Extremely High Debt Environment (Fiscal Dominance)

• Assumption: Government debt soars to 50,000 yuan, while corporate borrowing capacity remains unchanged.

• Operation: Interest rates are lowered.

• Result: * Due to the massive scale of government debt, the rate cut causes depositors to lose 5,000 yuan in interest income (a huge liquidity drain).

• Corporations still only increase borrowing by 2,000 yuan.

• Net impact: -5000 + 2000 = -3000 yuan. Conclusion: The rate cut actually leads to economic contraction.

When government debt reaches a certain level, the interest payments themselves become the "lifeline" for maintaining economic liquidity.

In this situation:

• Rate hike: While it increases corporate costs, the high interest payments made by the government inject a large amount of funds into society, potentially stimulating consumption and inflation.

• Rate cut: While it reduces the burden on corporations, by cutting off the large-scale interest transfers from the government to the private sector, it may actually lead to less money in the market, triggering economic shrinkage.

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