Singapore River Skyline Building by cegoh. Public domain via Pixabay.
To understand how nations should finance themselves it is fruitful to look at how corporations finance themselves, how they divide their financing between debt and equity.
Corporations typically issue equity when they need financing for a new profitable investment opportunity, when their shares are overvalued by the stock market, or when they need to raise funds to service their debt obligations.
But what is the equivalent of “equity” – shares sold for a stake in a company – for a country? The logical parallel here is “fiat money”: government decreed paper currency. Fiat money issued by a sovereign nation is analogous of equity issued by a corporation. Both are essentially pro-rata claims on wealth.
Linking a nation’s monetary economics to a corporate finance framework yields several important insights.
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