Apologies for the gobbledygook.
From Worthwhile Canadian Initiative
A world where the interest rate on government bonds is (permanently) less than the growth rate of GDP ("r<g") is a weird world. The government can run a Ponzi scheme, where it borrows (sells more bonds) to pay for the interest on the existing bonds, so the stocks of bonds grows at the rate of interest. But since r<g, the economy is growing faster than the stock of bonds, so the debt/GDP ratio is falling over time. So unlike the real Mr Ponzi's scheme, it's sustainable. The government would actually need to borrow more than is needed to pay the interest on the bonds, if it wanted to keep the debt/GDP ratio constant over time.
In a weird world, where r<g, government bonds aren't really a government "liability" in the normal sense of the word. Having a positive debt/GDP ratio, and keeping it constant over time as the economy grows, is instead a source of revenue for the government. It's like the government owning an asset, not owing a liability.
But if you think about the currency in your pocket, there's nothing weird about it at all. It's all very familiar. If r<g, financing government deficits by selling bonds is just like financing government deficits by printing currency. Because currency pays the owner 0% nominal interest (and minus 2% real interest if the central bank targets 2% inflation), which is less than the growth rate of the economy. So r<g for currency.
In our familiar world, where r<g for currency, currency isn't really a government "liability" in the normal sense of the word. Having a positive currency/GDP ratio, and keeping it constant over time as the economy grows, is instead a source of revenue for the government. It's like the government owning an asset, not owing a liability. The government-owned central bank is a profit-centre for the government. Printing currency is a profitable business. We even have a special name for those profits: "seigniorage".
Revenue from printing bonds is like revenue from printing currency, if r<g for bonds. But there's a limit to how much revenue the government can sustainably earn by doing them.
All economics students are familiar with the idea that printing money is a source of government revenue. But slightly more advanced students also know there is a limit to how much revenue, in real terms (adjusted for inflation), the government can sustainably get by printing money (and Zimbabwe is what happens when the government tries to go past that sustainable limit). Because the faster the government prints money and spends it, the higher the rate of inflation. And the higher the rate of inflation the more negative the real rate of interest on money (the higher the opportunity cost of holding money), and the quicker people will get rid of money they earn, and so the smaller their money/income ratio....MORE
