Sovereign Finance: When Economic Growth and Sovereign Debt Are a Mismatch

John E. Silvia ()

Chapter Chapter 12 in Financial Markets and Economic Performance, 2021, pp 403-440 from Springer

Abstract: Abstract The imbalance between the federal debt burden and economic growth was evident in the experience of Germany in the early post-WWI period. Private sector demand for sovereign debt is a function of expectations of income, expected real returns exchange rates, and the availability of alternative financial returns. On the supply side, the supply of sovereign debt as a function of perceived policy desires and any limits that may arise from the cost of finance. Today, the three biggest holders of U.S. Treasury debt are the Fed and the central banks of China and Japan. These institutions are not motivated by maximizing profit nor do they mark to market their sovereign debt portfolios. The grand assumption that federal spending is costless has failed to hold. The ability of the sovereign to issue debt has faced limits. Two failures were for France and John Law and the United Kingdom after WWI.

Keywords: Weimar Republic; John Law; Assumption of Unlimited Demand; Debt Monetization; Budget Constraint; August 2011 S&P downgrade; Fiat Currency (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-76295-7_12

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DOI: 10.1007/978-3-030-76295-7_12

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