Federal government deficit spending works because interest is often higher than return on federal bonds
Federal government deficit spending works because the state holds the monopoly on violence and if you don’t pay taxes denominated in the state’s currency you go to jail, so everyone needs such currency. When European colonists wanted to implement their currency in their colonies in Africa, the first thing they did was imposing taxation on said currency.
Local government can’t do that
Because we politically decide not to allow it, but that’s exactly what I’m arguing against.
Federal government deficit spending works because the state holds the monopoly on violence and if you don’t pay taxes denominated in the state’s currency you go to jail, so everyone needs such currency.
That a related, but separate issue. That’s how taxes work at all, whether the government is doing deficit spending, the budget is in balance, or there is a budget surplus.
But it is taxation that gives value to currency in developed countries. If it was purely economic, people would indistinctly pay with $USD in the EU and with Euros in the USA.
That’s how taxation works, but it doesn’t solve government finance by itself.
The US government has always paid interest on the debt. It’s never missed a payment. That makes it a very stable investment, and until recently it was considered the most stable, predictable investment that could be made.
That also means the US could have stupidly-low interest on its debts. And because the investment is so safe, it also creates a bottom for interest rates. No other investment is safer, so any time the fed rate goes up, all other loan rates go up as well - otherwise investors would just put their money in the US instead of on a home or business loan.
That and other factors result in inflation generally being higher than the interest on loans made to the US, which results in a situation where paying cash up front is actually more expensive than getting a loan and paying with future tax revenue, because future tax revenue grows with inflation that outpaces the interest on the loan.
The US government has always paid interest on the debt. It’s never missed a payment
Hard to miss a payment when you literally can just create the currency that the payment is agreed on…
The following paragraph is a good description of state bond interest rates as a policy mechanism to control general interest rates in the society (governments also decide not just the minimum but the maximum interest rate through fiscal policy to banks in terms I myself am not very familiar with, but it’s a well-known fact and it’s how governments in Europe and the US decided to put higher but capped interest rates during the 2022-2023 inflation episode, and lower it after).
However you then make a non-sequitur to bring up inflation which hadn’t appeared in the conversation until that point. What you describe is actually backwards: central banks in the west (wrongly) believe that they can fix supply-shock inflation by raising interest rates which would supposedly cool down economic activity by reducing loans and therefore economic activity (most of inflation in developed countries is explained by shocks in supply, as we are literally seeing today with the Iran war, so this doesn’t work unsurprisingly). How is it that after living the energy crisis-caused inflationary episode of 2022-2023 and the current energy-caused inflationary episode of the Iran war, you still defend that inflation comes from monetary policy?
Federal government deficit spending works because the state holds the monopoly on violence and if you don’t pay taxes denominated in the state’s currency you go to jail, so everyone needs such currency. When European colonists wanted to implement their currency in their colonies in Africa, the first thing they did was imposing taxation on said currency.
Because we politically decide not to allow it, but that’s exactly what I’m arguing against.
That a related, but separate issue. That’s how taxes work at all, whether the government is doing deficit spending, the budget is in balance, or there is a budget surplus.
But it is taxation that gives value to currency in developed countries. If it was purely economic, people would indistinctly pay with $USD in the EU and with Euros in the USA.
That’s how taxation works, but it doesn’t solve government finance by itself.
The US government has always paid interest on the debt. It’s never missed a payment. That makes it a very stable investment, and until recently it was considered the most stable, predictable investment that could be made.
That also means the US could have stupidly-low interest on its debts. And because the investment is so safe, it also creates a bottom for interest rates. No other investment is safer, so any time the fed rate goes up, all other loan rates go up as well - otherwise investors would just put their money in the US instead of on a home or business loan.
That and other factors result in inflation generally being higher than the interest on loans made to the US, which results in a situation where paying cash up front is actually more expensive than getting a loan and paying with future tax revenue, because future tax revenue grows with inflation that outpaces the interest on the loan.
Hard to miss a payment when you literally can just create the currency that the payment is agreed on…
The following paragraph is a good description of state bond interest rates as a policy mechanism to control general interest rates in the society (governments also decide not just the minimum but the maximum interest rate through fiscal policy to banks in terms I myself am not very familiar with, but it’s a well-known fact and it’s how governments in Europe and the US decided to put higher but capped interest rates during the 2022-2023 inflation episode, and lower it after).
However you then make a non-sequitur to bring up inflation which hadn’t appeared in the conversation until that point. What you describe is actually backwards: central banks in the west (wrongly) believe that they can fix supply-shock inflation by raising interest rates which would supposedly cool down economic activity by reducing loans and therefore economic activity (most of inflation in developed countries is explained by shocks in supply, as we are literally seeing today with the Iran war, so this doesn’t work unsurprisingly). How is it that after living the energy crisis-caused inflationary episode of 2022-2023 and the current energy-caused inflationary episode of the Iran war, you still defend that inflation comes from monetary policy?