It will never be necessary to reduce the level of the national debt!


The above graph shows the UK national debt is now much lower than it has been in the 1940s relative to GDP, but the analysis of an “unorthodox post-Keynesian” economist, Warren Mosler in his book “Seven Deadly Innocent Frauds of Economic Policy”, who once stood to be US President shows that a central bank (such as the Bank of England or US Federal Reserve) doesn’t need to pay back the national debt to anybody who has lent money to it even when gilts/bonds mature, because the money remains at the bank in a different account!

I first publish an article by Martin Odoni (hstorm) that I largely agreed with, after having big disagreements in comments of my post on MoneyWeek’s “The End of Britain” video/letter, and then added my own analysis, correcting the odd mistake…

UPDATE (31/10/13): This article is misleading, mainly because Warren Mosler’s analysis does not take inflation seriously (see these 1-star reviews at Amazon). I have now written a review of that book and published it on this blog at


Britain – a Self Harming Economy 

By Martin Odoni

We, by which I mean the Western world and further, have gone through over five years of the worst financial crisis since before World War II, so we are told. The crisis has been cynically blamed on widescale ‘over-spending’ on welfare, accusations of public sector self-indulgence that I and many others have debunked elsewhere. In truth, the damage was done by ridiculous risk-taking in the financial services sector, chiefly in the United States of America, but by no means limited to there.

But irrespective of whose fault it is that the financial crisis happened, the simple fact is that it is still here, and one of the consequences for the UK was that the last Labour Government, headed up by Gordon Brown, chose to hand the banks a series of enormous bail-outs of public money to prevent the whole financial system collapsing. This more or less quadrupled the National Debt owed by the British Public Sector in the blinking of an eye. The exact debt the country owes depends very much on which calculation, and indeed which definition, you use. By the kindest calculation i.e. the one that leaves out all private sector debts, including ones that have public sector overlaps, the country owes roughly £1.4 trillion. By other, more realistic calculations, it is somewhere between £5 trillion and £6 trillion.

Since the present Coalition Government came to power, it has been in the grip of what seems a frenzied obsession with paying down the National Debt as the only way it can think of to end the crisis. To do this, it thinks it would need to dismantle the structural Deficit i.e. put a complete stop to the amount it has to borrow each year to meet its spending commitments.

This is not quite the case though. While there is no doubt that the National Debt is too high – it damages the country’s credit rating and also can put an unhappy strain on international relations – it is certainly not the out-of-control runaway locomotive that the Government seems convinced it is. Indeed, it’s not exactly a problem. It contains an absurdity, for sure, and one day it might well evolve into a real problem, should economies in certain other countries collapse, but as things stand, it really is not a big deal at all.

The National Public Sector Debt is largely just the sum total credit belonging to non-Government agencies (which we shall call ‘the creditors’, although a lot of them are exporters instead) in deposit accounts within the Bank Of England.

What happens is that, when the UK Government purchases goods or services from a foreign country, it sets up a deposit account (yes, just like the sort of deposit account you get in a regular High Street Bank) within the Bank Of England in the creditor’s name, and credits that account for the full cost of the goods purchased. Whilst the money is in the deposit account, it can’t be used for purchasing anything (again, just like in a normal High Street Bank deposit account), but it receives a high rate of interest. This account is sometimes called a ‘Gilt’, a ‘Bond’, or a ‘Security’.

Now, when the deposit account ‘matures’ i.e. reaches the date when it needs to be paid back, all the Government has to do is to transfer the whole sum into a current account in the creditor’s name, again within the Bank Of England. (Yes, yet again it works in exactly the same way as a current account on the High Street; low interest rates, if any, but the sums can now be used for making payments.) Then the Government simply has to forward credit notes for the total to the creditor. That credit note will allow the creditor to claim any British goods available for sale up to that total, without having to pay any money for them.

Once that total is off the creditor’s deposit account and into the current account, the debt is officially paid off. That’s all that most of the National Debt really is, just a combined total of credit notes that haven’t been printed yet, because the respective deposits haven’t matured. As soon as one of these credit notes is printed, its sum is no longer part of the Public Sector Debt.

And that’s it. That’s all that happens.

This is happening with trade deal after trade deal every single day. But new deals are also being struck every single day, which is one of the reasons why the Debt never seems to go down.

And the most important point, before anyone asks, is this; no, the credit notes cannot be cashed in by the creditors. The creditors cannot demand money in their place, or that they be paid off in gold, or some-such; the pound-sterling is not signed up to the gold-standard, it is a non-convertible currency.

The upshot of this is that the British Government doesn’t have to send its creditors any actual money. All it has to do is just give a guarantee to let the creditors claim British-owned sales goods to the value of the amount owed – in other words, it has to give them the credit notes. What the creditor chooses to do with a credit note once received is really up to him. He can leave it in limbo, he can use it to open another deposit account within the Bank Of England to increase the interest further, he can genuinely use it to claim sales goods (in the unlikely event that he can find any available on the British market worth having), or he can even trade it to someone else. But those are pretty much the only options the creditor will have. There is near enough nothing that he can do to get the money itself.

There is a point of bad honour in this, in that the UK has effectively taken vast quantities of goods from countless trading partners without really paying for them (“What else is new?” cries most of the Commonwealth). But looked at in purely practical terms, there is no real need, as things presently stand, for the UK to pay off the National Debt at all. The creditors would have known the risks when they sold their goods to the UK (and indeed to other countries) in the first place – that they were never going to receive any actual money for the goods, only credit to their agreed value that they could eventually purchase British-owned market goods with in return. Such a trade is merely an exchange-in-waiting. From the moment the value of the sum is transferred to a Bank Of England current account, the creditor can use it to make purchases on the British market, therefore he has received the ‘purchasing power’ the deal entitles him to as though the credit were real money, so the debt is classed as ‘paid off’.

Even if the creditors find there is never anything on the British market that they wish to buy, there is every possibility that at least some of them will continue trading with the UK, depending mainly on which country he is from. For instance, countries that are ‘export-driven’ (see below), such as China, are more or less compelled to keep selling to the UK – and yes, even more so to the USA – even though there is seldom anything they can do with the credits they receive. This is because if they do not keep exporting, their own economies will collapse; they will only have their own markets to sell to (and maybe a few countries with much smaller markets of their own), but if they have little or no internal demand because of inadequate pay-rates among the general population, which is usually the case, most of their goods will go unsold, and the industries will have to stop retailing or producing, causing surges in unemployment. This is why the Chinese Government currently holds an ever-growing mountain of over $2 trillion at the US Federal Reserve, and hardly ever uses any of it – because it needs to keep exporting to the US to keep its heavy-manufacturing base turning over, but can hardly ever find anything it can use from the US markets to take back in return.

Because Britain has little native manufacturing industry, it has to keep importing, as it would struggle to meet its population’s own needs if imports stopped. (This is quite different from the position of the USA, which still has a large native industrial base that can ‘kick in’ very quickly if necessary.) So for the sake of trading relationships, it would be best for the UK if it can get the Debt down quite substantially in real terms – say by going back to manufacturing goods again that creditors would actually want to buy – especially in case circumstances in exporting countries were to change. Say the Chinese economy did collapse, then the British would have to look elsewhere for many of the imports it needs. Not all prospective trading partners will be ‘export-driven’ in the same way as China, in which case the bad real-terms record of the UK as a trading partner would come back to haunt the negotiations – the new prospective exporter might say, “You people never produce anything that I would want to buy, so what use are your credit notes going to be to me? Pay me in dollars or euros, or something!” But one way or another, this has almost nothing to do with the methods the Coalition Government are trying to employ to reduce the Debt anyway.

The Public Sector Debt is not really a crisis after all, and it’s not even an issue to any great extent, at least not yet, and it won’t be until a major export partner collapses. But the problem is that nobody in Parliament seems to be aware of how the National Debt really works, of how little pressure there really is to pay it off, or of how simply (and automatically) it is paid. All they do is see the huge numbers involved, nearly have a heart attack, and respond by taking a hatchet to necessary services in order to cut costs. In-so-doing, they cause economic slowdowns that reduce tax yields and so make the borrowing requirement grow even bigger.

The Government’s whole approach is quite pointless, and it has caused much needless suffering for many people, to no achievable end. We are still lumbered with a crisis that is in large part a phantom, even though its effects are very real.

That the crisis is ongoing after half a decade is a testament, not to national self-indulgence, but to national self-harm.




I apologise profusely, not just because of “being accusatory, and further appointing [myself] the referee of the discussion, which is a very childish way to behave” and accept it was a glitch in WordPress software that was responsible for you not getting a notification that I had posted it on my own website.

But that’s not the only reason to apologise. I was just getting to the end of writing a new comment, based on the whole of your article this time, which I really thought would be compelling evidence that you had got it wrong, when I discovered a little detail in Warren Mosler’s book which convinced me that you and he were basically correct all along! Well done on winning the argument!

Rather than rewriting my comment, which would spoil the flow, I will keep the text as I had originally written it, with me starting off convinced you’d got it wrong.

I have just followed the link to another blog post by Martin Odoni in the first paragraph – “accusations of public sector self-indulgence that I and many others have debunked elsewhere”. It actually contains good left-wing arguments, but does admit that he has a “fairly basic understanding of economics”. Martin is obviously well-intentioned, but he does agree with (at least most of) the ideas of an “unorthodox post-Keynesian” economist Warren Mosler who thinks so much of himself that he stood to be President of the USA!

I admit to also having a fairly basic understanding of economics, but when I had my brainwave of not paying back the national debt (after a socialist revolution), I realised I needed to find out who is actually lending the money. I found out that governments (or central banks) issue “bonds” ( “of limited term to maturity” via a “bond market”. In the UK, bonds are generally referred to as “gilts” ( According to that page: “The data collected by the British Office for National Statistics reveal that about two-thirds of all UK gilts are held by insurance companies and pension funds. Since 2009 large quantities of gilts have been created and repurchased by the Bank of England under its policy of quantitative easing.”

According to, “The British Government finances its debt by issuing Gilts, or Government securities. These securities are the simplest form of government bond and make up the largest share of British Government debt. A conventional gilt is a bond issued by the British Government which pays the holder a fixed cash payment (or coupon) every six months until maturity, at which point the holder receives their final coupon payment and the return of the principal.” Note that the principal is returned when the gilt matures, rather than being placed into an account with the Bank of England that can only be used for certain purposes, which would be a massive disincentive for anyone (or any company/financial institution) to invest in them.

Warren Mosler, who Martin Odoni relies upon for much of his economic knowledge, said, in “Seven Deadly Innocent Frauds of Economic Policy” (, “Right now, China is holding some $2 trillion of U.S. Treasury securities. So what do we do when they mature and it’s time to pay China back? We remove those dollars from their savings account at the Fed and add them to their checking account at the Fed, and wait for them to say what, if anything, they might want to do next.”

Well, I’ve read (and searched in case I missed it) the above Wikipedia pages, plus, and, and there are no uses of “current account”, “savings account” or “checking account” (which is presumably the US term for current account) apart from the unrelated “current-account [trade] deficits” in the latter page.


“If it wants anything else – cars, boats, real estate, other currencies – it has to buy them at market prices from a willing seller who wants dollar deposits in return.”

It is all crystal clear now: when the bondholder’s bond/gilt matures, he/she can trade it on the decentralised Forex (foreign exchange) market for other currencies! [Maybe Martin missed this detail of Warren’s analysis, rather than goods or services.] All it requires is a buyer for dollars. So Martin and Warren are correct that the national debt of the US, UK or actually any other country can keep increasing indefinitely without ever needing to be paid back! There may of course be inflation and a change in currency exchange rates, though, of course.

Martin got it wrong above in saying that the pound is “a non-convertible currency”. According to, a nonconvertible currency means:

“A currency that may not be converted into another currency on the foreign exchange market, or that may be converted only in limited amounts. Some countries limit convertibility to prevent citizens from making bad investment decisions in, say, a country experiencing hyperinflation, while a few communist countries issue nonconvertible currencies to protect their citizens from capitalist influences. A nonconvertible currency is generally traded only on the black market. It is also called a blocked currency or an inconvertible currency.”

One thought on “It will never be necessary to reduce the level of the national debt!

  1. I have reread Warren Mosler’s book (reading about all of the “seven deadly innocent frauds” – it then goes on to self-promotion in his election campaign which I haven’t bothered with) and done further research into others’ opinions of it, and it is clear that it has a massive flaw in not taking inflation seriously. There is also the slight of hand in suggesting that there is no way an investor can take money out of the US Federal Reserve (Fed) when he/she can, as long as he/she can find someone to swap with on the markets, and this includes foreign currencies (the words “foreign exchange” and its abbreviation “Forex” are omitted from the entire book, as a search of the PDF file reveals, probably deliberately to imply investors are stuck with dollars).

    The dollar being the world’s reserve currency, with some other countries’ currencies “pegged” to it, may make it less susceptible to fluctuations in inflation and exchange rates than with other currencies.

    Additionally, Martin Odoni (hstorm) assumed that the Bank of England behaves precisely the same way the Federal Reserve does. According to, “The Federal Reserve System has both private and public components, and was designed to serve the interests of both the general public and private bankers. The result is a structure that is considered unique among central banks. It is also unusual in that an entity outside of the central bank, namely the United States Department of the Treasury, creates the currency used.”

    I’m not an expert in either capitalist (bourgeois) or Marxist economics. Even though I did regard myself as a Marxist in my time in the Militant Tendency/Militant Labour/Socialist Party from 1990-98, I only read two Marxist texts on the subject – “Wage Labour and Capital” and “Wages, Price and Profit” – I have all three volumes of “Capital” (“Das Kapital” in German) but never had the time or inclination to try to read them. The first of these made a lot of sense, but seemed to be out-of-date in not considering advertising and brand loyalty. I couldn’t get my head round the second at all. Oh, I did read Lenin’s “Imperialism, the highest stage of capitalism”, which predicted the tendency towards monopolisation, which ironically Thatcher’s advertising guru Maurice Saatchi recently announced on Newsnight that he agreed with Marxists as far as this was concerned (talking about the Big Six energy companies), but that his Centre for Policy Studies would try to come up with one big idea to get David Cameron re-elected as prime minister.

    There are still arguments today about whether the key Marxist prediction of “the tendency for the rate of profit to fall” is actually correct, but it is clear that that was not the cause of the 2007/8 credit crunch. It was due to bankers creating AAA-rated complex “derivatives” that very few people understood but were based on US “subprime” mortgages that poor people couldn’t afford – and when the house prices crashed, there was a massive crisis.

    So what conclusions can we come to about the stability of British capitalism nowadays? Are we really the seventh richest country in the world (and what about the increasing disparities between rich and poor)? What will happen when quantitative easing ends? [Some economists predicted big rises in inflation/interest rates when it started; some predict similar things when it ends; have they a clue what they are talking about!?] What about the British housing bubble bursting (made more likely by the extension of the ConDems’ “Help to Buy” scheme)? What about impact from the Eurozone (especially if some foreign banks go under that owe British banks money)? What if there is a US debt default? What about the big fines British banks are having to pay to customers/businesses? Would high interest rates (MoneyWeek’s “End of Britain” suggests 5%) mean that UK plc goes bankrupt, with ensuing social and economic chaos and great potential for socialist revolution!?

    I’ll leave these as questions to be considered by others. Feedback would be greatly appreciated – preferably on my new post

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