(2) is wrong. Or at least the wrong way of thinking about it. Bonds are savings. When the savings are spent they create the extra flow that pays back the bond.

(2) is wrong. Or at least the wrong way of thinking about it. Bonds are savings. When the savings are spent they create the extra flow that pays back the bond. It's just a continuation of a suspended spending chain. Always remember that spending comes first and causes taxation - which will always match the initial spending to the penny unless it is delayed by people saving (ie not spending the instant they get their income). Imagine a stone skipping across a pond with each bounce being a tax point. Saving is pressing the pause button on that process, which then resumes when the savings are spent again. And of course the assets may never be spent. They may just pass down from generation to generation. And likely will since that is the basis for pension funds.