Monetizing the Debt Definition
"Monetizing the debt" is a financial phrase used to describe broad economic decisions made by the United Stated government, especially referring to transactions between the Treasury Department and the Federal Reserve Board, which is not a true government agency but works with the government to manage financial decisions that affect markets across the economy. While many people consider monetizing debt to be simply "printing money" the details are often complex and particular to the situation.
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Definition
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Monetizing debt is the act of paying for debts, especially government debts, by printing new money. The Fed, or Federal Reserve Board, is in control of printing money and can decide to create currency in order to deal with troublesome government debts. The end result of this process is an increase in the total amount of currency that is present in the public market, which gives people throughout the country access to extra money.
Dangers behind Monetizing Debt
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The primary danger cited in monetizing debt is the increase in inflation. Inflation occurs when there is too much money in the economy. With the supply too high, the value of the money itself goes down, and prices rapidly increase beyond the ability of wages and investments to catch up. This drastically lowers the value of the dollar and creates both international and private economic problems. Many Fed decisions are made to stop inflation, and monetizing debt is often criticized for encouraging inflationary tendencies.
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Monetizing Debt as Part of Government Action
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Monetizing government debt occurs in several stages. The government begins by borrowing money. While the government receives money from taxes and other debts it can collect on, it may not have enough money at any given time to pay for all necessary expenses, or it may want to borrow money to change the economy. So the government creates bonds and sells them to private investors. When the time comes for these bonds to be collected, the Fed prints enough money for the Treasury to redeem the bonds, or otherwise spend money in the economy to have the same effect, ultimately removing the government's debt.
Monetizing Debt in Response to Interest Rates
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Monetizing debt can also occur as a more natural reaction to rising interest rates. The Fed often tries to aim for a specific interest rate level for major borrowing between banks and the government, which can affect interest rates throughout the country. If interest rates are rising far beyond what the Fed wants, the Fed will choose to monetize debt in order to spread more money through the market, which will lower interest rates again and bring rates closer to the Fed's target.
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