this post was submitted on 07 Jun 2024
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The debt we're talking about here (as opposed to deficits) is practically all bond sales, isn't it?
Yeah. It's another form of creation of money. It's a useful tool for some things, like the central bank being able to control interest rates in the economy, as shown during the recent inflationary episode.
Yes more or less, that is indeed how the central bank creates money most of the time; the government creates a piece of paper that says “IOU 100k and I’ll pay you 5% interest on it for 20 years and then I’ll return your original 100k to you in 20 years” (that’s a bond), which they sell on the open market, at auction (where the variable element is the interest rate someone is willing to accept). When the central bank wishes to increase the money supply they buy government bonds on the open market (ie from other holders, rarely from the government directly) by materialising money out of thin air.
When they wish to shrink the money supply they sell their government bonds and destroys the money that they receive from the sale.