"Monetizing the debt"

I confess I’ve always been a bit unclear about the expression “monetizing the debt,” as in, “the government (or Fed) can just monetize the debt.” I’ve done a little web research, but thought others might have a useful perspective here. As far as I can tell, it means that the government prints money right now and uses that money to pay off its loans (or buy back its own securities). Effectively, it could skip the issuing debt part altogether and just print money to pay for goods and services that it would otherwise need to pay for with debt. Is that correct? Are there extra implications? Obviously this would tend to be inflationary and/or devalue the currency. Anything else?

this could happen two ways. the fed could just buy treasury securities as another buyer at auction, but this would distort the auction yields, so not preferred option. the fed could buy them in the LT open market, like they do in fedfunds ST market. this would distort market yields down, but at least the auction yields would indicate true value. note that there is a feedback loop in there, if the market is convinced that the fed will support in ST but not so much that inflation becomes issue in LT, then market will ‘follow the fed’ until such point that it freaks out about inflation (fed credibility shot). watching the difference between auction yields for 30 yrs and market yields should indicate what the market thinks.

> Effectively, it could skip the issuing debt part altogether and just print money to pay for goods and services that it would otherwise need to pay for with debt. bchad, what I know is that the phrase “printing money” is badly misused. The Fed cannot do that, and as far as I know this has not happened at least since the Civil War. The only way the government can actualy get money is through the Treasury department’s debt issuance process or taxes (ignore some other little means). The Fed is a bank, it is not the government, and so it can only use the available tools available to it to iinfluence interest rates and money supply. Monetizing the debt simply means the action taken by the Fed to turn government’s debt into money, which will necessarily increrase money supply. But the Fed has to have the money to do that, it cannot just make it out of thin air. This is money that it has accumulated through the years by selling assets. If it runs out of “cash”, we are all in trouble. That’s my $0.02.

So it’s the Treasury that runs the (literal) printing presses, which would explain why the secretary of the treasury’s signature is on every dollar of currency. Although each dollar also has the phrase “Federal Reserve Note” on it, so it can be a bit confusing. So the Fed is a bank with lots of currency (or equivalents). It buys things to inject cash into the economy. That suggests that at some point it can run out of money. Meanwhile the Treasury actually the controls the bills that go into circulation. The Fed can’t print money, but the Treasury can. But wasn’t the Fed created in part to take “money printing” largely out of the hands of politicians? And where does the Fed get its monies to buy assets in the first place? I’m a bit embarrassed that I don’t understand this better (since I feel I should), but up until recently it hasn’t been all that essential to get into these details.

the fed very much can ‘create money out of thin air’. thats their prerogative, as long as it meets their dual charter of growth and price stability. another phrase for ‘printing money’ is ‘expand the fed’s balance sheet’. the fed just buys up assets from the markets with freshly created money, thus boosting money supply, and those assets then sit on the fed’s ‘expanded’ balance sheet until it sucks that money back by selling those assets back to the markets at a future date. if they don’t take that second step, they permanently expanded money supply. if rate of growth of money supply vastly exceeds the rate of economic growth, you get inflation. temporary expansion of the fed’s balance sheet is ok if there are deflation expectations, as there are at present.

no, the printing press is definitely the fed the treasury, theoretically, is just like you and me - another actor in the market, with its own debt obligations. the fed is independent of them - which is a very very very good thing. if the treasury wants more money (deficit funding), it must raise debt. that debt can be funded by your and my savings or by those of the rest of the world, or ‘monetized’ by the fed (funded by freshly created money). the fed’s balance sheet consists of the securities it holds, plus an infinite pool of cash, which it brings into existence as required. the fed can never be insolvent, but the treasury can certainly be so.

bchadwick Wrote: ------------------------------------------------------- > So it’s the Treasury that runs the (literal) > printing presses, which would explain why the > secretary of the treasury’s signature is on every > dollar of currency. Although each dollar also has > the phrase “Federal Reserve Note” on it, so it can > be a bit confusing. > > So the Fed is a bank with lots of currency (or > equivalents). It buys things to inject cash into > the economy. That suggests that at some point it > can run out of money. > The Fed can run out of collateral, I guess, but there are lots of ways around that. > > Meanwhile the Treasury actually the controls the > bills that go into circulation. The Fed can’t > print money, but the Treasury can. But wasn’t the > Fed created in part to take “money printing” > largely out of the hands of politicians? And > where does the Fed get its monies to buy assets in > the first place? > Not really so except in an odd way. The Federal Reserve issues notes and currency is a liability of the Fed. The Fed buys the physical notes from the Bureau of Printing and Engraving which is part of Treasury (which enforces counterfeiting laws). Treasury can’t just issue Federal Reserve Notes or other currency now except T-bills which are sorta currency. The only way Treasury could stop the Fed from issuing notes was to shut-down BPE or tell them to stop listening to the Fed or some other weird act that probably violates some law or other. > I’m a bit embarrassed that I don’t understand this > better (since I feel I should), but up until > recently it hasn’t been all that essential to get > into these details.

when i say ‘print money’ i mean ‘money supply’. the physical bills are an irrelevant detail. only a fraction of the money supply is in physical bills. its the electronic records at banks that really constitute money supply. i do think that under the circumstances, the fed has done a terrific job. but its a job half done. the unwinding of this ST excess money supply will be the other half - and thats what i am watching for. i would encourage all of you to read every article about the fed these days - we’re living through amazing monetary creativity. if he plays his cards right, ben may actually be a hero here. the key as i said is how he unwinds all this money supply before inflation strikes.

^ I agree with all of that. “Print money” is a metaphor. Of course, since Ben is omniscient he will be able to predict when and how to unwind the massive increase in money without crushing everyone. Right. He has messed up everything else, but something that nobody has ever done before he will be able to do.

i presume the fed reimburses the BPE and treasury for the actual cost of the paper, metal, printing supplies, and minting costs. but the currency is issued by the fed. so the treasury is just providing a printing/minting service to its customer, the fed. so along with the total money supply, the fed also decides how much of that money supply is in physical currency. if people start running out of dimes or $20 bills, they just increase the proportion of those specific denominations. in all this, it helps to think of the treasury as just like any other entity in the economy, and the fed as living under the government’s power and protection, but still independent of it.

rohufish Wrote: ------------------------------------------------------- > i presume the fed reimburses the BPE and treasury > for the actual cost of the paper, metal, printing > supplies, and minting costs. but the currency is > issued by the fed. so the treasury is just > providing a printing/minting service to its > customer, the fed. > Right. > so along with the total money supply, the fed also > decides how much of that money supply is in > physical currency. if people start running out of > dimes or $20 bills, they just increase the > proportion of those specific denominations. > I guess, but the “dimes” part is the US mint. > in all this, it helps to think of the treasury as > just like any other entity in the economy, and the > fed as living under the government’s power and > protection, but still independent of it.

bchad asks why the government cant just create money and pay for its needs. We are not talking about whether it is physical money or not, that does not matter. The point is that the Fed and the Treasury cannot make money (electronic credit or cash or checks, or whatever) out of nothing. This is the point I see being missed in this discussion.

dreary - the fed can create money out of thin air. that’s why they’re the fed.

There’s lots of ways to create money out of thin air. Take repo loans for example. The same $100 bills can be lent again and again and again, each time increasing the money supply. Lowering the bank reserve requirement increases the money supply though nobody directly printed money.

Of course the money supply increases by the usual means, but that is not what bchad is talking about, I think. What I gather from the comments is that some believe that all the Fed (or even the government) has to do is simply print money by either loading a truck with U.S. dollar bills and paying for government obligations that way, or crediting sellers’ bank accounts with electronic money to pay for stuff the Fed and the government buy. That’s nonsense. The Fed basically started by the government handing it certificates for gold and other assets which it then “monetized” by issuing U.S. money, through the Bureau of Printing and Engraving and the U.S. Mint, thus making up the nation’s base money. From there on, it works basically like any other economic entity, buying and selling securities in the market, but with some important differences. First, it is not a profit-seeking entity, although as of late this year, it sure looks that way. Second, its goal is to keep a certain level of money supply, and all that stuff we all know about Fed Funds rate, discount window, and reserve requirement. It is crucial to understand that when peopel say it creates money out of thin air, what is meant is the same thing as when referring to banks, in the sense that they create money out of their reserves via the well known lending process. Just like a bank cannot enrich itself by freely lending money it does not have, a Fed, or any central bank, cannot increase its wealth (or its country’s wealth) by freely “creating” money. I suggest that you take a look at the Fed’s balance sheet, and see how the Fed can get away with just paying for things out of thin air, and how it would explain that to its auditors!. Cheers.

Are you suggesting that the Fed’s balance sheet is fixed or static or something? The Fed can expand its assets and liabilities whenever it wants. If it wants to print dollar bills and exchange them for GM debt it can do it. Throw the GM debt on the BS as an asset, the dollar bills as a liability.

OK, so what is the function of the Fed’s balance sheet? When it buys things with dollars, it goes on the balance sheet, and when it sells things it comes off. But is there a relationship between the size of the balance sheet and anything else that’s important? It’s odd, because when I’m used to thinking about central bank reserves in other countries, I think about the size of the balance sheet connecting to the ability of the bank to manipulate the exchange rate. But I’m not sure about how to think about it when it’s the dollar.

dreary: i’m not sure what you’re trying to express, but to me it came across as something out of the gold standard days when the money supply was limited by the gold reserves. nowadays, if ben wanted to have a party, he could buy up the whole world, and flood us all with dollars. of course, somewhere in the middle of the process, the dollar would collapse, and his party would have a premature bustup. there is no limit to the fed’s ability to create new reserves out of nothing - other than the risk of devaluing the currency, and stoking inflation. bchad: you’re mixing up the foreign exchange reserves and the central bank balance sheet. forex reserves are used to manage exchange rates. the balance sheet is used to manage money supply. the size of the balance sheet is the value of reserves in the financial system (pure, root money which expands by money multipliers when lent and relent by banking system). the fed has basically doubled reserves recently, but the money supply has not expanded 100% (vs. 3% or so if kept in sync with econ growth) because banks are not lending against those reserves. when they start lending, actual money supply will expand, and the fed will need to sterilize by withdrawing reserves (reducing the size of its b/s), otherwise, MS will expand way too fast, and inflation will result.

As usual, rohufish has completely messed this up. The past tense of loan is loaned, not lent. Lent is that time before Easter.