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My understanding is that, while government debt is in some ways a fiction, it serves an important purpose in setting the risk-free rate of return in the economy
by sfblah 6y ago
My understanding is that, while government debt is in some ways a fiction, it serves an important purpose in setting the risk-free rate of return in the economy. Yes, the debt could be eliminated and replaced with constant money printing, but this would eliminate that important market signal.
By pinning rates low as the Fed has done, that signal has been disrupted, and that is probably why we've seen repeated financial bubbles and panics. Also, it runs the risk of money being diverted to projects that only make sense because the risk-free rate of return is so low that extremely risky ventures seem "worth it."
- somedude895 6y ago> Also, it runs the risk of money being diverted to projects that only make sense because the risk-free rate of return is so low that extremely risky ventures seem "worth it." This makes it sound like low interest rates encourage high-risk high-reward ventures. However, they also very much lead to unprofitable businesses surviving, where the possibility of high reward is simply not there; zombie companies. This allows badly managed companies to coexist along with well managed ones, increasing market inefficiencies and lowering productivity of an economy by not letting markets eliminate rotten apples and allowing better business models to take over.