“You loan me ten bucks. I photocopy the bill four times, give you back one of the copies, and announce that we’re square. That’s monetizing the debt.” From Lionel Shriver’s The Mandibles
In the private sector, it would be called a Ponzi scheme. When the Federal Reserve Board does it, it’s called “monetizing the debt.”
The Balance explained that, “The Federal Reserve monetizes debt any time it buys U.S. Treasuries. When the Federal Reserve buys these Treasuries, it doesn’t have to print money to buy them. It issues credit and puts the Treasuries on its balance sheet. Everyone treats the credit just like money, even though the Fed doesn’t print cold hard cash.”
The process lowers interest rates, because the bonds taken out of circulation reduce supply, driving demand higher. But if reducing the supply of bonds drives prices higher and interest rates lower, shouldn’t more dollars drive the value of the dollar lower and the price of goods higher?
Logically, if you were to double the supply of money tomorrow, a dollar should be worth half of what it is worth today. Prices would double, so the rate of inflation would be 100%.
And yet even with boatloads of new money, the inflation rate has barely budged. The M1 money supply, which includes cash, checking accounts and other liquid monetary assets, is about 245% higher than it was eight years ago, when the Federal Reserve Board began its easy money policy. Meanwhile, the Fed has been reluctant to increase interest rates in part because it has not been able to reach its targeted inflation rate of 2%.