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When I read about national debt, it's usually about how debt is bad because with too much debt, debtors would demand higher interest rates. Eventually the government can't pay the interest, defaults, and the economy collapses.

However not discussed is why the central bank can't just step in and keep lending money to the government. It's not like the central back doesn't already do that - according to this article, 27.6% of the US national debt is currently to another arm of the government. But if the central bank can just keep buying government bonds, the government can also force the interest rate on its debt as low as it desires (just get the central bank to buy more bonds), not to mention deficit spend to its heart's content. And if the government is able to do that, then national debt isn't a problem at all!

It seems to me that there's only a problem if 1) the country doesn't have a central bank or 2) you're using another country's currency (e.g. for members of the Eurozone). Am I missing something?

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  • $\begingroup$ Your idea is contradictory as it only works if the money NEVER enter into the market. The market is pretty sensitive, people will eventually know that the money is inflated. $\endgroup$ – mootmoot Jun 1 '18 at 11:37
  • $\begingroup$ There is no such thing as "good" or "bad" in economics. It's simply the case that some people prefer one set of evils over another set. It's all a matter of opinion. $\endgroup$ – Hot Licks Jun 1 '18 at 18:04
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Yes.

The central bank (say the Fed in U.S.) can purchase bonds, but notice:

1) The Fed is not going purchase t-bonds and t-bills directly from the Treasury. It will only purchase or sell bonds in the market. ("open market purchase" or "open market sell")

2) Open market purchase is not only the buying of bonds, but also the creation of money (You sell bonds to the Fed, and the Fed will pay you). Increase in money supply means inflation. Obviously, the Fed can't buy too much bonds, or the U.S. will have to deal with disastrous hyperinflation.

3) Most central banks have some degree of independence in determining what to do. The Fed won't purchase more than they want, and the government is not able to force them.

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  • $\begingroup$ There’s not a lot of modern theory that suggests that there is a direct link from money creation from bond buying to inflation. QE was a policy in many developed economies (incluidng Japan, the U.S. and euro area), without any obvious inflationary consequences. $\endgroup$ – Brian Romanchuk Jun 1 '18 at 12:52
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    $\begingroup$ Right, and it could be the case that "no direct link" was due to the fact that central banks won't buy t-bonds without a limitation. Otherwise, drastic increase in money supply would inevitably lead to inflation. In the case of Zimbabwe and Venezuela, unlimited monetization of government debt had led to hyperinflation. $\endgroup$ – T. G. Jun 2 '18 at 8:20
  • $\begingroup$ I would add to this that the Fed is required by law to keep inflation under control, although exactly what means is more or less up to them. Related to that: economics.stackexchange.com/questions/27558/… $\endgroup$ – Fizz May 20 at 14:13
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This site is aimed to give non-opinion based answers; this question is worded in a way that leads to opinions (“bad”). I will do my best to give a straight answer.

I would argue that it is safe to say that there is a lot of hidden politics in discussion of fiscal policy and government debt. If someone does not like policy X, and policy X is popular, it is politically easier to attack X’s effect on government debt than X itself. This could explain the tone of discussions you have read.

As you note, it would be possible for a government to set the interest rates on all of its debt if it borrows in a currency that it controls (via control of the central bank). The standard argument against such a policy is that by doing so, the central bank would lose control of inflation. (That is, it needs to be seen to have the flexibility to raise interest rates to keep expected inflation under control.) There’s a lot of different theoretical arguments to get to that result. (As a disclaimer, I would note that I disagree with them, so I will not attempt to present them.)

Unfortunately, these arguments are often based on cryptic mathematics. You could try asking another question specifically on that topic to get a further background. (I did a quick search, but the questions I saw had various issues. In order to get good answers, you need to ask a very specific question, and avoid introducing editorial comments, as answers end up responding to the editorial comments.)

The next line of attack is that by increasing debt, interest costs are rising (assuming interest rates are positive). This implies that these costs become an increasingly large part of the budget. Furthermore, overlapping generations models (OLG models), typically suggest that this results in generational unfairness. (Future generations are disadvantaged relative to the current generation.)

Finally, there is the “intertemporal governmental budget constraint.” This constraint - if it holds, which is unclear - suggests that governments will need future primary surpluses to match current debt levels. (The primary surplus is the budget balance excluding interest payments.) The theoretical status of the budget constraint is controversial, but one could argue that it is related in practice to the previous argument about interest payments.

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For the central bank to keep buying a lot of government debt indefinitely, it would have to start printing money at some point. That has the usual drawbacks from pronting money such as (hyper-)inflation.

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