the evidence shows, bond yields track that rate and bond dealers do not set the market rate for interest. As a consequence, when bond yields rise, meaning bond prices are low, the bank can always buy bonds in any quantity they need to bring them back down again. This is normal and is called an open market operation, and those have happened for decades, if not very much longer, and by decades, I mean in my experience since World War II. So this is something that the government does as a matter of fact. The Debt Management Office of the government usually holds a couple of hundred million pounds of government debt just for this reason, so it can manage interest rates. That is why the bond vigilante story is complete nonsense. It's the government that's in control of the market, not the City. QE during the financial crisis and during the COVID period just proved that beyond any serious doubt.
But despite all of that, politicians still talk about bonds as debt because they have never understood what bonds are. They're paranoid about repaying, when that is always going to be possible, and that ignorance has real consequences. It drives unnecessary austerity. But the fact is that those who promote these false narratives are really seeking to deliver austerity anyway. That is why they like this idea that bonds are debt and have to be repaid when none of that is true.
Never forget their true agenda. They are trying to say something that is socially useful is not. They're trying to claim we should get rid of it when they know we should not. And they're doing so so that they can cut government spending, that is their reason.
And the simple fact is that if bonds are savings, as they are, there is no burden to eliminate. There is no crisis to manage. There is only a savings facility to run well.
Every time a politician warns about bond markets, they are accepting a false premise. Getting this right, then, is not a technical issue. It is a precondition for competent government.
The fear of government bonds is manufactured. Manufactured by far-right commentators who want to crush the government, and it can be rejected. The language of debt burden and crisis is political. It is not economic.
Bonds are a savings facility that the economy depends upon. The real question is not how to reduce the size of that savings facility, but how to manage it well, and governments that understand that are never constrained by bond markets.
That's what I think. You might disagree. As usual, there's a poll down below. If you disagree, let us have your comments. We try to read as many of them as we can, and please share this video if that's what you're inclined to do or like it, because that also helps us with YouTube. Finally, if you'd like to buy us a coffee, which is a way of supporting this channel, there is a link down below for that as well, and we'll be very grateful because I'm a bit of a caffeine addict.
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If National Debt is merely the Nation’s Wealth, then that must mean that the most wealthy are responsible for the most debt?
I think I read that on average, the average adult owes £33K in total debt, so it now sounds like you are responsible for the debt of the wealthy.
Debt is not debt – it is savings. And yes, the wealthy are most responsible. But it is not an issue in itself, although wealth subsidies and inequality are.
I imagine you need a lot of caffeine to be so effusive before 7 in the morning. It’s mid-afternoon here in Tasmania
Part of the concern expressed regarding bonds is the cost of ‘servicing the debt’, the cost of interest payments that could have been spent elsewhere. Why this is not the burden it appears to be, where this money goes at present and where it COULD go instead if a different type of bond were issued are all topics you have covered elsewhere but I suggest that should be included in a part 2 video or the definitive “Everything You Think You Know About Bonds But Don’t”.
PS Should that be “Everything You Think You Know About Government Bonds But Don’t”, just in case you get confused for an S&M website.
This was recorded last Thursday…
Having just got up & just read your summary, my reaction is (1) Of course. (2) Why don’t our MPs understand that? (3) Rachel Reeves keeps going on about growth, but never chooses to invest in it. Grrrr!
Might it be that the massive majority of “our” politicians, senior state officials and the main stream media could appropriately be placed on a spectrum between the poles of “Ignorance” and “Selfishness”?
Thanks for this. It might be helpful for you to also address the frequent claim that servicing the UK’s debt is preventing investment in better public services, etc.
For example, the OBR state: “In 2025-26 we expect debt interest spending to total £111.2 billion. That would represent 8.3 per cent of total public spending and is equivalent to over 3.7 per cent of national income.”
Why worry about that?
It’s the wrong question.
It is not a debt servicing cost. The real question is, why are we rewarding the savings of the wealthy with excessive interest rates?
That’s an interesting and excellent explanation of government bonds. It should be required reading for MPs.
One problem is that bonds, a.k.a. gilts, are managed by the Debt Management Office. The very name of that part of government misrepresents it’s purpose. As I understand it, the DMO tries to ensure a minimum balance of £500million so that the government’s account with the Bank of England does not go into arrears. Again this misrepresents the purpose of the DMO; it matters not a jot if the government’s account with the BoE is “overdrawn”. The whole apparatus of bond management is named and organised as if bonds were debt not savings. And I think this matters. It is very difficult to explain to people the true function of bonds when the very terminology used misrepresents every aspect of the process.
Another problem is the specific implementation of bond sales. They are sold at auction. This means that a nominally £100 bond supposedly paying 5%, is neither sold for £100 nor pays 5%! This is extreme confusion marketing, seemingly designed to inhibit understanding. Add to that that sales of gilts are restricted to authorized institutional dealers and primary market participants. This provides a nice little, risk free earner to the city.
I usually assume ignorance or stupidity rather than malice. But the misrepresentation of gilts is so pervasive and long standing that it is either deliberate disinformation or culpable negligence. We are being lied to. It makes me angry.
The debt management office should be renamed and reorganised to reflect it’s true purpose. Bonds should be sold at a fixed rate like normal savings. And they should be available, retail, to the public. I suggest merging the DMO with National Savings and Investment under the latter name.
The insatitutional structure of the DMO is a massive problem
And I sincerely hope it won’t be reproduced in an independent Scotland.
When the time comes, I trust we will be able to call on your advice.
I came across a new to me but great old English word a few days ago – Ultracrepidarianism – the habit of giving opinions and advice on matters outside of one’s knowledge. Something I think we’re all guilty of on occasions but, reading some of this morning’s YouTube comments….. and, of course most politicians!
This cannot be said enough.
But what you also doing is refining, preparing a new theory of money that has the potential to link the citizen to their government and vice versa. It could also help to redefine democracy.
There is a lot more hoping on right now on that
I feel that you are reaching out for something – it is there, it is real and it is not imagined (but it takes, perversely imagination in these orthodox times to admit that it exists, to open the door and step through). It is based on the history and reality of the creation of what we know of as money today. It is like all ideas, a matter of finding the right words. I can feel it…….but what are the words that make it be? At the centre of it though is the word ‘life’. All this Neo-lib ‘can’t do’ bullshit is about resignation and death.
Agreed
I’ve yet to do my own digging of bonds and the truths surrounding them, but your daily podcasts have help build some understanding.
Could I ask, when we perpetually hear on the news that the price of government borrowing has gone up, is that just a change to prices of bonds in the secondary market, that has no impact on the interest rate the government pays on any primary bonds, or is the primary auction interest rate figure affected by fluctuations in the secondary market?
Can I once again thankyou for what you do, you are helping to empower people with knowledge and encouraging people that what we hear should be questioned.
Bond price changes are secondary market issues
But that b impacts the price of new primary bonds`
The plantation are all in ther Debate Ammunition links.
You say, and it makes sense, that the government is providing a favour by making safe savings available. Cynically, I ask what does the government get out of it? Does having these savings add to credibility? I’d think not to a neo-liberal cast of mind. So what is it?
It gets favour with the wealthy and the City and they think they need that
I’ve been speaking to friends about how the household analogy of a national economy is incorrect and I sense that they are nervous about rejecting it because it is so straightforward: tax in, spending out, debt which needs to be repaid. They also seem to be very wary of market confidence: they think any fall in the City’s confidence in a government will ultimately cause inflation. I was under the impression that bond prices and interest rates are set by the BoE in the primary bond market but the secondary bond market works differently. Could you maybe do a video about that, please?
I have dine this. Please read the debate ammunition linked today.
I think it could be helpful to extend the explanation to the fact that all the funds held in bonds were diverted, in the first place, from monies spent into the economy by the government and that they haven’t reclaimed (taxed back).
Given that we, as a society, instruct our government to spend on our behalf, for the benefit of all of us, then a major issue lies in the fact that government then has allowed disproportionate, and in many cases, obscene amounts of SOCIETY’S money to be captured by a few.
With greater, and more widespread, understanding we can exert more pressure on our government, which is after all our servant and not our master, to put policies in place to correct this fundamental injustice.
That is in the explanation. Please read the related download as well. It is frustrating to be told I have nit done things I have done many times.
Bonds/gilts = corporate welfare or free money for those who already have money.
All bond holders could be reimbursed by a swap back to cash for their face values and no macroeconomic effect would occur other than that the free income stream to those former bond holders would cease.
This is ridiculous. What do you want? A more crash prone economy? Crass comments just annoy me. This is high up there on that scale.
In my opinion in principle we should sell gilts with coupon equivalent to the effective interest rate of premium bonds. If you don’t want them don’t buy them.
I know such an idea needs refinement eg wrt taxation etc but the principle holds.
We should abandon the full funding rule which was a monetarist invention brought in by Howe and Lawson during the 80s.
It is debt in every sense of the word. If a company borrows £1m through a bond issuance and a pension fund buys that bond, you can’t say the company isn’t in debt because the publics pension fund bought the bond. The debt is real and smoke and mirrors won’t hide it.
Do you ever engage your brain? You clearly have not here.
My argument was reasonable and deserved a reply, falling back on insults is something Donald Trump does.
I used editorial judgement and decided you were trolling
Mark, you’re comparing apples with elephants. A company is not a government. A company cannot create it’s own money. So it has to borrow from other people, just as you or I have to borrow to pay for our homes. But our government can and does create money. All the money we use in our economy.
It may be that I have missed an earlier post or posts before I discoverd this series. Over the years I have seen various documentaries and ‘Look at Life’ style trivia which take us into the vaults of the BoE to show the stacks of gleaming gold bars. What, if any, function or purpose do all these gold bars have in the UK economy; we are not on the gold standard, so does the BoE provide a safe deposit for the owners of gold, or just own it and sits on the stuff because it doesn’t know what to do with it?
Most of the gold you see in the Bank of England’s vaults is not actually owned by the UK government.
The Bank acts as a custodian for a great deal of gold owned by foreign central banks, governments and commercial institutions. In other words, one of its roles is providing very secure storage.
The UK government does own some gold as part of its foreign exchange reserves, but far less than many people imagine. Since sterling is no longer linked to gold, those reserves play no essential role in supporting the currency.
So what purpose does gold serve today?
First, it is a reserve asset. Central banks hold it because it is widely accepted internationally and is not the liability of another government.
Second, it can act as a form of insurance in times of extreme financial or geopolitical stress.
Third, there is a large element of history and tradition involved. Central bankers tend to be conservative people, and gold has occupied a special place in monetary systems for centuries.
From an MMT perspective, however, gold is not what gives sterling its value. The value of sterling comes from the UK state’s ability to impose taxes payable in pounds and from the productive capacity of the UK economy.
If every gold bar disappeared from the Bank of England tomorrow, the government would still be able to spend pounds, collect taxes and settle its obligations. The monetary system would continue to function.
That is why I tend to think gold’s economic significance is often exaggerated. It is an asset, and sometimes a useful one, but it is not the foundation of the modern monetary system.
This is a superb article. “Bonds are a savings facility that the economy depends upon. The real question is not how to reduce the size of that savings facility, but how to manage it well” is a quote that could help many people begin to see things differently. It is a very good point that more than 10% of ‘government debt’ is held in prize bonds, something most of us do not think of as government debt.
Some thoughts and questions, which may have already been addressed elsewhere I appreciate.
I think we have to accept that paying debt interest is a real burden. Perhaps it could be lower than it is, that is a separate thing (though obviously important and a recent Times article pointed out that Japan has kept interest rates significantly lower that the UK).
“Bond dealers do not set the market rate for interest” – is that not what happened in the Liz Truss episode?
I think we need to realise that no individual politician can take a lead here. Imagine if Andy Burnham were to declare that he had discovered MMT and was going to apply it to make life better for everyone. He could be destroyed by the mainstream media. What we can realistically hope for is that he takes the idea on board and along with perhaps one or major media commentators starts a dialogue across politics and media. Widespread discussion and agreement has to precede implementation.
To that end and perhaps risking being patronising I suggest those of us inclined to write letters consider writing to the columnists in the financial pages, some of whom provide contact details, pointing out ‘alternative’ thinking and asking them to use their influence to start a proper discussion/debate.