About Government Debt and Currency worth
For me, a laypeople of economics, this relationship (in the title) is strange. The importance of it can not be ignored, so I would like to learn something about it.
As we know, now the majority of the big countries supply the new currency via Central Bank. The central bank is normally very independent to the government. When the government needs more money (money here is different from currency, it represents the real worth of goods in my explanation), it has to borrow money since it does not possess the power to issue new currency (note it is currency here). This money borrowed is the government debt, it could be internal or external, the tax income is used as the guaranty. The internal debt is normally borrowed from central bank, and the external debt can be hold by oversea banks, governments or other institues. The high credit government is able to issue government bond whilst the low credit government will meet difficulties on doing so and normally choose to borrow money from commercial banks. Here we must remember one thing that now currency are not bound to gold price any more, this makes things much more complicated (I am confused frankly speaking. In fact, I am told that now, without bounding with the gold, the currency are exactly only kind of government debt - reserved by the tax income, etc., not the gold storage anymore.).
It can be inferred that, the interest of the government debt should be higher than the inflation rate, or the worth of the debt when it meets the deadline will lower than the price when the holder bought it.
When the government gets the internal debt, there is no change in the total amount of the currency in market (if the central bank does not issue new currency except cycling the old currency). Thus if there is no increase in productivity (new product equals to the consuming and permanent assets depreciation), there is no inflation or deflation. It is in fact that the people who lend the money to someone (the government) and this borrower buy things from the people. Thus if there is improvement in productivity, deflation occurs and price drops.
If the central bank issues more currency than neccessity (to replace the old currency) to buy the increased part of products, inflation occurs.
Considering what will happen when the government gets external debt: the total amount of the currency increases, and because these currency is not domestic, it has nothing to do with the domestic price - the total amount of domestic money increases. If the government uses these currency to buy goods in domestic market, these goods are in fact "exported" (fake). This action helps solve the deflation caused by productivity increase without causing inflation.
So, if the price of external government debt drops, the "export" will decrease, which will lead to the drop of goods price. However, things will change if the external debt are not used domestically. Macroeconomics is too hard... really.
As we know, now the majority of the big countries supply the new currency via Central Bank. The central bank is normally very independent to the government. When the government needs more money (money here is different from currency, it represents the real worth of goods in my explanation), it has to borrow money since it does not possess the power to issue new currency (note it is currency here). This money borrowed is the government debt, it could be internal or external, the tax income is used as the guaranty. The internal debt is normally borrowed from central bank, and the external debt can be hold by oversea banks, governments or other institues. The high credit government is able to issue government bond whilst the low credit government will meet difficulties on doing so and normally choose to borrow money from commercial banks. Here we must remember one thing that now currency are not bound to gold price any more, this makes things much more complicated (I am confused frankly speaking. In fact, I am told that now, without bounding with the gold, the currency are exactly only kind of government debt - reserved by the tax income, etc., not the gold storage anymore.).
It can be inferred that, the interest of the government debt should be higher than the inflation rate, or the worth of the debt when it meets the deadline will lower than the price when the holder bought it.
When the government gets the internal debt, there is no change in the total amount of the currency in market (if the central bank does not issue new currency except cycling the old currency). Thus if there is no increase in productivity (new product equals to the consuming and permanent assets depreciation), there is no inflation or deflation. It is in fact that the people who lend the money to someone (the government) and this borrower buy things from the people. Thus if there is improvement in productivity, deflation occurs and price drops.
If the central bank issues more currency than neccessity (to replace the old currency) to buy the increased part of products, inflation occurs.
Considering what will happen when the government gets external debt: the total amount of the currency increases, and because these currency is not domestic, it has nothing to do with the domestic price - the total amount of domestic money increases. If the government uses these currency to buy goods in domestic market, these goods are in fact "exported" (fake). This action helps solve the deflation caused by productivity increase without causing inflation.
So, if the price of external government debt drops, the "export" will decrease, which will lead to the drop of goods price. However, things will change if the external debt are not used domestically. Macroeconomics is too hard... really.
posted by =DOC=Cai-Fan at
9:17 pm
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