This is the third in this series of infographics on the basics of economics.

The first, on economics, has been published, as has that on microeconomics.

The series will continue with:

• Political economy

• The household analogy

• And more.

AI use.

In some way or other, I used AI in the creation of this post. I disclose how I use that technology here.

AI use. In some way or other, I used AI in the creation of this post. I disclose how I use that technology here. The thinking is all mine.

This is the first in a series of infographics which will continue with:

• Microecnomics

• Macroeconomics

• Political economy

• The household analogy

• And more.

AI use.

In some way or other, I used AI in the creation of this post, but overall, not a lot. I disclose how I use that technology here.

As I noted on Monday evening, he might have spent time in the Treasury under Tony Blair and Gordon Brown, but since then he has shown little interest in the issue until he quit as defence secretary over funding.

That absence of thought matters. I described him in that same article as “a man to perpetuate the status quo.” That’s what people who have not thought do: they note the rules, and work within them.

Now we know that this is what Healey, backed by Burnham, who reiterated his commitment to fiscal rules yesterday, will do. That is because he made a speech at the Treasury yesterday in which, according to the FT:

He declared that “fiscal control is the first duty of any Chancellor”.

He then added:

“It is the fiscal credibility that gets us economic stability, growth and national security.”

The statement attracted remarkably little comment. It appeared well down in the FT article. It was noted as if it were simply a statement of fact. It is, however, nothing of the sort. In those few words, Healy revealed his assumptions about how economies work, and every one of those assumptions is open to challenge, not least because they both define much of modern British economic policy, and explain why it has failed.

The opening claim was that fiscal control is the first duty of a Chancellor. The obvious question to ask is, why? That is not a rhetorical question. Instead, it is because I think that a Chancellor’s first responsibility is to create a prosperous, resilient and fair economy.

After all, why should controlling the government’s finances be considered more important than maintaining full employment? Or ensuring the delivery of decent public services? Or tackling climate change? Or investing in the country’s future?

Managing the public finances is one of the tools available to achieve those objectives, but it cannot be the objective itself. Confusing an instrument of delivery with the purpose of activity has become one of the defining characteristics of Treasury thinking. And that confusion has consequences, because once fiscal control becomes the goal rather than the means, every other ambition the government might have is subordinated to it. To open your description of the job you plan to do with a category error is quite something, but Healey managed it.

Healey then went on to claim that fiscal credibility creates economic stability. Again, the question is why? There is good reason for asking. Economic instability has many causes. Of late, the UK has endured banking crises, energy shocks, Brexit, supply chain disruption and pandemics. None of these arose because government borrowing was too high. None arose because a fiscal rule designed to deliver fiscal credibility had failed. That is because economic stability does not depend on such rules. It does, instead, depend upon secure energy supplies, functioning financial markets focused on delivering working capital for the economy and not speculative finance, productive investment, resilient infrastructure, effective public institutions and social cohesion. Fiscal policy contributes to that stability, but it most definitely does not determine it. Once more, in that case, Healey’s claim was wrong.

Then Healey went on to argue that fiscal credibility produces growth. Behind that simple statement lies an entire economic philosophy.

The assumption is that if government demonstrates fiscal restraint, financial markets become more confident. Interest rates then remain lower, and private businesses invest more as a result. The claim is that growth then follows. This is simply another version of what is called the Treasury View. It rests upon the belief that government borrowing crowds out private investment.

The evidence to support this claim is not encouraging.

That is partly because this View is based on the belief that there is a finite pool of money in the economy and the government competes for use of that limited resource with the private sector. That might have had some basis in truth a century ago when the country used the Gold Standard to limit the money supply, but it does nothing remotely like that now. Instead, as we know, banks do not lend because someone else has first deposited savings with them. They create money whenever they make loans. The stock of loanable funds is not fixed. Businesses do not invest because the government has borrowed a little less. They invest because they expect customers to buy what they produce. Reducing public borrowing does not conjure those customers into existence.

The whole intellectual foundation for this View is based on an outdated falsehood, in turn based on the mistaken belief once held by the UK Treasury that government activity must be constrained by limiting the money supply, in turn based on the mistaken belief that individuals always know best how to spend and invest because there are no communal goals or public goods

The reality is the opposite of the beliefs implicit in the Treasury View. Public investment frequently does create the customers that the private sector seeks. Investment in transport, education, housing, research, healthcare and energy systems expands productive capacity while increasing demand. It creates profitable opportunities that encourage private firms to invest alongside the public sector. Far from crowding private investment out, government investment often crowds it in.

This is not just theory. Britain has already tested the Treasury View, which is the foundation of austerity. Following the financial crisis, governments pursued fiscal restraint for much of the period after 2010. If the orthodox theory were correct, business investment should have surged as government stepped back. Instead, productivity stagnated. Business investment remained weak. Infrastructure deteriorated. Economic growth disappointed year after year. The promised private-sector renaissance never appeared.

So, let me come to Healey’s final claim, which is, in many ways, the most curious. He said fiscal credibility delivers national security.

The implication seems to be that stronger growth enables higher defence spending. But even if that is true, it does not explain why defence spending is so often treated as though it should simply be a fixed percentage of GDP.

If GDP rises because house prices increase, creating more transaction income, or because the City of London enjoys another profitable year, does Britain suddenly require more warships? And if GDP falls during a recession, are we somehow less safe than we were the week before?

National security should begin with strategy. What threats does Britain face? What capabilities are required to meet those threats? What investment is needed in defence, intelligence, cyber security, energy resilience, food security, scientific research, infrastructure and public health? Only after answering those questions should government decide what resources are required. Strategy should determine expenditure. A ratio derived from GDP is merely a convenient accounting convention, and they are rarely of any use to anyone but managers with limited imagination and little strategic ability.

The relationship between growth and security also runs in the opposite direction to that implied by Healey. Investment in resilient infrastructure strengthens the economy. Investment in education raises productivity. Investment in research creates new industries. Investment in secure energy systems reduces vulnerability while supporting economic activity. Security often creates growth. Growth does not automatically create security.

The real significance of Healey’s statement is therefore not just what it says about one politician, important as that is right now. It reveals how deeply embedded Treasury thinking has become within British politics. Ideas that are, in reality, contestable economic theories are now presented as unquestionable common sense.

Fiscal control comes first. Fiscal credibility creates growth. Growth creates security. Defence should be measured as a share of GDP. Each proposition reflects a political choice about how we should organise our economy, but none of them does in any way represents an economic law, let alone a fact.

That matters, most especially because Britain desperately needs a different conversation, and Healey’s suggestion represents a brazen attempt to close that opportunity down.

The question we should be asking is not whether governments are sufficiently fiscally disciplined, but whether they are creating the conditions in which people can flourish.

Success should not be measured by compliance with arbitrary financial rules. It should be judged by whether governments deliver decent housing, secure energy, productive investment, high-quality public services, environmental sustainability and genuine economic resilience.

Those are the outcomes that matter. Fiscal policy should serve them. A Chancellor who begins by treating fiscal control as an end in itself has, before a single decision is made, already confused the map for the territory, and that always leads to economic and political failure, a situation with which we have become all too familiar.

I had some hopes for Andy Burnham. John Healey has shattered them. More of the same is the same hard gruel he is going to supply.

One of the biggest stories of the past decade has been worsening mental health among young adults. Countries across the globe have seen a marked rise in reports and diagnoses of conditions such as anxiety, autism and ADHD and a steep rise in the share who report a disability.

I want to be clear that this is a phenomenon I take very seriously. The rise in young people’s psychological distress is certainly real.

I agree with him. This issue is real. Where, however, I part company with him is in his explanation of why that distress is real.

John Burn-Murdoch is a statistician. As a result, his article was principally about measurement.

He asked whether rates of mental illness have really increased, and then wondered whether we have simply become more willing to describe ordinary human distress in the language of mental health. In particular, he constructed an argument that evolved around this suggestion:

Young people and progressives have become much more likely to interpret day-to-day challenges as mental health problems

As he noted:

This shift in how people conceptualise mental health could be seen as a positive — the hard-won result of years of campaigning to reduce stigma and raise awareness and inclusivity — but if it is happening more among some groups than others, it will distort our sense of what is really getting worse and for whom.

To not be too unsubtle about it, the implication was that the issue of worsening mental health among young adults is not real, and is actually the result of young left-wingers moaning about society, and that this issue should therefore be ignored.

That is an incredibly convenient idea for the neoliberal worldview of the Financial Times, and for neoliberal governments, but I think just about everything about the suggestion is wrong.

Looking beyond diagnosis

Reduced stigma, better diagnosis and greater awareness have undoubtedly changed the way many people understand their experiences. But I think that to suggest that this is the reason why increased reporting of mental ill health by some in society is happening risks overlooking a much bigger development.

Over the last thirty years, biology has changed in ways that have profound implications for how we think about society. Those changes have received remarkably little attention outside medicine, but I think they should matter just as much to economists, politicians and anyone interested in public policy.

The reason is straightforward. Modern biology increasingly suggests that society does not merely shape our opinions, opportunities or behaviour. It shapes our bodies. I accept that this is, to many, a remarkable claim, but it is becoming increasingly difficult to ignore.

The evidence we already have

We know, for example, that people living in poverty die younger than those who are better off. We also know that they spend far fewer years in good health. There is not simply a gap between the richest and the poorest. There is a social gradient. As deprivation increases, healthy life expectancy declines.

We also know that autistic people have substantially lower average life expectancy than the population as a whole. The reasons are complex, but they include high levels of chronic stress, poorer access to healthcare, higher rates of mental illness and living in environments that frequently fail to accommodate autistic ways of thinking.

We also know that people exposed to racism experience poorer health.

We know that the legacies of colonialism continue to shape health outcomes across societies.

We know that insecure work, poor housing and persistent financial insecurity all damage health.

All of these are well-established observations.

What is much less clear is why so many apparently different experiences should produce such similar outcomes.

We normally explain each of them separately. My suggestion is that perhaps we should not. Perhaps they have something much more fundamental in common.

Allostasis and the biology of adaptation

The biological idea that first made me think this might be possible is called allostasis. It is not a complicated concept. It simply describes the way living organisms survive by continually adapting to the changing world around them.

As we all know, nothing alive exists in a stable environment. Every living thing must continually respond and adapt to changing circumstances. Human beings are no exception. Our brains and bodies are constantly anticipating change and adjusting to it. Most of that work happens without us ever noticing. Allostasis happens all the time, and most of us do not notice. But the fact is that this continual adaptation has a cost.

If the demands placed upon us are occasional, that cost is small, and we have a chance to embrace the change during periods of recovery.

If they become continuous, the body rarely, if ever, returns to its resting state. The physiological burden is in that case both continuous and cumulative.

Biologists call that accumulated burden allostatic load. That issue of allostatic load might, I think, turn out to be one of the most important concepts that economists have never considered, both for healthcare and for broader questions of political economy. What is more, if that suggestion is right, then it has implications that stretch well beyond medicine.

That is because it suggests that we should stop thinking of health as something that simply happens to individuals. We should instead begin by asking what demands society places on the people who live within it, what the consequences of those demands might be, and how they might be managed.

Two kinds of adaptation

That is because not all adaptations are the same, even though the process of adaptation is inherent in the human condition. We all know that every person has to adapt because that is what life requires. Illness, ageing, bereavement and uncertainty are unavoidable. They all require adaptation. I think of this as the first differential of adaptation. It is universal. We all experience it, although not necessarily in the same way.

Societies, however, create another form of adaptation altogether.

This is not imposed by nature. It is imposed by the way we organise our institutions. I think of this as the second differential of adaptation. This second differential demands additional work from some people because society has been designed to better suit the needs of some than others.

Wealth and the burden of adaptation

That second differential is distributed very unequally. Take wealth as an example. We know it is deeply unequally distributed, and we tend to think that this means that people with greater wealth can buy more goods and services than those without it. That is true, but I suspect that is not its greatest benefit.

The reality is that wealth reduces uncertainty. In the process, it does something else that may be equally significant: it reduces the number of decisions that must be made simply to keep life functioning.

If something breaks, a wealthy person can simply have it repaired or replaced. If travel arrangements fail, alternatives can be found. If income is interrupted, there are savings to draw upon. Problems remain, because they always will, but they rarely threaten the stability of everyday life for a wealthy person. In other words, the amount of adaptation required of them is reduced.

Now compare this with life on a low income. Every unexpected event requires another calculation. Can this bill be paid? What has to be postponed? How is work reached if the car breaks down? Can the rent still be met? Will there be enough money left for food? None of those questions is asked only once. In many households across the UK, and around the world, they recur week after week, month after month, and year after year.

The effort involved is not simply financial. It is cognitive, emotional and physiological. The human body of those facing these issues is continually responding to uncertainty that never quite disappears. Their allostatic load is high, and rarely, if ever, subject to respite.

That, I think, is why poverty is so damaging. It is not simply the absence of money that creates its health impact on those who suffer it. It is the continual adaptive work that poverty demands that creates that outcome.

Neurodivergence and continual adaptation

The same way of thinking may also help explain other observed phenomena.

For example, why do autistic people, and maybe those with other neurodivergent conditions, have poorer health outcomes than neurotypical people?

The evidence is now quite strong that autistic people have significantly shorter average life expectancy than the population as a whole. Various explanations are offered. Healthcare is often less accessible for neurodivergent people. Mental ill health is more common. Suicide rates are higher. There are associated medical conditions that also matter.

But I wonder whether another factor has been underestimated. The fact is that many autistic people spend much of every day adapting to environments that were not designed with them in mind. Social conventions that many neurotypical people grasp without conscious thought require considerable effort to negotiate for neurodivergent people just to get through the day. Sensory environments that others barely notice may be exhausting. Workplaces often reward behaviours that have little to do with competence and much more to do with conformity to neurotypical expectations.

The effort involved in continually interpreting, adjusting, and masking is immense, but the issue is not autism itself; it is the continual demand for adaptation.

Institutions, inequality and adaptive work

The same point can be made about ADHD, disability - both physical and mental - more generally, racism, sexism and the legacy of colonialism. Each creates circumstances in which some people must continually adapt to the demands of institutions that others take for granted.

That is because these institutions - and I am talking about most of the institutions in our society when I make this generalisation - are not neutral. They embody assumptions about who they were designed for. Those who fit those assumptions experience relatively little friction when engaging with them. Those who do not have continually to work out how to fit in. That is adaptive work that imposes considerable strain. It is also work that is rarely recognised.

Racism provides an obvious example. Those who experience it are required continually to judge situations that others pass through without thought. They have to assess whether they are safe, whether they will be treated fairly, whether prejudice will affect the outcome, and whether they need to modify their behaviour or expectations. That continual assessment has a cost.

The same can be said of colonialism. Colonial rule did not merely extract resources. It also imposed systems of law, education, administration and culture that privileged some people while marginalising others. Formal empires may have disappeared, but many of those institutional structures remain. Those whose cultures and histories were subordinated still bear much more of the burden of adaptation than those for whom those institutions were originally designed.

My suggestion is that when there is common ground - and there may be much more of that than we realise - we should stop seeing these as separate issues.

Perhaps poverty, racism, colonialism, disability and neurodivergence are all different expressions of the same underlying process.

Each requires some people to undertake much more continual adaptation than others.

If that is true, then inequality is not simply about who has more income or wealth. It is also about who carries the biological costs of adapting to the society that we have collectively created.

Rethinking economics through biology

Where does this leave economics? I think this realisation demands that economics ask very different questions from those that have dominated the subject for the last century.

Economics has largely been built around the allocation of scarce resources. It has become preoccupied with markets, prices, productivity, efficiency and growth. All of those have their place, but they also share an implicit assumption. They assume that the purpose of the economy is to produce more.

I have never believed that. The purpose of an economy is not to maximise GDP. GDP is a measure of activity. It is not a measure of success. As I now argue, the purpose of an economy is to create the conditions in which people can flourish.

If that is true, then biology may help us understand what flourishing actually means.

What a good society does

In this context, a good society is not one that eliminates adaptation. That would be impossible because life itself demands continual adaptation. That is the inevitable consequence of the second law of thermodynamics. Instead, a good society is one that reduces unnecessary adaptation.

That means it creates security where insecurity serves no purpose.

It creates certainty where uncertainty achieves nothing.

And it creates institutions that adapt to the people who use them, rather than requiring people to continually adapt to institutions.

That is a very different way of thinking about public policy.

Housing policy should reduce insecurity.

Employment law should reduce insecurity.

Education should recognise that human beings learn differently, rather than assuming that everyone should conform to a single model.

Healthcare should not merely treat the consequences of chronic stress. It should seek to prevent the conditions that give rise to it.

Social security should reduce uncertainty because uncertainty itself carries biological costs.

Tax, public services and adaptive costs

Tax has a role as well. I have argued for years that taxation does not fund government spending. It cannot do so when government creates the currency that it spends. Tax exists for other reasons. It helps manage inflation. It changes the distribution of income and wealth. It discourages harmful activity and encourages beneficial behaviour. Perhaps we should now add something else. Maybe a well-designed tax system changes the distribution of adaptive costs. It should limit the concentration of privilege that allows some people to avoid many of the burdens of everyday life while others carry them disproportionately.

Good public services also reduce adaptive costs. They should remove uncertainty from everyday life. Knowing that healthcare, education, care, housing, and transport will be available means society absorbs risks that individuals would otherwise have to bear alone. That is one of the things a civilised society should do.

Measuring what really matters

This way of thinking also changes how we measure success. We have become obsessed with GDP because we assume that if output increases then society must be improving. That assumption always seemed of dubious value. It now seems even more doubtful.

The reality is that we now know an economy may grow while simultaneously increasing insecurity, shortening healthy life expectancy, and imposing ever-greater adaptive burdens on millions of people. That is what we are seeing, day in and day out now. This is why so many people living in the UK, as well as in many other countries, are now so aggrieved by the situations that they face. They are, quite literally, being worn out by their allostatic load, and can take it no more.

If so, growth tells us remarkably little, and we should instead ask different questions.

How much unnecessary uncertainty does this society create?

How much unnecessary adaptation does it require?

How unevenly are those adaptive costs distributed?

Do our institutions reduce the burden of living together or add to it?

Those seem to me to be questions that economists should have been asking all along.

A framework for adaptive political economy

I stress, I do not suggest that what I have outlined here is an established scientific theory. It is not. But I do think it is a framework for political economy that deserves exploration, especially when it appears capable of explaining a remarkable range of observations we usually treat as unrelated.

We know poorer people die younger, and that people with autism die younger, whilst trends in healthy life expectancy closely follow social deprivation. Racism does undoubtedly damage health, as does the legacy of colonialism, and insecure work, as does poor housing.

We normally try to explain each of these separately, but perhaps they are not separate. Perhaps they all have one thing in common. Perhaps they all increase the amount of adaptation that some people must undertake simply to participate in the societies in which they live.

If that is true, then inequality is not simply an unequal distribution of income or wealth. It is also an unequal distribution of the biological costs of adaptation, with the bias in that distribution being towards high income, high wealth, neurotypicality, and being endogenously white.

That changes how we think about political economy. Politics then becomes the process by which societies decide how those costs of adaptation are distributed, whilst economics becomes the study of how institutions either increase or reduce them. Accounting becomes the means by which we identify who ultimately bears the cost of adaptation and health becomes one of the principal ways in which we observe its effects.

In that case, I suggest that biology may provide a foundation for political economy that economics has largely ignored. For a century or more, economists have borrowed their metaphors from physics. They have sought equilibrium, optimisation, and mechanical efficiency. Perhaps they have been looking in the wrong place because economies are not machines. They are living systems inhabited by living people. Their purpose should be to enable those people to live long, healthy, creative and fulfilling lives.

If they fail to do that then, whatever else they may achieve, they are failing.

I tentatively call this way of thinking ‘adaptive political economy’, but the underlying idea is straightforward. Every human being must adapt because that is what life requires. The question for political economy is whether the society we create unnecessarily adds to that burden or helps reduce it, and my suggestion is that the first duty of any society should be to reduce the unnecessary biological costs that it imposes upon the people who live within it.

That, I think, is the question that John Burn-Murdoch’s article unexpectedly led me to ask. It is also the question that I now think economics should begin with.

Acknowledgement

Saying that, I must acknowledge one last thing. This article emerged out of a morning of conversation with Jacqueline. The idea of allostatic burden came from her. I adapted it in response to an FT article to which we both took objection for offering simplistic and potentially deeply misleading conclusions with regard to the causes of mental ill health, which we think might well have sound biological roots.

The idea that we can break the power of financial institutions by letting people save their money directly with the state, indicating in the process the things that they wish the government to invest in on their behalf to create better communities in which they can live, and which will leave a legacy for those who might follow them, turned out to be something that had very real appeal to many people, I think because it could provide a new financial architecture for this country, and others around the world.

The power of the City of London does not come from anything it creates, because it almost entirely undertakes speculative activity, which drains resources from the real economy and fails to provide funds for investment in it. Simultaneously, it seeks to hold the government to ransom on behalf of wealth. If we can break that relationship, and put in its place a new relationship between people, the government, and the communities in which people live, we can establish an entirely new way of thinking about the economy, politics, and well-being. That is what motivates the ideas in this piece.

The supposed need for increased UK defence spending - although on what no one seems to know - and the claim by Keir Starmer that borrowing must not be used to fund it - although, no doubt, he has no logic to back that claim - is giving rise to discussion on whether Andy Burnham might revive the 1940s idea of War Bonds.

This does, of course, create a wide range of issues for those who understand that borrowing cannot fund government spending, because that is always funded by money created by the Bank of England on the government’s instruction, within the limits of an approved budget. However, it is important to note the distinction between spending and investment. Capital spending is not the same as revenue spending, and, in fact, it can be funded with savings.

That is not just an economically correct statement; it is, given the gross misuse of most savings at present, either as dormant funds in bank accounts, or for the purposes of financial speculation of no benefit (and potential harm) to society, a redirection of funds towards social purpose that any government should be promoting is, it would seem to me, to be a matter of political and social priority. The issue of government-backed bonds for this purpose does, in that case, make economic and social sense.

As a result, our imaginations can be freed. Instead of asking how government can persuade financial institutions to lend it money, we can ask a much more interesting question: what government-facilitated public purposes might real people choose to support with their savings?

I think we should be broad-minded about this. The need for investment in our society is so strong that a very wide range of purposes come to mind. In my opinion, all of them should be on the agenda of any government with a social purpose and the goal of releasing potential at its heart. Included in that number are all of the following.

Defence bonds

If the government really believes the UK faces an existential threat, it should let people choose to save in support of national defence.

Unlike taxation, this creates engagement. People could literally say, “Part of my savings is helping protect the country.” That is a choice people should be allowed to make.

NHS bonds

People should be allowed to place savings with the government knowing they were associated with long-term investment in:

• hospitals;

• medical equipment;

• digital systems to support healthcare;

• medical research; and

• staff training.

That is not because the NHS needs the money before it can spend, but because people want a safe place to save while expressing a social value.

Care bonds

Britain desperately needs social care reform. Care bonds could support investment in:

• care homes;

• community care;

• disabled services; and

• support for unpaid carers.

Many older people, in particular, might welcome the symbolism.

Housing bonds

Housing bonds could be linked to investment in:

• affordable homes;

• housing renovation;

• energy efficiency, and

• community regeneration.

Again, this is not because the government needs the money to spend, but because many savers would rather know their savings were supporting decent housing than speculative property bubbles.

Climate bonds

Climate bonds could become a mainstream savings product, associated with investment in:

• flood defences;

• insulation;

• renewable energy;

• electricity grids;

• rewilding; and

• coastal protection.

This is exactly the sort of intergenerational investment many pension savers might welcome.

Children’s future bonds

Parents and grandparents might find these bonds particularly attractive if they support investment in:

• schools;

• universities;

• apprenticeships;

• early years provision;

• libraries; and

• youth services.

Saving, in this case, becomes a statement of hope and of intergenerational solidarity.

Community bonds

Suppose local authorities could issue national government-guaranteed bonds. They could support investment in:

• swimming pools;

• theatres;

• libraries;

• parks;

• sports centres; and

• local transport.

People would know exactly which place they want to benefit. That could transform local democracy.

Infrastructure bonds

These might not be glamorous, but they could be absolutely essential by supporting investment in:

• water;

• sewerage systems;

• railways;

• tramways;

• electricity generation, storage and transmission; and

• digital infrastructure.

These are the backbone of the economy. This is what pensions should fund.

Science and innovation bonds

Britain has extraordinary research capacity, but it does not deliver on that potential. These bonds could support:

• universities;

• research institutes;

• advanced manufacturing;

• artificial intelligence;

• biotechnology;

• pharmaceuticals; and

• quantum computing.

Many people might willingly save to strengthen these.

Resilience bonds

These would be designed to prepare Britain for future shocks through investment in:

• emergency food systems;

• pandemic preparation;

• strategic manufacturing;

• energy security;

• cybersecurity; and

• water resilience.

Instead of responding to crises after they happen, people could save towards preventing them.

Nature bonds

Few people might mention bonds of this sort, but I think they might be especially important and popular in a country that takes conservation and the environment very seriously. These bonds would support the restoration and maintenance of:

• rivers;

• peatlands;

• forests;

• national parks;

• other wildlife habitats;

• biodiversity; and

• soils.

These are investments whose return is measured in resilience rather than immediate financial gain.

Cultural bonds

These bonds would support investment in:

• museums;

• the arts;

• music;

• theatre and other performance spaces;

• minority languages and culture;

• film; and

• historic buildings.

Britain consistently underinvests in its cultural capital despite it being one of its greatest strengths.

Skills bonds

These bonds would support lifelong education and investment in

• retraining;

• adult education;

• vocational skills;

• professional development; and

• lifelong learning.

Every technological revolution requires continuous investment in people’s skills.

Regional development bonds

Each English region, as well as Scotland, Wales and Northern Ireland, could have its own bond issuing programme supporting investment in:

• local infrastructure;

• business development;

• housing;

• transport;

• education; and

• community facilities.

People often identify with the country or region where they live long before they identify with Whitehall. Why not let them save accordingly?

Intergenerational bonds

These bonds might, perhaps, create the most imaginative possibilities. They would have very long maturities, of perhaps forty or fifty years. They could be bought by grandparents and be redeemed when their grandchildren reach adulthood, or even later. Inheritance tax incentives could be attached to them. They would be invested to represent:

• long-term stewardship;

• intergenerational responsibility; and

• confidence in Britain’s future.

The funds might be bid for by localities.

In themselves they might be a financial expression of stewardship.

The biggest idea

Suggesting these bonds require imagination. So, too will their use. So, instead of naming bonds after sectors, why not name them after social purposes, such as:

• Health Bonds;

• Education Bonds;

• Future Generations Bonds;

• Security Bonds;

• Nature Bonds;

• Community Bonds; and

• Housing Bonds.

Each might be identical financially, meaning they would have:

• the same maturity;

• the same interest rate;

• the same government guarantee, and

• the ability to wrap the bond in an ISA or pension wrapper, as I have explained many times before, including in the Taxing Wealth Report, chapters 25 and 26.

The difference would be:

• the public purpose to which funds were applied;

• the reporting supplied;

• the saver’s preference for the use of their savings, and

• tax relief for saving would now deliver public as well as private benefit

That matters because economics is about relationships. Saving would cease to be merely the accumulation of wealth. They would, instead, become an exercise in building participation in creating a better society for everyone to share.

The final step

The next obvious step would be to cease calling these government-backed bonds debt, precisely because they are not debt in the ordinary sense. They are voluntary savings deposited with the state. They might then be called:

• National Savings;

• Public Investment Accounts;

• National Future Accounts;

• Public Purpose Savings;

• Citizen Investment Accounts; or

• National Partnership Accounts.

Those with a marketing bent could probably do better than any of those; my point is that naming them properly to reflect what they really are would matter.

The accounting would be unchanged as a result. The economics would be unchanged, except that the quantum of funds available to the government might increase and expectations surrounding them might change, but most importantly, the politics would be transformed.

People would stop asking, “How much does the government owe?”

Instead they would ask, “What have we chosen to save for together?”

That is a different conversation. Government bonds are not a financing necessity for a currency-issuing government. They are safe savings instruments, useful tools of monetary management where appropriate and, perhaps most importantly, a way of creating a relationship between private wealth and public purpose. Once we recognise that, there is no reason for them to be generic. They can become expressions of the kind of society people wish to help build.

I have had a kidney stone for more than a week now. Some of that time, I have been rolling around in agony. When pain relief got control, I had just had the time to think.

So I decided it was time to write an explanation of what I think economics really is, in a series of if/then statements: 32 in all.

This is the result. It’s not that long. It might be the best thing I have ever written. And you might disagree. But I think it’s worth a read.

What is economics?

1. If every human being has needs that cannot be met alone, then every human being depends upon relationships with others.

2. If people depend upon one another to survive and flourish, then every society must organise those relationships.

3. If economics studies how societies organise themselves, then economics is the study of how societies manage the relationships on which life depends.

4. If every person possesses unique but finite potential, then society should seek to create relationships that help each person realise that potential.

5. If people flourish when they can realise their potential, then the purpose of an economy is to create the conditions in which this is possible.

6. If all human life depends upon the natural world, then every economy depends upon its relationship with nature.

7. If the natural world provides the energy, materials and ecological systems on which life depends, then no economy can exist independently of nature.

8. If the people, relationships, knowledge, institutions, infrastructure and natural systems within a society embody the capacity to meet need and create future wellbeing, then that capacity is its societal capital.

9. If societal capital is the total productive, caring, creative and regenerative capacity embodied within a society, then the purpose of economic activity is to create, maintain, renew and wisely use that capital.

10. If production transforms societal capital into goods and services that meet needs, then production is a means of realising societal capital, not an end in itself.

11. If unmet need persists despite society possessing sufficient societal capital to meet it, then society has failed to manage the relationship between societal capital and wellbeing.

12. If care develops, maintains and restores the people and relationships on which every society depends, then care is one of the principal means by which societal capital is created and renewed.

13. If education, healthcare, environmental stewardship, scientific discovery, culture and democratic institutions increase society’s future capacity to meet needs, then they are investments in societal capital.

14. If people specialise in different activities, then they become increasingly dependent upon one another.

15. If people depend upon one another, then exchange becomes one way of managing those relationships.

16. If exchange takes place across many people and over time, then society benefits from a common system for recording obligations, claims and settlement.

17. If money performs that function, then money is an accounting system for managing economic relationships.

18. If money records claims upon societal capital but is not itself societal capital, then money is not the economy.

19. If finance exists to allocate and manage claims upon societal capital, then finance exists to support the development and use of the real economy, not to become an end in itself.

20. If relationships within society are varied and complex, then they require many different institutions to manage them.

21. If families, communities, businesses, companies, co-operatives, markets, charities and governments each manage different relationships, then each has an essential economic role in creating, protecting or mobilising societal capital.

22. If markets organise only some relationships well, and neglect others such as care, public goods and long-term stewardship, then markets alone cannot sustain societal capital.

23. If governments can help society create, protect and mobilise societal capital where markets cannot, then government is an essential economic institution.

24. If every institution shapes power as well as resources, then economics must ask who controls societal capital, who benefits from it and who is excluded from it.

25. If today’s decisions determine tomorrow’s societal capital, then economics must manage relationships across time as well as between people.

26. If the real limits on an economy are the quantity, quality and resilience of its societal capital, then these are the real constraints on economic activity.

27. If money is an accounting system for managing claims upon societal capital, then money can never be the ultimate constraint on an economy.

28. If money can never be the ultimate constraint on an economy, then the first question in economics should never be, “Where will the money come from?”, but instead, “Do we have, or can we create and mobilise, the societal capital needed to achieve our goal?”

29. If inflation occurs when financial claims exceed society’s capacity to mobilise its societal capital, then the task of economic policy is to develop and manage societal capital whilst ensuring that financial claims remain consistent with the economy’s real capacity.

30. If inequality concentrates control over societal capital and limits access to its benefits, then reducing inequality is an economic necessity.

31. If measures such as GDP record flows of economic activity but ignore changes in societal capital, then they cannot by themselves define economic success.

32. If the purpose of an economy is to create, maintain, renew and wisely use societal capital so that everyone can realise as much of their finite potential as possible within planetary limits, then economics is the study of how societies manage the relationships that make this possible.

A resulting accounting framework for economics

This understanding of economics also suggests a different accounting framework.

Conventional economics is primarily concerned with measuring flows of money, income and production. It pays much less attention to the underlying capacity that those flows create, maintain, restore or destroy.

This framework begins with a different question. It asks how society’s capacity to meet needs and enable people to realise their potential changes through time.

That capacity is what I have called societal capital. It is the productive, caring, creative and regenerative capacity embodied in the people, relationships, institutions and natural systems of a society.

The purpose of economic accounting is therefore to explain changes in societal capital.

Every accounting period begins with an opening stock of societal capital.

Economic activity then changes that stock.

Some activities create new societal capital. Others maintain existing societal capital. Others consume or deplete it. The task of accounting is to record those changes faithfully.

The simplest accounting identity is therefore:

Opening societal capital

+ creation of societal capital

− consumption of societal capital

= Closing societal capital.

As understanding improves, that identity can be refined by distinguishing between creation, maintenance, depletion and changes in the assessed quality or resilience of societal capital. The purpose is not to make accounting more complicated. It is to describe economic reality more faithfully.

Money forms part of this accounting framework, but only a part.

Money records financial claims upon societal capital and helps coordinate the relationships through which societal capital is created, maintained and used. It is therefore a subset of the accounting framework for economics. It is neither the accounting framework itself nor the economy that the framework seeks to describe.

The central question for economics, therefore, becomes:

Has society strengthened or weakened its societal capital?

If societal capital has increased, society has enhanced its future capacity to meet needs and enable people to realise their potential.

If societal capital has merely been maintained, that capacity has at least been preserved.

If societal capital has been depleted, society has become poorer, whatever its GDP, profits, wealth or financial assets may suggest.

Seen in this way, economics is not primarily about money. It is about accounting for the capacity of society to flourish.

Why this matters

Thinking about economics in this way changes almost everything.

It changes what we measure. Instead of concentrating on money, deficits, debt, or GDP alone, we begin by asking whether society is creating, maintaining, and renewing the capacity on which future well-being depends.

It changes what we value. Care, education, public health, environmental stewardship, trust, democratic institutions and social cohesion are no longer treated as secondary concerns. They become central because they are among the principal means by which societal capital is created and sustained.

It changes the questions we ask of government. Instead of asking whether there is enough money to achieve a goal, we ask whether society possesses, or can develop, the societal capital required to achieve it. Money becomes a tool for organising economic activity, not the measure of whether that activity is possible.

Most importantly, it changes what economics is for. Economics ceases to be the study of markets, prices or financial optimisation. It becomes the study of how societies create, maintain, govern and renew the societal capital upon which all future well-being depends.

That, I suggest, is a better economics because it begins with reality rather than abstraction, with people rather than money, with relationships rather than markets, and with the future capacity of society rather than the financial transactions of the present.

The article in question was staggering in the scale of its apparent arrogance and ignorance. It was either arrogant because it promoted the use of a fallacy, in the form of the household analogy, to explain this supposed debt crisis, which does not exist, or ignorant because it clearly believes that it does. She must also, if she is not arrogant, believe that the household analogy with regard to government finances is correct, and it is wrong.

My response was first published on my blog this morning, both because of the significance of this issue, and the fact that what that article makes clear is that the OECD, governments, and major economic commentators have decided to deliberately use the household analogy as a basis for explaining government finances when they must all know that the household analogy is false. As such, it seems that they are actively involved in a process of deliberate economic misinformation to constrain the role of democratic governments, deny people their democratic choices, and prevent the supply of essential services on which people are dependent, and will be increasingly so in the event of a forthcoming economic crisis, which I am as certain as I can be will now happen.

For all these reasons, I share the article here.

Gillian Tett, the Provost of King’s College, Cambridge, where once John Maynard Keynes was both a fellow and a professor, and which was his academic base throughout his life, has written an article in the Financial Times, where she is a member of the editorial board, suggesting that countries around the world should be “alarmed about their nations’ surging debt”.

Tett’s article was written in response to a recent OECD publication on “Empowering Public Understanding of Public Finances”. This, like much of what the OECD produces on economics, as I noted in a recent Substack article, is highly neoliberal in its outlook and analysis, which is, of course, exactly why Gillian Tett has quoted it, because it feeds straight into her debt paranoia. As she broadly correctly notes when seeking to summarise it:

Governments are being asked to manage long-term fiscal risks in an environment where public trust and people’s willingness to tolerate trade-offs are low.

From there, Tett adopts the approach I explained in my article on normal people a week ago. She assumes a right to proclaim what is good for such people as a member of the educated elite. Her logic for doing so appears to be based on that promoted by the Rockefeller Foundation in the early twentieth century, when some of the richest people in the world thought that they had the right to set the economic and social policies that governments should follow, a logic we are still familiar with today because it still remains that of the world’s elite from Musk, to Blair, and beyoind.

Tett then appears to assume that her readers in the Financial Times are, like her, a part of that elite, as she sets out to tell the world what they must learn so that they might understand just what it is that they should accept with regard to government spending, taxation, and debt. She does so by agreeing with the OECD, noting that in the report she refers to:

[T]he OECD argues that governments need to take four steps:

• demystify the budget for politicians;

• communicate clearly with the public;

• give citizens a proper voice in fiscal policy; and

• co-opt civic bodies to be fiscal advocates.

What is the goal? It is, based upon what I can only presume, from the construction of her article, to be her apparent attendance at an OECD seminar on this issue, that finance ministers should use social media platforms, such as Instagram, to explain debt and embrace simple metaphors, such as a household budget, to explain fiscal choices. As she notes:

Margaret Thatcher famously deployed this analogy, and it was used again this week on the BBC by Sir Howard Davies, former chief UK financial regulator.

There is, of course, one simple problem with that. It is that the household analogy is wrong (as the linked glossary entry explains). Worse than that, it is profoundly misleading and mischaracterises the nature and function of money altogether as far as a government is concerned, as well as the role of tax in the government funding cycle, and the nature and purpose of government debt, as well as government bonds.

It is as if Tett’s great desire, as a member of the financial elite, is to mislead, because that is what she is suggesting be done.

And she suggests the threat should come with menaces attached. As she proclaims:

[T]he sad reality is that humans are highly skilled at selectively ignoring bad news. So the OECD’s ideas seem unlikely to work without another ingredient: bond market pressure. After all, voters and politicians in Portugal, for example, only embraced radical debt-cutting measures after a market crisis.

So perhaps investors should now pray that something like a “goldilocks” crunch emerges — a wave of bond market turmoil that is just big enough to show voters why fiscal consolidation is needed, but not so big that it craters the financial system and economy.

She added:

Is it cynical to wish for such a jolt? Yes. But [this may be] be the only way to concentrate minds — ideally before we face a truly devastating debt explosion.

Let me, then, summarise Tett’s debt-paranoid approach. First, without showing the slightest sign that she understands what so-called government debt is, or why it has risen, she is saying that governments must:

Keep people in the dark and feed them economic bullshit about a household analogy that is meant to mislead, and does.

Second, she is saying:

The beatings will continue until people agree that the eleite are right.

And third, she is saying:

Things might turn to shit if the elite do not get their way, and just to prove the point, they’ll turn them to shit anyway by shrinking the state, just to prove they were right.

Either way, shit is what you’ll get.

That’s your lot.

Accept it.

Rarely have I seen anything I think so arrogant, brazen, or self-deluded, as well as just wrong, in the pages of the FT. But at least we know that the household analogy is being used quite deliberately as an economic narrative, and I can only presume Tett knows it is a falsehood designed to constrain government, in which case we know exactly where she, and the OECD, stand politically.

To support this post and to explain the household analogy, a new post in the ‘View On’ series has been published this morning. It includes an extensive reading list on this topic.

Failure to resolve the energy crisis in the Middle East would plunge the world into a “dark scenario” of tumbling growth and sharply higher interest rates, the OECD has warned.

The Paris-based organisation said a “prolonged disruption” to energy flows that lasts into the second half of 2027 would cut global growth to 2.1 per cent this year and just 1.8 per cent next year.

Such rates are “extremely low outside of major global recessions such as the global financial crisis or the pandemic”, the OECD warned, adding that major central banks such as the US Federal Reserve would need to respond by lifting interest rates at least a half-point to curtail inflation.

To be blunt, nothing about this comment from the OECD makes any sense whatsoever.

If there is going to be, as the OECD implies is possible, a “prolonged disruption” to energy flows that lasts into the second half of 2027, that will be because the Strait of Hormuz will remain closed. If so, 20% of total global oil supplies might be disrupted, and a greater proportion of global gas supplies might be as well. In addition, the raw materials for around 30% of global fertiliser supplies will be disrupted, as will supplies of helium, sulphuric acid, and other key raw materials for a great many industrial processes, including the creation of the chips necessary for AI and its further development, including the construction of data centres.

If that were to happen, to suggest that the only impact on the world would be a cut in its global growth rate from 2.1% to 1.8%, which is an insignificant, almost immaterial and statistically almost irrelevant difference, is absolutely ridiculous.

Steve Keen published data supporting his claim that there has historically been a direct, almost linear link between growth in oil use and growth in worldwide GDP. For every 1% increase in global oil consumption, there has been a 1% increase in GDP. Let me be clear: we do not know whether this will work in reverse, and, as yet, the disruptions that have taken place have not resulted in a reduction in oil consumption because oil reserves have been released to cover supply shortfalls.

However, if Steve is even partly right, the probability of a major recession in the situation for which the OECD is preparing a forecast is not a minor or inconsequential risk; it is near a full-blown certainty, and the scale of that decline in global economic activity will not be measured in minor parts of a per cent, but in terms of significant multiples of percentage points. What we will actually be looking at is a downturn on a scale unprecedented in the lives of most people now on this planet, for which we appear to be making no adequate preparation, largely because organisations like the OECD are acting in connivance with world political leaders to pretend that this eventuality will not happen.

This is, in my opinion, an act of gross irresponsibility. To pretend that we are not facing a catastrophe that will have its greatest impact on the world’s most vulnerable people is scandalous. And those will suffer the most because they will have the least capacity to survive in a neoliberal world that looks as if it will manage the shortfall we are to face by price-based rationing rather than ethical needs-based rationing.

I now find the scale of this irresponsibility almost impossible to comprehend. There are already reports of major problems with food supplies in parts of Southeast Asia because, even if supplies of rice can reach Indonesia from places like Vietnam, fuel shortages within the country are impeding effective distribution. This, in itself, is indicative of the massive disruptions to supply chains that are going to become a feature of the world economy as this year progresses, none of which will go away in 2027, particularly because disruption to food supplies this year will have a significant impact upon the availability of seeds in 2027.

To be blunt, the OECD is not just wrong in that case; it is callously wrong. The consequences of the disruption we face will not be measured by fluctuations in GDP alone. The biggest impact will be the number of unnecessary deaths that will arise because the world will fail to manage the distribution of adequate energy and food supplies to those in greatest need due to a lack of preparedness, to which the OERCD is contributing.

It is already clear that this will be the result of the deception being deliberately carried out by profoundly neoliberal organisations and governments. They are still pretending that markets will be able to overcome the absolute shortages in supply that will exist at unprecedented levels, creating physical supply shocks that will test the world’s empathy and logistical capacity in ways never yet known.

When Trump and Netanyahu went to war against Iran, what we did not know was that they were beginning what might be one of the greatest human disasters in history. That the OECD cannot see this just proves how unfit for purpose they are.

Their reassurances also remind me of those we heard early in 2008, when we were told there was no risk of a global financial crisis. Some of us realised that a crisis was imminent at the time and said so. Steve and I were amongst those who did.

But let me put that in context. A global financial crisis was just that: it was about finance. This time, we are talking about a crisis in the supply of the basic essentials necessary for people to survive. In that case, the scale of the impending catastrophe is entirely different, yet those in positions of responsibility are still pretending that we have nothing to worry about.

They were wrong in 2008. They are wrong now. One day, I hope they will be held accountable for what is about to happen because the charge sheet is going to be very lengthy indeed.

I have now assembled those posts into a fairly lengthy e-book, which is available for download as a PDF from my blog site, here.

Like all our PDFs, this is available free of charge, although you will be asked if you want to make a donation, and, if you are so inclined, I admit that I would be grateful. Running my blog, YouTube, Substack, and related operations involves costs of more than £75,000 a year, and donations make a significant contribution towards covering those costs.

Why publish this now?

One reason is that the work to assemble this collection is complete.

The second is that it marks the 50th anniversary of my starting my undergraduate studies.

It is also because this weekend I am celebrating 20 years of blogging. My blog was called Tax Research UK back in 2006, and has been Funding the Future since 2023, but all the material ever published is still available on the same site.

Since 2006, I have written most days and have done so continuously for the last few years. In that time, I have published more than 25,300 blog posts, which is an average of more than 3.4 per day, 365 days a year, for two decades.

Our research, when thinking about how to mark this anniversary, suggested that I might be amongst a small handful of people in the world who have ever done anything like that, particularly when the content in question is not about aggregating other people’s material but is, almost invariably, my own comment or opinion.

I have recently added this Substack to my repertoire to provide an opportunity for longer-form posts and to enjoy a different style of commentary. However, for posts that mostly provide commentary on the day’s political and economic events, my blog continues at Funding the Future.

In the meantime, please do download a copy of the book. It features a combination of my economic heroes and villains, as well as a range of other people, not all of them economists, from Jesus of Nazareth to John Rawls and Erwin Schrödinger, all of whom have, in some way, influenced my thinking about economics.

John began by explaining how his environmental awareness was shaped by childhood experience in rural Jersey. He grew up on what would now probably be called a low-input, organic farm, next door to a highly commercial strawberry farm. What he saw there horrified him. The use of pesticides and herbicides was not incidental; it was, as he put it, almost a form of warfare against the environment. A later school exchange to a high-input arable farm in France reinforced the same lesson. He saw soil being damaged, worms killed, birds poisoned, and land treated as if it had no life of its own. That was one of the formative experiences that made him an activist.

He also paid tribute to a teacher, Brian Tricker, who redirected him away from a narrow scientific education and towards the humanities. That mattered because, as John said, the humanities taught him to engage with ideas, absorb arguments, and think about how the world might be changed. That was not just career advice. It shaped the course of his life.

My own route was different, but there were echoes. I grew up on the edge of Ipswich, close to farmland, and with countryside as part of my childhood experience. But the moment that shaped my thinking came from an unexpected source: an editorial in a parish magazine written by the local vicar. He argued that we lived on a finite planet and had a duty to steward its resources. That idea lodged in my mind. It then connected with the books I read as a sixth-former, including The Limits to Growth, E. F. Schumacher, and E. J. Mishan’s The Costs of Economic Growth. The lesson was clear: the pursuit of growth without limit was dangerous.

John rightly challenged the idea that this was a new discovery of the 1960s and 1970s. He reminded me that earlier moral philosophers and classical economists had recognised the finiteness of land and natural resources. Adam Smith, Marx, Ruskin, Robert Owen, and even Malthus, in his problematic way, all understood that economic life was embedded in society and nature. The tragedy, as John argued, is that neoclassical economics abandoned that tradition. It turned economics into a supposedly quantitative science, and anything that could not be counted was treated as an externality.

That was also my experience at university. I arrived expecting economics to address the questions that had already begun to concern me: finite resources, environmental constraint, and the limits of growth. Instead, those issues were almost entirely absent. The subject I was taught had no meaningful place for the environment. That failure left me angry then, and it still matters now.

John’s path through agricultural economics was more useful. Because agricultural economics still recognised land, labour and capital as distinct factors of production, it gave him a framework for thinking about world trade, food systems, the global South, and the destructive consequences of policies such as the Common Agricultural Policy. He recalled writing a paper criticising that policy because it subsidised overproduction, encouraged high-input farming, and created absurd outcomes such as butter mountains and wine lakes.

That led us into one of the central themes of the discussion: the conflict between microeconomic efficiency and macroeconomic absurdity. I recalled an audit client in Suffolk who made money by building and operating sheds on former airfields to store surplus wheat produced under the Common Agricultural Policy. At the micro level, this was profitable. At the macro level, it was nonsense. Land, labour, capital, food and public money were being used to sustain a system that generated waste.

John extended that point by noting that some of this surplus was then dumped on countries in the global South, often presented as aid. In reality, it undermined local farmers by collapsing prices and destroying livelihoods. What was claimed to be generosity was often another form of economic imperialism.

That took us to Oxfam, food aid, and the politics of agency. Both of us were involved in Oxfam-related work in the 1980s, and both of us came to understand that emergency food aid might be necessary in a crisis, but it could not be a development policy. The real issue was whether people had the power and resources to shape their own futures. Charity that denies agency is not justice.

John then explained how Susan Strange helped crystallise the issue for him. She argued that the real question was not why rich countries should give aid to poor countries, but why resources were disappearing from those countries in the first place. That meant looking at tax havens, flight capital, illicit financial flows, and the failure to tax multinational companies. In other words, the route from environmental concern to tax justice was not accidental. It was part of the same political economy.

That is the point I think matters most. Tax justice, environmental justice, and economic justice are not separate subjects. They are all about power. They are all about who controls resources, who gets the returns, who bears the costs, and who is denied agency. They are also about what economics chooses to see and what it chooses to ignore.

John and I ended by agreeing that this conversation had only scratched the surface. We touched on neoliberalism, the obsession with growth at any cost, the destruction of environmental safeguards, and the way economics has detached itself from moral philosophy. But there is much more to discuss, including the meaning of capital, the failures of accounting, the relationship between finance and ecology, and the ways in which neoliberal politics still tries to defend a model that is clearly failing humanity and the planet alike.

What struck me most, however, was something simpler. Both of us came to these issues through lived experience. We saw farming, land, pollution, waste and economic absurdity for ourselves. We did not begin with abstract models. We began with the real world. Perhaps that is precisely what economics has forgotten how to do.

Richard Murphy’s view is almost the precise opposite. For him, government bonds are fundamentally a savings facility, not a borrowing mechanism; they are a necessary feature of a well-functioning economy, not a mark of failure; and the narrative of fear that surrounds them, sustained above all by the mythology of bond vigilantes, is a political weapon used to enforce austerity and constrain democratic government.

What Government Bonds Actually Are

Richard Murphy’s starting point is definitional, and it is a departure from conventional framing. A government bond - in the UK context, a gilt - is not, in any meaningful economic sense, a loan that the government takes out and must repay. It is a deposit account.

When an institution or individual buys a government bond, they are placing money on deposit with the government for a fixed period at a fixed rate of interest. At the end of that period, the deposit is returned, usually by issuing a new bond to replace the old one.

The process is not fundamentally different from holding money in a National Savings account or a premium bond. The label “debt”, while technically accurate in an accounting sense in that all bank deposits are liabilities of the entities with which they are saved, creates a false impression of vulnerability and obligation that does not reflect the underlying economic reality.

This reframing matters enormously. The UK government issues its own currency and has its own central bank. It cannot be forced to default on debt denominated in sterling. If bonds fall due, the government can always ensure the central bank creates the reserves necessary to settle them.

That is not a controversial claim. The Debt Management Office’s own description of gilts notes that the British government has never failed to make interest or principal payments as they fall due. The implication, which Richard draws out at length, is that the entire apparatus of alarm around government bond issuance rests on a category error, which is the result of treating a deposit with a currency-issuing sovereign government as though it were a sum lent to a household or a business that might genuinely run out of money.

Why Governments Issue Bonds — and Why They Do Not Need To

If the UK government cannot run out of money, why does it issue bonds at all? Richard Murphy’s answer is that bond issuance is not operationally necessary but is economically useful for several distinct reasons, none of which amount to the government “borrowing” in the ordinary sense.

The first reason is savings provision. Large corporations, pension funds, insurance companies, and foreign governments all need somewhere safe to hold substantial sums. Bank deposit guarantees cover only the first £120,000 per depositor, which is trivial for institutions holding billions. Government bonds provide the only truly risk-free savings vehicle at scale. Without them, the functioning of money markets, pension funds, life assurance companies and international trade in sterling would be severely impaired. The national debt, in this light, is not a burden; it represents the accumulated savings that the private sector has chosen to place with the government.

The second reason is monetary management. Bond issuance helps manage the money supply and supports interest rate policy. When the government spends, it injects money into the economy; when it issues bonds, it provides a vehicle for that money to be saved rather than spent, preventing inflationary pressure. Bonds also give the Bank of England a mechanism through which to conduct monetary operations, including quantitative easing and quantitative tightening.

The third reason is international. Sterling remains a global reserve currency, and foreign governments and institutions that accumulate sterling through trade need somewhere to hold it productively. Government bonds serve that function. In all of these respects, bond issuance reflects economic structure rather than fiscal need. As Richard emphasises, the government could in principle fund all its spending directly through the Bank of England and pay no interest to the private sector at all. The choice to issue bonds is a political and institutional one, not an economic necessity.

The Myth of the Bond Vigilantes

No aspect of government bond markets features more prominently in Richard Murphy’s writing than the “bond vigilantes”: the financial market participants who, in mainstream economic discourse, are said to enforce fiscal discipline by selling government bonds when they disapprove of a government’s spending decisions, driving up yields and forcing a change in policy. This narrative, Richard argues, is a myth, or rather, it is a political construction that serves specific interests.

The so-called bond vigilantes are not heroic guardians of fiscal probity. They are traders and fund managers at major financial institutions such as pension funds, insurance companies, banks, and hedge funds, who buy and sell bonds as part of their routine investment activity. They sell when they can make a profit elsewhere or when uncertainty makes them nervous. There is nothing principled or democratic about the process. And crucially, their power over interest rates is far more limited than the conventional narrative implies. The Bank of England sets the base rate, and gilt yields track that rate. When markets try to drive yields higher than the Bank of England is willing to tolerate, the Bank can simply buy bonds in whatever quantity is necessary to bring yields back down. Quantitative easing programmes demonstrated this during both the financial crisis and the Covid pandemic, and the Bank’s emergency intervention during the Liz Truss mini-budget crisis of 2022 demonstrated it again, but this activity is much more commonplace then commonly thought.

The Truss episode is important to Richard’s analysis precisely because it is so often cited as proof that bond markets constrain governments. His reading is different. What the episode demonstrated was not that governments cannot spend but that announcing unfunded tax cuts taking place while simultaneously flooding the gilt market with new issuance, and doing so without any independent economic assessment, created a specific and avoidable crisis. The government’s own actions, combined with the Bank of England’s quantitative tightening programme, caused the disruption. Bond markets gain power only when governments choose to fear them, or when institutional decisions create avoidable vulnerabilities. A government that understands its own monetary sovereignty and manages its central bank relationship accordingly is not beholden to traders’ moods.

Bonds, Wealth, and Democratic Accountability

Richard Murphy does not treat government bonds as entirely benign. He raises two concerns that are distinct from the mainstream critique but more analytically serious.

The first is distributional. To buy a government bond, you must have wealth. The primary holders of UK gilts are financial institutions such as pension funds, insurance companies, banks, and overseas investors, all of whom benefit from interest payments paid, according to popular narratives, at a cost to government spending that might help those less financially advantaged. Government bonds are, in this sense, savings accounts for the already-wealthy. The interest paid on them represents a transfer from the public purse to those with surplus capital to invest. This does not mean bonds should not exist, but it does mean that the interest cost should be minimised, that distribution matters, and that the wealthy’s effective subsidy through bond interest reinforces the case for more progressive taxation.

The second concern is accountability. Richard has noted that the bond market operates under a much thinner layer of democratic scrutiny than government departments, whose accounts are audited by the National Audit Office and scrutinised by the Public Accounts Committee. The influence that bond markets exercise over fiscal policy is substantial and largely unaccountable. Politicians claim that “the markets” will punish progressive spending when there is no accountable source for that claim. The idea that markets sit in judgment on democracy is not an economic fact; it is a political choice that governments can refuse to make.

Reform: Towards Purpose-Driven Public Finance

Richard Murphy’s analysis points towards reform rather than abolition. He does not argue that governments should stop issuing bonds; he argues that the current system is outdated, structured to serve financial intermediaries rather than citizens or the public interest, and is in need of substantial redesign.

The current gilt market, he argues, was designed around assumptions formed centuries ago about the nature of money, the savings needs of society, and the management of inflation and risk. It benefits speculators and large institutions ahead of ordinary savers, and it potentially gives undemocratic actors leverage over public spending decisions.

An alternative approach would offer purpose-driven savings products directly to citizens, or bonds explicitly linked to investment in public infrastructure, the green transition, and social care, accessible through straightforward retail channels. This would broaden ownership, restore democratic legitimacy, and align the savings function of government bonds with the investment needs of the economy.

The overarching point is that governments should manage their bond markets, not be managed by them. When gilt yields rise to levels that reflect speculative pressure rather than economic fundamentals, the appropriate response is for the government and the Bank of England to intervene by buying bonds as necessary to bring yields back to a level consistent with policy objectives. The real constraint on government spending is not the bond market. It is the availability of real resources in the economy: labour, materials, and productive capacity. Managing that constraint well is the task of competent macroeconomic policy and a proper bond-led investment policy. Deferring to the preferences of gilt traders is not.

Reading List

The following posts from the Funding the Future blog provide further detail on Richard Murphy’s thinking on government bonds, arranged in reverse chronological order.

Glossary entry: bonds – December 2025

The bond market conspiracy — 15 May 2026

How to manage the cost of government borrowing — 12 May 2026

The UK government should be buying bonds — 23 March 2026

Glossary entry: bond vigilantes — 30 December 2025

MMT and rules of government borrowing — 3 September 2025

Is it time to replace the bond market? — 27 July 2025

Government bonds are just savings accounts for the very wealthy — 4 July 2025

Are bond vigilantes really in control? — 5 June 2025

Glossary entry: deficits and the national debt — 19 June 2025

Why do governments issue bonds when they don’t need to? — 12 August 2024

Governments don’t borrow from financial markets — 2 August 2024

Why we have a national debt — 8 May 2024

About the Author

Richard Murphy is a political economist, emeritus professor of accounting practice at Sheffield University Management School, and one of the UK’s most widely read heterodox economics bloggers. He is the author of the Funding the Future blog at taxresearch.org.uk and runs the Richard J Murphy YouTube channel, which has more than 370,000 subscribers. He co-founded both the Tax Justice Network and the Green New Deal.

You can find Richard at:

• Blog, Funding the Future blog

• Twitter/X, @richardjmurphy

• Bluesky, @richardjmurphy.bsky.social

• YouTube, Richard J Murphy YouTube channel

PDF

A PDF version of this post is available here.

There are occasions when I record a video that I think is really quite significant, and which I will need to go back to, potentially again and again, in the future.

The video that I have published on YouTube this morning is one such video.

In it, I discuss the economic crash that I am now quite sure is coming the UK’s way later this year as the full physical consequences of Donald Trump’s war on Iran become apparent across the world and oil, gas and food supplies become increasingly scarce as a consequence of the closure of the Strait of Hormuz.

There is now almost nothing that we can do to avoid this crisis. Oil and gas supplies are severely disrupted. Reserves of both are severely depleted worldwide and cannot make up for shortfalls for much longer. Production capacity in the Gulf is also significantly damaged, meaning supplies will be reduced even if the Strait of Hormuz is fully reopened, which seems unlikely. Meanwhile, shortages of fertiliser are already affecting food supply chains in some parts of the world, and these are likely to last at least two years, even if the Strait of Hormuz is reopened.

My friend and occasional collaborator, Professor Steve Keen, has shown that the relationship between oil consumption and GDP worldwide is almost linear. In other words, GDP has risen over time in direct proportion to increased oil consumption. If the process works in reverse, as both he and I expect, the consequences are going to be far bigger than most people imagine for our economy and the world's. They will make the crises of 2008 and 2020 look positively small-scale by comparison, and, in my opinion, although we have not been at war, we will end up having to manage, later this year, what will look like a war economy, with all the consequences that follow from that.

As I explain in this video, there are no signs at present from our government that they even acknowledge the existence of this problem, let alone that they are doing anything about it, but without prior planning, everything about this crisis will be very much worse. We know that from past experience.

We also know that the government did not plan for the consequences of the financial crisis in 2008, even though some of us, including Steve Keen and myself, were talking about the fact that such a crisis would happen well before it occurred. Similarly, we know that the government failed to anticipate the Covid crisis, even though all the warning signs were present that it should have recognised. Again, I emphasised the need for action at that time, before the government took any necessary steps.

Are we going to make the same mistakes again? I fear we might, and in this video, I talk about some, but by no means all, of the actions our government should now be planning in the face of this impending crisis.

Will they take these steps? I do not know, but I would recommend that you watch this video to understand the scale of the crisis facing this country, which might well emerge before Christmas, if not sooner.

A transcript of this video is available on my blog, here. A Debate Ammunition PDF summarising some of the arguments in this video and providing points for debate if you want to discuss the issues I raise can also be downloaded here.

I accept the fact that all forecasts can be wrong. This is an occasion when I would hope to be so, but my track record in forecasting crises is much better than the average economist's, and I fear I am right yet again. That explains some of the significance that I attach to this video. I have a feeling that this is one that I might come back to again and again in the future to make the point, “I told you so”.

There is a story now being told by central banks around the world. It is that when inflation surged after the pandemic, monetary authorities acted decisively, and monetary stability has now, more or less, been restored.

That story is convenient as far as they are concerned, but it is also, in large part, untrue.

Look at the evidence I post below, and a very different picture emerges. Across the major developed economies, central banks were consistently late to react to inflation. When they finally did move, they relied on blunt tools in the form of interest rate increase that imposed enormous costs on households while doing relatively little to address the underlying causes of the inflationary surge. Now, having cut rates again, many are discovering that inflation has not quite gone away.

This is a story told in seven charts that compare bank base rates and CPI inflation in major economies where the cult of the independent central bank is worshipped as if it is always and forever true. Each covers this decade:

What these charts show is not a triumph of technocratic central bank competence. They demonstrate the limitations of modern central banking.

The pattern, as is obvious, is remarkably consistent. Inflation surged during 2021 and 2022. We all know the reasons why. First, it was the consequence of supply chain disruption after Covid and then the result of speculative market turmoil after Putin began his war on Ukraine.

The reality was that after these events, Central banks hesitated. Then they tightened interest rates aggressively. After that, inflation fell back largely because the supply shocks that had driven much of it eased. But inflation has now settled at levels that are, in many cases, still above target, while interest rates remain significantly above the near-zero norms that prevailed before 2022.

That matters because interest rates are not neutral. They are themselves inflationary forces within an economy. Before turning to that issue, however, it is worth recalling just how late central banks were to react.

The delay that mattered

Looking at the detail these charts reveal, the European Central Bank kept its deposit rate at zero while eurozone inflation climbed from negligible levels in 2020 to more than 10 per cent by October 2022. It did not begin raising rates until July 2022, long after inflation had become embedded across the eurozone economy.

The Federal Reserve was similarly slow. It kept rates near zero until March 2022 despite US inflation already running at 7.5 per cent and rising fast.

The Bank of England acted slightly earlier, beginning rate increases in December 2021. But its first move, a token 0.15 per cent increase, was wholly inadequate if it believed rate increase would tackle the inflationary pressures already evident by then.

Australia’s central bank’s behaviour was strange. The Reserve Bank of Australia had indicated in 2021 that rates were unlikely to rise until 2024. It then abruptly reversed course and started increasing rates in May 2022.

The consequence of all these actions was initially prolonged periods of deeply negative real interest rates. In other words, inflation significantly exceeded official interest rates for months, and in some cases, years.

During that period, borrowing was effectively subsidised in real terms. Asset prices rose. Property markets remained overheated. Meanwhile, the cost of living surged for ordinary households.

Only New Zealand came close to acting in a timely fashion. The Reserve Bank of New Zealand began tightening in late 2021 and moved relatively aggressively thereafter. Even so, inflation still rose above 7 per cent.

So the idea that central banks anticipated and controlled inflation is hard to sustain. The evidence suggests the exact opposite.

The wrong cure for the wrong illness

When central banks finally reacted, they did so together. Between early 2022 and mid-2023, the world experienced the most synchronised tightening of monetary policy in four decades.

Rates rose sharply across almost every major economy.

But this raises an obvious question. Did those rate rises actually cure inflation, or did inflation decline largely because the shocks that caused it began to fade? That distinction matters enormously.

The inflation surge of 2021 and 2022 was driven predominantly by supply-side disruption. Pandemic shutdowns fractured global supply chains. Shipping systems failed. Energy prices exploded following Russia’s invasion of Ukraine. Food prices surged. Goods demand rebounded abruptly after Covid restrictions ended.

None of those problems could be resolved by raising mortgage rates. Higher interest rates do not unload container ships. They do not pump more oil and gas into Europe. They do not reopen Ukrainian grain corridors.

What they do instead is transfer costs onto households and businesses. Mortgage payments rise. Consumer borrowing costs increase. Business investment becomes more expensive. Governments face higher debt servicing costs and then turn to austerity if they follow neoliberal dogma, as all these governments do. In other words, central banks responded to a supply-side inflation shock with policies designed primarily to suppress demand.

Of course, demand pressures also played a role, especially in the United States, where pandemic fiscal support was particularly large and indiscriminate. But that does not alter the essential point. Much of the pain imposed by higher rates appears to have been economically unnecessary. What followed was not a precise calibration of inflation management. It was the application of a blunt instrument to a structurally complex problem.

And now central banks may have created another problem for themselves.

The new inflation trap

Having pushed rates sharply higher, central banks have subsequently begun reducing them again. The ECB started cutting in mid-2024. The Bank of England followed. The Federal Reserve did too, later that year.

But inflation has not fully returned to target in most economies. Instead, many countries now appear stuck in a new equilibrium where both inflation and interest rates remain structurally higher than before the pandemic.

There is a reason for that. High interest rates are themselves feeding inflationary pressures.

Higher mortgage costs directly increase housing expenditure, which is a major component of some inflation indices. Higher borrowing costs for businesses are passed on through prices. Governments paying more interest on debt inject additional income into financial markets and wealth portfolios.

In other words, interest rates are not merely tools used to control inflation. They are also contributors to inflation.

The UK illustrates this especially clearly. Bank Rate may have fallen from its peak, but it remains far above pre-2022 norms. Meanwhile, inflation remains above target, and services inflation remains persistently high. The Bank of England itself appears uncertain whether further cuts would reduce pressures or simply reignite them.

Canada faces a similar dilemma.

Australia has already experienced renewed inflationary pressures after rate cuts began.

Sweden, meanwhile, may have gone too far the other way, cutting rates so aggressively that inflation is now undershooting target.

What all this suggests is that central banks are no longer steering economies with confidence. They are hovering between competing risks, uncertain whether their own policy settings are now part of the inflationary problem they claim to be solving, and that should concern us.

Central banks were granted independence on the assumption that technocratic monetary management would deliver stable prices with minimal political interference. The events of the last five years have exposed the fragility of that assumption. Inflation has surged. Central banks reacted late. They imposed enormous social costs as a result, for no obvious gain. Inflation then eased largely because the original shocks diminished. And now many economies appear stuck with structurally higher interest rates than they require and persistent residual inflation, which may itself be driven by over-high interest rates.

Meanwhile, the distributional consequences are profound. Higher rates benefit savers, banks and financial wealth holders. They penalise mortgage borrowers, indebted businesses and governments seeking to maintain public services. The transfer of income from labour to capital becomes more explicit. That is not an accidental side effect of monetary policy. It is one of its defining characteristics.

And it is time we said so clearly and asked why we now tolerate a system of supposed inflation management that very obviously fails to deliver, whilst imposing massive social cost when doing so. Should the era of independent central banks be over in that case?

I posted this video in the role of the City of London Corporation on YouTube this morning:

A transcript is available on my blog, here.

But, and this is the key point of this post, I also created what I call my ‘Debate Ammunition’, based on this video. That is available as a PDF, but as this is the first time I have mentioned these reactions to video here, I also share the content of that Debate Reaction, which is as follows:

DEBATE AMMUNITION

18 May 2026

TODAY’S TOPIC

The City of London Corporation Must Be Abolished

THE CORE ARGUMENT

The City of London Corporation is not a harmless constitutional relic — it is an active instrument designed to protect capital from democratic accountability, operating as a state within the UK state. Through its privileged access to ministers, its corporate voting rights, and its role as the hub of a global offshore network, it systematically enables wealth to escape taxation and regulation while constraining elected governments. It should be abolished, and the offshore network it anchors should be dismantled through mandatory transparency.

THE ARGUMENT STRUCTURE

Step 1 — The Corporation is a lobbying body wearing civic clothing: The City of London Corporation looks like local government but isn’t: businesses vote in its elections, its Lord Mayor travels abroad with Cabinet-level honours, and it enjoys privileged access to ministers, all in service of financial interests, not the public.

Step 2 — The offshore network is the real weapon, and London is its hub:

Tax havens are not tropical islands; their epicentre is London. The Corporation connects outward to Crown Dependencies and British Overseas Territories — an integrated system built on secrecy, tax abuse, and regulatory opacity. Richard calls these havens “the aircraft carriers of the anti-democracy movement.”

Step 3 — Three functions, one purpose: making governments afraid: The offshore system does three things. It:

· It lets wealth escape taxation

· lets wealth escape regulation through opaque structures, and, most critically

· lets capital credibly threaten to leave, which incapacitates elected governments even when they have no economic reason to be afraid.

Step 4 — Finance dominance has not served Britain — and the evidence is in plain sight: Productive investment has declined, regional inequality has deepened, housing became a speculative asset, industrial policy was abandoned, and governments now treat City approval as more important than public well-being — as Starmer’s political situation illustrates directly.

THEIR ARGUMENT → YOUR REBUTTAL

Argument 1

They Say: “The City generates enormous tax revenues and jobs — attacking it would devastate the UK economy.”

Your Response: Finance dominance has weakened the productive economy, not strengthened it. The cost in terms of deindustrialisation, regional inequality, and housing unaffordability has been paid by the public, not those who got rich from it. A sector that extracts wealth is not the same as one that creates it.

Argument 2

They say: “Capital is mobile. If you clamp down, it simply moves elsewhere and you lose the revenue anyway.”

Your response: That threat is exactly what tax havens exist to manufacture. Governments are not actually powerless; they have been made to believe they are. Automatic information exchange and country-by-country reporting have already shown that the secrecy can be cracked. The threat works because we keep surrendering to it.

Argument 3

They say: “The City of London Corporation is a harmless historical curiosity with no real power over national policy.”

You say: Its Lord Mayor travels abroad with Cabinet-level honours. Businesses vote in its elections. It has privileged access to ministers and has consistently backed deregulation, banking secrecy, and offshore structures. If it had no power, the finance industry wouldn’t spend so much protecting it.

Argument 4

They say: “These transparency reforms are already happening through OECD processes: there is no need for unilateral UK action.”

You say: The automatic information exchange system depends on local regulators to verify it works; regulators who may be captured by the very finance industry they oversee. Multilateral processes provide political cover, not accountability. Sanctions on non-compliant jurisdictions and mandatory public registers are the only measures with teeth.

THE ONE-LINER

“The City of London Corporation exists for one reason: to protect capital from the people who elected the government that’s supposed to control it — and it’s time we ended that arrangement.”

FURTHER READING — FROM THE FUNDING THE FUTURE BLOG

What do 678,000 people do in the City? - 30 November 2024

Examines who works in the City, the dominance of foreign-owned firms and speculation over productive activity, and argues it functions as a parasite on the broader economy rather than a powerhouse.

We don’t need the City of London - 26 June 2024

Makes the MMT case that the government does not need the City to fund itself — it creates its own money — and that the claim of dependency is a political fiction used to constrain democratic choice.

What does the City of London do for the UK? - 20 February 2023

Argues that despite over £60 billion a year in tax reliefs flowing to the sector, the City demonstrably fails the broader UK economy — a damning verdict on the finance-first consensus.

Is the City of London staging a coup against Labour right now? - 9 January 2025

Written during the January 2025 gilt sell-off, argues that coordinated bond-market pressure on Labour may be deliberate and politically motivated, and linked to far-right networks.

Do tax havens still matter? - 14 June 2025

The most recent statement of Richard’s position: secrecy jurisdictions remain an abomination that threatens economies, democracies, and fair competition, and reform has not gone nearly far enough.

The City of London is at the heart of the UK constitutional crisis - 21 September 2014

Traces the City’s constitutional privileges back to Magna Carta, showing the rights of the City have been placed above those of ordinary citizens for eight centuries — and that nothing has changed.

What is your opinion? A poll

I need to know whether you think sharing these ‘Debate Ammunition posts here, possibly via Notes and as PDFs, is useful on Substack. Might you answer these questions:

Britain is being told that rising government borrowing costs are simply the inevitable verdict of financial markets. That claim deserves much more scrutiny than it receives.

UK government borrowing costs are now substantially higher than those of France or Italy. Britain is paying more than 5% on ten-year borrowing and over 5.75% on thirty-year borrowing, whilst much of Europe borrows far more cheaply. The official explanation is that markets are worried about Britain’s public finances. But that argument makes very little sense.

The UK issues debt in its own currency. It has its own central bank. There is no meaningful risk of involuntary default. If anything, countries inside the eurozone ought to face greater constraints because they do not individually control currency creation. And yet Britain is paying considerably more to borrow. So we need to ask a different question. Who benefits from these high interest rates?

The ownership of UK government debt matters enormously. About 33% of UK government debt is owned by overseas investors. They hold sterling assets because the UK remains a major trading economy and because UK government debt is still regarded internationally as a relatively safe financial asset.

The Bank of England holds around 18.5% of UK government debt, largely as a consequence of quantitative easing operations undertaken after the financial crisis and during COVID.

UK banks and financial institutions directly own another 27%, whilst UK pension funds and insurance companies hold around 21%.

That means that banks, financial institutions and pension-related wealth-management organisations together control more half of all UK government debt, before overseas investors are even considered. Ordinary households directly own less than 1%.

This matters because the UK government is expected to pay around £111 billion in debt interest in 2025–26. Of that sum, around £37 billion will go overseas. Approximately £23 billion will go to pension funds and insurance companies. Almost £50 billion will go directly to banks and financial institutions, including payments linked to reserve balances held through the Bank of England system.

This is one of the largest upward redistributions of income in the UK economy.

The ultimate beneficiaries are overwhelmingly the already wealthy. The top 10% of wealth owners in the UK hold roughly two-thirds of all financial assets, including pension wealth. That means approximately £48 billion a year in government interest payments ultimately flows to the wealthiest 10% of people in the country. The overlap between the top 10% of wealth owners and the top 10% of income earners is extremely high. Meanwhile, the bottom 70% of the population receives almost none of this money directly.

This is the real issue with UK borrowing costs. The problem is not simply the accounting cost of debt interest. The problem is the social and political consequence of those payments. Britain has created a system where enormous sums of public money are transferred to wealth-management institutions and the already affluent whilst millions of people are told there is no money available for public services, poverty reduction, social security or investment.

We also need to challenge the idea that this is some neutral “market outcome”. Financial markets are not detached observers objectively judging economic performance. They are institutions pursuing their own interests. Whenever governments propose policies that might redistribute income, improve public services or reduce inequality, borrowing costs often rise sharply. Financial institutions sell government bonds, bond prices fall, and effective interest rates rise. Governments then face pressure to retreat from redistributive policies whilst higher interest rates increase the flow of income back to the very institutions applying that pressure.

This is not some mysterious law of economics. It is a mechanism for protecting wealth.

The role of the Bank of England also deserves much closer attention than it usually receives. The Bank currently maintains exceptionally high interest rates compared with much of Europe. It also pays very large sums in interest on reserve balances held by commercial banks. Those reserve balances were largely created through quantitative easing after 2008 and during COVID. In effect, commercial banks were gifted very substantial reserve balances as part of the state response to crisis.

Other countries have reduced the cost of paying interest on such balances. Japan has done so. The eurozone has done so. The UK could do likewise and potentially save around £10 billion a year. Instead, Britain continues to prioritise financial-sector profitability.

Why? The answer appears obvious enough. High interest rates attract mobile international wealth into the City of London. Britain continues to operate as a global centre for wealth management and financial services, and high returns help sustain that position. The public pays the price.

The consequence is that Britain increasingly operates an economic system designed to protect wealth before people.

Governments, therefore, need to stop pretending they are powerless. The UK government could reclaim greater control over interest-rate policy. It could reduce the rates paid on reserve balances. It could also refuse to allow financial markets to dictate political priorities through threats over bond yields.

Most importantly, governments need to understand the actual power relationship involved here. The financial system depends heavily on government debt. Pension funds require gilts to underpin pension promises. Banks require government securities for liquidity management and repo markets. Financial institutions need these assets to operate safely.

The government, by contrast, does not need bond markets in the simplistic way politicians often imply. Government spending occurs through the monetary operations of the central bank. Bond issuance is a policy choice within that framework, not proof that markets “fund” government spending in the same way a household requires a bank loan.

That changes the political equation entirely.

The current system is not inevitable. It is a political arrangement that privileges the interests of wealth holders and financial institutions. And that means it can be changed.

Britain faces deep poverty, collapsing public services, housing insecurity and widespread economic anxiety. Continuing to prioritise the demands of financial markets over the well-being of millions of people is not an economic necessity.

It is a political choice.

That is precisely what has been happening in the UK for more than a decade, and the scale of it is now becoming clear. Recent answers from HM Treasury to questions posed by my old friend, Prem Sikka, now Lord Sikka, reveal that tens of billions of pounds have been paid in interest to commercial banks on central bank reserves arising from quantitative easing.

These payments have now reached staggering levels, exceeding £38 billion in 2023 and more than £25 billion in 2025, and they continue. This demands explanation. More importantly, it demands challenge.

Firstly, we need to understand what quantitative easing did. When the UK government, working through the Bank of England, undertook QE from 2009 onwards under Labour Chancellor Alistair Darling and his Conservative successors, it created money to buy back government bonds previously purchased and held by financial institutions. By 2021, some £895 billion had been created for this purpose.

This process was presented as a necessary monetary policy. It obscured a much simpler truth: the UK government always create money when it spends. The elaborate mechanism of issuing bonds and then repurchasing them served largely to maintain a narrative that government must tax or borrow before it can spend, neither of which is true. That narrative is politically convenient. It is not economically necessary.

Secondly, we must consider what has happened since. The reserves created through QE sit within the banking system, held at the central bank where they are described as central bank reserve accounts. Crucially, those reserves attract interest, as if they were created by the banks themselves, instead of being a gift as a result of state money creation. That interest rate is linked to the base rate set by the Bank of England. As that rate has risen since 2022, so too have the payments made to commercial banks.

The result is extraordinary. Around £85 billion has already been paid in interest on these reserves. This is not a payment for productive activity. It is not a reward for risk-taking or investment. It is, in effect, a transfer of public money to private financial institutions simply because the accounting structure of QE allows it.

At the same time, these payments have been used to inflate what is described as the UK national debt. That, in turn, has been used to justify cuts in public spending, on social security, health, education, and housing. In other words, money has been found in abundance for banks, while scarcity has been imposed on the public.

Thirdly, the justification for this policy is weak. The increase in interest rates was supposed to address inflation. But much of the inflation experienced in recent years has been imported, which has been driven by global energy and commodity prices, particularly in the wake of the war in Ukraine. Raising domestic interest rates could not resolve those pressures. What it could do, and did do, was increase the income flowing to banks via reserve interest payments.

This raises a fundamental question of economic governance and political choice.

If the state can and does create money at will, why is it choosing to direct so much of it towards institutions that least need support, while claiming it cannot afford to protect those who most do?

So, why does this matter?

The issue here is not technical. It is moral and political.

Firstly, it exposes the gap between how government finances actually operate and how they are presented. The persistent claim that public spending must be constrained because of debt or deficit concerns sits uneasily alongside the willingness to authorise tens of billions in payments to banks without meaningful debate.

Secondly, it reveals how policy choices redistribute income and wealth. Interest on reserves is not neutral. It channels public resources into the financial sector, reinforcing existing inequalities. At the same time, fiscal restraint is imposed elsewhere, with predictable consequences for those reliant on public services and support.

Finally, it highlights the absence of democratic scrutiny. These payments are not inevitable. They are the result of institutional design choices; choices that could be revisited.

So, what follows?

There are alternatives.

The UK Treasury could, if it chose, end or significantly reduce the payment of interest on central bank reserves. Even a partial adjustment could save tens of billions over time, with annual savings comfortably exceeding £10 billion. That is not a marginal sum. It is comparable to a significant share of major public spending programmes.

Such a change would not eliminate the role of interest rates in monetary policy, but it would recognise that current arrangements go far beyond what is necessary to achieve macroeconomic objectives.

More fundamentally, it would require honesty about how public finance works. Governments are not financially constrained in the way households are. The real constraints are resources, capacity, and political will.

At present, that political will appears to favour the financial sector over the wider public, and narrative convenience over truth. That is not an economic inevitability. It is a choice. And it is one that deserves to be questioned.

I was recently asked whether I am really a modern monetary theory (MMT) supporter. It is not a new question, but it is one worth addressing because it reveals a misunderstanding, not so much about my position, but about what MMT is.

Firstly, I agree with MMT’s description of the monetary system.

Government spending creates money. Taxation follows, withdrawing money from the economy and influencing its distribution. Government borrowing is not a financing requirement for a state that issues its own currency, but a mechanism that provides savings opportunities for the private sector.

I have long argued these points. They are not theoretical curiosities. They describe how the system works. And once understood, they dismantle much of the narrative that has constrained economic policy for decades, not least the claim that governments must “live within their means” in the same way as households. They do not. Their constraint is real resources, not revenue.

Secondly, however, I do not regard MMT as a doctrine. It is an explanation. It tells us how the monetary system operates. In that sense, it is no more a policy than gravity is a policy. Understanding gravity informs what we can do, but it does not decide what we should do. The same is true with MMT.

MMT removes false constraints. It clarifies what is possible. But it does not determine priorities. Those remain political choices, shaped by values, institutions and power.

Confusing an explanation of how money works with a prescription for what the government must do is a category error. And it is at this point that differences arise.

This is most clearly seen in the debate around the job guarantee. Some regard it as central to MMT. I do not. I regard it as a policy proposal, one way of seeking to achieve full employment.

My concern is that it implicitly accepts the existence of a pool of labour that the market does not employ, and which the state must then absorb. That may be preferable to unemployment, but it still accepts failure in the structure of the economy.

My aim is different. It is to use the understanding that MMT provides to manage the economy so that full employment is achieved without the need for such a residual mechanism.

In other words, I do not accept that we must design policy around the expectation of systemic underemployment. I would rather design the system so that it does not arise.

So, why does this matter?

My work does not begin with MMT. It begins with accounting and observation. I look at how the Treasury and central bank operate. I look at how institutions behave. I look at how money flows through the economy. From that, conclusions follow. Those conclusions often align with MMT. But they are not derived from adherence to it. And that matters, because it keeps the analysis grounded rather than tied to any particular school of thought.

It also means my focus extends beyond monetary operations.

I am concerned with tax justice, inequality, corporate behaviour, governance and power. Money is embedded in all of these, but it is not the sole issue. It is part of a wider political economy.

Understanding money matters because it exposes choices. It shows that many of the limits imposed on government action are not real, but political. But once that is understood, the question becomes what we choose to do with that knowledge. And that is where debate must move beyond MMT itself.

So, am I an MMTer? If the question is whether I accept its explanation of how money works, then yes.

If the question is whether I accept that it dictates a particular set of policies, then the answer is no. I see no contradiction in that position. It recognises the value of MMT without turning it into something it is not.

What matters is not the label. What matters is how we use understanding to shape the economy we want. Because economics is not an abstract exercise. It is about outcomes, institutions and power, and the choices we make about them.