Here's a fun saying, from one of the most colorful politicians in American history,
Louisiana Senator Russell Long: "Don't tax you,
don't tax me, tax that fellow behind the tree".
It's a script that speaks to a fundamental truth.
It's very difficult politically to raise taxes to balance government budgets.
And this is true, whether the country in question is a rich democracy,
like the United States, France,
or South Korea, or an authoritarian country like China, Russia, or Iran.
This precisely because, taxes are so difficult to implement politically.
Nations often have to resort option two to finance their budget deficits,
borrowing from the public.
With "The Borrow Money" option,
the National Government sells IOUs in the form of bonds or Treasury bills,
directly to the private capital markets,
and then uses the proceeds of the sales to finance the deficit.
Know, that in this case,
the nation's central bank is completely out of
the borrowing loop and the borrowing is left to that Nation's Treasury department,
which is usually separate from the central bank.
Note also, that when the government sells bonds to finance the deficit,
it is competing directly in the capital markets with private corporations,
which may also be seeking to sell bonds to raise capital,
to invest in new plant and equipment.
So what do you think is going to happen to the bond market interest rates,
when the government borrows additional funds to finance its deficits?
And how might that affect businesses trying to borrow funds?
Take a minute to write down your answer before moving on.