5 ms·

While I think your post for the most part did a good job of summing up the issues I am a little confused by the following. "Default and excessive inflation can

• dimitar 12y ago
  * If creditors see that you are trying to monetize debt too quickly, they will demand higher rates. * At some level of inflation, seigniorage revenue will fail to increase. * If the government borrows money in a foreign currency to spend too much, depreciation makes loans harder to repay and there is no seigniorage. * If a government refuses to loose monetary policy while spending too much, it will not be aided by monetizing debt, which makes default even quicker, since interest rates will rise regardless. Expectations of default can lead to capital flight, which if money is tight will wreck even more damage to revenue.
  • wbl 12y ago
    Creditors can't raise rates on bonds. When you issue a bond, you get paid then, and the creditor gets paid later. They can raise rates on new issuance, but the inflation rate is determined by monetary policy, not so much fiscal policy.
    • toyg 12y ago
      Nation-states are constantly refinancing or issuing new debt, sometimes daily. The pool of potential creditors for this sort of debt is very limited, and will react pretty quickly to changes in almost any area of public policy by shunning your debt if rates are not to their liking. Also, some of this debt is auctioned, with results indicating what the market thinks of proposed rates. So yeah, in practice creditors can alter rates.