Ben Bernanke Redefines Debt Monetization

My first takeaway from Fed Chief Ben Bernanke’s extraordinary speech yesterday is that this man, while surely a brilliant economist, is naive about many things in the world, not the least of which being the implications of his role in financing a good portion of the nation’s debt in recent years as evidenced by the tortured logic he uses to rationalize his actions in his own mind, now going so far as to redefine the term “monetizing the debt” as only applying to a permanent condition.

With monetary policy being so accommodative now, though, it is not unreasonable to ask whether we are sowing the seeds of future inflation. A related question I sometimes hear-which bears also on the relationship between monetary and fiscal policy, is this: By buying securities, are you “monetizing the debt”-printing money for the government to use-and will that inevitably lead to higher inflation?  No, that’s not what is happening, and that will not happen. Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates.

What is hilarious about this comment (and, ultimately, both sad and disturbing) is that monetizing the debt can never be a “permanent source of financing” for governments. History appears to be quite clear on that particular subject - that when governments simply print money to finance spending, that particular government or policy approach invariably (and sometimes violently) proves to be relatively short-lived.

As for the idea that these securities will be sold back into the market “at the appropriate time” - after the Fed’s balance sheet has likely ballooned to $4+ trillion and when the U.S. government is at the mercy of markets to determine the interest rate it pays - two words apply … fat chance.

In the words of Michael Gold (Jeff Goldblum) from The Big Chill, “I don’t know anyone who could get through the day without two or three juicy rationalizations. They’re more important than sex”.

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4 Responses to Ben Bernanke Redefines Debt Monetization

  1. But What Do I Know? October 2, 2012 at 10:26 AM #

    Nice catch, Tim. Nietzsche says something about our civilization being supported by “necessary lies” — the idea that the Fed’s actions are temporary and reversible is one of them, apparently.

    BB has never worked on a trading desk. Since he now owns one-third of Treasuries with maturities over 10 years, he cannot unwind that position without a big buyer. Who will that be, I wonder, and at what price? If he holds the Treasuries until the economy improves, who is going to want to buy his position at current prices? If he accepts a price decrease to get rid of the bonds, the ensuing rate rise will severely damage the asset values of all the other housing stock, debt and (presumably) equities out there.

    BB needs a greater fool to get rid of this Treasuries, but it’s not clear who that could be, especially since he is only going to sell them at precisely the wrong time.

    But hey, I’m sure that he feels better when he can tell himself it’s “temporary.”

  2. DLP October 2, 2012 at 5:32 PM #

    With the likely exception of Zimbabwe, I’d bet most central banks say it’s only temporary when they begin to monetize the debt.

  3. Frank H October 2, 2012 at 11:53 PM #

    Tim- extremely well said!. economics is supposed to be the science of common sense……if we counterfeit enough money (something we put people in jail for) everything will be fine. We can repeal the law of scarcity!


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