[neilwilson]

They say that Economics is the science on mistaking stocks for flows, and this is a very good example.

Interest is denominated in $/month. Loans are denominated in $. Mixing those up is like mixing up miles per hour and miles. They are different units of measurement - the first is a flow, the second is a stock.

Remember that bankers are people too, and they eat just like you do. Therefore interest is nothing more than the wages of bankers. They take those wages and they spend them back with firms in return for food and shelter. The firms then pay the banks with the money they earn from bankers. Round and round the money goes. Bankers earn on the turn as they say.

The same applies to government interest. It is paid on bonds and reserves to financial institutions who pay people a pension from them. Those pensioners then spend that income, which generates additional taxation (because that's how percentages work), which will then balance the amount government paid in the first place.

Therefore the tax that offsets the government interest payments comes from paying the interest payments.

It's just a way of stimulating output, or redistributing it away from the producers to pensioners and other people with money.

In fact all government spending creates the additional tax that offsets it - to the last cent for any positive tax rate. It's a simple geometric progression. The only question is when. If somebody doesn't spend all their income, then taxes are not collected from the spending, earning and re-spending process that would otherwise occur.

And that's what creates the 'deficit' - people deciding not to spend all they earn.

Also known as saving for a rainy day.

There is no need for government to pay interest at all. It's entirely a policy choice. People can then choose to continue to save for no reward, or they can spend the money, which will stimulate economic output.

[dataflow]

No, I'm not mistaking stocks for flows. I'm not sure where you got the idea that I'm mixing up interest with the loan principal.

I'm sorry but your long-winded explanation (as this topic always produces for reasons I never understand) just isn't something I can make sense of. You're pointing out loops in the payment graph. Sure there are, nobody claimed the graph is loopless. But that obviously doesn't imply 100% of the flow is going through a closed loop. The more you increase the outward flow the more you need to increase the inward flow, and the extent to which you can do the latter is not limitless. This seems too obvious to me to convince myself it can be just hand-waved away with a complicated explanation.

> There is no need for government to pay interest at all. It's entirely a policy choice.

I don't know why you purchase (say) bonds, but most people I know purchase them for the interest, not out of some sense of patriotic goodwill. You'd think if the government could get the same loans with the same terms without paying interest, then they would avoid paying interest...

Nobody's explanation of this ever makes sense to me, like you can see above. Half of it always seems overcomplicated (missing half the issue) and the other half just seems outright wrong. (This is precisely why I said someone needs to write a convincing & comprehensible blog post on this.)

[neilwilson]

"I don't know why you purchase (say) bonds, but most people I know purchase them for the interest,"

You don't need to issue bonds. When government spends it automatically borrows the same amount at that time as a function of the way bank transfers work at the accounting level. Tax payments then reverse that as the money spins around the economy, which reduces that borrowing. What is left is simultaneously what people have saved from that spending flow, and the government deficit.

"You'd think if the government could get the same loans with the same terms without paying interest, then they would avoid paying interest."

That rather depends who government is working for doesn't it. If it is exempting holders of debt assets from the inflation process, by giving them free money when there is no need - while spinning an elaborate story to cover - it makes perfect sense.

"The more you increase the outward flow the more you need to increase the inward flow, and the extent to which you can do the latter is not limitless."

When you turn on the hose pipe, and then increase the flow by turning the tap, do you need to widen or lengthen the pipe, or does the water just come out of the end faster?

Sovereign money is a closed system. The more government spends, the more tax and financial savings it creates. Tax + financial savings = spending. Always. And it can do that until the cows come home.

What stops the process is running out of real things to buy at a price worth paying. Then government spending stops.

Government spending works like spinning a stone across a pond. Each hop is a tax point reducing the size of the next hop, and eventually the stone disappears.

Saving is like videoing the hopping and pressing the pause button. The hopping will then continue when the pause button releases - ie when the savings get spent.

"Nobody's explanation of this ever makes sense to me,"

Perhaps if you drew out the balance sheets, and applied the journals you'd see how it works.

What you're missing, it would seem, is that for every debtor there is a creditor and everything must always add up to zero at all times.

Do that and you'll see that what you're calling 'unsustainable debt' is just a balancing entry in the accounts.