Government debt forms a significant portion of peoples’ savings in many countries – whether that debt is held directly by individuals or indirectly in the form of a pension funds and so on.
Obviously people can put SOME savings into housing, the stock market or other assets. But suppose this is not enough to satisfy the population’s desire to save – should government then have to go into debt to supply the savings that the population wants? This question is of particular relevance, given that it can be argued, as I do here, that the conventional justifications for governments going into debt do not stand inspection.
The answer is that if the stock market etc are not enough to fulfil the populations’ “savings desires” government will just HAVE to go into debt, else we’ll get “paradox of thrift” unemployment. That is, if the population does not have enough savings, it will just store up money: an activity which reduces demand and causes unemployment. And money (or monetary base to be more exact) is at least nominally a form of debt – owed by government to the holder of monetary base.
As an alternative to storing up monetary base, the population can of course store up something very similar to monetary base, something that is normally seen as “genuine” government debt: e.g. Treasuries in the US or Gilts in the UK.
But if interest is paid on any of this debt (monetary base, Treasuries, etc), AND if there really is no other good reason for governments being in debt, then we have the ridiculous situation where one section of the population, taxpayers, have to make a sacrifice just to ensure that another section, i.e. savers, have what they want.
The solution to this problem is to let the monetary base and/or government debt expand to the point where savings desires are satisfied, but offer zero or very near zero percent by way of interest on government debt. And as we all know, this is more or less the situation in Japan.