Monetizing Debt

What Should We Know About Monetized Debt?

Monetizing debt is closer to bona fide counterfeiting than it is to being a valid government policy. Monetizing debt is an immediate regressive tax on the American people. Because the tax is regressive, it hurts the lowest earners most because each dollar means so much more to the poor.

How Does the Federal Reserve Monetize Debt?

Let's say Congress needs a billion dollars. They issue US savings bonds which are purchased by you, me, China, Japan and anyone else who wants to buy them. When we buy these bonds, we are loaning the government real money from wealth that we have on hand. This is called real borrowing. Let's say that after we all have as many bonds as we want, there is a half billion dollars that has not yet been purchased. The Federal Reserve steps in and agrees to purchase the $500,000,000. The Fed does not have the money. Rather, they simply make an entry in a ledger (Congress' checking account) thereby creating the money out of thin air. As an additional insult, they then declare the bonds they have purchased as additional reserves and can now lend not only the original half billion, but because of the reserve ratio, they can lend an extra $4.5 billion to banks and others.

What's the Problem with Monetizing Debt?

This works as long as all debts are repaid. However, in a financial crisis such as the sub-prime mortgage crisis, debts are not repaid. The system spirals in on itself and crashes, unless the government prints more money to try to cover the crisis. During this time, your wealth is stolen. At some point in time, the government must account for creating money that did not exist. It will catch up to them just as it did to Bernie Madoff and all the other central banks that have failed in the past. It is the taxpayer who eventually pays the tab either through taxes or inflation.

Adding Insult to Injury

When monetizing debt the government doesn't just print the money and thereby steal from the citizens. That would be too transparent. Rather they "print it" through trickery (designed by British parliament in 1694 who stole the idea from banks in Venice from the 1300's). The trickery is to have the central bank, our Federal Reserve create it as a loan to the government. Now we not only have to pay back money that does not exist, we also have to pay interest on it. We are paying interest on money that is stolen from us in the first place, thereby adding insult to injury.