Monetizing the Debt
Frequently touched on here at SwiftEconomics.com, the Federal Reserve has been purchasing Treasury debt at an unprecedented clip. Just how much Treasury debt? The following graph summarizes activity over the past four months:
Basically, monetizing debt is a process of lending money to one’s self. The government spends, proceeds to write an IOU (debt contract in the form of a T-bill) and hands it to the Federal Reserve. When the central bank purchases the debt from the public, more money is put into circulation. With an increased money supply and fractional reserve banking, the public is left with high-powered money.
News & Notes:
· The Fed purchased $7.5 billion of Treasury securities on July 14 and tentatively plans to make a TIPS purchase in an operation on July 16.
· The Fed has said it will buy up to $300 billion in Treasuries by autumn.