Friday, 28 March 2014

National debt should be called “private sector savings”.

At last – a letter in the Financial Times spells out what advocates of Modern Monetary Theory have been saying for years, namely that government debts might as well be called “private sector savings”.
I also advocated the change of name here a year or two ago.
I particularly like this passage from the letter: “A frequent question is: “Look at the size of the debt – how on earth are they going to finance it?” One could just as easily ask: “Look at all those savings in Japan – where on earth are they going to invest that?”
The letter also advocates what it calls “sectoral flow of funds analysis”: another tool that MMTers are keen on.
In fact money deposited at the UK’s “National Savings and Investments”, which is a sort of publicly owned savings bank, is all invested in government debt. Now if you ask people if a rise in sums deposited at NSI is beneficial, all else equal, they tend to answer “yes”. I know, because I’ve asked several people.
But if you ask them whether a rise in government debt is beneficial, all else equal, they almost invariably say “no”.


  1. Here is another way to think of government debt:

    Government debt is owned by a few individuals. Those individuals are increasingly better off when the government debt increases.

    Government debt is an obligation on every citizen which must be paid in the future. Before you automatically say "No, it does not need to be paid off.", consider that an increase in debt is an increase in the total amount of financial property available in the economy. Only those who hold the debt are beneficiaries, the rest will feel increased competition from financial dilution of their own financial assets.

    Now you can say "But it is never paid back." You are correct, The damage done to non-holders of the new debt are is permanent.

    1. Hi Tom,

      A thoughtful point, but I think I can answer it. Here goes…

      When government increases the debt, the process is as follows. Govt borrows from £X from the cash rich and gives them bonds (Gilts in the UK) worth £X in return. Govt then spends that £X into the economy. So more or less the entire population is better off. Or in MMT parlance, the entire population’s “net financial assets rise”. (Incidentally I see Adair Turner has adopted that bit of MMT parlance.)

      At that stage, most people will have an increased stock of base money. Govt may subsequently induce commercial banks to part with their increased stock of base money (aka reserves) in exchange for Gilts. But that doesn’t alter the fact that the bulk of the population has an increased stock of govt liabilities.

      Thus I don’t accept that the less well off are much harmed by increased govt debt. Of course if the size of the debt is EXCESSIVE, and hence a relatively high rate of interest has to be paid to induce debt holders to continue holding it, then certainly that would harm the less well off: they’d have to pay taxes to fund the interest paid to debt holders.

      Incidentally Simon Wren-Lewis did a post on a closely related point to which a left a long response. See:


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