“This process of financing government spending is called monetizing the debt.[1] Monetizing debt is a two step process where the government issues debt to finance its spending, the central bank purchases the debt from the public and the public is left with high powered money.”
does the above statement mean that when the govt doesnt tax enough to meet some type of spending obligation, it gets the federal reserve to create fiat money (frn-ish type things) to meet the spending obligation and get taxpayers to pay back the federal reserve? this sequence doesnt make sense to me.
does monetization occur in other sectors and is it inflationary and harmful?
They launder the money through an indirect process. Technically the government sells bonds at “market rate”, but the central bank issues credit to meet its interest rate targets, hence the central bank allows the banks to buy up all the government debt with money they don’t have.
In theory the taxpayers have to pay back the debt, but since taxes are never going to go up what will instead take place is either a credit hyperinflation or the banks will cut off the government and cause a sovereign default that will collapse the state.
“Technically the government sells bonds at “market rate”, but the central bank issues credit to meet its interest rate targets, hence the central bank allows the banks to buy up all the government debt with money they don’t have.”
does this pump money into the economy while leaving the market with less assets or tings to buy because the govt debt spending has acquired various assets with the money they didnt have??
Given that the money did not previously exist, which is why the government had to spend at a deficit, then yes, creating the credit to pay to buy this debt is inflationary.
that’s why the wiki author calls it high-powered money. the inflation the new money creates will not have affected prices yet as the first user uses the money. as the money circulates through the economy prices will rise due to the added money and its value will be less for later users.
All inflation is harmful. The only inflation that does not produce a business cycle is inflation that affects all price levels equally, but this is only a byproduct of relative inflation, and so is impossible without relative changes in price levels over the short-run. But, even this inflation is still harmful, because it decreases purchasing power. In the case of credit expansion, it is harmful not only because it decreases purchasing power, but because it will also change the prices of some capital-goods relative to others, causing malinvestment.