Financial markets cannot punish a sovereign government. Here’s why

Steven Hail, Stephanie Kelton and Darren Quinn

What the UK Mini-Budget Really Proved

“You’ve got to keep the financial markets on side,” BBC presenter Victoria Derbyshire warned a guest recently. “They are nervy, they are jumpy… they can punish a country.”

This single statement captures one of the most pervasive and damaging myths in modern economics: the idea that a sovereign, currency-issuing government is at the mercy of financial markets. It’s the ghost story told to scare politicians away from investing in their people — the threat of the “bond vigilantes” who will supposedly bankrupt any nation that dares to run a deficit.

This myth was on full display during the UK’s brief Liz Truss government. When bond yields spiked, the media immediately declared that the markets were “punishing” the UK for its fiscal plans. However, as the video shows, this narrative is fundamentally wrong.

What the UK Gilt Crisis Really Was
The chaos in the UK bond market was not the work of all-powerful “bond vigilantes.” It was a self-inflicted liquidity crisis, sparked by a technical issue with pension funds.

As MMT economist Stephanie Kelton explains:
“It really was just a classic liquidity crisis. It’s not bond vigilantes that got their way. It’s the Bank of England that got its way. The BoE stepped in and kept interest rates from climbing even higher.”
In short, the central bank, not the market, was the ultimate arbiter. It had the power to restore order, and it did.

The Central Bank Always Has Limitless Pockets
This gets to the core of the MMT reality. A central bank that works with its sovereign government can always control interest rates on government debt. Why? Because it has the unique ability to create its own currency.

Economist Steven Hail puts it perfectly:

“…what they demonstrated is what we often say, which is that if the central bank wants any particular yield on government debt to be wherever it wants it to be, then it’s always in the position to deliver on that because it has limitless pockets.”

Markets don’t get to “punish” a government that issues its own currency. The government and its central bank set the terms.

A Dangerous Misunderstanding
Believing the myth that markets are in control can have devastating real-world consequences. It creates political fear, justifying austerity and preventing governments from making necessary investments in healthcare, climate, and infrastructure.

As Stephanie Kelton powerfully warns: “It’s potentially dangerous to have this serve as an example if it’s misinterpreted, if what happened is misunderstood as the so-called bond vigilantes coming in and being in control of what a currency-issuing government can do for its people when it wants to commit resources.”

What This Means for Us
Every time you hear a politician or a talking head claim “we can’t afford it” or “we need to balance the books like a household,” they are perpetuating this exact myth.

Green Party Deputy Leader Zack Polanski was right to challenge the premise on BBC Newsnight:

“The first thing we need to do is absolutely destroy this myth that a national economy is anything like a household budget … we don’t need to tax and spend, we need to spend and tax.”

A government that issues its own currency, like Australia, the UK, or the US, spends by creating money and taxes to regulate the economy, not to “fund” itself. The only real constraints are the availability of real resources (labour, materials, energy) and the risk of inflation.

The financial markets are not our masters. They are a tool. It’s time our political leaders understood the difference.

Source: Modern Money Matters
Darren Quinn from Sociocultural Australis [email protected]

Reproduced with the permission of the authors.