ABSTRACT
When a government deficit spends, it instructs its central bank to electronically credit the account of the recipient of the spending by a certain amount - also crediting the reserves of the recipient's bank. It then auctions off interest-paying bonds worth the same as the newly created money. This creates the illusion that the purchaser of the bond has 'loaned the government money'. Thus government bonds must be sold, draining out the excess reserves into an effective interest-bearing savings accounts. The amount of money the government can issue depends on the desire of the private sector to hold its IOUs at whatever interest rate the central bank sets. Thus there will almost always be demand for the government's IOUs beyond that which it directly creates by imposing tax liabilities. Thus to pay currency for a government bond is only to 'lend' back to the government its own IOU and take another IOU to replace it.
