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Government Debt is Not Your Enemy
Economics
Modern Monetary Theory
Debt
Government Debt
This article argues that government debt is not a sign of economic sickness; it is often the foundation of private prosperity.
When journalists discuss the economy, they almost universally rely on a specific narrative: the government has “maxed out its credit card,” there is a “black hole” in public finances, and our national debt will be a crushing burden to our future generations.
This story is told so often it feels like common sense. However, according to economists like Richard Murphy, this narrative is not only wrong, it is a “dangerous fiction.”
In reality, increased government debt is not a sign of economic sickness; it is often the foundation of private prosperity. Here is why the panic over the national debt hampers our understanding of the economy, and why the debt itself is actually good for your wealth.
The Simple Truth: Debt Equals Wealth
This is a fundamental accounting reality rarely acknowledged in political debate or any article by journalists: every taka of government debt is a private financial asset (meaning, held by any non-governmental entity, which could be a private individual, a company, a state backed pension fund, a foreign entity, the central bank etc).
The economy operates on a system of sectoral balances. When the government spends more than it taxes (running a deficit), that money does not disappear into a black hole. It goes into the bank accounts of nurses, construction companies, foreign suppliers etc. Therefore, a government deficit strictly creates a private sector surplus.
Note
The Golden Rule of Balance
As Richard Murphy explains, “every time the government increases its debt, the private sector… gets wealthier.”
If the government were to eliminate its debt entirely, it would have to tax back every taka it ever spent that is currently circulating in the economy. This would effectively destroy private wealth.
We can visualize this relationship in Figure 1 below. The flow of money shows that government deficit is mostly a transfer of private sector surpluses to the government.
And by extension any “debt” that arises from the deficit is simply the accumulation of private sector surpluses + interest payments.
Who Actually Owns the “Debt”?
The common fear is that we are leaving a bill for future generations. But we are also leaving them the asset. The debt funds the infrastructure and assets our grandchildren will use, but they will also inherit the bonds themselves—effectively inheriting “a great big pile of cash.”
It is important to understand who actually holds this debt. It is not just shadowy foreign entities; it is the bedrock of our own financial security. Entities that mainly hold government debt include:
Banks: They hold government debt to maintain liquidity and facilitate interbank payments. Their investment could also include Sukuks or other forms of Shariah compliant financing measures.
Savers: If you have a savings account or fixed deposit, you are likely benefiting from the interest paid on government debt. If you directly bought treasuries or invested in a fixed income fund, again, you are a direct beneficiary.
Pension Funds: They buy government bonds to ensure they can pay out pensions to retirees.
Insurance Companies: They hold government debt to back long-term investments and reduce premiums.
If we were to “pay off” the debt, we would remove the safe assets that pension funds, insurance companies etc. rely on, potentially causing the financial system to malfunction.
The MMT Perspective: Money is Not the Constraint
To understand why debt isn’t a health hazard for the economy, we can look at how money is actually created. As detailed in Modern Monetary Theory (MMT), the government is not like a household. It does not need to earn money before it spends it; it creates the currency.
This operational reality reverses the intuitive order of operations, as seen in Figure 2.
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Spending comes first: Government spending creates new money in private accounts. The government doesn’t need to check if it has money in its state coffer to spend, the central bank will provide overdraft (essentially print money) if the government spends money and there’s no money in the account.
Taxation comes second: Tax exists to reclaim some of that money to control inflation, not to fund the spending.
Bonds are a choice: Issuing debt (bonds) is just a way to provide a safe savings vehicle for the private sector and to manage interest rates.
These three statements are foundational to a modern understanding of economics. The government is the monopoly issuer of the currency. Logically, the government must spend the money (or lend it) into existence before anyone in the private sector can have it to pay taxes. So, the idea that taxes fund government spending is backwards.
The constraint on government spending is not a shortage of cash, but a shortage of real resources (labor, materials, and technology).
As long as the economy has the “capacity to produce”, the government can afford to “buy” (spend money and create more debt).
However, the terms “capacity to produce” and “buy” are, of course, doing a lot of heavy lifting here. Unproductive and unnecessary government spending doesn’t lead to anything; rather, it just becomes a burden, since ultimately it doesn’t help increase private spending and wealth (which would, in turn, help increase taxation). So, an underground tunnel to nowhere is not a good use of government debt. Rather, it would likely create problems because it would have a very low ROI, and a lot of the spending may be directed to foreign suppliers, who may only reinvest a very minimal portion of the proceeds they receive from that spending into the domestic economy. From that, we move onto geopolitics and international economics, since the unnecessary spending may create private wealth for that foreign supplier in their country of origin. This is a whole different can of worms that I am not getting into today.
Why “Fixing” the Debt is the Real Danger
The obsession with reducing the debt, often through austerity, is what actually damages our economic health. Because government debt represents private savings, a government trying to run a surplus is actively trying to reduce the savings of the private sector.
When politicians slash spending to “fix” the debt, the results are tangible decay:
Hospitals and schools fall into disrepair.
Flood defenses become inadequate.
Funding for energy transition disappears.
We should stop viewing debt as a headache and start viewing it as a tool. We could mobilize the idle cash sitting in savings accounts by issuing bonds dedicated to productive activities—rebuilding hospitals, training workers, and greening the economy.
Conclusion
The next time you hear a warning about the “crushing burden” of government debt, remember the other side of the balance sheet. That debt is the savings in your pension fund, the liquidity in your bank, and the money circulating in the economy.
We shouldn’t be trying to destroy it; we should be using it to build a bridge to a prosperous future, ensuring that the “debt” any future generation inherits is matched by the valuable infrastructure and thriving economy it was supposed to create.