To maintain a given level of stimulation therefore requires an exponentially increasing level of deficit spending, increasingly distorting the proper relationship between government and the private sector. The task is to rationalize that exogenous component. This is a subject that was covered extensively in earlier discussions with Per Gunnar Berglund. Government debt is a surrogate for private debt, in the sense that it represents money placed into circulation. Interest on private loans is justified by credit risk, the risk of default and non-repayment.
Interest therefore contributes to what is in effect an insurance fund.
Government in principle is the best credit risk of all, with no chance whatever of default. It should therefore logically pay no interest. This actually more correctly models the dynamics of the real world economy. The reason is that if there are many overlapping loans, it doesn't matter if interest is collected at the beginning, during or at the end of individual loans. The effect is exactly the same.