then you would have inflation as too many dollars chase not enough goods (high aggregate demand)." Payment of bond interest is fiscal and increases net financial assets, thereby potentially increasing effective demand if the interest is not saved. According to the principles of functional finance, to reduce effective demand outpacing the capacity of the economy to produce, the government should increase taxes , thereby withdrawing some of the nongovernment net financial assets it has created through deficit expenditure. Martin Reply: December 9th, 2010 at 12:59 pm Thank you. To restate your conclusion, an increase in net financial assets will result in either higer taxes, higher prices or an increase in national debt (savings) unless the capacity of production increases. So you agree that any deficit spending that goes to non productive uses results in the decrease of future purchasing power (i.e. if I pay someone to dig a hole and someone else to fill it the resulting increase in net financial assets results in a decrease in purchaing power. If I raise taxes then I determine politically who gets less and if I don't then higher prices forces it on everyone). US Trade Deficits 1.Trade deficits with nations who have exchangeable currencies should result in relative changes to the exchange rate between the two currencies. a.Assuming locals who produce goods in one nation are paid in local currency and the firm who employes them is paid in a foreign currency there should be a demand for local currency and a