And no, I don’t mean Compact Discs, I mean Certificates of Deposit, such as your local bank issues you. Basically, they take your money and lend it back out, then charge interest on it. The hope for a bank is that their net cash flows are positive. Reserves and capital holdings (mostly capital holdings) are of interest only to buffer against disruptions in cash flows or temporary mismatches. Banks operate on attempting to sell cash flows with different risk properties, taking on risks that they are able to better manage than their customers.
A certificate of deposit involves a purchaser handing the depository an amount of money and receiving a certificate as proof of deposit. The money is generally considered safe, in that the amount of the deposit is always receivable, though the interest payments may be terminated, depending on the agreement contained in the certificate. The CD generally offers a fixed interest rate, compounded over a certain period, at which point it matures. The customer may then roll it over at a new rate.
A bond is an exchange of cash for a certificate indicating the issuer will repay the value stated, plus interest. Functionally, this is the same as a CD. The major differences are in the terms of the agreement, where the principal value of a bond is generally not as safe as a deposit. There are also tax differences, etc.
However, the basic function is very much the same: you sell cash to someone else, in exchange for a realized cash flow. Banks attempt to use this capital to fund additional incoming cash flows, while corporates take the cash for capital investments to eventually realize cash flows from sales.
Now, consider that the government operates like a business, from an economic perspective. However, the type of business and nature of its cash flows are important. Ostensibly, the government issues debt and collects taxes to fund capital investment (social works, police, military, etc.). However, we may consider the tax burden to be a debt obligation on citizens, so in effect the government operates as a bank, selling certain positive cash flows to people (bonds) to fund the expansion of the broader loan portfolio it has (the tax burden). When considered as a financial institute, we actually expect the government to maintain a net negative balance in liabilities versus reserves, but we expect cash flows to be positive. Capital holdings and reserves constitute a constraint on the level of liabilities which can be issued, given a certain risk profile of the sorts of liabilities.
Given this, the debt load (as say, debt to GDP) isn’t as important as the nature of the capital holdings it can sell to maintain its positive cash flows. Government profit should be non-existent, as there is no owners beyond the citizenry. We therefore expect the government to maintain a continual negative cash flow, as profits get reinvested in the citizenry.
World of Discourse 