Where do the funds for deficit financing come from?

Question

If the govt. borrows money from the apex bank then does it keep some security with it? or does the bank just mint money?

Answer 1

the government has a budget that is based on projections of revenues and expenditures.  Those projections are guesses.  When the country is in a recession, or at war, or just lacks the political will to live within its means, it often will turn to deficit financing to reconcile the gap between what it plans to spend and what it expects to take in in revenue.   That is an unbalanced budget, in common parlance.

Even if the government puts out a budget that is balanced for the period it covers, revenues could fall short of expectations, or spending could outpace the planned budget.  

In any event, the way the government gets the money to cover the difference between income (revenue) and expenditures is to issue bonds.   these bonds are sold at auction to whomever wants to buy them.  the interest rates paid to the holders of the bonds is adjusted during the process of selling them untill all the money we need is obtained through the sale of the bonds.    this is called borrowing money, but the actual mechanism is auctioning off bonds, which are a promise to pay money in the future for less money today.

There is no security deposited in a bank as part of the process, the bonds are said to be "backed with the full faith and credit of the united states of america".  investors know that it would be catastrophic for the united states to have its government bonds considered anything less than 100% safe in terms of being repaid, so the interest rates we have to pay on those bonds is often less than most other bonds sold by private firms or other governments.   but at certain times, when the economy is weak, or the government appears particularly ineffectual at managing its finances, the interest rates can go up, and it costs the government more to borrow the money (sell its bonds).