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I mean, a government can always create its own fiat currency without borrowing it. The conventional mechanism is to issue bonds and have the central bank create new currency to buy them off the treasury. There is "debt" on paper only.

However, the conventional wisdom of central bankers is that this is inflationary. So, what they force governments to do is to issue debt to foreign or domestic creditors. If the government sells debt to domestic creditors it drains money away from the economy. Which is why a "fiscal stimulus" package funded by selling bonds domestically is taking money away with one hand to return it with the other. Unfortunately this is what some governments are doing.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Carrie (migeru at eurotrib dot com) on Thu Sep 3rd, 2009 at 08:56:56 AM EST
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