Sunday, August 30, 2009

There is no such thing as "monetizing the debt"

This term, "monetizing the debt" has been thrown around a lot recently and it's unfortunate, because it is being used completely in error. When misinformed people talk about monetizing the debt they are claiming that the Fed is buying Treasury securities from the U.S. Treaury--in essence, writing a check to the Treasury because the Treasury is out of money so the Fed is "giving it money" by buying its securities.

That is patent nonsense.

First of all the Treasury can NEVER be out of money as long as the United States government is the issuer of its own, sovereign currency. The Treasury "spends" by merely crediting bank accounts and does not need checks written to it from the Fed in order to spend.

Below are two, very clear explanations from the New York Fed, which is the bank charged with the responsibility of conducting monetary operations.

First statement, on who the Fed conducts business with:

"The Federal Reserve conducts open market operations with primary dealers—government securities dealers who have an established trading relationship with the Federal Reserve..."

So...this explains that the Fed buys securities FROM THE PUBLIC AND NOT THE TREASURY!!

The second statement explains why the Fed conducts monetary operations:

"The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserves balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC)."

Thus, the act of buying and selling securities is solely to MAINTAIN AN INTEREST RATE!!!


Unknown said...

Sir, you are mistaken on several points.

First, the US Treasury has not issued it's own currency since the 1960's. Those are called US Treasury Notes. Dollar bills nowadays are called Federal Reserve Notes. The US Treasury issues bonds to investors to pay our debt and does not have the ability to print currency.

Second, prior to 2008 the Federal Reserve bought or sold US Treasuries from US banks to control monetary supply. However, since about May of 2009, the Federal reserve has been buying US Treasuries from securities dealers and other entities (not just banks). They have done this to reduce the volume of US Treasury bonds on the open market in order to maintain low interest rates for new bonds issued. This means that other buyers, like foreign governments and institutional investors, will still see US Treasury bonds as good investments at low interest rates. This is the shell game that is being referred to in other articles and posts.

The problem with this approach is that it is illegal and is creating a dollar devaluation bubble. It is illegal because neither the Fed, nor the US government is supposed to be able to monetize the debt without congressional approval. It is creating a devaluation bubble by over-expanding the money supply in a secretive manner. If the US Treasuries are purchased directly or indirectly by the Federal Reserve, the US Federal Reserve is actually printing (not really printing, just keystrokes on a computer) Federal Reserve Notes to pay the US Treasury's debt. It is tantamount to paying for US government operations by printing sovereign currency. This causes dollar devaluation and inflation by extension.

I believe your mistake comes from believing that the US Treasury prints it's own sovereign currency. Sadly we have not done that for decades. In fact, the Federal Reserve contracts with the US Mint to print Federal Reserve Notes. The US Mint is paid approximately $.06 per bill by the Federal Reserve Banks for the service of printing and that is the end of their involvement.

mike norman said...

By "currency" I am referring to the Treasury's ability to spend by crediting bank accounts. And the Fed has always dealt with primary dealers. Monetary operations are how it maintains an interest rate, which is ALL the Fed really does...sets rates!

bubbleRefuge said...

Evan, how is monetizing the debt reflationary? Its just an simple asset swap. Exchange a dollar deposit for a treasury note in a securities account. You need to read this site,, and Wray. You are wrong.

MortgageAngel said...

Evan, kind Sir, with all due respect; The U.S. Mint stamps coins. The U.S. Bureau of Engraving and Printing (headed by the U.S. Dept. of the Treasury) is responsible for the production, if you will, of all U.S. Currency.