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My background is not in economy, but I know that the indebtedness of the western countries is slowing the growth of the economy.

So my line of thinking is the following. Would it be feasible if a country's central bank (which would be state owned) prints money and then the government by various tenders for small businesses and startups distributes this money?

This created money would be granted for productive purposes only, interest free and not returnable if the company performs well. Also I think that this increase in the money supply would not generate inflation because the money will be backed by future products and services. By this measure the production and consumption would increase in the country. Therefore the state would need not to take foreign loans because the required sum of money for it's purposes would be covered with taxes. Of course small and medium sized companies would be taxed much less than big, multinational companies.

What are your thoughts on this?

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Remember that increases in a standard IS-LM model an increase in government expenditure generates an increase in the real interest rate. As such, private investment decreases. Traditional economic theory would suggest that what you recommend will crowd out private investment. The question can then be modified as follows- does a 1 Dollar increase in government expenditure decrease private investment by less than 1 Dollar? In other words, is the government multiplier greater than 1? A lot of empirical work has been done on this.

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    $\begingroup$ This answer would benefit from a link to a piece of the empirical work mentioned. $\endgroup$ – Giskard Nov 9 '15 at 0:36
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    $\begingroup$ A great paper is by Nakamura and Steinsson "Fiscal Stimulus in a Monetary Union: Evidence from US Regions" . AER (2014) $\endgroup$ – ChinG Nov 9 '15 at 18:59
  • $\begingroup$ Thank you for your answer. ChinG, you say that "an increase in government expenditure generates an increase in the real interest rate." but as I said if the government invests (gives out money) to the private sector, then less private companies will issue loans from banks. Therefore banks would lower the interest rate just to keep business going. Also "Traditional economic theory would suggest that what you recommend will crowd out private investment.", this might not be the case but truth to be told if money is cheap then investors could bid up the price of capital assets. $\endgroup$ – MultiMdave Nov 10 '15 at 18:40
  • $\begingroup$ But if done in a healthy dose, then yes private investments would grow, and the debt repayment would be financed from production. My understanding is that the core of the problem in modern economy is that value and interest rates are denominated in a single currency. If I view the availability and terms of these government tenders as an interest rate, then I think that the unpayable debt problem disappears. $\endgroup$ – MultiMdave Nov 10 '15 at 18:42
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This will eventually lead to increased money supply and then push up inflation rate, because, those companies who received the newly printed cash will have to pay back existing loans in their books. An illustrative answer can be found here.

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  • $\begingroup$ Thank you for your answer. I understand what you are saying. And in general you are right. Because of this debt refinancing problem I stated that only startups and small sized private businesses would be eligible for the government tender with specific statement in the tender that debts cannot be repayed with this money. Also I understand interest rate as a monetary indicator which indicates the price of the money, the availability of credit money. $\endgroup$ – MultiMdave Nov 9 '15 at 21:30
  • $\begingroup$ Therefore I think that by substituting the interest of this created money with the availability and terms of these government tenders, toxic debts, misallocated funds would be minimized and also cyclic indebtedness would be prevented. $\endgroup$ – MultiMdave Nov 9 '15 at 21:30

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