Temperamentally, Mohamed El-Erian is a careful analyst and his recent Project Syndicate essay, “When Markets Run on Empty,” contains several serious, unsettling observations. Credit-card delinquencies are rising. Household dissaving is accelerating. Energy buffers are finite. The gap between market euphoria and underlying fragility is authentic. He is absolutely right to note all of this.

But the framework he uses to organize these observations is analytically broken. That matters because it points toward policy remedies that will accelerate and deepen the very symptoms he is properly concerned about.

A Willingness to Spend vs. an Ability to Spend

El-Erian’s organizing proposition is that a willingness to spend is accelerating past an ability to spend. The problem is that he casually applies his proposition symmetrically, to “households, corporations, governments, and investors” as he puts it, treating these as parallel cases of actors whose spending capacity can be “exhausted.”

This is not raised as a minor technical quibble. It is a category error that does immense ideological work without saying so.

We all understand that a household that runs out of dollars has exhausted its ability to spend. It must borrow, sell assets, and/or cut consumption. This is the constraint El-Erian has in mind when he describes spending “facilitated by a massive drawdown of buffers” and “an accelerating reliance on leverage.”

But we also should understand that a monetary sovereign like the U.S., the U.K, Canada, Japan, or Australia is not a scaled-up household. It is the monopoly issuer of the very currency in which the debt on El-Erian’s list of concerns is denominated. It cannot run out of dollars, pounds, or yen in the way a household runs out of dollars, pounds, or yen. Its spending is constrained by real resource availability, especially labor, energy, productive capacity, and also by inflation when spending outruns those resources. But it faces no financial exhaustion in the sense El-Erian implies. The “ability to spend” for a currency-issuing sovereign is a question of resource constraints and inflation management, not of buffers or of Treasury accounts running dry.

By listing governments alongside households as parallel cases of potential spending exhaustion, El-Erian naturalizes the household analogy for the sovereign government. That is the oldest rhetorical move in the austerity playbook and, whether El-Erian intends it or not, carries with it debilitating consequences.

What the Sectoral Balances Identity Explains

One way of understanding the damage El-Erian’s diagnosis and misguided prescription can create becomes visible the moment we recall the sectoral balances identity, the simple accounting reality that the financial surplus of one sector is, by definition, the deficit of another.

El-Erian is entirely correct that household balance sheets are already stressed. Credit-card delinquencies are rising. Auto-loan defaults are accelerating. Lower-income households are dissaving to maintain consumption. This is Hyman Minsky’s fragility dynamic in plain sight: the private sector has moved from hedge finance (in which income covers debt service) toward speculative and Ponzi positions (in which income covers only interest, or neither).

Now ask what happens if governments respond to El-Erian’s implicit prescription, that the “willingness to spend” must be brought back in line with the “ability to spend” through fiscal consolidation. The sectoral balances identity explains unequivocally that a reduction in the government deficit will everywhere and always result in a reduction in the non-governmental (i.e. private and foreign sector) surplus. At the precise moment when household balance sheets are already strained, fiscal consolidation would reduce the flow of net financial assets available to the domestic private sector (ceteris paribus, as economists like to say).

What frustrates is that El-Erian’s doesn’t admit that his own evidence refutes his implied remedy. His framework diagnoses Minsky fragility in the private sector but then recommends a policy that deepens that fragility. It seems that he cannot see, or seeks to ignore, the accounting reality: Assuming steady current account balances, government deficits always create new net financial assets in the private sector and government surpluses always destroy net financial assets in the private sector. Always.

A Supply Shock Is Not a Solvency Problem

El-Erian’s most immediate, concrete concern is, understandably, the disruption to energy supplies through the Strait of Hormuz, and here his framework makes a second, consequential error: it misidentifies the nature of the constraint.

A closed strait is, clearly, a real-resource supply shock. Energy becomes scarcer and more expensive because physical supply is disrupted, not because anyone has run out of financial capacity to pay for it. The inflationary pressure this generates flows from sellers’ market power in a constrained supply environment, precisely the mechanism Isabella Weber’s eye-opening work on sellers’ inflation has illuminated. Prices rise because suppliers can raise them, not because aggregate demand has overwhelmed productive capacity.

Effective policy responses to a supply shock are targeted: draw down strategic reserves, invest in alternative supply chains, accelerate the energy transition that reduces dependence on any single chokepoint, and pursue diplomatic resolution. What supply shocks do not call for is generalized demand suppression, which is what “restoring the ability to spend” through fiscal tightening would amount to. Suppressing demand in response to a supply shock produces stagflation’s worst outcome: you get the output loss and keep the inflation.

It is confounding that El-Erian conflates “the system is running short of energy buffers” with “the system is running short of financial capacity.” These are different problems with different solutions. Treating them as the same thing, organized under the unified rubric of exhausted spending ability, produces the wrong medicine, the wrong remedies.

One More Thing: Distributional Blindness

But the deepest problem with El-Erian’s analysis is not what it gets wrong, but what his framework makes unnecessarily hard to see, what we might call “distributional blindness.”

El-Erian makes the very important observation that lower-income households are exhibiting rising delinquencies and default rates, while corporations continue to buy back shares and investors remain “virtually all-in on stocks.” But he doesn’t explain or respond to this reality, almost certainly because he treats “the economy” as a unified set of actors all approaching a common moment of spending exhaustion.

Instead, the ability to spend is not being exhausted uniformly. It is being exhausted first and fastest at the bottom of the income distribution, while financial capacity concentrates at the top. A family carrying high-interest credit card balances while missing car payments is not in the same analytical category as a Fortune 500 corporation borrowing at investment-grade rates to fund share repurchases. Treating them as parallel instances of “spending beyond one’s means” obscures so much of what matters about where we are right now

This bifurcation is not accidental and it is not new. It is the predictable distributional outcome of decades of fiscal and monetary architecture that has systematically directed net financial assets upward, through capital gains treatment, through the mechanisms of financial deregulation, through wage stagnation papered over by expanding household credit. What El-Erian is observing in real time is not a universal buffer drawdown. It is the awareness that buffers that were always thinner at the bottom are close to zero and that the policy toolkit is bereft of any distributional instruments that might have generated and buttressed them.

The markets are flying high because the portion of the population that owns financial assets is, as El-Erian notes, still all-in. That is not resilience. It is bifurcation, a two-economy structure in which the distress of at least the bottom third has not yet transmitted to the asset prices owned primarily by the top tenth.

When it does transmit (and El-Erian is no doubt right that the conditions for transmission are accumulating), the policy response will matter enormously. A framework that cannot distinguish currency-issuing sovereigns from households, that misreads supply shocks as financial exhaustion, and that treats distributional bifurcations as uniform buffer drawdowns, will produce exactly the wrong policy at exactly the wrong moment.

We really can do better.

Susan P. Borden is a political economist working at the intersection of democratic theory, monetary and fiscal policy, and ecological economics. She is chairman of Modern Money Lab, a think tank supporting a unique, international graduate program in Sustainable Economics (modernmoneylab.org.au) and a co-founder of Modern Money Lab US (modernmoneylab.org).

The United States and Tindale’s Trap

Craig Tindale has recently proposed a provocative idea he calls the Tindale Trap. (https://x.com/ctindale/status/2059518139134840932?s=46)

He argues that the reserve-currency privilege of the U.S. systematically erodes instead of enables productive capacity, by way of five interlocking feedback loops.

• First, safe-asset demand from the rest of the world keeps the dollar persistently overvalued, pricing US tradable production out of global markets.

• Second, capital flows to financial assets rather than productive ones, because financial returns are high and manufacturing returns are suppressed by the exchange rate.

• Third, low borrowing costs enable debt expansion that deepens dependence on the very conditions — dollar dominance, financial openness — that sustain the trap.

• Fourth, rising asset prices mask material decline, because portfolios swell while factories close.

• And finally, orthodox economic thinking misreads financial stability as economic health, reinforcing the very system and supporting the policies that are hollowing the productive base.

This loop results in what Tindale calls “conversion failure”: the condition in which money remains abundant but the ability to convert money into real output rapidly and at scale has atrophied. Modern industrial and post-industrial ecosystems -- the dense networks of skills, suppliers, infrastructure, and institutional knowledge that make possible the complex production of desirable goods and services -- take decades to build but can be dismantled in years. Once gone, they are not easily reconstituted, no matter how much financial firepower a government deploys.

Before accepting the full Tindale diagnosis, though, a prior question is worth pressing: is reserve-currency status actually necessary to produce this trap? Or is it one particularly potent pathway into a more general failure mode available to any monetary sovereign whose financial sector grows dominant enough and whose policy institutions get captured thoroughly enough?

The answer matters. The exchange rate channel is the one mechanism that is reserve-currency-specific. External demand for U.S. liabilities as global safe assets does put persistent, structural upward pressure on the real exchange rate -- not cyclically, but chronically. That appreciation systematically prices tradable production out of global markets in a way that non-reserve sovereigns don’t experience. But the other dynamics Tindale identifies -- financialization, orthodoxy capture, the masking of real decline by asset-price appreciation -- are available to any monetary sovereign with a sufficiently dominant financial sector. The UK experienced profound deindustrialization before it fully lost reserve-currency status. Australia has deep housing financialization without any global safe-asset role. These are political economy pathologies, not structural inevitabilities reserved for the dollar.

What reserve-currency status adds, above and beyond those shared vulnerabilities, are two things: a structural exchange rate amplifier and a very long fuse. Running large current account deficits for decades without triggering a crisis is only possible when the rest of the world needs your liabilities. That privilege buys time -- time that, it turns out, is not a gift. It allows the productive erosion to continue, uninterrupted, long past any point at which a corrective signal would otherwise have arrived. And this is where the trap becomes Minskyan in structure: the system appears to be working -- bond markets are satisfied, inflation is contained, capital is flowing in -- precisely because financial stability is being mistaken for economic health. Reserve-currency privilege looks, paradoxically, like a stability machine. But prolonged, unearned stability is exactly the condition under which fragility accumulates, but systemically unnoticed.

The U.S. is not deep in the Tindale Trap because the mechanics were structurally irresistible. It is deep in the trap because the privilege removed every institutional incentive to notice what was happening until the conversion capacity was largely gone.

Tindale is correct that this trap produces conversion failure. He is wrong, or at least incomplete, however, when he implies that the needed correction involves redirecting scarce financial capital from financial uses to productive ones. That framing smuggles loanable-funds logic up through the cellar door. A currency sovereign like the United States does not face a financial constraint on productive investment. It faces real constraints: the atrophied human and industrial ecosystems, the missing skills, the supply chains that no longer exist domestically, the regulatory and procurement infrastructure that has been hollowed alongside the physical one.

The trap is real. But its nature is physical and institutional, not financial.

China, Coal, and Tooze’s Graph

Adam Tooze, on an entirely different tack, has recently posed a deceptively simple question about China’s economic rise: how do we express, in a single measure, the largest single transformation in world economic history? (https://substack.com@adamtooze/note/p-196910088 r=4gdvb&utm_medium=ios&utm_source=notes-share-action)

Using Branko Milanović’s population-weighted growth calculation, China’s growth surge over the last 44 years has been 20 times larger than Japan’s postwar miracle and 300 times larger than America’s gilded-age takeoff.

Even more striking is Tooze’s physical metric. Measured in coal, he writes, the history of our species falls into three phases. The first is the pre-industrial somatic economy of firewood, human power, and animal labor. The second is the two-century arc of industrialization from the 1750s to the 1990s, spreading outward from northwest Europe to North America, Eastern Europe, and Japan. And then, quite suddenly in the 2000s, a third phase: China’s coal consumption soaring vertically to levels four times greater than the United States at its historical peak.

Standard accounts of China’s rise reach, almost reflexively, for financial explanations. China saved. China accumulated reserves. China channeled capital into productive investment. The implicit frame is one in which the binding constraint on development is access to financial resources -- money, credit, capital -- and China’s great achievement was to mobilize those resources efficiently.

That account is structurally wrong.

The coal graph suggests many stories, but the most interesting may be this: it answers the question that orthodox economics consistently fails to ask. Not how did China finance its growth, but how did China resource its growth, and what were the real-world constraints with which that growth had to contend?

China is a currency sovereign. The renminbi is issued by the People’s Bank of China, which operates as an arm of the state. State-directed banks extend credit not by intermediating savings but by extending credit as franchisees of the state. Finding the money has not been the problem.

It never is, for a currency-issuing sovereign. The binding constraints are never financial; they are always the physical, material, human, and institutional resources. You cannot run out of your own currency. You can run out of steel, energy, engineers, arable land, and time.

Tooze’s coal graph makes this acutely visible. That vertical spike is not a financial artifact. It is a record of China mobilizing an extraordinary volume of real resources — energy, labor, materials, organizational capacity -- at a pace and scale unmatched in human history. The financial side of the ledger simply accommodated that mobilization, as it always does for a currency sovereign operating within its real resource envelope.

The question was never: Can China afford to build? The question was always: Does China have the workers, the energy, the materials, and the political will to build? And for several decades, the answer was emphatically yes.

Two Sovereigns in the Same Frame

Now let’s try to understand China and the United States together.

China, a currency sovereign, mobilized real resources at civilizational scale over four decades, producing the largest single transformation in economic history. The state directed credit creation toward priority sectors. The binding constraint was always physical -- how much coal, how many workers, how much steel -- and for a long period those constraints were loose enough to accommodate extraordinary growth.

The United States, also a currency sovereign and additionally the issuer of the global reserve currency, presided over the systematic atrophy of its own productive capacity during the same period. The absence of a financial constraint was even more pronounced than China’s, because the U.S. faced essentially unlimited demand for its liabilities from the rest of the world. And yet the productive base declined.

The contrast is clarifying. Currency sovereignty is necessary but far from sufficient. What matters is not the capacity to issue currency but the political will to deploy that capacity in service of real resource mobilization -- to build, to employ, to invest in the human, physical, and institutional substrate of productive capacity. One country deployed that will. The other let the privilege of not having to deploy it become the reason not to.

Coal and Climate

But that is not all that matters. We cannot read the coal graph purely as a story of sovereign capacity successfully deployed. That vertical spike is also the record of an ecological catastrophe in progress. China’s growth mobilized real resources, yes, but it did so without any containing discipline, with no Planetary Boundaries envelope, no resource constraint beyond the immediately physical. The result was growth that was, in the language of ecological economics, deeply unsustainable: drawing down natural capital, exporting pollution, and contributing massively to the atmospheric commons problem that now threatens the conditions of future production everywhere.

This is what sovereign capacity without an ecological frame looks like. It is, simultaneously, both impressive and profoundly dangerous.

The conventional response -- in mainstream and, too often, even in heterodox circles -- is to treat the ecological constraint as something to be managed after growth has been achieved, or alongside it through technological substitution. But the physical scale of what is required makes that response unquestionably inadequate. The real resource mobilization needed for genuine energy transition is of a China-like order of magnitude. It must be financed, of course, but for a monetary sovereign, that is the easy part. It must be physically produced, and it must be produced within the envelope that sustains the conditions of production itself.

This is not a technical challenge with a financial solution. It is a political economy challenge requiring a framework adequate to its scope.

A New Plot

The China story and Tindale’s Trap are, in the end, failure modes of opposite kinds.

China demonstrated sovereign capacity without ecological containment: extraordinary mobilization of real resources, unconstrained by planetary limits, producing growth that was impressive in scale and unsustainable in form.

The United States demonstrated reserve-currency privilege without productive mobilization: extraordinary financial capacity, systematically converted into asset inflation and industrial atrophy, producing conversion failure dressed up as economic dynamism.

Both failure modes are now fully legible. Both have consequences that are materializing inthis moment.

A democratic monetary sovereign -- one that takes seriously both the MMT insight about the absence of financial constraints and the ecological economics insight about real resource limits -- looks like neither. It mobilizes sovereign capacity in service of real resource building, within a Planetary Boundaries envelope, through institutions that are democratically governed and democratically accountable. The framework for that kind of sovereignty doesn’t have to be invented from scratch; its architecture can be specified, its policy instruments designed, its distributional logic thought through.

The coal graph describes one version of what happens when a sovereign, democratic or not, mobilizes without that framework. The Tindale Trap describes the other. The gap between those two failure modes is where the work of institutional redesign and invention has to occur.

Does anybody have some ideas? I’d love to hear them. And I have a few.

Susan Borden is a political economist working at the intersection of democratic theory, monetary and fiscal policy, and ecological economics. She is chairman of Modern Money Lab, a think tank supporting a unique, international graduate program in Sustainable Economics (modernmoneylab.org.au) and a co-founder of Modern Money Lab US (modernmoneylab.org).

Here is a puzzle, maybe worth pondering.

In the years after the 2008 financial crisis, some of the quickest, smartest uptake of Modern Monetary Theory’s clear-eyed description of monetary operations happened in an unexpected place: trading desks. “Finance Twitter,” the loosely organized community of macro traders, hedge fund analysts, and fixed income professionals who routinely argued about monetary plumbing, turned out to be especially receptive to the MMT framework. This was certainly not because they were persuaded by its fiscal policy implications. Nor had they become suddenly enthusiastic about public investment or job guarantees. It was because getting the operational reality of how the monetary system actually works is useful when you’re positioning your trades. If you believe the U.S. government might “run out of money,” you’ll make some bad trades. If you understand that the Fed sets rates, that Treasury auctions are always bid, that the solvency constraint facing a currency-issuing sovereign is categorically different from the constraint facing a household or a corporation, you’ll make better ones. The operational truth penetrated where it was instrumentally necessary.

Which makes Jared Bernstein’s recent Atlantic article especially puzzling. (https://www.theatlantic.com/ideas/2026/05/national-debt-problem)

Bernstein, of course, is not a trader. He is a political economist, a former chair of Biden’s Council of Economic Advisers, a longtime labor market researcher, and a committed progressive who has spent his career trying to make the economy work better for working people. His Atlantic article announces a conversion -- from a longtime deficit dove to a cautious hawk, driven, he says, by the supposedly “simple and unforgiving” math of interest rates now exceeding growth rates. He is worried about a debt-spiral and thinks we should be too.

But Bernstein has access to the same operational understanding of monetary systems that the traders have. He knows the Fed sets rates. He knows Treasury auctions clear. He knows that the United States, as the issuer of the global reserve currency, is not Greece or even the United Kingdom. He knows these things and then he writes as though he doesn’t quite believe them.

The real subject of this Substack is not whether Bernstein’s debt-spiral math is right (it isn’t, and we’ll get to that). Instead, it asks why a serious economist with progressive values and loads of experience, feels compelled to sound a fiscal alarm in a way that the bond traders -- who have far more at stake in getting it right -- never needed to.

The Debt-Spiral That Isn’t.

Let’s tackle the economics first.

Bernstein’s spiral runs like this: higher deficits require more bond issuance, which requires higher rates to attract buyers, which raises debt service costs, which produces higher deficits. He calls this “simple and unforgiving math.”

The problem is the second link in his chain. It assumes the U.S. government is a passive price-taker in its own bond market, that it must offer whatever rate the market demands to find buyers.

That is not how U.S. sovereign debt works.

The Federal Reserve sets the short-term interest rate. Term premiums on longer-dated Treasuries reflect expectations about future short-term rates and inflation, both substantially within the reach of monetary and fiscal policy. The Fed demonstrated during the pandemic, and has demonstrated repeatedly in its history, that it can purchase Treasury securities at scale to influence yields. As important, U.S. Treasuries are the reserve asset of the global financial system. Foreign central banks, sovereign wealth funds, and international institutions hold dollars and dollar-denominated assets as the foundation of their reserves. There is structural global demand for Treasuries that has no close analog in any other country’s debt market.

Bernstein half-sees this. He acknowledges that Treasury auctions “sell whatever is issued, regardless of administration or budget” and that “the dollar is different.” But then he treats these as merely quantitative, pretending they just confer more leeway, not that they are different in kind, and carries on with his debt-spiral, seemingly oblivious to the fact that he had just undermined it.

He also leans heavily on the 2022 UK gilt crisis -- the Truss/Kwarteng mini-budget meltdown -- as his cautionary tale. But the U.K. crisis was driven by a very specific combination of political credibility shock and pension fund leverage dynamics in the liability-driven investment market, with the additional structural fact that sterling, while a sovereign currency, is not the global reserve currency. Importing it wholesale into the U.S. fiscal debate is a category error.

As we have said interminably, nobody is arguing that deficit spending is without constraint. It is just that the real constraint on a currency-issuing sovereign isn’t solvency because it can always service debt in its own currency. The real constraint is a mismatch between the productive capacity of the economy and the composition of public and private sector spending. If spending persistently exceeds the productive capacity of the economy, prices will rise causing inflation. Inflation is the constraint. So the relevant question is never how much debt but what is the spending buying and is the economy at capacity? deficit that funds a green energy transition or universal childcare expands productive capacity. A deficit that funds a capital gains tax cut doesn’t. It is the composition, not the level, that really matters, a distinction Bernstein gestures toward and then sets aside.

The price of admission

So why does Bernstein write the piece he writes, rather than the one his knowledge would seem to support?

Here is one thought.

For decades, “seriousness” in American elite policy discourse has meant a specific cluster of things: reassuring bond markets, respecting financial actors, signaling fiscal restraint, demonstrating comfort with the language of scarcity. This is the cultural grammar of the policy world Bernstein has operated in throughout his career. But on examination, this grammar isn’t really describing an economic position. It is describing a social one.

Progressive policy economists who have spent careers marginalized by Wall Street, centrist Democratic donors, mainstream macroeconomic orthodoxy, and ratings-agency discourse understand, at some level, that entry into that world requires a credential. The credential isn’t expertise; they have that. It’s more like a demonstrated willingness to speak the language of fiscal prudence. To show that one’s ambitions for stronger labor markets, industrial policy, public healthcare, and reduced inequality will stay within the limits that finance finds acceptable. To signal: Don’t worry, I’m not one of the irresponsible ones.

This produces a characteristic rhetorical structure that you can find throughout mainstream progressive economic writing: Yes, we need public investment, but we must reassure markets. Yes, inequality is dangerous, but deficits are also dangerous. Yes, government should act, but only within fiscal limits. The progressive goal is always paired with the reassurance, the ambition always hedged by the concession to financial orthodoxy.

Notably, demonstrations of seriousness, unlike economic arguments, are not really falsifiable. You can point out that the debt spiral mechanism doesn’t hold for a monetary sovereign and Bernstein will absorb the critique but continue using the language, because the language isn’t primarily doing epistemic work. It’s doing social work.

The inversion of democracy

This matters far beyond Bernstein’s individual career choices, because the pattern he seems to exemplify has significant consequences for democratic life.

Once financial elites become the imaginary adults in the room, the collective whose confidence must be maintained before democratic ambition can proceed, the logic of democratic governance quietly inverts. The question is no longer: What kind of society do we want to build? It becomes: What will markets tolerate?

That is a radically narrow conception of democracy, and it did not emerge from nowhere. Postwar American liberalism largely assumed that democratic governments were entitled to shape markets in service of public purposes, setting the terms under which the financial system operates rather than seeking its permission. The transformation that began in the late 1970s and accelerated through the Reagan era reversed this: democratic ambition came increasingly understood as something that had to justify itself before the tribunal of investors. The bond market became, in the political imagination of the center-left, a veto player.

The irony, verging on tragedy, is that this deference was never going to work, even on its own terms. The traders who understood monetary operations did so precisely because they were optimizing for their own interests, not for democratic outcomes. Ray Dalio and Jamie Dimon are not going to endorse large-scale public investment, wealth redistribution, or labor market rebalancing just because progressive economists have learned to speak “responsibly” about deficits. Finance elites are invested in asset protection, creditor primacy, and the political centrality of capital markets. The progressive adoption of fiscal-restraint language doesn’t change those interests. It just legitimizes the framework that protects them.

So progressive economists who follow this pattern don’t gain entry into a negotiation they can win. It’s the legitimization of a worldview organized around the permanent subordination of democratic purpose to investor psychology. They internalize the narrative authority of finance in order to get a seat at a table where the menu has already been decided by people who don’t share their goals.

That is not a strategy. It’s not even a bargain. It’s a capitulation.

The Better Frame

Bernstein is right, of course, about the negative effects of the Bush and Trump tax cuts. He is right that taxing unrealized capital gains is long overdue. He is right that funding productive public investment is categorically different from “funding” windfalls to asset holders.

Those conclusions point toward a clear agenda: reverse the tax cuts, tax the wealth that has accumulated at the top, invest in the productive public goods -- especially in renewable energy, childcare, healthcare, education -- that expand the real capacity of the economy to provision the society it serves.

But membership in the club of “serious people” requires periodic demonstrations of fiscal anxiety, especially from progressives. One must show willingness to discipline democratic ambition before finance feels comfortable granting legitimacy. The modern center-left increasingly treats finance not as a sector to be governed, but as a permission structure for democratic action. Bernstein’s debt-spiral anxiety and ritualized alarm about U.S. solvency may renew or even upgrade his membership in the club of serious people, but it also cedes the argument to the people who are the first, for example, to limit or cut Medicaid in the name of fiscal responsibility.

The real measure of fiscal responsibility for a monetary sovereign is not the debt-to-GDP ratio. It’s whether public spending is building the physical, human, and ecological capacities that enable a democratic society to thrive over time. By that measure, decades of tax cuts for the wealthy and underinvestment in everything else represents the actual fiscal crisis. It is not a number on a spreadsheet.

Finance Twitter understood the operational reality of the monetary system because getting it wrong cost money. Citizens and their governments need to understand how monetary systems operate because getting it wrong costs something far more important: the failure of our democratic society to deliver a just and generative well-being economy.

Towards the end of Bernstein’s piece, he writes, “Unfortunately, the politics of getting the United States on a sustainable track are miserable. With the midterms around the corner, I am certainly not suggesting that Democrats now run as the party of fiscal responsibility and eating your spinach. Even economists have to weigh fiscal discipline against threats to democracy and the rule of law.” Really? Can that even be a close call?

He goes on, “I may have flipped from dove to hawk, but this political moment requires a nod to Saint Augustine’s prayer: ‘God, guide us toward fiscal sustainability … just not quite yet.’” That is a tell. It manages to signal fiscal responsibility (I believe in sustainability!) while deferring the uncomfortable implications (just not right now, because the politics aren’t there). This is performative seriousness, not an economic argument.

The right question was never what markets will tolerate. It was always and remains what we citizens are prepared to demand.

Susan Borden is a political economist working at the intersection of democratic theory, monetary and fiscal policy, and ecological economics. She is chairman of Modern Money Lab, a think tank supporting a unique, international graduate program in Sustainable Economics (modernmoneylab.org.au) and a co-founder of Modern Money Lab US (modernmoneylab.org).

Here is a question that sounds technical but is actually philosophical: What kind of mathematics does a political economy need?

This is not about the arithmetic of accounting, though that matters too. The deeper question is about the mathematical imagination embedded in economic theory itself: the concepts, metaphors, and logical structures that shape which questions get asked, which answers look sensible, and which possibilities remain literally unthinkable.

The mathematics we choose is not neutral. Choose your mathematics, and you have already framed a lot about how you see the world and what you imagine is possible.

Mainstream economics made its choice in the 1870s. The marginalist revolution -- Jevons, Walras, Menger -- was an explicit project to remake political economy in the image of Newtonian mechanics. The ambition was scientific respect and prestige, and the instrument was the calculus: the mathematics of smooth trajectories, continuous adjustment, optimization at the margin, and equilibrium as a resting point found by setting a derivative to zero.

The concepts that followed were all borrowed from 19th-century physics: equilibrium, optimization, marginal change, smooth trajectories, reversibility, isolated agents, scalar maximization. The economic system, in this imaginative construct, behaves like a very complicated billiard table -- balls in motion, forces in play, but ultimately tending toward a determinable resting state.

Neoclassical economics, built on this foundation, asks a characteristic calculus question: Toward what point does the system converge? Every analytical tool -- supply and demand curves, production functions, utility maximization, general equilibrium -- is in service of that question. Even when the models grow enormously complex, the underlying mathematical imagination remains the same: find the optimum, characterize the equilibrium, describe the trajectory of convergence. Calculus naturalizes continuity -- the assumption that we can always make one more small move in the right direction until we arrive somewhere that is, by construction, the best we can do. The political economy that ensues has a characteristic shape: decentralized, self-correcting, tending toward equilibrium. Distribution, when it is considered at all, becomes a question of marginal productivity. Policy interventions are frictions. History doesn’t much matter, because the calculus of optimization works the same wherever you start.

This is not a description of any economy that has ever existed. But it is an enormously powerful frame, because it makes economic questions look like engineering problems -- solvable in principle, with politics as noise.

Living Systems, not Inanimate Machines

But political economies are not billiard balls. They are not pendulums, or machines, or any kind of inanimate mechanical system. They are living systems -- and living systems behave quite differently. The only time a living system is in equilibrium, after all, is when it is dead.

Think about what living systems, natural and human-made, actually look like: metabolic flows, immune responses, neural networks, tensegrity structures, ecosystems, adaptive governance systems. These systems do not converge toward fixed points. They maintain themselves. They absorb disturbances without collapsing. They reorganize under pressure. They sustain internal differentiations while preserving structural coherence.

They are, in the most fundamental sense, relational systems. Their behaviors cannot be understood by analyzing individual components and their marginal interactions. They can only be understood by examining the structural relationships that allow the whole to remain viable -- the constraints that bind, the tensions that hold, the boundaries that protect.

This is precisely where geometry enters -- not as metaphor, but as the right, useful mathematics. Geometry is the study of structure, form, and boundary, of what holds together, what contains, and what separates. It is the native mathematical language of relational systems. And it asks fundamentally different questions and solves fundamentally different problems than does calculus.

Mainstream economics asks: Toward what point does the system converge? Heterodox economics asks, or should ask: What structural relationships allow the system to remain viable -- to stabilize, not equilibrate, over time? The first is a calculus question, the study of trajectories of variables. The second is a geometry question, the study of what holds systems together.

Optimization or Stabilization?

This distinction rests on a deeper one: the difference between optimization and stabilization.

Optimization implies a target state -- a scalar objective function, marginal tradeoffs, convergence. There is somewhere the system is supposed to get to, and the task of policy is to remove the frictions that prevent it from getting there. Efficiency is the ultimate value, because efficiency is what the calculus of optimization measures.

Stabilization implies something altogether different: continuous adjustment, dynamic constraint management, resilience under disturbance, distributed coordination, structural integrity. There is no target state. Instead, there is a viable space -- a range of configurations in which the system can sustain itself and its members -- and the task of policy is to maintain the structural conditions under which that viability is possible.

A living political economy is never optimized. It is dynamically stabilized.

This is not a rhetorical point. It has immediate implications for what we design, what we measure, and what we value. A Full Employment Guarantee, for example, is not an optimization device; it does not claim to find the “optimal” level of employment. It is a buffer stock, a dynamic structural stabilizer that maintains a viable employment space and automatically adjusts as private demand fluctuates. It asks: how do we keep the system in a range where every person who wants to participate can? That is a geometry question, not a calculus question.

The same logic applies to fiscal policy aimed at mobilizing real resources toward shared socioeconomic goals, and to monetary policy that maintains the institutional infrastructure within which the real economy operates. In neither case is there an optimal point to calculate, to find. There are structural relationships to manage, boundaries to respect, and a viable space to sustain.

Realities, not Metaphors

This geometric imagination is not new to economics, though it has been consistently marginalized (to coin a phrase). Piero Sraffa’s 1960 Production of Commodities by Means of Commodities was a geometric achievement: he showed that relationships between wages, profits, and prices traced paths through a production space that could switch and reverse in ways the smooth marginal calculus of neoclassical theory categorically could not accommodate. The Cambridge Capital Controversy that followed was, in a way, a confrontation between two mathematical imaginations. The calculus won institutionally. It really has not won intellectually.

Hyman Minsky’s Financial Instability Hypothesis is geometric in precisely the same sense. Hedge, speculative, and Ponzi finance are not points on a smooth optimization curve; they are qualitatively distinct stability regimes, separated by thresholds, between which economies shift as internal financial pressures accumulate. The 2008 crisis was a Minsky moment (a prediction, really) -- a threshold crossing, not a deviation from equilibrium. Calculus could not see it coming. A geometric sensibility, attentive to the structural accumulation of fragility, could.

Kate Raworth’s Doughnut Economics is the most widely circulating geometric framework in contemporary heterodox thought: a ring defined by a social foundation below and an ecological ceiling above. The question it poses -- are we in the ring? -- cannot be answered by any calculus of optimization. The doughnut cannot be optimized. It can only be inhabited, or not. An economy’s sectoral financial structure -- the relationships between government, private, and external sectors -- is similarly a geometric constraint, a hyperplane that every economy must traverse by accounting necessity, whatever the policy intentions of its participants.

These are not metaphors. They are geometric realities. Calculus cannot see them, much less describe them.

Why Now?

The choice between calculus and geometry is not, finally, a technical one. It is a question about what kind of system we think we are inhabiting and governing.

If we think a political economy is a machine that tends toward equilibrium when left alone, calculus is our mathematics. It will give us marginal tradeoffs, optimal points, and the serene conviction that interference is friction.

If we think a political economy is a living system that must be continuously held in a viable range -- that stability must be actively produced, that boundaries are real, that relationships are the units of analysis -- then we need geometry. We need the mathematics of structure, form, boundary, and integrity.

Our crises -- looming ecological catastrophe and indefensible inequality -- are emphatically not marginal. They are structural, relational, and bounded. They will not be resolved at the margin. They require us to think about the shape of the system we are in, and the shape of the system we are trying to build.

Calculus had its century. This one needs geometry.

Susan P. Borden is a political economist working at the intersection of democratic theory, monetary and fiscal policy, and ecological economics. She is chairman of Modern Money Lab, a think tank supporting a unique, international graduate program in Sustainable Economics (modernmoneylab.org.au) and a co-founder of Modern Money Lab US (modernmoneylab.org).

There is a conversation happening in private -- in congressional offices, in diplomatic cables, in the hushed registers of people who are paid to think about risk.

It is not about policy. It is not about ideology. It is about whether the man who holds the most consequential executive power in the world retains the psychological capacity to exercise it without causing catastrophic, potentially irreversible harm -- and whether the institutions designed to prevent exactly that will continue to look away.

This is not a clinical, psychiatric diagnosis of the President. It is a citizen’s observations of two patterns, a pattern of presidential action and a pattern of institutional paralysis. The President is incontrovertibly impulsive, unilateral, and structurally immune to correction. The people and institutions whose constitutional function is to provide friction -- to slow, to question, and sometimes to refuse -- have instead chosen accommodation over deliberation.

This combination, at this moment, creates conditions for a catastrophic executive decision that cannot be undone.

The Incredible Shrinking Democratic Space

Democracy is not a machine. It is not self-executing. It does not run on rules alone.

It runs on something harder to name and easier to destroy: a shared commitment to the space between us -- the zone of negotiation, disagreement, and compromise -- where power is exercised with others rather than over them. Where decisions are made through a process that, however frustrating, retains the consent of those governed. Where the person who holds authority understands, at some operational level, that others exist independently of his or her will and desires, that they have standing, that their judgment matters.

That space, the space where democratic life actually happens, is not guaranteed by the Constitution, though the Constitution tries to protect it. It is guaranteed, or not, by a tireless engagement in the often messy, necessarily inefficient, practice of democracy, and the unwavering commitment of those who hold power to insist on it. When power is exercised not as stewardship but as assertion, not to enable the collective to function but to demonstrate, over and over, that one man can impose his will upon it, that space shrinks. It does not shrink gradually and then stabilize. It shrinks until it disappears.

We are watching it disappear.

The Pattern

What does it look like when power becomes compensatory, when it is exercised not because a decision needs to be made but because the person making it needs to feel powerful?

It looks like this: Executive actions taken not because they are effective but because they are dramatic. International commitments abandoned not because circumstances have changed but because continuity feels like constraint. Institutions gutted not because they are failing their function but because their independence is intolerable. People dismissed not for poor performance but for the unforgivable offense of disagreement.

The tolerance for complexity, for the acknowledgment that problems are hard and solutions uncertain, disappears. The response to criticism accelerates and loses proportion: thoughtful differences degrade to insults which culminate in retaliation.

This is not the stuff of policy disagreements. It is not the ordinary friction of a contentious administration. It is the behavioral signature of power that has become, at its core, about something other than governance.

That would be worrying enough. But this pattern is intensifying at the very moment that the political environment that once provided external validation is collapsing. The President’s approval is at historic lows. The affirmation of the 2024 election -- the one that told him he was winning, dominant, beloved -- is not holding. The predictable response of a person whose psychological equilibrium and sense of self depends on that affirmation is not humility. It is not recalibration. The response is escalation, the kind of action that feels like power -- unilateral, unchallengeable, dramatic.

That is where we are. And the question is not whether it is likely to produce something catastrophic. It is highly likely. The question is whether anyone with the authority to prevent it will act in time.

The Abdication

The American constitutional system was designed, with penetrating insight into human nature, around a simple and enduring proposition: power without friction is power without limit.

The cabinet exists, in part, to provide institutional friction -- to slow, to question, to modify, to refuse. The 25th Amendment exists precisely for the circumstance in which the president’s capacity to discharge his duties has become so obviously impaired. Congress holds the oversight, appropriations, and if necessary, the removal authorities that make executive power answerable to something beyond itself.

None of these mechanisms require that we all agree on a clinical diagnosis. They require only that the people who hold them do not look away, that they look honestly at what is in front of them and act on behalf of all of us.

What we are witnessing instead is accommodation on a scale that has no modern precedent in a functioning democracy. A cabinet that has not merely failed to constrain but has actively pledged loyalty and love (literally) to a man rather than to the republic. A Congress that has treated its oversight function as an uncomfortable inconvenience (think Mike Johnson) to be avoided rather than a constitutional duty to be fulfilled. An institutional culture in which the question “what does my oath require?” has been replaced by “what does my political survival permit?” And, not incidentally, a failure of leadership in business, among professions, and in the academy to honestly and publicly say, “What the hell!”

This is not a secondary problem. This is the primary problem.

Because the danger is not only that one man might make an impulsive, catastrophic decision. The danger is that the entire architecture designed to prevent such a decision has been deliberately, systematically, almost cheerfully disassembled. In the United States today, democracy’s room has no walls.

What Next…

Prediction is not certainty. But pattern is evidence.

The kind of action most likely to emerge from this combination -- approval collapse, compensatory urgency, no institutional friction -- is not a carefully deliberated strategic initiative. It will be something that feels like decisiveness. A military action branded as strength. A constitutional rupture framed as boldness. A foreign policy shock designed to generate the sensation of dominance. Sound familiar? But the next time it will have to be bigger.

It will not be chosen because it is wise or because the situation requires it. It will be chosen because it is available, because it is dramatic, and because in the moment it is chosen, it will feel like proof that the President is still powerful. January 6th gave us a preview. What comes next will not be improvised.

The consequences of that kind of decision -- in a nuclear-armed world, in a geopolitical environment of extraordinary fragility, with alliances already strained to breaking -- are not recoverable in the ordinary sense. Some doors, once opened, do not close.

This is not alarmism. It is the straightforward application of pattern recognition to a situation of constitutional -- possibly existential -- gravity.

What Is Needed

Nobody is asking for revolution. At least not yet. We are asking for the ordinary, responsible functioning of republican government.

We need members of Congress -- especially its leadership -- to acknowledge that the oversight mechanisms they have abandoned are not optional features of the constitutional order. They are its operating system.

We need Scott Bessent and Marco Rubio to ask themselves, honestly, whether their continued accommodation serves the republic or only their own positions -- and whether history will distinguish between the two.

We need citizens to understand that the anxiety many of us feel is not irrational and not even partisan. It is understandable and appropriate. It is the proper response to an obviously dangerous situation. And it has a legitimate outlet: the demand, persistent and public, that the people entrusted with constitutional authority use it.

Are we up to it?

______________________________

Susan P. Borden is a political economist working at the intersection of democratic theory, monetary and fiscal policy, and ecological economics. She is chairman of Modern Money Lab, a think tank supporting a unique, international graduate program in Sustainable Economics (modernmoneylab.org.au) and a co-founder of Modern Money Lab US (modernmoneylab.org).

Robert Kagan is not a man given to despair, which is why his recent essay in The Atlantic lands so hard. The United States, he argues, has suffered a defeat in Iran unlike any in its modern history, one that “can neither be repaired nor ignored.”

Kagan’s diagnosis is not wrong. Roughly 20 percent of the world’s traded oil and a third of its liquefied natural gas pass through the Strait of Hormuz. By controlling the strait, Iran can pressure Japan, South Korea, India, Europe, China, and much of the developing world without firing a shot. Indeed, Iran can demand accommodation simply by threatening disruption.

Kagan calls this “the post-American world order.” We might rename it “the fossil-fuel world order” because Iran’s new power is not military, it is not economic in any productive sense, nor is it really ideological. It is geographical leverage within a hydrocarbon-dependent world.

As global struggles go, that is an unusually specific point of very substantial leverage: one class of commodities and one choke point.

The suggestion here is that Kagan mistakes the chessboard for the game. To say the obvious, the moment the world’s major economies are no longer dependent on Gulf hydrocarbons, the Strait of Hormuz, from a geopolitical point of view, becomes not worthless, but dramatically less determining. Kagan’s checkmate dissipates. In fact, his game board begins to dissolve.

Let us stipulate that the Trump administration is intellectually hopeless, operationally hapless, and morally bankrupt.

Let us also stipulate that the United States has been and remains, for now, the sole issuer of the world’s reserve currency and thereby has the exclusive capacity to spend what the world’s real economy requires without being revenue constrained. No borrowing from foreign creditors. No “finding the money.” No permission required from bond markets. Its sole constraint is that its spending must be targeted at expanding real productive capacity rather than chasing existing goods or services.

To be clear, this is not a theory. It is the operational fact that financed World War II, the Marshall Plan, the Interstate Highway System, and the Apollo program. None of those initiatives were constrained by financial capacity.

This is what Kagan cannot see because it lies outside the conventional “realist” frame: the United States still possesses a strategic instrument no petrostate can match - monetary sovereignty.

Monetary Sovereignty and National Security

If nothing else, the Iran debacle has made clear that the strategic aim of the U.S. and its democratic allies (frayed as those alliances have become) should be to eliminate the geographic leverage that gives Iran what Kagan calls its “checkmate” position, while preventing any future party - friend or adversary - from acquiring similar leverage over the global energy supply.

But how? And how fast?

The U.S. could make a consequential public pivot to an energy independence doctrine with the declared strategic aim of (1) eliminating the geographic leverage that gives Iran what Kagan calls its checkmate position, while (2) preventing any future party - adversary or friend - from acquiring equivalent leverage over the global energy supply. This pivot need not be framed as a Green New Deal or a climate commitment. It would be advanced as a new strategic doctrine aimed squarely at national security and, not incidentally, at inflation management.

Evoking World War II, not just rhetorically but literally, is an apt historical analog. FDR did not ask Congress to find the money to pay for the expenditures necessary to convert from automobile to tank production. The currency-issuing federal government simply authorized the spending. Money was never the problem; the real economy was the actual constraint - finding the engineers, the workers, the steel, and the factories. The challenge was carefully managing those real resources, including implementing wartime price controls and rationing that accompanied the mobilization.

In the current circumstance, the United States does not lack the dollars to finance a crash renewable energy buildout. What it lacks are the supply chains, the trained workforce, the transmission infrastructure, and the manufacturing capacity such a buildout would require. Those are real constraints and they are exactly what a properly designed mobilization would address, directing new spending at expanding the real productive base, not just stimulating demand in an already-constrained economy.

The inflationary risk is real but manageable, and here the analysis matters. Oil at $150 or $200 per barrel - the scenario Kagan describes - is a supply-side price shock, what economist Isabella Weber calls seller’s inflation: prices driven by market power and supply constraints, not by excess demand. The correct policy response to seller’s inflation is a supply-side intervention: expand the supply of the thing whose scarcity is driving prices. A renewables mobilization would be just that kind of intervention. Over the medium term, energy generated by wind, solar, and storage has near-zero marginal fuel cost. The mobilization would be anti-inflationary by design.

There might even be a hard-to-measure “announcement effect” that could operate immediately, before a single additional gigawatt was built. A credible U.S. commitment to a WWII-scale transition would tell every energy-importing nation in the world - every nation Kagan describes as being forced to “work out its own arrangements with Iran” - that a different future is being built. If the U.S. were trusted, the desperation calculus could change very quickly. The scramble to accommodate Tehran, if still urgent, might at least not appear so permanent.

We should be able to imagine a new U.S. president in January 2029, paraphrasing President Kennedy in 1962, saying:

“We choose to transform the world’s energy economy in this decade not because it is easy, but because it is hard, not only because it is wise, but because it is just, not so that we can win, but so we can lead. It is for this reason that I regard the decision at the beginning of this administration to shift our efforts to achieve renewable energy independence from low to high gear as the most important decision to be taken - for our children, for our neighbors in the North and the South, and for democracies everywhere - during my incumbency in the office of the presidency.”

Monetary Sovereignty and Global Democracy

A second strategic possibility follows the same monetary logic — and deserves its own full treatment. The United States can also use its reserve-currency position to help free Global South nations from debt structures that reinforce Chinese, petrostate, and Wall Street leverage.

China’s Belt and Road Initiative has left dozens of countries carrying debilitating external, dollar-denominated obligations. Much of the developing world now sits trapped between energy dependence, dollar debt, Chinese leverage, and vulnerability to supply shocks. The United States could offer another path: helping finance debt obligations while simultaneously supporting locally controlled renewable energy development and institutional capacity building.

Not charity. Not extraction. A geopolitical architecture aimed at making energy sovereignty broadly achievable and new 21st-century democratic alliances sustainable.

The point is not that any of this would be politically easy. It would not. Nor is this an immediate solution to the present crisis. Energy transitions occur over decades even when mobilized seriously.

But Kagan’s conclusion - that America has no consequential moves left - only follows if one accepts his fossil-fuel chessboard as immutable.

That is a fatal mistake.

Susan P. Borden is Chairman of Modern Money Lab and Principal of Modern Money Lab US, a 501(c)(3) institution advancing MMT-informed policy research, education, and advocacy.

Released with great fanfare last week, “The Report of the Yale Committee on Trust in Higher Education” isn’t a diagnosis. It is diagnostic.

It is institutional narcissism masquerading as honest self-reflection.

It is mission-narrowing masquerading as courage.

It is charity masquerading as justice.

It is submission masquerading as integrity.

It is a press release masquerading as a solution.

The purported topic of the report, “trust in higher education,” is lodged entirely in matters of institutional reputation and concludes by proposing several remedies, most notably clearer admissions standards and a narrower institutional mission.

The unasked question bearing on widespread trust that would have required real introspection is: “What do democratic societies actually need from higher education and have we been providing it?” Instead, this utterly self-referential report fails to consider the role Yale and similar elite universities have played - or the role they could and should play - in the never-ending work of shaping, strengthening, and renewing democratic norms, institutions, and habits of citizenship.

Indeed, the report’s most disheartening, emblematic moment is when the faculty committee recommends that the university strip its mission statement down to a single, “clean” purpose: “to create, disseminate, and preserve knowledge through research and teaching.” No more “improving the world today.” Deleted. No more fostering “an ethical, interdependent, and diverse community.” Vaporized. Those former aspirations, the committee writes, are “worthy goals - but they are not what makes a university a university.”

Really? “… but they are not what makes a university a university.” It is a breathtaking sentence. John Dewey once warned against what he called the “spectator theory of knowledge,” the idea that the job of education is to transmit an existing body of truth to a passive receiver. Dewey’s concern applies with particular force to the Yale committee’s revised mission: “Create, disseminate, and preserve knowledge” describes knowledge as a thing to be handled, not a capacity to be developed. Dewey would have recognized the narrowing immediately, and he would have named its cost: the surrender of education’s democratic function.

Another penetrating educational philosopher, Jerome Bruner, argued that a school should be a “forum for negotiating and renegotiating meaning,” an explicitly public, dialogic, democratic space. Again, Yale’s mission-narrowing alternative, to “create, disseminate, and preserve knowledge,” describes a repository, not a forum. It describes transmission, not negotiation. Bruner would say that an institution organized around transmission rather than negotiation cannot produce citizens: it can only produce credentialed receivers.

Consider what the credential actually does. Yale’s own admissions philosophy, codified in a 1967 letter by President Kingman Brewster and cited admiringly in this very report, was explicit from the start: Yale would seek “future leaders,” prioritizing those “whose capacities would benefit from Yale’s resources.” What the committee does not say is that “future leaders” has always meant, in practice, the reproduction of a governing class. The credential Yale confers is not merely an educational certification. It is a form of social consecration, membership in a network whose value derives precisely from its exclusivity. Under these circumstances, one might have thought that the faculty committee would have endorsed a Yale education steeped in the American democratic project as a crucial measure of its trustworthiness.

Then there is the pretense of neutral knowledge production -- Yale’s newly sanitized mission. This is not just pedagogically wrong, it is epistemologically naive. There is no mission to “create and disseminate knowledge” that floats free of the values, power relations, and narrative commitments that make knowledge intelligible. In truth, elite universities are not politically neutral knowledge producers who inadvertently drifted into bias. An honest inquiry could have asked to what extent elite universities may have been contributing to the intellectual infrastructure that has eroded democratic capacity -- neoclassical economics, technocratic expertise, the conflation of money and merit. The trust crisis isn’t a PR problem. It is, in no small part, a consequence of what these institutions have actually been credentialing, defending, and legitimizing for fifty years.

__________

Which brings us to matters economic.

Let’s get real: Yale admits roughly 2,000 undergraduates a year into a total enrollment of about 4,700. There are approximately 18 million students currently enrolled in American higher education. Americans carry a collective student debt load approaching $1.8 trillion, spread across nearly 43 million borrowers, the majority of whom are no longer in school. More than half are over 35. One in five is over 50. This is not a crisis of current students navigating a difficult market. It is a multigenerational financial wound, still open, still bleeding. The committee is proposing to solve a public finance crisis with private philanthropy. This is not a solution; it is a press release.

For decades, elite universities’ capacity to privately subsidize tuition and fees has been deployed as evidence that the market in higher education is working, that access exists, that meritocracy functions, that public subsidy is therefore unnecessary. Unwittingly or otherwise, they have provided ideological cover for a public disinvestment that has overwhelmed almost two generations with paralyzing debt. Meanwhile, state legislatures have systematically defunded public universities, where the overwhelming majority of American students actually are. And the purchasing power of Pell Grant aid to students in smaller, less endowed private institutions has eroded to a fraction of its 1970s value. The Yale report mentions none of this.

And let’s not forget that the economists who designed and promote the balanced-budget orthodoxy, the retreat from public investment, the treatment of education as private consumption rather than a public good, were overwhelmingly credentialed by institutions like Yale. The deficit hawks who argue that federal spending on education and student debt relief is unaffordable, the theorists who model human capital as individual investment appropriately financed by individual debt -- they are, disproportionately, the products of elite universities. The trust crisis has an intellectual history, and that history runs directly through the institutions now bewildered by it.

(By the way, Yale’s $41 billion endowment exists in a tax-exempt structure that constitutes, in straightforward terms, a substantial ongoing public subsidy. The question of what public obligations attach to that subsidy -- not just to Yale’s own students, but to the broader higher education system the endowment’s growth has helped privatize -- is entirely absent from the committee’s deliberations. An institution that benefits this extensively from public tax treatment while producing graduates who go on to argue that public investment is fiscally irresponsible has a political economy problem that no admissions reform will remedy.)

__________

Finally, the Yale report is, at bottom, a document produced under duress. It is written as the Trump administration has frozen billions in research funding, targeted faculty and students for their political views, and made explicit that the autonomy of elite universities is conditional. The committee is careful not to say this is why they are recommending the “reforms” they have proposed. But narrowing the mission, expecting viewpoint neutrality, promising to scrutinize the “diversity of perspectives” in departmental hiring - this is precisely the kind of institutional self-contraction that authoritarian pressure is designed to effect. Public trust in democratic institutions is not restored by making educational institutions less committed to advancing the values democracy requires. It is much more likely to accelerate democracy’s erosion.

The Yale report is compliance masquerading as integrity. The mission-narrowing recommendation is the tell. Strip out the ethical commitments, the interdependence, the world-improvement, and retreat to “pure” knowledge production. This isn’t reform. It’s self-protection. It asks: What can we defend? It fails to ask: What does democracy need? That inversion transforms institutional narcissism into institutional policy, and untethered “solutions” into a self-promoting press release posing as an honest self-study.

Pathetic. Yale’s President and faculty surely know the perilous times we are in require so much more of all of us.

Susan P. Borden is a political economist, focused especially on inequality, climate, and sustainable, democratic prosperity. She is chairman of Modern Money Lab, the home-base of a unique, international graduate program in Sustainable Economics (modernmoneylab.org.au) and a co-founder of Modern Money Lab US (modernmoneylab.org).

In 1797, Thomas Paine sat down to solve a problem that had been troubling him for years. It wasn’t poverty exactly, though poverty was everywhere. It was the injustice beneath the poverty, the sense that something belonging to everyone had been quietly enclosed, and that the enclosure had been so complete, and so long ago, people had forgotten anything had been taken.

His pamphlet, Agrarian Justice, opened with a provocation: civilization had made the wealthy wealthier and the poor poorer. He argued that it was not because markets were cruel, or because the poor were lazy, but because private ownership of land had dispossessed everyone who didn’t already own land as part of their “natural” birthright. Paine believed that the earth, in its uncultivated state, was the common property of the human race. When some authority fenced it in, the rest of humanity was owed something - a ground rent, Paine argued, on the commons that had been enclosed.

His remedy was strikingly concrete: a National Fund, financed by inheritance taxes, paying every person a lump sum at twenty-one and an annuity after fifty. Not charity. Not poor relief. A dividend -- your share of the common inheritance, returned to you. The “common” wealth he had in mind was the land, the pre-enclosure earth, what he understood to be the natural inheritance of humanity. Paine’s ground rent was a moral claim on the historical act of enclosure.

More than two centuries later, Paine’s ethical sensibilities and concerns reverberate more than ever; it’s only his economics that need recasting in our modern context. When grappling with the injustice underlying poverty today, not least of all in the extraordinarily rich countries of Europe, North America, and Australasia, Paine’s resonant analysis and search for a remedy beg to be reinterpreted for 21^st century monetary economies.

Is Public Money a Monetary Commons?

In modern monetary economies like Australia, Canada, the United Kingdom, and the United States, money first enters the economy as a public creation via government spending. Indeed, it is not a stretch to think of all government spending -- literally, not metaphorically -- as the generation of “common wealth.” What happens next is a distributional decision: Of the “common wealth” a government creates by spending into the economy, how much should it cede to the private sector and how much should it extract in due course via taxation?

It can be a bracing realization that in countries like the United States that import more than they export, the private sector can accumulate net financial savings only if the government runs a deficit large enough to offset the trade deficit. This is not a political opinion. It is an immutable accounting fact-of-life -- but still challenging to take fully on board.

• U.S. government deficits create net financial assets in the private sector. That’s because the government is in deficit when it spends more money into the economy than it taxes out of the economy. What’s left in the economy stays in the private sector. Even though that’s clearly a plus for households and enterprises, we call that a “deficit” with all its familiar, negative connotations.

• On the other hand, government surpluses destroy net financial assets in the private sector. That’s because the government can only be in surplus when it taxes more money out of the economy than it spends into the economy, thereby reducing the financial assets of households and enterprises. (There is a reason most modern monetary economies almost always run budget deficits.) But as we know, left un-interrogated, many assume government surpluses are responsible and desirable (even if not achieved in the U.K. or the U.S. for over 25 years, very rarely and briefly before that, and always followed by a recession or worse, much worse).

Stepping back, what this means is that the total stock of net financial assets (NFAs) held by the private sector in the U.S., for example, is the direct product of decades of accumulated government deficit spending, also known as the national “debt.” NFAs are not spontaneously generated by private enterprise. They are created, in the most literal, double-entry bookkeeping sense, by a public authority, the currency-issuing government, acting on behalf of the community. The strongest version of this insight is that in a democracy, the people, acting by way of their franchise through elected representatives, authorize government expenditures, paid for by newly created common wealth, some of which are eventually left in the economy as private sector financial assets.

The Metering Valve

Now consider taxation which brings a related surprise. A currency-issuing government doesn’t require tax dollars in order to spend. In fact, it has to spend first; only then can it tax some of that spending back. Even more startling, our tax dollars are destroyed as they are remitted. They don’t accumulate in a vault somewhere. Government spending creates new financial assets in the banking system; taxation reverses that process by deleting them.

What taxation actually does is something more interesting and potentially more democratic: it regulates, usually on an annual basis, how much of the monetary commons that was spent into the economy in the previous year -- how much of that common wealth -- remains in private hands.

Think of taxation as a metering valve, that measures and regulates the flow of this common wealth. When a democratic community taxes, it is asserting its collective stake in the net financial assets that government spending created. When it taxes less, it is leaving more of that stake with households and businesses, but vice versa when it taxes more. The important point is that the rate of taxation is not a revenue decision. It is a distributional decision about the private sector’s share of the monetary commons -- how much of the common wealth is allowed to remain privately-held vs. how much the government, on behalf of the public, takes back. That decision is shaped by two primary concerns. One is the government’s desire to help manage aggregate demand, which in turn helps manage inflation. The other, if the tax is progressive, is a public interest in compressing the income inequality gap. Taxation’s purpose is never to fund government spending.

Is That All There Is?

The image of the metering valve fails, however, in at least one respect. The net financial assets that taxation removes from the private sector do not accumulate anywhere. They are not held in some common form. They are extinguished. The circuit completes, the ledger balances, and the public’s share, having been asserted, disappears. It is deleted.

When you think about it, this is a remarkable institutional choice. We possess this mechanism, taxation -- already operating, requiring no new infrastructure -- through which a democratic community continuously negotiates the share of the financial wealth left in the private sector that its own monetary authority created. We use that mechanism exclusively to adjust the volume of private financial holdings. We don’t use that mechanism to retain any of that taxed-away portion of those financial assets in a common, public form, recalling that a principal purpose of taxation is to manage aggregate demand by reducing available financial assets.

One wonders, though, if that is the best we can do. Paine understood that the community’s claim on the commons had to be held in order to mean anything. A National Fund was his institutional suggestion -- a vessel in which the public’s share of government-created financial assets could be kept and from which it would flow to every person as their birthright dividend. Although there is no evidence that he was thinking about inflation, Paine’s National Fund would almost certainly have had a negligible inflationary effect since funds would only be released on a person’s 21st birthday and not again until after the age of 50. (In 18th century England, life expectancy at birth in was 37 - 40 years.)

We have better, very sophisticated tools now. And we understand the system, its dynamics and its plumbing. We can see, measure, and evaluate the monetary commons in real time. The question and the remedy Paine posed for his era -- not just that the community has a share, but how that share might be held and expressed - - remain exactly as potent and provocative today as they were in 1797.

Common wealth. Paine thought it mattered. Perhaps we should too.

Something to think about.

Susan P. Borden is a political economist, focused especially on inequality, climate, and sustainable, democratic prosperity. She is chairman of Modern Money Lab, the home-base of a unique, international graduate program in Sustainable Economics (modernmoneylab.org.au) and a co-founder of Modern Money Lab US (modernmoneylab.org).

Robert Kagan has been prolific in the past few weeks, most recently in a widely circulated essay in The Atlantic, “America Is Now a Rogue Superpower.” He makes the case that however the war with Iran concludes, it has deepened wedges between the U.S. and its former allies, strengthened the expansionist ambitions of Russia and China, accelerated global political and economic chaos, and left the US weaker and more isolated than at any time since the 1930s. He adds that even a military “success” against Iran would be hollow if it accelerated the collapse of the alliance that has been the true source of American power for eight decades. In other recent articles, Kagan has argued that the US faces a choice between establishing a long-term military presence to sustain whatever gains the Trump regime imagines the war against Iran might produce or pulling back and allowing events to take their course with the attendant risk of repeating the post-WWI pattern when American withdrawal allowed the balance of power to be refashioned in destabilizing ways.

Kagan’s longstanding intellectual framework is built on the proposition that American power projected outward is what holds the liberal order together. But what if that is the core of the problem? Iraq, the Financial Crisis of 2008, the Iran war: maybe the credibility of outward projection has been spent. Maybe the liberal order can’t be restored through the same mechanism that undermined it. Maybe the instrument that is broken can’t repair itself.

In fact, what if the causal arrow now runs the other way? What if the only credible path to renewed global influence emerges from domestic renewal - not just through abundance as some have suggested, but through new realized standards of magnanimity, fairness, generosity, imagination, opportunity, possibility, and shared missions that should and could be the goals of a modern democracy?

Hopelessly optimistic? Maybe. But the rest of the world aside, such a domestic resurgence is arguably necessary to breathe new life in the struggling American democratic project.

Kagan’s immediate concern, however, is about the next five to ten years of multipolar instability. Even if the country elects newly committed legislative and executive branches of government, it is likely to take a decade or more to earn the rest of the world’s confidence that the U.S. is fully committed, in intent and direction, to exemplary domestic priorities. So in tandem with a decade committed to renewing America at home, what if the United States simultaneously made an immediate, radical, good faith commitment to the Global South?

The Global South?

Most people in the so-called developed world, including most progressives, have only a vague sense of the debt crisis currently crushing the developing world. The numbers, once assembled, are both staggering and heartbreaking. For instance:

• A record 61 developing countries now allocate 10% or more of their government revenues just to interestpayments and that number is rising.

• Overall, 3.4 billion people - more than 4 out of 10 people on earth - are living in countries that spend more on interest payments than on either healthcare or education.

This is not a peripheral, soft humanitarian concern. It is a structural feature of the global economy, one that is getting worse, not better, and one that the current architecture of international finance seems wholly unable to address.

Taking a closer look:

In 2023, 26 developing countries saw net negative financial transfers of $48 billion -- meaning they paid out $48 billion more to external creditors than they received in new disbursements. The data are still being assembled, but by 2025, that number was expected to have reached 44 countries, with the volume of outflows exceeding $100 billion. The Global South is not receiving development finance. It is providing finance -- to Wall Street bondholders, to the World Bank, to the IMF, and increasingly, to China.

China’s role in this picture is both central and rapidly changing. At the peak of its Belt and Road Initiative in 2016, China was disbursing more than $50 billion annually in new development loans, more than all Western creditors combined. It was the world’s largest bilateral development lender. Today it is the world’s largest bilateral debt collector. New loan commitments have collapsed to roughly $7 billion annually. In 2025, it is estimated that the world’s poorest and most vulnerable countries will have made record debt repayments to China totaling $22 billion. In 2012, China was a net drain on the finances of 18 developing countries; by 2023, that number had risen to 60.

The contractual architecture of Chinese lending makes this situation particularly difficult to escape. An excellent study of 100 Chinese loan contracts, conducted by researchers at AidData, the Center for Global Development, and the Kiel Institute, found that virtually every contract since 2014 contains sweeping confidentiality clauses, provisions that position Chinese lenders as senior creditors, requirements to maintain offshore escrow accounts beyond the borrowing government’s control, and “No Paris Club” clauses that contractually prohibit borrowing countries from restructuring Chinese debt in coordination with other creditors. China has, in effect, built a contractual trap - not through malicious intent, but through the systematic pursuit of repayment priority in every deal it signed.

To be clear, 42% of African external debt is owed to private creditors - bondholders and hedge funds charging interest rates that are sometimes four times higher than comparable World Bank lending. Predictably, the poorest countries in the world are paying the highest rates, servicing debts that in many cases date to a period of artificially cheap global capital that no longer exists.

Put another way, Global South countries are currently a net exporter of capital to the wealthy world, the inverse, the precise inverse, of what development finance is supposed to accomplish.

It has happened before. In 1947, the United States found itself at a moment of global instability and chose strategic imagination over retrenchment. With Europe in ruins and democracy fragile across the continent, the United States committed roughly $13 billion - approximately $150 billion in today’s dollars - to rebuild war-torn European economies. The Marshall Plan is remembered as an act of generosity. But it was primarily an act of strategic imagination. American policymakers understood that prosperity abroad would reinforce stability at home - that a world of recovering democracies was an environment in which American power, American values, and American commerce would also flourish. It worked; it was an enduring achievement. It stabilized fragile democracies, strengthened alliances, and helped establish the foundations of a postwar international order that provided eight decades of relative great-power peace. Notably, it cost less in today’s dollars than the annual debt service coverage we are about to propose - and it transformed the world.

What If? A Specific, Tractable Proposal

What if the United States targeted the 47 lowest-income countries in most acute debt distress, a well-defined set already used by international development institutions, concentrated in sub-Saharan Africa and fragile states, overwhelmingly dependent on concessional financing, with little or no access to private capital markets? These are the countries where the human cost of debt service is most severe and the geopolitical opportunity may be most concentrated.

And what if the United States committed to covering the annual debt service payments of each of those 47 countries to China? Without further study, the data are a bit difficult to parse, standardize, and recombine, but it looks as if the 47 lowest-income countries most in distress collectively owe China roughly $55 billion in total debt stock. Annual debt service on that sum - principal plus interest - is a fraction of that figure, probably in the range of $8-12 billion annually, depending on maturity profiles. And of course, that figure would decline as existing loans mature.

For context only, covering the annual Chinese debt service of the world’s most distressed economies could cost as little as 1% of the $800 billion the U.S. has been spending on defense annually and about 0.5% of the Trump regime’s newly requested defense budget of $1.5 trillion.

To be clear, this proposal contemplates neither restructurings nor prepayments. No contracts would need to be renegotiated and no IMF process or “No Paris Club” clauses would be triggered. This would not require China’s consent nor the participation of any multilateral framework. The borrowing country would continue to service its debt normally. The U.S. would simply cover the payment.

Monetary Diplomacy

The predictable domestic objection would be something like “we can’t afford to pay other countries’ debts.” The answer would be best approached as a teaching moment:

1. The U.S. is the monopoly issuer of U.S. dollars, the currency in which most of these countries’ debts are denominated. When the U.S. spends dollars into the domestic or the global economy, it creates those dollars. That is the nature of monetary sovereignty.

2. The U.S. dollar is the reserve currency of the world. For too many countries, the dollar system has often been experienced as disciplinary. Think of IMF conditionality, sanctions, financial leverage. This proposal advocates replacing monetary repression with monetary diplomacy. The intention would be to deploy the reserve currency privilege not to dominate but to stabilize.

3. The limit on U.S. government spending, domestically or globally, is not how much. It is for what, to whom, requiring what kind of real, non-financial resources (labor, technology, productive capacity, natural resources, etc.). Economists call this functional finance, the principle, articulated by Abba Lerner in 1943, that the purpose of fiscal capacity is to achieve real economic outcomes, not to conform to conventional financial rules. The question is never how much money is involved. It is always: what does this spending actually accomplish? What real resources does it deploy or release?

4. Applied globally, that question has a clear answer: covering these debt service payments releases the fiscal space of the world’s most distressed economies at zero real cost to the United States. That is not a fiscal trick. That is the logic of monetary sovereignty, applied with strategic purpose.

Details

Conditions? The US could attach essentially no conditions - which would be the most powerful signal - or could attach light-touch conditions around things like renewable energy investment or education and health spending with the freed-up fiscal space. The key is that any conditions would be visibly different from the kind the IMF imposes. The U.S. would not say “cut your public sector expenditures and liberalize your capital account” but instead “take the freed resources and invest them in your people.” Internationally, that distinction would almost certainly be enormously legible.

The domestic political framing. This policy would strategically deploy American financial capacity to rebuild relationships that the current administration has destroyed in countries where China has been filling the vacuum. Rolled into one, that’s a national security argument, a soft power argument, and, if linked to environmental initiatives, potentially a climate argument.

Reliable on-going relationships. The borrowing country’s government would have a concrete, recurring reason to maintain its relationship with the U.S. Every year the payment was made, that relationship would be renewed and reinforced. No longer just an occasional state visit, conversation at the U.N., or exchange of ambassadors, it would be a sustained commitment, the value of which would almost certainly compound over time. Monetary diplomacy could replace diplomatic niceties and one-time gestures with reliable, evolving relationships.

China couldn’t really object or counter. China would receive its contractual payments on schedule. (It would be odd and incoherent to match the offer; China would have to start paying other countries’ debts to itself.) And the policy would expose the underlying nature of the Chinese lending relationship without requiring anyone to say a hostile word about it.

Low cost/no cost. Furthermore, it’s only money. This plan would require no American workers, no materials, no physical capacity. It would be a pure financial transfer that costs the U.S. sovereign currency issuer essentially nothing in real terms. What matters is what the spending does, not what it costs in nominal terms. Well framed and sensitively handled it could help the U.S. acquire, quite quickly, a reservoir of geopolitical credibility and possibly a faster track to reclaiming trustworthiness.

Caveats

It would be a mistake not to acknowledge the irony. A proposal that the United States unilaterally cover the debt service payments to China of the world’s most distressed economies is, in a narrow sense, still an act of American power projected outward, the very model that is almost certainly exhausted. The distinction lies in the nature of the projection: not imposing a political or economic model, not conditioning assistance on ideological conformity, not building a permanent architecture of dependency, but enabling, helping to create the fiscal space within which sovereign governments can make their own choices about their own futures. It is, at best, a transitional act: using the monetary capacity that reserve currency status still confers to purchase the time and credibility that a deeper American transformation will require. The ultimate destination - an America whose global influence derives from what it is rather than what it spends - remains the longer project. This suggestion is the first step toward that goal, not a substitute for it.

The Larger Framework

The United States, as issuer of the world’s reserve currency, occupies a structurally unique position in the global monetary system. It is not merely a large economy among other large economies. It is, in an important sense, the monetary sovereign of last resort for a dollar-denominated global financial system. The dollar’s reserve status confers extraordinary privilege - the ability to run persistent deficits without the balance of payments crises that constrain other nations, the ability to set global financial conditions through its interest rate decisions, the ability to impose devastating economic consequences through sanctions. That privilege has been noted, understood, and frequently discussed.

What is almost never discussed is the corresponding responsibility that attends that privilege. It may not be an exaggeration to realize that the U.S. effectively functions as the central bank of the global economy. A responsible global monetary sovereign would use its unique fiscal capacity not merely for domestic purposes but to stabilize the global system on which its own prosperity and security ultimately depend. Debt distress in 47 low-income countries is not their problem alone; it is a systemic instability in a dollar-denominated global economy, and the issuer of that dollar has both the capacity and arguably the obligation to address it.

There is a long intellectual lineage behind this obligation, even if it has rarely, if ever, been honored. At Bretton Woods in 1944, John Maynard Keynes proposed a supranational reserve currency - the Bancor - precisely to prevent the kind of extractive creditor-debtor dynamics that now define the Global South’s relationship with the global financial system. His plan would have imposed symmetric obligations on surplus and creditor countries, not just on debtors: those who accumulated claims on the world would bear responsibility for recycling those claims productively back into the global economy. The United States rejected that proposal. It preferred a system built around the dollar and around American discretion. Eighty years later, the consequences of that choice are visible in every finance ministry in sub-Saharan Africa.

Keynes was right. The question now is whether the United States, from its position as the system’s monetary sovereign, is willing to act on the logic it rejected in 1944, not because it lost the argument, but because it has finally understood what winning it actually cost.

Susan P. Borden is a political economist, focused especially on inequality, climate, and sustainable, democratic prosperity. She is chairman of Modern Money Lab, the home-base of a unique, international graduate program in Sustainable Economics (modernmoneylab.org.au) and a co-founder of Modern Money Lab US (modernmoneylab.org).

Last week, the U.S. Department of Labor released a proposed rule that would allow private credit investments to be included in the 401(k) retirement accounts of ordinary Americans. Also last week, a major private credit fund run by KKR, the private equity and real estate investment firm, was downgraded to junk status by Moody’s, several other funds blocked investors from withdrawing their money, and Morgan Stanley strategists warned that default rates in direct lending could climb above 8 percent. The Trump administration called the proposed rule “democratizing” retirement investment. Like other things in Trump world, the timing feels thoughtless and impulsive, the policy feels misleading and corrupt.

That’s not wrong, but economist Hyman Minsky would have characterized it quite differently.

Hyman Who?

Hyman Minsky (1919–1996) had a straightforward but uncomfortable thesis. Financial stability inevitably undermines itself. Periods of calm don’t just precede crises - they cause them.

His framework, known as the Financial Instability Hypothesis, is populated by a taxonomy of borrowers who emerge at different stages of predictable economic cycles. Minsky called borrowers during the early, cautious phase, hedge units. These hedge borrowers have sufficient income to pay both interest and principal on their debts. As confidence grows (and memories of the last crisis fade) speculative borrowers proliferate; they can cover interest payments, but they need to roll over their debts continuously to avoid default. Finally, at the peak of the cycle, Ponzi borrowers appear; they can cover neither interest nor principal from current income and depend entirely on rising asset prices and continued access to new credit to stay afloat.

Minsky spent most of his career being ignored by the mainstream of his profession, but after he died, and the economy was shattered by the 2008 financial catastrophe, economists of all stripes began referring to the Great Financial Crisis as a “Minsky Moment.” Minsky had explained that the system doesn’t collapse because of random bad actors or moral failure. It collapses because, within the system itself, success breeds excess. Lenders compete for market share. Standards erode. Structures that would have seemed irresponsible at the bottom of the cycle seem prudent at the top, because nothing has gone wrong. Yet.

Minsky’s hypothesis was embedded in a broader theory about the evolution of capitalism itself that he called money manager capitalism. In his later work, he described the shift from an economy in which banks intermediated credit (and were regulated accordingly) to one in which vast pools of institutionally managed money - pension funds, insurance companies, hedge funds, private equity - came to dominate finance. The problem, Minsky argued, was that money managers are evaluated on short-term returns, rewarded for taking risks that won’t blow up on their watch. As a result, the system has no natural signals or mechanisms for pricing in long-run consequences.

Sound familiar? It should.

Today’s private credit boom is a textbook example of that system: vast institutional portfolios searching for yield in a world where genuinely safe assets are scarce.

Today’s Private Credit Story

In the aftermath of the 2008 financial crisis, regulators rightly imposed stricter capital requirements on banks, which, in turn, reduced banks’ appetites for riskier lending. So far so good. But as the economy stabilized, confidence and optimism grew, and with it, as Minsky predicted, came increased demand from borrowers. Nature abhors a vacuum and so does capitalism. The gap was filled by funds operating largely outside the regulatory perimeter. Private credit - essentially, lending conducted by alternative asset managers rather than regulated banks - has grown to roughly $3 trillion over the past decade.

To the financial press and many analysts, for years this looked like a success story. Businesses that couldn’t access bank credit found willing lenders. Investors seeking yield in a low-interest-rate environment found what they were looking for. Returns were strong, defaults were low, and the conventional wisdom held that the structure of the funds - called “closed-end,” with limited redemption windows - meant contagion risk was contained.

This is precisely the story Minsky warned us about. The decade of apparent stability was not evidence that the risks had been managed. It was evidence that the cycle hadn’t yet turned.

The downgrading of KKR and the blocking of redemptions last week are not random; they are today’s embodiment of Minsky’s taxonomy. Funds that were pitched as speculative (yield-seeking, leveraged, but manageable) are revealing themselves to be closer to Ponzi (dependent on new inflows and rising valuations to honor existing commitments). Meanwhile, researchers at the Federal Reserve Bank of Boston have described U.S. banks’ links to the private credit sector as “extensive,” with roughly $300 billion in bank loans flowing directly to private credit providers. The interconnections that the industry had insisted were limited are, in fact, substantial.

The AI infrastructure buildout has added further reasons to be concerned. With AI revenues falling far short of desired capital expenditures, technology companies have turned to corporate bonds, private credit, and special purpose vehicles (SPVs) to bridge the gap, moving more than $120 billion in data center spending off their balance sheets in under two years. An SPV is a financial shell company created specifically to hold debt that its parent prefers not to carry - structurally similar to the off-balance-sheet vehicles that obscured risk exposure in the run-up to 2008. In one representative arrangement, a private credit fund owns the majority stake in an SPV formed to finance a major hyperscaler’s data center. The technology company contributes a minuscule equity stake while the SPV carries the debt - allowing the tech company to avoid putting that liability on its own balance sheet. Morgan Stanley estimates that private capital could fund over half of the $1.5 trillion required for new data centers through 2028. Minsky would have had no trouble naming a structure in which speculative AI revenue projections underwrite debt-heavy off-balance-sheet vehicles, funded by private credit, and now potentially seeded with 401(k) capital: a Ponzi unit in formation.

Nor would Minsky be surprised by the official response: Treasury Secretary Scott Bessent wants to “prevent contagion” while simultaneously loosening capital requirements on banks. The Fed has cut its supervisory staff by roughly 30 percent. And at a recent meeting of the Financial Stability Oversight Council - the body charged with monitoring systemic risk in the U.S. financial system - officials publicly discussed hedge funds, artificial intelligence, and regulatory burdens. Conspicuously absent from the public agenda was any discussion of the rapidly growing private credit sector.

“Democratization” as Misdirection

The administration’s framing of the 401(k) proposal as “democratization” is infuriating. It implies that ordinary Americans have been unfairly excluded from attractive investment opportunities - that the problem is access and the solution is inclusion.

Minsky’s analysis suggests an entirely different reading. When Ponzi-stage assets need fresh capital to stay afloat, the system goes looking for new sources of money. Retail investors - whose 401(k) balances are sticky, whose financial sophistication is limited, and who cannot negotiate the terms of their participation - are an attractive target precisely because they are captive. “Democratizing” access to private credit, at this moment in the cycle, is less an act of inclusion than a mechanism for distributing losses more broadly before they are recognized.

This is not a new pattern. The final stage of every major credit cycle involves the packaging and distribution of deteriorating assets to investors who are the last to know or comprehend. And Minsky understood why. His theory of money manager capitalism contains an important, underappreciated corollary: when safe assets are scarce, finance manufactures new ones. Mortgage-backed securities filled that role in the 2000s, drawing ordinary households into the risk cycle through the very retirement and savings vehicles meant to protect them. Private credit - repackaged, rebranded, and now routed toward 401(k)s - is performing the same function today. The asset class changes. The mechanism does not.

The Trump administration’s spokesman promises that “common-sense guardrails” will ensure fiduciary compliance. Minsky, who spent decades watching financial regulators discover the limits of their frameworks after the fact, would have been more than skeptical.

Great. So What Would Minsky Prescribe?

Remarkably, Minsky was not a pessimist. He believed that financial crises were not acts of nature but the predictable consequences of institutional structures designed by people. He seemed certain that those institutional structures could also be redesigned by people.

Minsky’s prescriptions were heterodox and coherent: robust public employment programs to stabilize income flows independent of the credit cycle; strong financial regulation with supervisory teeth; public or quasi-public development banks to direct credit towards socially productive ends rather than speculative ones; and critically, a recognition that the financial system is not self-regulating and never has been.

Not one of these prescriptions is anywhere near the current policy agenda. Instead, we are watching the deregulation of both the banking sector and the shadow banking system, the insertion of Ponzi-stage credit instruments into the retirement savings of ordinary Americans, and the not-so-quiet scaling back of the supervisory infrastructure that might catch problems before they become crises.

Minsky’s most famous observation is that stability is inherently destabilizing. The longer things apparently hold together, the more fragile the underlying structure becomes. We have had more than fifteen years of seeming structural stability. Private credit is now exploding inside that structure. The cracks are visible.

But here is what Minsky understood: a crisis predicted is not a crisis fated.

Hyman Minsky didn’t just leave us a warning. He also left us an invitation.

____________________________________________________________________________

Susan P. Borden is a political economist, focused especially on inequality, climate, and sustainable, democratic prosperity. She is chairman of Modern Money Lab, the home-base of a unique, international graduate program in Sustainable Economics (modernmoneylab.org.au) and a co-founder of Modern Money Lab US (modernmoneylab.org).

1. The “Hearing” Room Where Nobody Listens and Nobody Learns.

Last week the House Budget Committee convened another hearing with the Faulknerian title, “The Best Metric to Reverse the Curse: A 3% Deficit-to-GDP Path to Fiscal Sustainability.”

This particular committee hearing has become a ritual, routinely performed in Washington with minor variations for more than four decades. Any of us could write the script: Each party blames the other, both sides imagining or pretending they are handcuffed by the reigning metaphor of the household budget. The government allegedly spends with the equivalent of a family checkbook and credit card, surpluses are virtuous, deficits are irresponsible, and cumulative deficits, called debt, are a sinful burden that we are immorally leaving to our grandchildren.

These are not really hearings. They are empty and performative rituals. Most of all, they are unexamined nonsense.

The Committee’s witnesses were the usual congregation led by Maya MacGuineas of the Peterson Foundation funded Committee for a Responsible Federal Budget. This time she was supported by Jared Bernstein, who should know better, and Kurt Couchman, representing, without irony, “Americans for Prosperity.” As usual, MacGuineas testified that the numbers are “too scary to list,” although she listed them anyway. Chairman Arrington of Texas reminded us - again - that the national debt now stands at $39 trillion, that every American child “carries a $530,000 share,” and that this trajectory is “unsustainable,” “dangerous,” and an “existential threat.”

The last federal budget that won the approval of MacGuineas was more than 25 years ago as the Clinton administration, year-over-year, proudly transformed the government’s deficit of $290 billion in 1992, to a surplus of $260 billion by 2000. But that Clinton surplus – perennially held up as the gold standard of fiscal rectitude, the thing we should all aspire to repeat – is instead the most instructive illustration of exactly what the Committee members stubbornly, steadfastly get wrong.

2. What a government surplus actually is.

To review: As any accountant will tell you, the national accounts of the U.S. economy consist of three sectors: the government sector (federal, state, and local), the private domestic sector (households and businesses), and the foreign sector (the rest of the world). Their financial balances - their surpluses or deficits - must, by definition, sum to zero. This is not a theory or a model. It is a tautology - as certain as the proposition that every sale requires a buyer. In the United States - a wealthy country that imports more than it exports and pays for those imports in its own currency - a federal budget deficit larger than its trade deficit necessarily produces a private-sector surplus. Conversely, a federal budget surplus necessarily pushes the private sector into deficit, meaning that households and businesses combined are spending more than they earn.

Indeed, the private sector can be pushed into deficit even when the government itself is running a deficit, if that deficit is smaller than the trade deficit.

Most important: When the government spends more money into the economy than it taxes out, that deficit becomes new net financial assets held by the private sector. To the penny. In the United States, the federal budget can only be in surplus if the government taxes more out of the economy – quite a bit more - than it spends into the economy. In other words, the government’s financial “improvement” is the private sector’s financial deterioration.

The late-1990s Clinton surplus offers the clearest real-world example of how this accounting identity plays out. The “deficit” doesn’t disappear. It migrates.

3. The Clinton years: What actually happened.

The chart below shows the balances of each sector of the economy as a percentage of GDP through the years of the Clinton administration, one of the very few times in American history that the federal government budget has been in surplus. The foreign sector surplus (the green line) grew from about 2% of GDP at the beginning of the administration to about 4% at the end. The government sector (the blue line) moved from a deficit of about 4% of GDP to a surplus of about 2% of GDP. As that was happening, the private sector (the orange line) went from a surplus of about 2% of GDP to a deficit of about 6% of GDP.

As should be clear, the Clinton surplus didn’t eliminate debt. It relocated it.

Debt, as a percentage of GDP, moved from the government’s balance sheet to the private sector’s balance sheet.

Put another way, as the federal government’s financial position “improved” by hundreds of billions of dollars, the private sector’s financial position deteriorated by a corresponding amount. By 1994, households and businesses, in aggregate, were spending more than they were earning and those private sector deficits could only be sustained by private credit, i.e., by private sector borrowing. It is not a coincidence that the late 1990s were marked by (a) the highly leveraged dot.com boom, (b) the beginnings of “mortgage innovations,” followed later by (c) the proliferation of mortgage backed securities, collateralized debt obligations, credit default swaps and even synthetic collateralized debt obligations, all designed to create the illusion of safe private obligations.

Those Clinton surpluses lasted for three years, from fiscal year 1998 to 2001. Higher tax rates, economic growth, and restraint in government spending produced a budget surplus of $69 billion in 1998, peaking at $236 billion in 2000. Except at the Federal Reserve and in the minds of a very few economists like Hyman Minsky, this was treated as an unambiguous triumph, touted in State of the Union addresses and the congressional hearing rooms of that era - exactly what last week’s Budget Committee witnesses want eventually to repeat.

In 2000, surprising members of Congress - who can’t seem to remember that every financial liability is somebody else’s financial asset - the Federal Reserve reacted to this brief moment of government surpluses not with celebration but with concern. Trying to explain that government liabilities are the financial system’s most important assets, Alan Greenspan testified: “The federal government has been running unified budget surpluses since fiscal year 1998… If current policies remain unchanged, the publicly held federal debt could be retired entirely by 2012…. Treasury securities play a critical role in financial markets… Their disappearance would necessitate significant adjustments in the way financial markets function and in the way monetary policy is implemented.”

Greenspan needn’t have worried. The 2001 recession ended the surpluses; tax receipts could no longer equal, much less exceed government spending. But the longer arc of private debt substitution for government deficits continued ramifying through the economy - through the explosion of mortgage-backed securities, through the metastasis of private credit dressed up as safety - until it all came crashing down in 2008. The Clinton surplus didn’t eliminate debt. It simply moved it from a transparent, accountable, sovereign balance sheet to an opaque, inherently fragile and unstable private one.

4. The Story They Tell

Needless to say, this is not the story told by Budget Committee witnesses eager to join the Committee in “reversing the curse” of government debt by proposing a fixed deficit limit of 3% of GDP. In their telling, the Clinton experience is proof that deficits can be eliminated. MacGuineas has long argued that tax cuts enacted by the Bush administration, combined with increased post 9-11 defense spending, plus expanded domestic spending such as the Medicare prescription drug benefit, undermined the progress the Clinton administration had made by exerting fiscal discipline. There is no acknowledgment that as the government budget was moving towards surplus and the current account balance was widening, the private sector was, necessarily, being pushed into deficit and increasing instability.

Instead, the witnesses have sold the Budget Committee on a “3% rule” (mindlessly borrowed from the Eurozone where it demonstrably doesn’t work). Their idea is that if the annual deficit does not exceed 3% of GDP and nominal GDP growth averages 4 to 5%, then overtime the accumulated debt to GDP will slowly decline. It is hard to overstate how one proposal could be, simultaneously, so intellectually vacuous and consequentially pernicious.

This idea is bereft of any macroeconomic fundamentals. It fails to account for the country’s trade balances and it ignores the relationship between government debt and private sector financial assets. Most damning, it treats fiscal policy as a fixed numerical target instead of an endogenous outcome of thoughtful policies aimed at stewardship of societal (and, it should be added, planetary) well-being. Members of the Budget Committee should be insulted – or at least embarrassed.

5. Why is this happening?

The question that nags is why? It is perhaps understandable that left unexplored and undiscussed, many citizens would apply the familiar experience of their household budgets to the budget of their governments. But what about these “expert” witnesses?

In fact, beyond handwaving about “unsustainability,” debates over government deficits are rarely thoughtful, technical discussions about macroeconomics. Instead, one suspects that the underlying, motivating concerns go to who receives income, who holds financial assets, and how economic risk is distributed across society. After all, policies that boost government spending on social programs often strengthen labor markets, expand public services, and increase transfers to lower and middle-income households. Policies that focus on austerity do the opposite. They weaken labor markets and increase reliance on private markets for services like healthcare or retirement.

But what about progressive members of Congress? Why do they not acknowledge that only their federal government can issue their nation’s currency - so cannot become involuntarily insolvent - and take it from there? Why don’t they test the robustness of their political and policy priorities, not by how much they will cost, but by a hard-nosed assessment of how to produce and mobilize the non-financial, real resources those policies require?

It is an important question that usually gets swallowed up in the guns or butter question - why can we give tax cuts to the rich and fund national defense but can’t give childhood tax credits and fund the conversion to renewable energy? That’s a good question, but unnecessarily cedes the economic ground to adversaries. It is within the reach of every member of Congress, beginning with members of the Budget Committee, to gain a modern understanding of the economy’s plumbing, which is all that’s needed - not mathematical theories or poorly constructed models.

Understanding the plumbing of the modern monetary system should not be optional for legislators entrusted with governing it.

Foreign Affairs has just republished physicist Amory Lovins’s famous, and for many of us, paradigm-shifting essay originally printed in 1976 called “The Road Not Taken.” Focusing on the United States, this essay comprehensively demonstrated the imperative of rethinking the nation’s system of energy generation and usage by mapping out two paths -- a hard path (the fossil fuel-paved one we were and are still on) and a soft path (one with a radically improved match between human energy requirements and resilient energy production technologies and infrastructure). Fifty years later, “The Road Not Taken” remains penetrating and prescient, very much worth reading again (https://www.foreignaffairs.com/united-states/energy-strategy-road-not-taken-amory-lovins).

Lovins’s overriding claim was that the hard and soft paths are mutually exclusive because they compete for the same real resources -- fully consistent with the fundamental economic premise that it is the real resources, not the financial resources, that should be dispositive for any enduring fiscal policies and public commitments. In his telling, the two paths compete for engineers, manufacturing capacity, specialized materials, regulatory attention, grid infrastructure, and political bandwidth. These are scarce. Committing them to nuclear reactors and coal gasification plants meant they were unavailable for fluidized-bed boilers, solar collectors, and efficiency retrofits.

It is notable that Lovins arrived at this conclusion from an engineering analysis, while still contending with a set of conventional, unexamined neoliberal economic assumptions. If the essay could be updated, the temptation would be first to deepen and sharpen his real-resource arguments. But the bigger revision would be to dissolve especially his financial assumptions that unnecessarily constrained his argument about what is possible. That modern understanding might be enough to convince us that although we have failed to take the soft path during the fifty years since Lovins so eloquently sounded his warning and plea, it is not too late.

The Major Revision

First, Lovins assumed that the scarcity of financial capital was the binding and growing constraint on the soft path. It is not. The world’s biggest energy users are also monetary sovereigns. There is no question that they can provision the development of the soft path, making the case Lovins was trying to build even stronger, not weaker. Furthermore, he imagined that a major battle had to be waged in capital markets. Today, we know that the ultimate battle is competition for real resources -- engineering capacity, natural resources, other materials, manufacturing and technological capacity, political bandwidth. Finally, while Lovins made a stirring political case for the soft path, he didn’t fully appreciate that public investment can be an especially generative vehicle for democratizing productive assets, reducing energy poverty, and creating broadly distributed employment.

The Capital Trap

Lovins’s most structurally important concern was what he called the “capital trap,” the fear that financing the hard path would consume so much capital that future transitions would become impossible. He worried explicitly that if synthetic gas cost $25 per barrel-equivalent and nuclear electricity cost $60–120 per barrel-equivalent, and if the energy sector itself required much of the resulting capital just to maintain itself, capital might never again be cheap or plentiful enough to pivot. “Wherever we make our present transition to,” he wrote, “once we arrive, we may be stuck there for a long time.”

This is an important insight, but it is located in the wrong domain. The trap is real, but the mechanism Lovins imagined is not. For a currency-sovereign nation like the United States, federal investment in the soft path is not constrained by available savings or loanable funds. The federal government cannot run out of dollars. The capital trap, properly understood, is a trap of real resources: once engineering talent, supply chains, grid infrastructure, and manufacturing capacity are locked into hard-path commitments, they become unavailable for soft-path deployment. That is the constraint worth worrying about. The financial constraint is imaginary.

Private Provisioning

Lovins went on to describe a devastating feedback loop in utility financing in which large capital programs lead to poor cash flow, which leads to higher electricity prices, which leads to reduced demand, which leads to worse cash flow, which leads to overcapacity, which leads to still higher costs. (This predated, of course, the additional extraordinary burdens of the digital revolution.) He was not wrong that private, bond-financed utilities face a genuine financial constraint. But public entities need not. A publicly owned or publicly capitalized energy institution -- whether a green investment bank, a federal energy authority, or municipalized utilities -- doesn’t need to float bonds at market rates, maintain coverage ratios, or satisfy equity investors. It can invest counter-cyclically, absorb transition costs, and price energy at long-run social costs rather than at short-run financial requirements.

Crowding Out

Continuing in this vein, Lovins worried that, over a decade, the hard path would consume “three-fourths of cumulative net private domestic investment,” starving other economic sectors. This concern is the discredited crowding-out assumption: that there is a fixed pool of investable resources which, over time, the voracious energy sector would inevitably capture. What he didn’t realize was that federal deficit spending on the soft path -- insulation programs, solar deployment, cogeneration infrastructure, efficiency retrofits -- doesn’t drain a fixed pool of available funds; it creates private sector income and net financial assets. The government’s deficit is the non-government sector’s surplus. A properly designed federal soft-path investment program would not starve other sectors; it would generate the income and demand from which private investment flows. (Incidentally, Lovins notes that soft-path investments are more labor-intensive than hard-path ones -- “even making more energy-efficient home appliances is about twice as good for jobs as building power stations.” Exactly: labor-intensive public investment reduces unemployment, supports wage growth, and creates broadly distributed income rather than concentrated capital returns.)

Institutional Barriers

Lovins correctly identified institutional barriers as a central obstacle. He wrote about 3,000 conflicting building codes, promotional utility rate structures, misallocated costs between landlords and tenants, and fragmented government responsibility. But he missed the paramount institutional barrier in both 1976 and in 2026: the deficit myth itself. Lovins’s article was written entirely within the governing cognitive frame, prevalent then and now, that the federal government faces household-like budget constraints and that there is a finite pool of “taxpayer money” available for energy investment. He presented the soft path as cheaper and therefore more feasible -- which is true -- but the argument conceded the premise that federal investment is financially constrained, which it is not. Today his argument could be doubly advantaged: the soft path is both better value in real-resource terms and not subject to the financial constraints Lovins thought were binding.

Energy as a Productive Asset

Lovins had a vision of distributed, household- and neighborhood-scale soft technologies: rooftop solar, efficient homes, community heat storage, neighborhood-scale district heating. He imagined these developments as productive assets that, properly capitalized, could generate an ongoing income stream -- in the form of reduced energy costs -- while building household and community net worth. For Lovins, the soft path wasn’t just an energy strategy; it was also a wealth distribution strategy. Today we would understand that the federal government can capitalize these kinds of programs directly, constrained only by the availability of materials and labor – which, of course, could themselves be partially addressed by a Job Guarantee directed toward the soft-path buildout.

Inflation: Cost-Push, Not Demand-Pull

Lovins noted that energy price inflation was a major concern driving hard-path policy. His supply-side solutions actually map onto a contemporary understanding of inflation in the energy sector as fundamentally cost-push in character. The remedy to energy price inflation is not macroeconomic demand suppression but supply expansion through efficiency and soft technologies, which reduce the unit cost of energy services by harnessing less wasteful, increasingly renewable energy sources. This is structurally anti-inflationary in a way that no demand-management policy can replicate.

The Lesson

The worrying, closing line of this exemplary essay was “We shall not have another chance to get there.” Lovins’ entreaty remains more urgent in 2026 than it was fifty years ago. But what we can add today is this: Financial constraints were never the reason we didn’t embark down the road less traveled. The reasons were political, institutional, and ideological -- and they still are. There is still time. We can do this.

*(think iceberg)

Jason Furman published another piece in the New York Times this week (“If You Hate Trump’s Economy, I Have News for You,” March 18, 2026), one that demands a rejoinder because it makes a serious claim. He’s not spinning. He’s not cheerleading. He’s doing something more intellectually dangerous: he’s presenting a flat picture of a curved world that he insists is both objective and perspicacious.

Furman concludes that the American economy in 2025 looked almost exactly like the American economy in 2024. GDP growth, inflation, unemployment, real wage growth, the budget deficit, the trade deficit were all within measurement error of the year before. That just shows you, he claims, that the partisan hysteria on both sides -- Trump’s characterization of a “nightmare” Biden economy and Democrats’ sudden discovery of an “affordability crisis” -- is mostly noise, nothing to get excited about. To make us feel better, Furman writes, “The economy is a large, complex system and Mr. Trump is a small part of it.”

Just noise? Really? Let’s look at the numbers he relies on to make his case.

Cohabiting inside Furman’s symmetric appearing data, meant to reassure us that year-over-year, everything is basically the same, are two numbers, one right after the other: the S&P 500 increase of 23.3% and 18.7% and the Real Earnings Growth of 1.2% and 1.4%. Furman presents these as mutually reinforcing indicators of economic continuity and stability.

But they are not.

(As is frequently remarked after one of Mr. Furman’s assertions: “How can he say that?”)

Those data points are the indelible signature of a political economy that might appear superficially stable but is accelerating in its structural inequality and, almost certainly, in its democratic fragility. S&P asset holders increased their wealth by nearly twenty-five percent in a single year. In the same year, workers increased their purchasing power by less than one-and-a-half percent. Can’t Furman see and feel the increasingly corrosive socioeconomic effect of the income and wealth gaps evinced in the unfluctuating trajectories of those two measures, compounding year after year? Apparently not. In Furman’s account, both figures are accorded the same analytical weight – a demonstration of year-over-year steadiness undergirding long-term stability.

Then there is the deficit.

Furman lists it in his table — $1.78 trillion in 2025 — as a roughly neutral indicator, paired with the trade deficit as though both are costs to be acknowledged. This is the loanable funds assumption operating silently beneath an apparently empirical exercise. In the loanable funds world, government borrowing “crowds out” private investment, the deficit is a liability, and its size is a source of concern.

But in the real world, a $1.78 trillion deficit is $1.78 trillion in new net financial assets injected into the non-government sector. The question that should bear on Furman’s essay is not whether that injection is too large or too small, but a distribution question: Who “felt” that? On whose private sector balance sheet did those new financial assets end up?

Furman then pivots to his central claim: that polling reveals that citizens’ unexamined political preferences and biases distort and overwhelm any rational assessment of the state of the economy.

To prove it, he summons the following chart from the University of Michigan.

The Michigan consumer sentiment chart is striking if not surprising: Democrats’ views of the economy collapsed after Trump’s inauguration, just as Republicans’ views had collapsed after Biden’s. It is not surprising that values, income, and political identity shape economic perceptions. But Furman attempts to transform negative economic sentiment into a measurement artifact -- partisan identity expressed through economic anxiety. “When politics changes, perceptions follow,” Furman writes, “even if paychecks, prices and jobs do not.”

Then in the same paragraph he buries the counter-evidence, acknowledging “the legitimate concern that the purchasing power of wages is below the track it was on before Covid.” “Below the track.” Not below the pre-Covid level; real wages have technically recovered. Below the trajectory. The mild but compounding upward path that households were on before the pandemic intervened has not resumed.

Furman goes on to develop his “vibedepression” framing which unabashedly inverts the truth. He suggests that negative economic sentiment is a misreading -- partisanship dressed up as economic experience. But the vibe is not a misreading. It is an accurate reading of the part of the economy that the aggregate framework is designed not to see. People are not anxious because their team lost. They are anxious because the future they expect to build - quietly, through wages and savings - has been receding in real terms while the headline numbers stayed calm. An S&P that gains 23% in a year while your paycheck gained 1.2% is not an abstraction. It is felt. The vibe is the signal the aggregates suppress. It does not show up in GDP growth rates. It shows up in the decisions people make about whether to have children, whether to buy a house, whether to believe that effort connects to outcome.

Furman ends with a call for honesty: “We should probably be more honest about judging the economy and more explicitly admitting that our opinion is based on much more than interest rates or inflation or even our own economic circumstances.”

Good idea. Let me be honest: What I see in his table is a year in which the ocean liner he describes — stable, slow to turn, barely affected by any president — continued on the course it has been on for forty-five years. Asset prices rising at multiples of wage growth. Aggregate stability concealing distributional fragility. Steady as she goes – towards the iceberg, just below the surface.

Writing about deficits, the title of Kyla Scanlon’s recent essay in the New York Times (March 12, 2026) is “Our Inability to Live Within Our Means Makes the U.S. Vulnerable.”

When one thinks about it, a country’s real means are its productive capacity: the skills and energy of its workforce, the depth of its technological base, the resilience of its infrastructure, the security of its energy and food supply. Those are the resources a government can mobilize — or fail to mobilize. Those are the limits that actually bind. By that measure, one might assess that the United States has been living well below its means for a very long time.

But that is not, of course, what Scanlon intends. She writes with exceptional clarity about the dangers of Trumpism, citing the long-term damage being inflicted by his administration’s policy incoherence, its contempt for allies, its assault on the Federal Reserve, its contradictory dollar signals. All of that is real, damaging, worrying.

But the story Scanlon tells to explain why the Trump modus operandi is so ill-considered and destructive is both dangerous and wrong. It is dangerous because the misguided saga she has bought into runs the risk of unintentionally sabotaging progressive priorities from within, a result more corrosive than anything Trump’s allies have mustered. She is too well-intentioned to get trapped, perhaps without realizing it, in moribund fictions that matter very much.

Scanlon’s story goes like this:

The United States is profligate, spending more than it collects. Fortunately, foreign investors - Japan, Britain, China, Europe - step in to fill the gap by buying Treasury securities. But Trump’s unique recklessness undermines foreign investors’ confidence and is suicidal because it risks alienating the creditors we depend on. Without those buyers, interest rates will soar and the country’s whole financing edifice will come crashing down.

Appropriating the satisfying storytelling structure of hubris (Trump’s) inviting punishment (withdrawal of investor confidence), it’s an easy tale to sell. The problem is - and Scanlon surely knows this - the monetary mechanics underlying her story are not just wrong, they are backwards. And getting them right really matters.

The Sequence Problem

“In fiscal year 2025,” she writes, “the United States spent roughly $7 trillion and collected about $5.2 trillion in tax revenue. That leaves a $1.8 trillion gap that has to be closed.”

“Has to be closed?”

Scanlon apparently imagines that the U.S. government spends from an existing stock of funds and when it runs out, it must appeal to foreign and other creditors to “close the gap.” But that isn’t how federal spending works.

The federal government doesn’t have or need a savings account that it draws on to spend. Unlike any of us, any business, and any state or local government, new money is always created when the federal government spends. Every recent chairman of the Federal Reserve has patiently explained that when the US government spends - on Medicare, on trips to Mar-a-Lago, on a war in the Middle East - it does so by instructing the Federal Reserve to credit bank accounts. Registered as reserves, new money is created whenever the government spends money, That new money stays circulating in the economy, paying salaries, buying groceries, repairing bridges.

LATER the government imposes taxes. The federal government doesn’t impose taxes to fund spending. It taxes to manage aggregate demand, ensure price stability, incentivize behavior, and reduce the income inequality gap. When it taxes, it takes money out of circulation and erases it, destroys it. It doesn’t save it somewhere and it doesn’t need to. As the sole issuer of the currency, it creates money as required to help manage and balance the economy, not its budget.

Scanlon should trust that reality. But that would require rearranging her recollection of the sequence of government fiscal operations. The “gap” she describes doesn’t exist at the moment the government spends; it is an accounting residual that emerges long afterwards, at the end of the year, when taxes and other revenues are subtracted from outlays and a number with a plus or a minus shows up like points on the government’s scorecard. All bills have already been paid and, at that moment, nothing is owed to anybody.

The point is that Treasury securities are issued after the fact. They don’t fund spending. Instead, they provide the Fed with a mechanism to maintain its interest rate target by draining excess reserves that the government’s earlier spending created. Foreign investors who buy Treasuries aren’t financing American needs, habits, and aspirations. Those investors are already holding dollars that Americans’ spending has sent out into the world. When they buy Treasury securities, they are just swapping non-interest bearing paper (a.k.a. dollars) for interest bearing paper (a.k.a. Treasury securities).

The accurate bottom line is that the federal government always spends before it taxes; indeed as the sole issuer of the currency, it has to spend before it taxes. Scanlon has the sequence wrong. And again, it really matters.

Japan Is Not Running Out of Dollars

Then to further develop her concerns, Scanlon turns to Japan. The Bank of Japan is raising rates and the yen is rebounding. She worries, therefore, that Japanese investors are beginning to have better reasons to keep capital at home, so are likely to reduce their U.S. Treasury holdings, which in turn would put upward pressure on U.S. “borrowing” costs.

Why exactly?

This is a repeat of the kind of error we identified above. Scanlon imagines that there is a finite pool of global savings, and that if one big holder diverts its portion homeward, the price of the remaining supply rises. Again, this is not how it works. Japan runs persistent current account surpluses. That means it exports more than it imports, and most of that difference are claims accrued and held by Japanese entities but denominated in U.S. dollars. Those dollars have to be deposited somewhere. For decades, the answer has largely been US Treasuries — not because Japanese investors lacked alternatives, but because Treasuries are the most liquid and utterly reliable dollar-denominated savings instrument available.

So let’s look at the sequence again: If, for some reason, a Japanese institution sells Treasuries, one of three things happens: (a) other buyers, private or foreign, absorb the supply, (b) the yen appreciates as dollar claims are converted, or (c) some combination of both.

What can’t happen is what Scanlon evidently fears. The United States, as the sole issuer of dollars, cannot “run out” of buyers. The Federal Reserve can always buy Treasury securities - it has done so, at scale, within living memory. The constraint on that operation is inflation, it is never solvency. But inflation is not what happens when foreign investors lose confidence. It’s what happens when spending outruns the economy’s productive capacity. Those are different diagnoses with very different treatments.

Which brings us to what the bond market has been saying during the Iran war.

What Yields Are Actually Signaling

Now Scanlon makes an excellent observation. Ordinarily, geopolitical stress sends investors into Treasuries as a safe haven, pushing prices up and yields down. In the current Iran circumstance, that didn’t happen. US Treasury yields rose rather than fell.

Scanlon interprets this development as evidence that America’s exorbitant privilege, the issuer of the world’s reserve currency, is eroding — that the world is losing confidence in the US as a reliable haven. Maybe. Someday. More likely at this moment, however, the market is pricing in real resource disruption: Closed Strait of Hormuz. Oil at $100. Supply chains fracturing. Defense spending accelerating.

The bond market isn’t saying “we don’t trust America as a counterparty.” It’s saying “we expect more inflation, more spending on weapons, so bigger deficits, and more Treasury issuance. The Fed will be slow to respond because the Trump administration is strong-arming the Fed.” That’s not a confidence crisis. That’s a reasonable inflation expectations story, playing out in real time, in response to real supply shocks.

The distinction matters. A lot. If the problem is a confidence crisis requiring foreign-investor appeasement, the conventional policy prescription is to restore institutional credibility by cutting deficits, signaling fiscal restraint - in a word, austerity. But if the problem is inflation risk driven by supply disruption and resource misallocation, as is the case now, the prescription is to manage real resource use, directing fiscal capacity toward productive investment. It is very important that we don’t allow the boundless, bottomless political chaos engendered by the Trump administration to become an excuse to constrain or otherwise undermine public purposes.

The Trap

Let me put it in another way. Scanlon is trying to make an anti-Trump argument, which I am all for, but she ends up making an austerity argument. Her logic goes something like this:

Trump’s recklessness endangers our ability to borrow;

therefore we must borrow responsibly (i.e., less);

therefore deficits are dangerous in the hands of irresponsible actors.

It is a very, very short step from there to:

Deficits are dangerous, full stop.

That step is wrong, but it’s easy to take and deficit hawks will push there, enthusiastically.

To recap: The federal deficit is not, in itself, a burden. It is the mirror image of net private and foreign savings denominated in dollars. When the federal government runs a $1.8 trillion deficit, it has — as an accounting identity — added $1.8 trillion in net financial assets to the non-government sector. Those assets show up as savings in pension funds, foreign exchange reserves, private investment portfolios, and household balance sheets. The deficit is not a debt passed to our children. It is, in significant measure, the savings we are passing to them.

The question that matters is not how big the deficit is. It is what the spending does. Is it building productive capacity? Reducing real resource waste? Investing in the energy transition, in public health, in the infrastructure of a functional society? Or is it blowing up people, cities, desalination plants, and oil infrastructure in the Persian Gulf, cycling through supply-chain shocks, and delivering tax cuts that exacerbate inequality and generate consumption without investment?

Trump’s fiscal policy is disastrous not because it runs budget deficits. It’s disastrous because the deficits it runs are in service of both destruction and upward redistribution, while systematically dismantling the institutional capacity that makes a society governable.

Trust Is Real — But It’s Not About the Bondholders

Scanlon ends her piece with a plea for trust — and she’s right that trust matters. Where she is wrong is in identifying whose trust is at stake.

The institutional trust that underpins the dollar’s global role isn’t primarily about reassuring Japanese insurance companies that their Treasury holdings will be honored. They know the Fed can and will always stand behind those. What it’s actually about is the broader network of arrangements - legal, political, diplomatic, financial - that made the United States an indispensable node of the global economy: The rule of law. Consistent counterparty behavior. The credibility of arms-length institutions. The sense that America’s enormous fiscal power would not be deployed arbitrarily.

Trump is eroding all of that. Not because he’s running deficits - most serious modern governments run deficits investing in themselves and their people. It is because he has demonstrated that American power operates on a whim, that treaties mean nothing, that institutional independence is contingent on personal loyalty, and that the country’s considerable fiscal capacity is aimed at rewarding family, friends, and allies while punishing enemies – not in pursuit of thoughtful, abiding public purposes.

That is the real threat to American financial standing. And the response to it isn’t fiscal restraint. It is a government governed by a mission and an ethos – a government that understands that deficits created by spending on climate, healthcare, employment, housing, student debt, and other public needs and priorities are evidence of responsible stewardship - the opposite of recklessness - because it is mobilizing financial capacity on behalf of productive capacity that makes the currency worth holding in the first place.

I do worry that Kayla Scanlon’s framing, left unchallenged, cedes that ground before the important debates even begin.

Susan P. Borden, Modern Money Lab

To celebrate the 250th anniversary of Adam Smith’s The Wealth of Nations, the Harvard economist, Jason Furman, writing in the New York Times, correctly suggests that Smith has been misread from all directions — stripped of his moral philosophy by libertarians on the right and recast as a villain by progressives on the left. Furman’s Smith is more nuanced: a critic of monopoly power, a champion of workers’ living standards, a skeptic of mercantilism in all its forms.

Where Furman’s essay goes wrong is not in what it says about Smith, but in what it implies about us - that Smith’s framework, properly understood, provides the right guidance for the U.S. economy in 2026. Furman is categorically wrong, of course, and one is hard pressed to understand why he went there. Narrative nostalgia? Wishful thinking?

Furman is a careful, nuanced reader of Adam Smith and a more interesting essay would have explored what Smith would make of 21^st century Japan, Australia, Canada, the U.S, or his home country, the U.K. He would be astonished that each of these countries has a fiat monetary system operated by a sovereign, democratically elected government and would instantly understand that this reality changes everything. Above all, it changes everything about what government “getting out of the way,” as Furman would have it, actually means, and who benefits when we pretend it doesn’t.

The Money Smith Never Had

Smith, after all, wrote within an environment of metallic currency and its attendant scarcity. In that world, the state’s capacity to spend was limited. “Getting out of the way” meant something coherent: reduce the mercantilist apparatus of tariffs, guilds, and royal monopolies that extracted rents and suppressed competition, and let the productive capacity of ordinary people express itself.

But 250 years later, monetary sovereigns do not operate under a gold standard. The U.S. is the sole issuer of the U.S. dollar - a currency that exists as a creature of human-made law, not of nature. There is not a fixed number of dollars shuttling around the economies of the world. As we know, when Congress appropriates funds, the Treasury doesn’t first collect taxes or withdraw money from a government savings account and then spend dollars; it spends into the economy – always – by instructing the Federal Reserve to mark-up accounts of its creditors’ banks with new money. Taxes serve crucial functions - they create demand for the currency, shape incentives, reduce inequality - but they do not “fund” federal spending in the sense that Smith’s framework assumed and that Furman’s invocation of “discipline” and “getting out of the way” persists in implying.

This is not a technical quibble, as Furman elsewhere suggests. It is a fundamental, structural fact that Furman’s “Smith-as-guidance-for-today” framing, for some reason, deliberately obscures. Monetary sovereigns face no revenue constraint. The question is never whether government can “afford” to invest in the conditions of broad prosperity. The question is always whether sufficient real resources exist and whether their deployment serves the public purpose. Smith himself defined that purpose with admirable clarity: A society is not flourishing and happy, he wrote, if “the far greater part of the members are poor and miserable.” What Smith lacked was the circumstances or the imagination to ponder how the state could reliably ensure that flourishing.

The Market That Was Built, Not Found

Furman goes on to celebrate the spontaneous coordination that brings us canned soup and artificial intelligence - the invisible web of specialization that no single mind could design or direct. This is one of Smith’s especially generative and provocative insights. But it rests on a premise that Karl Polanyi spent an entire career dismantling: the idea that markets are the natural state of human economic life, too often temporarily suppressed by misguided, interfering political and social institutions.

They aren’t.

Markets at the scale Smith observed - and at the global scale Furman describes - were constructed through deliberate, often violent, state action: the enclosure of common lands, the legal transformation of labor into a commodity, the enforcement of contracts across jurisdictions, the creation of the limited liability corporation, the colonial extraction of raw materials at non-market prices. The canned soup on the shelf depends not only on the division of labor but on a vast infrastructure of property laws, monetary systems, and public investments in roads, ports, and communications that no private actor built - or could have built.

To frame government’s role as merely “disciplining power and defending competition” is to treat government’s role and responsibility as a given - a background condition rather than an ongoing political responsibility and achievement. But it isn’t a given. It is sustained or eroded by exactly the kinds of fiscal and institutional choices that the “getting out of the way” framing neuters or renders invisible.

The Supply Side Without a Demand Side

Perhaps the deepest limitation of Smith’s framework - and of Furman’s use of it - is that it is almost entirely a theory of supply. Productivity growth, the division of labor, the “moral core of economic progress” - these are all about expanding what an economy can produce. What they cannot account for and leave unattended is whether that productive capacity finds uses and buyers.

This is not a new critique. Keynes made it in 1936. Moreover, today’s monetary sovereigns are uniquely positioned to ensure that aggregate demand - the spending necessary to employ the economy’s productive capacity - is always sufficient.

How?

By maintaining the simple commitment that every person willing to work can find work, that public investment fills the gaps private investment can’t or won’t, and that the currency-issuing state will not withdraw spending capacity in down times - the opposite of the advice, incidentally, that Furman mistakenly offered President Obama following the 2008 Financial Crisis, precisely when the private sector had unused capacity and needed public investment most.

Furman’s “optimism” framing - 250 years of progress as vindication of “trusting the process” - pretends that the broad prosperity of the mid-twentieth century was produced by market spontaneity.

Really?

In the U.S., it was produced by a combination of high union density (one in three workers after the war vs. about one in ten workers today), progressive taxation (90% marginal rate until 1970), public investment in education (G.I. bill, Title IX), public investments in infrastructure (rural electrification, interstate highway system) and, crucially, the full employment fiscal policy of the postwar decades (Full Employment Act of 1946). When those policies were abandoned in favor of the “discipline” Furman continues to prescribe, productivity growth continued but wage growth stalled and income inequality exploded. The gains went to capital: between 1979 and today, productivity roughly doubled while median wages barely moved in real terms – precisely the divergence between prince and peasant that Smith believed market economies would narrow. To be sure, this isn’t a market failure; it is a policy choice that we can and should denounce and revoke.

The Mercantilist Parallel Furman Misses

Furman deploys Smith’s anti-mercantilism with precision against Trump’s tariffs — and in that he is not wrong. But there is another mercantilist structure in today’s economy that Smith would have recognized immediately, but which Furman fails to identify: the financial sector’s capture of monetary policy and fiscal space. Smith’s merchants and manufacturers conspired at every dinner to raise prices and restrict entry. Today we have deficit scolds who insist it is irresponsible of the monetary sovereign to spend more than it “earns” and neoclassical economists who counsel that full employment and public services must be sacrificed at the altar of “credibility.” This is the mercantilism of our era — a set of policy rules that serves particular interests (those who hold financial assets denominated in a currency they want kept scarce) while presenting itself as unambiguous, universal wisdom.

Smith attacked the intellectual framework that rationalized mercantilist policy — the idea that trade surpluses were wealth itself (a lesson the Trump administration appears not to have absorbed). The equivalent intellectual task today is to attack the misleading governing metaphor of household, the illusory idea that the currency-issuing government’s finances work just like a family’s.

What Smith Got Right, and What We Still Need

None of this is to dismiss Smith. His attack on concentrated power, his insistence that prosperity be judged by the living standards of ordinary people, his empiricism and commitment to describing and explaining the real world remain essential. Furman concludes that Smith's message is "to discipline power, defend competition, and keep the focus where he always insisted it belonged: on improving the lives of ordinary people." On these goals, we can agree completely.

We should also be able to agree that in the U.S. we have a monetary sovereign. We have the capacity to maintain full employment, invest in public purposes, and absorb private sector demand shortfalls without “running out of money.”

The question Smith posed — How do ordinary people flourish? — is still the right question. But in 2026, the answer requires more than a well-read Smith. It requires understanding the monetary system Smith never had and using it in service of the purpose he never abandoned.

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In his highly regarded speech this year at Davos and in subsequent speeches delivered during his current trips to Australia, India, and Japan, Canadian Prime Minister Mark Carney said something unusually blunt: the rules-based international order is breaking down and we should not expect it to return. This is not a temporary loss of trust or a cyclical downturn, he said, but a rupture - a world in which economic integration no longer guarantees cooperation, and in which power willfully overrides rules.

Notably, Carney’s characterization struck many as both courageous and self-evident, not just because of the peculiar ideas, the bankrupt ideals, and the primitive impulsivity that define the Trump administration. The self-evident quality of Carney’s bold characterization of the rupture also carried with it an undercurrent of inevitability, begging for a more penetrating examination of what has gone wrong.

A system that mistook rules for foundations

On reflection, the postwar international economic order has rested on a set of neoclassical beliefs:

• Markets will integrate economies.

• Trade will pacify rivals.

• Financial flows will discipline governments.

• Rules and institutions governing markets, trades and financial flows will substitute for politics and diplomacy.

For decades, this appeared to work. Open markets, monetary stability, and crisis backstops were treated as global public goods, largely because the system was underwritten by a hegemonic power willing to absorb imbalances, provide liquidity, and act as consumer and insurer of last resort.

But as Carney made clear, as does the aggression of the Trump administration in both trade and war, the circumstances that made this arrangement apparently viable have eroded. Energy and food systems turn out to be fragile. Supply chains turn out to have geopolitical vulnerabilities. Financial integration has amplified shocks rather than absorbed them. And the presumption that shared rules would restrain the most powerful actors has quite obviously collapsed. These circumstances have all the markings of a system-wide failure of structures that have long relied on markets, institutions, and norms to do the political work that they were never designed – and should never have been expected – to sustain.

Perhaps what Carney described as a breakdown of the rules-based order should also be understood as something even more elemental: the exhaustion of market societies as a substitute for global governing principles.

Polanyi and the limits of market rule

Writing in the mid-twentieth century, political economist Karl Polanyi argued that markets are useful tools, but a society organized as if markets were self-regulating would inevitably destabilize itself. His core insight was that certain foundational elements of social life - land, labor, and money - are not genuine commodities. They are not produced for sale and should not be governed by price signals alone.

Land is an attribute of nature. Labor is an attribute of human life. Money is a public institution created by the state. Polanyi predicted that treating land, labor, and money as market inputs rather than societal foundations generates pressures that would eventually provoke political backlash — what Polanyi called the double movement: Society pushes back when markets overreach.

From a Polanyian perspective, the breakdown Carney describes is not fundamentally a failure of enforcement and good will. It is the inevitable consequence of trying to govern society and nature through a market framework that is ill-suited to the challenge. The old rules-based order mistook monetary discipline for economic stewardship. Fiscal and monetary rules were treated as guardrails against excess. Balanced budgets, debt ceilings, and trade symmetry were presented as conditions for stability. But in practice, they served a different function. They constrained democratic choice while obscuring the real limits on economic activity.

Climate breakdown is only one boundary condition the old order has willfully ignored. Rising inequality poses a parallel and equally destabilizing threat. Extreme disparities in income and wealth do more than undermine optimism and fairness; they corrode the social contract on which democratic governance depends. When economic gains are persistently concentrated, the rules that govern markets cease to appear neutral. They come to be experienced as instruments of extraction rather than coordination.

The central political-economic question of our time is not how efficiently markets allocate demand. It is how deliberately and conscientiously nations build, protect, and steer their productive capacity to equitably provision their societies under binding ecological limits. Climate change threatens the planet’s capacity to sustain life; inequality threatens society’s capacity to govern itself. The loss of faith in the rules-based order that Carney describes is not simply geopolitical. Systems that deliver instability at the top and insecurity at the bottom will not and cannot sustain the consent of the governed that democracies require.

In a recent essay commenting on Mark Carney’s thoughtful, forceful speech in Davos, Robert Skidelsky revisits a familiar, apparent paradox of the modern dollar system. (https://thewire.in/world/on-mark-carney-and-the-fate-of-liberal-economies).

Conventional economic thinking teaches that persistent current-account deficits should weaken a local currency. Instead, since the mid-70’s, the U.S. dollar’s reserve status has attracted capital inflows, strengthening the currency even as imports surged. This allowed the United States to become what Skidelsky calls the world’s “consumer of last resort,” with the interesting and notable effect of stabilizing global demand. His essay describes the global economic role the U.S. has played since Richard Nixon’s abandonment of the gold standard, emphasizing the important idea that with monetary privilege comes responsibility: when the world demands your currency, your domestic choices have global consequences.

But Skidelsky’s conclusion – that reserve-currency status itself hollowed out U.S. industry – is uncharacteristically one-dimensional. In fact, the dollar’s global role created enormous policy space for the United States. What hollowed out American industry was how that space was used. And how it wasn’t.

An Inevitable Imperative or a Policy Choice?

Three domestic political-economic choices seem much more decisive than the single fact of dollar hegemony that Skidelsky’s recounting suggests.

• First, the United States embraced trade liberalization without a corresponding industrial policy. Persistent trade deficits were reframed as benign – or even virtuous – because they delivered cheap imports and subdued inflation. Adjustment was left to “the market,” which in practice meant communities absorbing shocks with little public support. This is akin to abandoning coal for reasons of climate change but failing to transform the job opportunities for communities of coal mining families.

• Second, financialization, the commodification of money, took over. Investment flowed into asset appreciation rather than productive capacity, so corporate strategy shifted toward shareholder value, offshoring, and short-term returns. This was not forcibly imposed by global finance; it was welcomed, legislated, and celebrated via deregulation, tax treatment, and other accommodations.

• Third, a strong dollar became an implicit labor-disciplining device. Cheap imports restrained wages, while deliberately weakened unions tilted the economy toward consumption and finance rather than production. To be sure, reserve-currency status made this easier to sustain, but it did not compel it.

In short, the United States did not lose industry because it could buy imports with dollars. It lost industry because it chose not to defend, renew, or reimagine its productive base.

Broken Bargains

Mark Carney correctly asserts that Donald Trump “broke the bargain” that had been underpinning the international system – in essence, that the U.S. supplied safe assets, certain services, and demand while much of the rest of the world supplied goods.

But long before Trump, a second, implicit bargain had already been broken at home. That bargain promised that global integration would be matched by domestic reinvestment – by training, infrastructure, regional development, and shared gains. It was this domestic bargain that collapsed in the 1980s and 1990s. Arguably, Trump has managed to shatter the global system by reacting – crudely and destructively – to a set of ongoing domestic political failures.

What If…?

What if the U.S. had deployed the reserve-currency privilege very differently?

In this counterfactual, the United States would still understand and accept that the world wanted dollar assets, but it would have planned accordingly. It would have treated monetary sovereignty not as a license for consumption, but as a tool for capacity-building.

Full employment would have been sought not by suppressing demand, but by guaranteeing work at a living wage. Industrial policy would have been permanent rather than episodic, aimed at learning curves, scale-up, and regional balance. Trade policy would have been explicit about its contribution to real objectives: high employment, strategic capacity, climate goals, and price stability—not some abstract measure of consumer welfare.

Inflation risk would have been addressed compositionally – by easing bottlenecks and reallocating demand – rather than through generalized austerity masquerading as fiscal responsibility. And the U.S. role as “consumer of last resort” would have been complemented by active support for productive capacity in the rest of the world, especially in the green transition, so that global demand did not permanently rest on American absorption.

None of this required abandoning openness. It required abandoning shibboleths and naïveté. The dollar’s global role did not hollow out American industry. It bought the United States extraordinary room to choose what kind of economy it wanted to be. That room was used – intentionally – to privilege finance over production, consumption over capacity, and disinflation over development. The result was a particular political settlement whose costs were unevenly distributed or long denied.

The takeaway is not that monetary privilege is inevitably perilous. What is inevitable is that policy space unused for productive purposes will not lie fallow; it will, in the alternative, be florid with extraction.

Part of the difficulty in thinking clearly about public debt is that in a currency-issuing system the term “debt” is itself a misnomer. What we call “public debt” is conventionally measured by the stock of outstanding Treasury securities, but those securities are not debt in the ordinary sense of a liability incurred to obtain scarce financing. They are better understood as the result of a portfolio swap: the exchange of reserve balances for interest-bearing government securities. From the perspective of the consolidated public sector, nothing is borrowed in order to spend; the state simply offers the private sector a different mix of its own liabilities. Treasury securities are not like household debt; they are more like time-dated deposits at the central bank. Framing them as debt mobilizes unexamined intuitions about solvency, repayment, and market discipline that do not apply to a government that issues its own currency — and it is these misplaced intuitions that make otherwise careful analyses of “debt sustainability” so persistently misleading.

Blanchard on Debt Sustainability

With that stipulation, Olivier Blanchard’s recent, typically measured essay on public debt makes one welcome point, but still gets it wrong.

Blanchard begins by dispelling the assumption that public debt automatically impoverishes future generations. He correctly argues that what is passed forward to future generations is not a stock of treasury bonds, it is what government spending paid for: the condition of the country’s infrastructure, the health and education of its population, the resilience of its energy and food systems, the state of its ecology and climate.

So far so good.

His supporting through-line is an elaboration of his well-established view that the trajectory of public debt matters much more than the level of public debt. His familiar argument, that public debt is sustainable as long as the interest rate r is below the economy’s growth rate g, might tell us how interest rates evolve relative to income; but this descriptive arithmetic is mistakenly elevated by Blanchard to a governing principle, applicable as a general rule to all economies.

This is where he begins to disappoint.

To illustrate his argument he focusses on France and the United States, conflating a currency user (of the euro), and a currency issuer (of the dollar). He slides easily between the two countries, treating public debt as if it were a single phenomenon governed by a common logic. But a government that issues its own currency is not financially analogous to one that does not. The U.S. federal government cannot be forced into involuntary default on obligations denominated in dollars; it alone creates the means of payment. France, as a member of the eurozone, is, of course, in a fundamentally different position. It must obtain euros ex post and is therefore exposed to liquidity risk, rollover risk, and market discipline unless the European Central Bank acts as an unconditional backstop. Rising spreads, deteriorating dynamics, and self-fulfilling crises – what Blanchard calls “bad equilibria” – are not intrinsic properties of public debt. They are institutional outcomes that arise when fiscal authorities are separated from currency issuance.

For a currency issuer, like the U.S., Japan, the U.K., Canada, and Australia, r minus g is not a condition of sustainability. A growth rate greater than the interest rate is not an unfettered license to spend; g greater than r offers no guarantee of safety if growth itself rests on fragile supply chains, asset bubbles, or environmental degradation. Nor does public spending become unsustainable when r exceeds g.

Framing sustainability in terms of debt ratios risks mistaking an accounting artifact for a real limit. The true economic constraint faced by a currency-issuing government is not solvency; it is inflation. Government debt is a financial record of past net spending into the private sector. It becomes problematic only when additional nominal demand runs ahead of the economy’s capacity to produce goods and services at stable prices.

The Old Loanable Funds Myth

The other anxiety about public debt in Blanchard’s analysis comes from a perennial preoccupation with “crowding out. “

Drawing on old fashioned macroeconomic lore, he suggests that higher public debt may reduce capital accumulation by absorbing private saving. In reality, investment is driven by the expectation of future demand and is financed through endogenous credit creation. Indeed, when labor and capacity are underutilized, it is possible for deficit spending to spur private investment by enhancing sales prospects and improving balance sheets. Even at full capacity, the relevant question is not whether government borrowing displaces some notional quantity of “capital,” but which real resources are being redirected and to what social purpose. Finance is not the scarce input; labor, materials, energy, and ecological space are.

Credibility

Countries in the eurozone, of course, have a special burden. Blanchard’s account of how increasing debt can trigger higher risk premia, worsen dynamics, and culminate in crisis closely mirrors the experience of southern Europe after 2010. But the “danger” lies not in debt levels and ratios per se, but in the institutional architecture that allows markets to discipline governments without a reliable lender of last resort. This institutional blindness becomes clearest in Blanchard’s policy conclusion. He argues that all governments – currency users and currency issuers alike – must maintain “credibility” by demonstrating a path back to “primary balance.”

Credibility should not be measured by adherence to financial targets abstracted from context, but instead by a government’s demonstrated capacity to manage inflation, maintain full employment, and expand real productive capacity over time. A fiscal authority is “credible” when it can mobilize resources in a crisis, withdraw demand when inflationary pressures emerge, and invest in the systems – healthcare, housing, energy, education – that determine future resilience. “Primary balance” is a choice, not a virtue.

The question, then, is not how much debt is too much debt, but the much more interesting question of whether monetary and fiscal institutions are aligned with the real resources and collective goals of the societies they are meant to provision.

Lately, much has been written about U.S. fiscal policy around the issue of bond generated “debt.” These ostensibly sophisticated concerns have focused on a potential loss of confidence in the U.S. bond market, asking “Who will buy the debt and at what price?” going on to suggest that interest costs will inevitably spiral out of control.

So let’s try a simple thought experiment:

What if the United States stopped issuing Treasury securities altogether? No bills. No notes. No bonds. The government still spends. Taxes still exist. The Federal Reserve still sets an interest rate. The dollar still floats. Nothing “radical” happens except that one long-standing ritual – issuing Treasury securities – disappears. Bear with me because, as it turns out, this isn’t really a thought experiment; it is just an extended unveiling of things that have always been true.

First: Spending Without Borrowing

Government always spends new money into the economy without “borrowing.”

Treasury securities do not “finance” this process. In the real world, bonds are issued after the fact, converting excess bank reserves into interest-bearing assets. They are a monetary policy operation, not a funding necessity.

Remove bonds and government spending still creates money, exactly as before.

Second: The Reserve Question

Without bond issuance, government deficits leave more reserves in the banking system. That is not a problem — in fact it is a familiar condition. If the priority is to maintain interest rate targets, the Federal Reserve can pay interest on reserves or it can set the policy rate at or near zero. If it wants distributional nuance, it can use tiered renumeration on reserves. None of this requires government securities. In fact, since 2008, the Federal Reserve has relied heavily on interest-on-reserves to manage rates.

Put another way, the “no bonds” world is not hypothetical. We are already halfway there.

Third: Where (and What) Exactly is the Debt?

This is the heart of the matter and when the conceptual fog lifts. If the government no longer issues bonds, there is no “debt” in the usual, ordinary sense. Instead, the private and foreign sectors—households, enterprises, and foreign governments – hold U.S. government liabilities in the form of deposits and reserves.

Those liabilities are also known as — wait for it — money. From a consolidated government perspective, nothing has changed except the label. The state still supplies net financial assets to the non-governmental sectors. It always has.

Calling those assets “debt” was, and remains, a political choice, not an economic one.

Fourth: What About the Need for Safe Assets?

This is important. Treasury securities don’t finance government expenditures but they do play other important roles. Because they are backed by the full faith and credit of the Unites States and, as the sole issuer of the country, the U.S. can ALWAYS redeem them, treasury securities provide risk-free income streams, collateral, and portfolio anchors for pensions and insurers.

Eliminating bonds would and should require creating “safe asset” alternatives. But that replacement is a design question, not a constraint. Interest-bearing reserves, central-bank term deposits, or publicly provided savings instruments can all serve the same role — much more clearly and transparently.

The point is that the demand for safe assets is real; the idea that only bonds can satisfy that demand is not.

Fifth: Vanishing Anxieties

In a bond-free world, a number of familiar anxieties vanish including: “The United States is running out of money!” “The United States is living on the Chinese credit card!” “Government debt crowds out private sector investment!” We could also dispense with recurring debt-ceiling crises and the morality theatrics of PAYGO, a self-imposed U.S. budget rule that forces lawmakers to offset new spending or tax cuts, effectively privileging deficit avoidance over a range of public policy goals and investments.

The disappearance of these pervasive anxieties would tell us something important:

Treasury securities are not just financial instruments. They are narrative instruments, preserving the illusion that (1) a currency-issuing government faces the same budget constraints as a household and (2) public priorities, ambitions, and aspirations must always be granted “permission” from markets.

Sixth: Inflation, not Debt, is the Binding Constraint.

For a government, whose principal responsibility is not to balance its budget but to balance its nation’s economy, inflation is always the binding constraint. If public spending outruns real productive capacity, prices will rise. Bond issuance does nothing to prevent that.

Inflation control resides in regulation, in taxation, and in strategic public investment — all in the service of real resource management. It does not reside in appeasing bond markets.

A Bond-Free United States

The United States Treasury without bonds would expose something uncomfortable. The preoccupation with public “debt” has never been about financing government. It is a habit. It is an ideological ruse masquerading as fiscal responsibility. It reflects and reifies the whole of the orthodox dogma.

By exploiting misleading beliefs in scarcity -- thereby reining in political expectations -- public needs, priorities, and purposes become “unaffordable.”

The consequences of failing to neuter these pseudo concerns constitute another subject for another time. What seems certain, however, is that a democracy cannot survive an economy unwilling to make the provisioning of the whole of its society its ultimate purpose and obligation.

Every citizen worried about climate, economic justice, healthcare, education, housing, or employment, knows that any major public policy proposal to tackle those challenges rapidly encounters the roadblock, “Yes. But how will we pay for it?” The underlying assumption is that money is scarce and government spending is – or should be – limited by government revenues – taxes and fees collected from the private sector.

Taxes are usually required to be paid in the currency of the taxing country, so clearly, ALL currency issuing countries must spend money into the economy before they tax money out of the economy. It is not – and it cannot be -- that governments tax first and only then spend tax revenue. Margaret Thatcher could not have been more misleading (or more misled) when she insisted, “There is no such thing as public money; there is only taxpayers’ money.”

For those of us who understand this, a nagging question is – well then, if taxes don’t fund spending, what do they do? What can they do? What should they do? What are taxes really for?

The Organizing Role of Taxes: Currency and Legitimacy

As most heterodox economists know and all MMT economists emphasize, government levied taxes create a sustained demand for government issued currency. Taxes thereby establish a system of public obligations that underwrite monetary circulation while simultaneously legitimizing the state’s claim on labor, other resources, and output. More abstractly, what’s most important is not that taxes make money scarce, it’s that taxes make money socially binding.

Shaping Social and Ecologically Sound Behavior: Where Taxes Help—and Where They Don’t

We know that some taxes can signal social priorities and sometimes discourage destructive or undesirable behavior – tobacco smoking, for instance. Maybe they can even reduce ecological harm at the margins. The caveat is that relying on price signals alone should not substitute for creating rules, caps, or public provisions. Among other things, over-reliance on taxes for these purposes risks commodifying justice (e.g., you can pollute if you are rich enough to pay the tax intended to reduce socially deleterious choices and behaviors).

Distribution Is Not an Afterthought: Taxes as Power Management

Progressive taxation has the compelling virtue of instantiating some notion of fairness. Confidence that our socioeconomic system embraces values related to equity are, without a doubt, essential to establishing and sustaining the conditions on which democracies depend. One way of looking at the problem of extreme wealth is that it permits disproportionate control over labor, land, energy, productive capacities, and political decision making. So another approach to understanding the purposes of progressive taxation is that it is – or should be – aimed at limiting excessive command of real resources. Put that way, progressive taxation becomes an explicit governance mechanism, not a funding necessity.

This idea also shifts and extends our moral or ethical framing. Public spending can now be understood as the way governments fuel an economy by mobilizing real resources. Taxation can be understood as one way governments manage (not fuel) an economy already in motion. Taken together, that in turn allows the government to pursue a public provisioning program without pushing nominal growth ahead of the real productive capacity of the economy.

Taxes and the Public Purpose: Making Space for Collective Provision

With that in mind, now we can think of taxes as a way to clear space for public investment in goods and services, for reducing private competition for scarce inputs needed for healthcare, childcare, education, infrastructure, and environmental and other human care work. This approach reframes taxation as enabling, not just restraining.

A Forward-Looking Role: Taxes and Asset Formation

We might then begin to realize that taxes don’t have to be understood as purely subtractive. Instead, taxes can support broad-based asset formation and long-term security. Indeed, an MMT-informed tax system could begin to think about reducing inequality not only by limiting excess, but by specifically and unambiguously creating the fiscal space to build durable public and private assets without inflation.

To be continued….