George Rebane
You hear a lot about this today, and almost no one understands it. According to the sociologists and educators who study what the electorate comprehends, ‘debt monetization’ means about as much to the average voter as the explanation of a freshly painted corral post does to a cow. And here Wikipedia is of less than no help –
Debt monetization occurs when a nation's central bank (for example, the Federal Reserve in the United States) "buys" government bonds. If a government's expenses exceed its tax revenue, if nothing is done the government will draw resources (capital) out of the private market. Since there is a limited amount of capital available in the market, there will be less available to fund business growth if the government takes out a substantial portion. If the debt is monetized, the capital is thereby returned to the private market. (emphasis mine)
This tells us that if the Fed buys Treasuries, then “capital is thereby returned to the private market”. Well, no.
First of all, the Fed doesn’t keep wads of cash on hand. Its assets consist of other securities that it has ‘bought’. And what does it use for all that buying? Give yourself an ‘A’ if you said freshly printed fiat money backed by less than a gentle breeze. There is no capital “thereby”, or any other way, “RETURNED to the private market.” It’s simply an injection of new cash into the US Treasury’s general fund that the federal government then uses to pay for its spending.
Every one of those ‘monetized’ dollars eventually winds up in the (American and the world) economy diluting the buying power of every other dollar that arrived there first. The resulting inflation is how it “draws resources (capital) out of the private market.” That means the dollars that you and I still hold in our wallets, money market funds, CDs, etc will now compete with more dollars out there for the goods and services that we need. And we wind up paying more of our dollars for them.
Just so we know; the Fed pulls money out of the market when it SELLS its assets for cash money, and then takes those dollars out of circulation (makes them disappear). That reduces the amount of cash floating out there, and this activity is then deflationary.
Debt monetization – kinda has a nice sanitary ring to it, as if it will somehow help set things right with our ongoing financial crisis. So let’s all be team players, and not tell Team Obama how we feel about this.
Comments