The debt trap: why governments can't just print their way out
Australia's debt is approaching $1 trillion and costing $20 billion a year in interest — so why do some economists say the solution is simply to print more money?
Every time a government runs a deficit, someone somewhere suggests the obvious fix: just print the money. It sounds almost too simple to be wrong. The government needs dollars. The government can make dollars. So why the fuss about debt at all?
Printing money doesn't cancel the debt — it hides the cost
The printing-money answer fails for a reason that becomes obvious once you think about what money actually is. Money is not wealth. It is a claim on wealth, a shared agreement that a given token can be exchanged for real goods and services. When a government creates more tokens without creating more goods, the existing tokens buy less. That is inflation, and it is not a remote theoretical risk. Hungary's hyperinflation after the Second World War remains the most extreme recorded case: by July 1946, prices were doubling every fifteen hours, and the government eventually issued a note denominated at one hundred quintillion pengős. The new currency, the forint, was set at an exchange rate with twenty-nine zeroes. The pengő did not return. The savings denominated in it did not return either.
Australia is not Hungary in 1946. No serious observer is suggesting imminent hyperinflation from current debt levels. But the printing-money objection matters for a subtler reason than catastrophe: even modest monetisation of debt, meaning the central bank creating money to buy government bonds rather than letting markets set the price, erodes the independence of monetary policy. The Reserve Bank's entire credibility as an inflation anchor rests on the premise that it is not simply an arm of Treasury. Once that boundary blurs, bond markets price in the risk that future inflation will eat into their returns, and they demand higher yields to compensate. The interest bill rises, and the government has made its problem worse.
Once that boundary blurs, bond markets price in the risk that future inflation will eat into their returns, and they demand higher yields to compensate. The interest bill rises, and the government has made its problem worse.
The real risk isn't collapse — it's running out of choices
The more immediate constraint in Australia is not hyperinflation. It is compounding. Gross Commonwealth government debt has exceeded $1 trillion. The interest bill on that debt is running at around $29.6 billion a year and rising, which makes it one of the larger line items in the federal budget. Every dollar that goes to bondholders is a dollar that does not go to a hospital, a school, or an aged care worker. The structural risk is not a dramatic collapse but a slow crowding-out: the budget becomes progressively less about what the government wants to do and progressively more about servicing what past governments borrowed to do something else entirely.
There is a version of the counter-argument worth taking seriously. Modern Monetary Theory proponents, including economists like Steve Keen, argue that sovereign currency issuers are categorically different from households: they cannot run out of their own currency, bond auctions have historically been oversubscribed, and the constraint on spending is inflation rather than solvency. That framework contains genuine insights. Governments do not face the same hard budget constraint that a family does. And as the Levy Economics Institute notes, all government spending is in a technical sense a credit to somebody's bank account, which complicates the clean distinction between "printing" and "borrowing." But acknowledging that governments are not households does not dissolve the inflation constraint. It relocates it. The question is not whether a government can always issue more bonds. The question is at what price, and what the accumulation of that debt does to the budget's room to manoeuvre over a decade.
Victoria's teacher pay deal is a small illustration of a larger pattern: commitments made today compound into obligations that future budgets absorb. The same logic applies at the Commonwealth level, scaled up. When debt service costs crowd out discretionary spending, the pain is diffuse and gradual, spread across many budget cycles and many portfolios. Nobody holds a single press conference to announce that the hospital upgrade did not happen because bond markets needed paying. It simply does not happen.
The real discipline imposed by government debt is not the risk of running out of money. It is the risk of running out of choices. A government that must dedicate an ever-larger share of revenue to interest payments has less capacity to respond to a recession, a pandemic, or a structural shift in the labour market. It arrives at the next crisis already carrying the last one.
Printing money does not erase that constraint. It redistributes it, invisibly, onto wages and savings. Borrowing responsibly does not erase it either. But it at least keeps the choices visible, where voters and policymakers can make them deliberately, rather than having them eroded by the slow arithmetic of compounding interest and rising prices.
Sources
U.S. Treasury Fiscal Data — Understanding the National Debt
Levy Economics Institute of Bard College — If Government Can Print Money, Why Does It Borrow?
Free Facts — Why Can't We Just Print More Money to Pay Off the Debt?
The Bearing — Victoria's $2bn teacher pay bet: can it buy better schools or just make a budget hole?
The Bearing — Credit agencies validate Chalmers, but the real test is what happens next
Frequently Asked Questions
Why can't the Australian government just print money to pay off its debt?
Creating money without creating more goods and services reduces the purchasing power of existing money — that is inflation. Rather than eliminating the cost of debt, printing money transfers it invisibly onto every Australian who holds savings or earns a wage.
How much interest is Australia paying on its national debt?
The interest bill on Commonwealth gross debt is running at around $20 billion a year and rising, making it one of the larger single line items in the federal budget. Every dollar spent on debt service is a dollar unavailable for hospitals, schools, or aged care.
What is Modern Monetary Theory and does it mean governments can spend freely?
MMT holds that a sovereign currency issuer cannot run out of its own currency and that the real constraint on government spending is inflation, not solvency. The insight is genuine, but it relocates rather than removes the constraint — the question becomes at what price governments can borrow and what accumulated debt does to future budget flexibility.
What happens when a central bank buys government bonds to fund spending?
When a central bank creates money to buy government bonds — known as debt monetisation — it blurs the line between monetary policy and fiscal policy. Bond markets then price in the risk that future inflation will erode their returns and demand higher yields, which pushes the government's interest bill up, worsening the original problem.
What is the real danger of high government debt if it doesn't cause a crisis?
The structural risk is not sudden collapse but a slow erosion of choices. A government dedicating an ever-larger share of revenue to interest payments has less capacity to respond to a recession, a pandemic, or other crises — it arrives at the next emergency already carrying the last one.