Money, Debt and Growth: An Economic Reality Check

Malte Wagenbach

If there’s one misconception that keeps tripping up policy debates from Berlin to Buenos Aires, it’s the comforting household metaphor. We keep pretending an economy is a big family budget: save more, borrow less, and everything will be fine. It isn’t—and it won’t. Modern money, public debt, inflation and growth obey a different arithmetic. Getting that arithmetic right is the difference between an economy that compounds opportunity and one that compounds mistakes.

1) How money is really created

Start with the plumbing. Commercial banks do not “lend out” pre-existing savings. When a bank makes a loan, it simultaneously creates a matching deposit—new purchasing power—on the borrower’s account. That is how most money in circulation comes into being; money is destroyed as loans are repaid. Central banks supply reserves to keep the payments system liquid and safe, but the initiative largely comes from the demand for credit and banks’ willingness to extend it. This is not fringe theory; it’s standard exposition from the Bundesbank and the Bank of England. (Bundesbank)

This leads to an iron accounting identity: every financial surplus somewhere is matched by a deficit elsewhere. In sectoral terms, the (private sector balance) + (external balance) + (government balance) must sum to zero. If households and firms, in aggregate, want to net save and the country runs a current-account surplus, the government will almost inevitably run a deficit—and vice versa. Wynne Godley spent a career hammering this home; Martin Wolf popularised it for a wider audience. Treat it as a law of motion for macro policy. (Wikipedia)

2) The state is not a household (especially outside the euro)

Because of those balances, a sovereign currency issuer is not merely a “user” of money. Taxes don’t fund spending in the mechanical sense that household income funds grocery bills; they create demand for the currency and help manage inflation, while bond sales stabilise interest rates and absorb savings. (Euro-area governments are an important special case: they don’t issue a national currency they control end-to-end, which tightens their constraints.)

Where private saving is high and private investment weak, the state’s deficit is often the safety valve that keeps incomes and employment from falling. That’s why blanket debt brakes are dangerous blunt instruments: they bind precisely when you need flexibility. Even the IMF—no one’s idea of a profligate cheerleader—has urged Germany to ease its debt brake to finance overdue public investment without jeopardising debt sustainability. Berlin is inching that way, carving out defence and infrastructure envelopes. Good economics catching up with accounting identities. (IMF)

None of this implies “deficits forever.” It implies deficits—or surpluses—consistent with full employment, stable inflation and sensible public capital formation. Germany’s chronic current-account surpluses underscore the point: decades of wage restraint and under-investment helped depress domestic demand and push savings abroad, exporting the counterpart deficit to trading partners. That is a distributional story as much as a macro one. (Brookings)

3) Inflation: watch unit labour costs, not folk tales

Inflation is not a morality play about “money printing.” Over the medium run in advanced economies, the best single guide to persistent inflation pressure is unit labour costs—wages relative to productivity. When wages run ahead of productivity for long enough, prices tend to follow; when productivity growth and wage norms are aligned, inflation stays tame. ECB researchers have documented a durable link in Europe, even as the U.S. pass-through has weakened. Interest rates still matter (they shape credit demand and relative prices), but raising rates into supply shocks is a crude tool with side-effects. (European Central Bank)

That is why wage policy, bargaining frameworks and public investment in productivity—everything from digital infrastructure to skills—belong in the inflation conversation. Monetary policy can lean, but it cannot lift.

4) Case study: The Argentine contradiction

Argentina, under President Javier Milei, offers a stark illustration of how macro stabilisation can diverge from lived experience—at least for a while. On the macro scoreboard: monthly inflation fell from the mid-20s in late 2023 to low single digits in 2025; analysts now see 2025 inflation around the low-20s. The government chalked up the first financial surplus in over a decade and a record trade surplus, aided by austerity and a rebound in farm and energy exports. Markets applaud. Households, less so. (Reuters)

The social ledger tells a harder story. Poverty spiked to ~53% in early 2024 amid the adjustment, before retreating later as inflation slowed; extreme poverty saw double-digit peaks. Industrial output lurched violently—deep contractions in late 2023 and early 2024, followed by episodic rebounds and fresh dips this year. Even as the CPI cools, real incomes for many remain below pre-adjustment levels, pushing people into precarious work. The stabilisation is real; so is the pain. Good policy requires seeing both. (Reuters)

5) What this means for Europe (and Germany in particular)

Europe’s mistake since the early 2000s has been to fetishise balanced books at the expense of balanced growth. Wage restraint suppressed domestic demand; investment—public and private—lagged; the current-account surplus ballooned; and the ECB was left to carry too much with too little. If we want higher trend growth without rekindling inflation, the formula is not mystical: align pay with productivity, raise productivity with investment, and let fiscal policy play its counter-cyclical role rather than locking it in a constitutional cupboard.

Reforming Germany’s debt brake is not an ideological U-turn. It’s an acknowledgement that the country’s capital stock—physical and human—needs renewal and that the cheapest time to invest is before stagnation becomes structural. The IMF’s arithmetic shows you can ease the brake modestly and still see debt-to-GDP fall. The sectoral balances tell you why: if the private sector wants to save and the external sector remains in surplus, the public sector can borrow to invest without overheating. (IMF)

The bottom line

• Money is created when banks lend; it is extinguished when debts are repaid. That’s the monetary engine. (Bank of England)
• Someone’s surplus is someone else’s deficit. Policy that ignores the sectoral ledger will misfire. (Wikipedia)
• Inflation follows unit labour costs over time. Productivity policy is inflation policy by another name. (European Central Bank)
• A currency issuer is not a household. In downturns, the state must be the buyer and investor of last resort—especially where private balance sheets are healing. (IMF)
• Stabilisation is not success if the social fabric tears. Argentina shows the macro can improve while micro lives worsen; sustainable reform must bridge that gap. (Reuters)

We don’t need new metaphors; we need to use the arithmetic we already have. Build institutions that raise productivity and share its gains. Let wages track those gains. Give fiscal policy enough room to support demand when the private sector retrenches, and enough discipline to prioritise investments that pay back. Do that, and “money, debt and growth” stop being a culture war and start being a development plan.