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Does the Fed Really Monetize Government Debt?

Posted by
July 31, 2012
in Blog

by George F. Smith

If monetizing debt is understood to mean printing money to pay for government deficits, then the Fed is guilty.

The basics are quite simple. The federal government issues and the Fed buys interest-bearing debt certificates. The Fed pays for these securities by creating digits on a computer that represent dollars. In this Age of Ron Paul, more people are learning that the digits do not represent savings borrowed from the public. The Fed is not a financial intermediary; it is a money factory. And while factories under capitalism produce for the benefit of the masses, this factory cranks out dollars for the politically-favored, to the detriment of the masses. The Fed is thus an anti-capitalist, anti-free market institution. The 12 members of the FOMC decide how much money they need and create the digits on-the-fly, from nothing. The idea of Bernanke or other Fed chairmen printing money is a metaphor, but an accurate one. It’s simply more convenient for the Fed to create digits than to print money.

It might be objected that this is not the equivalent of printing money because fiat money is not an interest-bearing asset. By purchasing government bonds, the argument runs, the Fed collects interest from the Treasury, thus providing an additional windfall for the central bank, which also collects the principal. The government would’ve been better off issuing a service order to itsmoney factory” and having it print the amount demanded and avoid the interest payments. In other words, instead of Bernanke creating digits, have Geithner create them.

Simply printing money to pay one’s debts, though, even when done by a legitimate government, runs the risk of being seen as such. Even eight-year-olds know a counterfeiter is a crook who prints money then spends it. It’s always possible kids today would survive government schools to adulthood, still believing the emperor is stark naked, and that could lead to revolution. Most adults, of course, have little interest in where money comes from as long as it buys things at the mall, and most economists have a habit of not biting the hand that feeds them, and thus lend support for an “independent” Fed….

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image: flickr.com/anearthling