- The difference between state spending and state revenues influencing the level (debt) and rate of change (deficit or surplus) of the 'national debt'*.[*I mean by 'national debt' (quotes are intentional) both the bonds issued by the state, including any bought by the central bank, plus any reserves or banknotes directly issued by the state or central bank (i.e. people's QE)
- The composition of how that national debt is financed (bonds and/or reserves), and the interest rate charged on it - i.e. on bonds or reserves (positive, zero or negative)
- The quantity and rate of change of private credit in the economy (influenced by capital ratios and capital levels, in the past and in China reserve ratios and reserve levels, controls on non-bank lending and credit guidance; also influenced by whether banks are permitted to issue deposits usable in the payment system)
- The composition of tax revenue, in particular the expected tax rate and thus the rate of return on marketable non-debt monopolistic assets (e.g. land and land value tax).
- The composition of state spending (including spending on 'people's QE')
- The composition of private credit (both deposit-creating credit, if permitted, and other credit such as bonds or P2P lending) between investment, consumption and asset purchase (influenced by financial system structures and government incentives)
Here are some possible strategies:
- An 'increased deficit' strategy changes 1 in a stimulative direction
- A QE strategy changes 2 in a stimulative direction
- A 'people's QE strategy changes 1 and 2 in a stimulative direction (and also may change 5)
- A 'financial repression' strategy ('e,g. monetisation of debt, without interest paid on reserves, mandatory reserve ratios for banks and repression of shadow and overseas banking) changes 2 in a stimulative direction (e.g. lower returns on bonds) and 3 in a depressive direction (restrictions on private credit)
- A bank recapitalisation strategy changes 3 in a stimulative direction (more bank capital means more lending)
- A land value tax strategy changes 4 in a depressive direction (lower returns for monopoly assets)
- A wealth tax strategy changes 2 in a stimulative direction (lower returns on government debt) and 4 in a depressive direction (land tax)
- A reduced debt/GDP ratio focused strategy might combine financial repression (2 and 3) with investment focused credit (6)
Institutionally, it may or may not be useful to limit the room for manoeuvre of one or more of the state actors. But that's another story. We need to know the options before choosing institutional design.