A meme on the political left that has recently been seeping into mainstream conversation including the BBC is that “sovereign nations can’t go bankrupt”. The theory goes that money can just be borrowed from your own central bank, which can after all just print more money. Hey presto – free cash. Who knew it was all so easy?

This experiment has been tried before in sovereign countries, Weimar Germany, modern Zimabwe, and lately socialist favourite Venezuela – whose currency has lost 99.999% of its value during the last six years of hyperinflation. On Friday last week the Banco Central de Venezuela announced that “three new banknotes will be incorporated into the current Monetary Cone” as early as this week. They will be for 200,000, 500,000, and one million bolivars each. The most valuable of those already being worth around 50 US cents, or 36p in the UK…

Tres nuevos billetes serán incorporados al Cono Monetario vigente, como parte de la ampliación de la actual familia de especies monetarias.#BCV 🇻🇪 pic.twitter.com/HdUDbrrZ5F

— Banco Central de Venezuela (@BCV_ORG_VE) March 5, 2021

The brutal truth of the matter is that sovereign countries can effectively go ‘bankrupt’, the pedantic legal distinction between a default and a 99.999% devaluation making little difference in reality to ordinary citizens. They can enter a sovereign debt crisis, where fears over the ability to service the debt interest payments rise, interest rates rise and money from abroad becomes prohibitively expensive to borrow. This has happened throughout history, with a wave of defaults occurring in the 1980s across Eastern Europe, Africa, and Latin America. Russia defaulted in 1998. Greece came close last decade.

When money is borrowed from a domestic central bank, countries can and do spiral into hyperinflation. Expanding the money supply does not magically create more value. It leads to wheelbarrows of cash, savings obliterated, and million Bolivar notes. Venezuela demonstrates it again this week. Controlling public finances matters…