The Story We Have Been Told
You have heard the story a hundred times. The government spends money it does not have. It borrows from bond markets. It piles on debt that our children will have to repay. One day, the lenders will lose confidence and stop lending, and the whole thing will collapse. Until then, we must be responsible. We must tighten our belts. We cannot afford things.
This story sounds like common sense. It is told by politicians, repeated by journalists, and enforced by independent fiscal watchdogs. In the United Kingdom, the Office for Budget Responsibility (OBR) treats this story as self-evident truth. When the government wants to spend, the OBR calculates how much that spending will add to “the national debt” and warns about the burden on future generations.
The Accountant Richard Murphy has been pointing out a problem with this story: almost none of it is true. Not “a bit exaggerated.” Not “simplified for public consumption.” Fundamentally, operationally, factually wrong. As Mr.Murphy wrote in May 2026, the OBR is “as wedded as ever to the ideas that the household analogy is true, that bonds fund government, that the government can run out of money, that bond markets set interest rates, and can withdraw from the gilts market even though they cannot function without gilts, and so austerity must return.”
Murphy is not an outsider crank. He is a former chartered accountant who founded the Tax Justice Network and advised the UK Treasury Select Committee. He is saying this because he knows how the payments system actually works. And so, in this article, we will walk through what he means, one fallacy at a time.
What MMT Actually Is
Before we get to the fallacies, we need a clear understanding of what Modern Monetary Theory is and is not.
MMT is a description of how fiat currency works in a country that issues its own currency and has a floating exchange rate. That is all it is. It is not a political programme. It does not say “governments should spend unlimited amounts of money.” It does not say “taxes should be abolished.” It does not say “inflation does not matter.” These are things people claim MMT says. They are wrong.
What MMT actually says is this: a government that issues its own currency does not need to tax or borrow before it can spend. It spends by crediting bank accounts. The central bank and the treasury work together. When the government pays a contractor, it instructs the central bank to add digital pounds (or dollars, or yen) to that contractor’s bank account. The money is created by the act of spending. It is not taken from a pile of pre-existing cash.
This is not theory. It is how the payment system works right now. Every government with its own central bank does this. The Federal Reserve, the Bank of England, the Bank of Japan - they all process government payments the same way. The money is created at the moment of spending.
Taxation serves a different purpose. Taxes create demand for the currency. They give the currency value, because you need it to pay your taxes. Taxes also remove money from the economy, which helps manage inflation. But the government does not need your tax dollars to fund its spending, in the same way that a referee does not need to collect your entry fee before the game, because he runs the league and prints the tickets. The order is: spend first, tax later.
Now let us look at the six fallacies the conventional wisdom treats as truth.
Fallacy One: The Household Analogy
The most pervasive error in all of public economics is the idea that a government is like a household. You earn money before you can spend it. You cannot spend what you do not have. If you borrow, you must eventually repay. The same logic, the argument runs, must apply to the state.
This analogy is the foundation on which almost every austerity argument rests. And it is false at the most basic level.
A household is a currency user. It operates within a monetary system it does not control. It must acquire money before it can spend it - by earning wages, selling assets, or borrowing from someone who has it. If a household cannot get money, it cannot spend. It can run out.
A sovereign government with its own currency is a currency issuer. It does not need to acquire the currency before spending it, because it is the source of the currency. When the government spends, it does not hand over tokens it collected earlier. It creates new tokens. The Bank of England does not keep a vault of pre-existing pound notes that the government draws down like a checking account. It credits accounts digitally. The money comes into existence when it is spent.
The household analogy persists because it is emotionally powerful. Everyone has struggled with a budget. Everyone knows what it feels like to run short. The politician who says “we have to live within our means, just like you do at home” is exploiting that feeling. But the analogy is a trick. A fish cannot go thirsty. A government that issues the currency cannot run out of the currency it issues.
This does not mean the government can spend without limit. The real constraint - which we will get to - is inflation, not solvency. But the moment you accept that the government is not a household, the entire edifice of austerity rhetoric begins to crumble.
Next time you hear a politician say the government needs to balance its books like a family does, ask yourself: does my family print the money I use to pay my bills? If not, the analogy does not apply.
Fallacy Two: Bonds Fund Government
If the government does not need to borrow before it spends, why does it issue bonds at all? This is one of the most common objections to MMT, and it reveals how deeply the borrowing story is embedded.
The conventional story goes like this: the government needs money, so it borrows from bond markets by issuing gilts (UK government bonds). The bond market provides the money that the government spends. Without bond buyers, the government would be broke.
This is backwards. The government spends first, by crediting bank accounts. That spending creates reserves in the banking system - electronic money held by commercial banks at the central bank. If the government spent without doing anything else, those reserves would accumulate. Banks would have more reserves than they wanted. Short-term interest rates would fall toward zero. This might be fine, but usually the central bank wants to maintain a target interest rate.
So the government offers bonds. Bonds are not a way of getting money to spend. They are a way of draining excess reserves from the banking system so the central bank can maintain control over interest rates. The government has already spent the money. The bond sale is a subsequent operation, an asset swap: the bond buyer gives up reserves and receives a bond. The government’s total liabilities (reserves plus bonds) do not change. Only the composition changes.
As Richard Murphy puts it, bond issuance is a policy choice, not a funding requirement. The government chooses to offer bonds because the financial system and the culture of government debt management treat them as the default. It offers bonds to provide a safe asset for pension funds, insurance companies, and savers. It offers bonds to drain reserves. But it does not offer bonds because it needs the money. It already has the money. It created it.
This is why the hand-wringing about bond market “financing” of government spending is misplaced. The question is not whether the government can find buyers for its bonds. The question is whether the central bank wants to maintain its interest rate target, and bond issuance is one tool for doing that.
Fallacy Three: The Government Can Run Out of Money
This fallacy follows directly from the first two. If the government must borrow to spend, and if bond markets can refuse to lend, then the government could theoretically run out of money. This is the nightmare scenario that fiscal hawks warn about: Greece, only for everyone.
A currency-issuing government cannot run out of its own currency. It is the monopoly supplier. It can always create more. This is not controversial. The only question is whether creating more would cause inflation - and that is a real question, not a trivial one. But the claim that the government could become insolvent in its own currency, like a company that cannot pay its debts, is a category error.
The United Kingdom issues pounds sterling. The Bank of England is the only entity that can create pounds. The UK government spends by telling the Bank of England to credit accounts. As long as the government is spending in sterling and taxing in sterling, it can never be forced into involuntary default on its sterling-denominated obligations.
This applies to any country that issues its own currency with a floating exchange rate: the United States, Japan, Canada, Australia, and many others. It does not apply to countries that borrow in a foreign currency, as many developing countries do. And it does not apply to eurozone members, because they do not issue their own currency - the European Central Bank does, and they are users of the euro, not issuers.
The countries that have actually defaulted on their debt - Greece, Argentina, Russia - all borrowed in a currency they did not control. Greece borrowed in euros. Argentina borrowed in dollars. They ran out of other people’s money. A country that borrows in its own currency cannot run out, because it can always create more.
This is the distinction the OBR does not acknowledge. And it is the distinction that makes austerity a choice, not a necessity.
Fallacy Four: Bond Markets Set Interest Rates
Another staple of conventional wisdom: governments must pay whatever interest rate the bond market demands. If bond markets lose confidence, rates spike. The country is at the mercy of “the markets.” This framing treats interest rates as something imposed on the government from outside.
In reality, the central bank sets the policy rate. In the UK, that is the Bank of England’s base rate. Bond yields - the interest rates the government pays on its debt - follow that policy rate. They do not lead it.
Here is how it actually works. The Bank of England sets a target interest rate, say 4.25 percent. To maintain that rate, the Bank stands ready to buy or sell government bonds at prices consistent with that rate. If bond prices fall (yields rise) above the target, the Bank can step in and buy bonds to push prices back up (yields back down). This is not a theoretical power. It is how central banks have operated for decades.
The OBR’s framing reverses cause and effect. It imagines that the government must go to the bond market, hat in hand, and accept whatever interest rate the market offers. In fact, the central bank sets the floor, and everything above it is a choice. The government is not a price-taker. It is a price-maker, mediated through its own central bank.
The bond market panic stories you read in the financial press are not wrong about the fact that yields can move. They are wrong about what it means. A rise in yields is not a signal that the government might default. It is a signal about expectations of future central bank policy, inflation, or global capital flows. It is a price movement within a system the central bank controls.
Fallacy Five: Bond Markets Can Withdraw from Gilts
This is the scariest version of the bond market story: that one day, investors will stop buying UK government bonds, the market will “strike,” and the government will be unable to finance itself.
This cannot happen, for a reason that is hiding in plain sight. The Bank of England is always the marginal buyer of last resort in the gilts market. It has to be, because the payment system requires it.
When a commercial bank wants to buy a gilt, it pays for it with reserves held at the Bank of England. Those reserves are the Bank’s own liability. When a foreign investor wants to buy a gilt, the transaction settles through the UK payment system, which is operated by the Bank of England. Every gilt trade ultimately settles in central bank reserves. The Bank of England is not just a participant in the gilts market. It is the infrastructure of the gilts market. The market cannot function without it.
This is why Mr. Murphy writes that the bond market “cannot function without gilts” - without the central bank’s settlement services, there is no gilt trade. The idea that “the markets” could collectively decide to stop buying gilts and thereby starve the government is a myth. It misunderstands the plumbing. The market for government bonds and the central bank are not separate entities. They are connected at the most fundamental level.
A withdrawal from gilts would mean investors selling their gilts for cash, which would increase reserves in the banking system, which would push short-term rates toward zero, which the Bank of England would then counteract by either buying those gilts itself or offering interest on reserves. In any scenario, the government can continue to spend. The mechanics do not stop.
Fallacy Six: Austerity Is Necessary
This is where the theory meets your life. Austerity - cutting government spending to reduce deficits and debt - is not a fiscal necessity. It is a political choice. The OBR presents it as a technical requirement: the debt is too high, so spending must be cut. But the premise is false. The government does not need to cut spending to avoid insolvency. It cannot become insolvent in its own currency.
Austerity is a choice about what the government prefers not to do. When a government cuts funding for healthcare, education, infrastructure, or social services, it is not doing so because it cannot afford them. It is doing so because it has decided that other priorities - lower taxes, deficit reduction, ideological commitments to a smaller state - are more important.
There is nothing wrong with making that argument honestly. People can disagree about the proper size and scope of government. But the argument should be honest. It should not pretend that the government is like a household that has maxed out its credit cards. It should not invoke the OBR as if its models represent physical law rather than a set of assumptions about how the economy should be managed.
The real cost of government spending is not the financial cost. It is the real resource cost. When the government builds a hospital, that hospital uses steel, concrete, labor, and land that could have been used for something else. When the government hires a nurse, that nurse is no longer available for the private sector. These are real economic trade-offs. They are worth debating. But they are not the same as “we cannot afford it.”
Next time you hear a politician say a school, a road, or a health service is unaffordable, ask: is the steel available? Are the workers available? Are the construction skills available? If the real resources exist, then “we cannot afford it” is a lie. It is a choice about priorities dressed up as a technical constraint.
The Real Constraint: Inflation
At this point, the skeptical reader should be asking the obvious question: if the government can create money freely, why not just create unlimited amounts and fund everything?
The answer is inflation. When the government spends money into the economy, it adds to total demand. If the economy has spare capacity - unemployed workers, idle factories, unused resources - that demand can be met with increased production. More is produced. More is consumed. Real living standards rise.
But if the economy is already operating at or near full capacity, the additional demand competes for a limited supply of goods and services. Prices rise. That is inflation. And inflation is a real cost that falls most heavily on the people who can least afford it - those on fixed incomes, those with savings in cash, those whose wages are slow to adjust.
MMT economists are acutely aware of this. They are not inflation deniers. In fact, the central MMT policy recommendation is not “spend whatever you want.” It is: maintain a job guarantee program that employs anyone who wants to work at a fixed wage, and let the automatic stabilizers - the demand for labor, the inflation signal - guide fiscal policy. When the economy overheats, withdraw spending. When it cools, increase it.
This is not very different from what mainstream economists recommend. The difference is that MMT rejects the artificial constraint of “we must balance the budget” and replaces it with a real constraint: we must manage inflation. That is a harder problem, but it is the real problem. The “government can run out of money” story is a distraction from the actual management challenge.
The great economist Henry Hazlitt wrote that the art of economics consists in looking at the long-term consequences of a policy, and tracing those consequences for all groups, not just the visible ones. The household analogy is a perfect example of failing to look past the first effect. It sees the government spending and reaches for the familiar personal finance metaphor. It does not ask whether the metaphor is structurally apt. It does not trace the actual mechanics of the payment system. It stops at what feels true and calls it analysis.
A Lens, Not a Verdict
We have walked through six fallacies. Let us summarize them:
- The government is not a household. It is a currency issuer, not a currency user.
- Bonds do not fund government. Spending creates money; bonds drain reserves.
- A currency-issuing government cannot run out of its own money. Insolvency in your own currency is not a risk.
- The central bank sets interest rates, not bond markets. Yields follow policy, not the other way around.
- Bond markets cannot “withdraw” from gilts. The central bank is the settlement system itself. The market cannot function without it.
- Austerity is a political choice, not a fiscal necessity. The real constraint is resources and inflation, not solvency.
None of this means that every government spending program is wise, that inflation is not a danger, or that fiscal discipline is irrelevant. It means the discipline should be about real resources and price stability, not about an arbitrary debt target derived from a false analogy.
Richard Murphy, who has been fighting this fight for years, puts it well: MMT is a description, not a prescription. It describes how the monetary system actually works. The next question - what we should do with that knowledge - is a political one. But that political debate can only be honest if it starts from an accurate description of reality.
The next time you hear a politician say “we cannot afford it,” ask two questions. First: do the real resources exist? Is there labor available, materials available, capacity available? If yes, the question is not about affordability. It is about priority. Second: are they using the royal we - the sovereign currency issuer - or the household we, the family budget? The answer makes all the difference.
These are two very different claims, and only one of them is true.