I'm trying to understand national debt. I gather that the United States, and other nations with central banks, accrue debt basically by printing new money at their central bank. This, I hypothesize, is to avoid giving private banks too much power. What I'm having trouble with is understanding the interest rate on these "loans". Given the peculiar circumstance of the arrangement, the national debt provides a way to monitor the possible inflationary effects of printing new money. It is paid back only as a way to take money out of circulation, and/or to allow the government to solidify wealth created by the economic stimulus, and to invest it abroad. But there's no apparent reason for one part of the government to charge another part of the government interest, so far as I can tell -- unless it represents something else. So what is the interest rate doing? And is there something I'm missing in my explanation?


1 Answer 1


Your understanding is wrong.

Nations accrue debt by selling bonds. They pay interest on those bonds to the bond-holders.

  • $\begingroup$ Can you explain this line? "A central government with its own currency can pay for its spending by creating money ex novo. In this instance, a government issues securities not to raise funds, but instead to remove excess bank reserves (caused by government spending that is higher than tax receipts) and '...create a shortage of reserves in the market so that the system as a whole must come to the [central] Bank for liquidity.'" (Source: en.wikipedia.org/wiki/Government_debt) It's not clear how government spending increases bank reserves, nor how issuing securities would remove them. $\endgroup$
    – Skatche
    Commented Mar 9, 2018 at 19:17
  • $\begingroup$ @Skatche that seems to me to be a different question to what you've asked above. Is that how it seems to you, or is it the same question? $\endgroup$
    – 410 gone
    Commented Mar 10, 2018 at 13:52
  • $\begingroup$ It is a different question. I can see what you're saying, and others have confirmed it: monetarily sovereign nations still accrue debt by offering bonds, although their ability to print new money changes the character of those bonds somewhat. But it's not at all clear to me how government overspending could create bank reserves, so I assume there's still something I'm missing. $\endgroup$
    – Skatche
    Commented Mar 11, 2018 at 14:53
  • $\begingroup$ ok, then please do a search to see if your additional question has been asked, and if it hasn't, please do post it as a new question $\endgroup$
    – 410 gone
    Commented Mar 11, 2018 at 16:02
  • $\begingroup$ @Skatche people don't like to hold currencies that can just be printed to pay for debt; therefore governments intentionally set up barriers to prevent themselves doing this $\endgroup$ Commented Oct 28, 2021 at 11:03

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