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At the moment many governments, such as Finland's, are able to borrow money at negative interest rates. My question is: why don't they borrow as much money as possible while interest rates are negative?

The answers I have heard so far don't make sense.

Governments avoid borrowing too much money because that would lead to spending more money

This doesn't make sense: they could borrow money and not spend it and just take the profit from the negative interest rate.

Governments avoid borrowing too much money because they want to minimize the risk that a bank fails and loses their money

This doesn't make sense: they could take the money out as cash, pay people to guard it, and still make a profit from the negative interest rate even if the money was just sitting in a safe.

Governments avoid borrowing too much money because there are limits to how much they can take out in loans in they won't to keep a healthy distance to those limits.

This doesn't make sense: if they borrowed money at a negative interest rate now, and just saved the money, they would be in a better position in the future compared to not taking the loan. (In all cases except when interest rates go even more negative in the future, in which case it might be beneficial to take the loans when the rates are lower - however, no-one is arguing that governments would be speculating like this).

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  • $\begingroup$ Small language point: the government borrows money, the private sector buyer that buys government bond is a lender. $\endgroup$
    – Brian Romanchuk
    Jul 22, 2019 at 18:51

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(The arguments you listed are questionable, so I will not discuss them.)

One thing to keep in mind is that we need to distinguish between the central bank and the fiscal authority (e.g., the U.S. Treasury). This is doubly true in the euro area. I will put aside what the central bank is doing, to match the spirit of the question.

If we are in a place that has limits on debt issuance - e.g., the US debt ceiling, or countries in the Maastricht Treaty - there are limits on debt that need to be respected. (Why these limits should be implied when it is profitable to borrow is a mystery to me, but that is a different question.)

If we put those legal limits aside, there is a very practical issue: when the Treasury issues bonds (which is a form of borrowing), it is removing money from the “private sector” (or more accurately, the “non-government sector”). Under normal circumstances, borrowing is aligned (roughly) with deficit spending, and the deficit spending sends money to the private sector

As a simple example, imagine a government runs a deficit of \$100 million. The deficit results in sending \$100 million in extra payments to whomever, and that will roughly coincide with what it needs to borrow.

If the government just issues bonds, there is no source of money available to buy them. (The central bank can operate to make it possible, but this is limited.) The government will need to do something with what it borrows, and that would most likely be buying financial assets from the private sector.

(Since this explanation was not adequate, I will explain further. If the government issues \$100 million in bonds, private sector entities need \$100 million in balances at the central bank to pay for them. However, banks need to keep balance levels near minimums to meet liquidity needs. If they are already at the minimum, there is no capacity to buy the bonds at auction. The only way the bonds are sold is via some arm of government to transfer \$100 million to banks to allow the auction to proceed. If the central bank is not able to do it, the only course of action is for the Treasury to buy something worth \$100 million from somebody in the private sector.)

It is entirely possible that the securities it buys are worthless, which poses a risk to the government. Also, it will hand windfall gains to people selling assets, which raises political issues.

They could borrow to fund investment, which is exactly what many people have argued for governments to do. However, the capacity to so is limited by useful projects to invest in, and any projects raise other political issues.

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  • $\begingroup$ Are you implying that the government does not want to borrow money to sit on it, because that would cause less money to be available for the private sector, thus slowing down economic growth? $\endgroup$
    – Atte Juvonen
    Jul 22, 2019 at 20:29
  • $\begingroup$ It’s handing money to a few select sellers of financial assets. That raises a lot of political concerns. $\endgroup$
    – Brian Romanchuk
    Jul 23, 2019 at 19:23
  • $\begingroup$ Is my interpretation of your answer correct or did you mean something else? $\endgroup$
    – Atte Juvonen
    Jul 23, 2019 at 20:10
  • $\begingroup$ No, my argument is that “sitting on it” is effectively impossible - they need to recirculate the borrowing (as discussed in my answer). If they don’t spend it - have an offsetting deficit - they have to buy private assets. Those purchases cause distortions - what are they buying, from whom, at what price? $\endgroup$
    – Brian Romanchuk
    Jul 25, 2019 at 11:01
  • $\begingroup$ I really don't understand why they can't just "sit on it". You say that if they don't spend it, they have to buy private assets. Why would they have to do that? Why can't they just take out the loan as cash and guard it? $\endgroup$
    – Atte Juvonen
    Jul 25, 2019 at 13:28

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