Monetize the Deficit

  

Categories: Econ, Bonds

A deficit: basically, government debt. Government spends $5k, thanks to having $4k from taxes and $1k in bonds it sold to the public, leaving a $1k deficit (it still needs to pay back the public for the bond sometime...and with some interest).

To monetize the deficit is to print money to pay off a deficit. In this case, the government can print $1k in dollars to pay for that debt. Convenient, right? Of course, this increases the money supply, so it does contribute to inflation. Governments can’t just print all the money it needs without leading to hyperinflation (we’ve seen that happen before, and it’s not pretty).

Why is monetizing the deficit even a thing if it sounds super irresponsible, in an inflationary sense? While it’s flipping more accepted forms of economics on its head, some argue that you can look at macroeconomics another way: the government can print money to monetize the deficit, and then tax people to remove money from the money supply to keep inflation down. More conventional economics is the view that taxes are used to raise money, and playing with interest rates and the money supply controls inflation.

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Finance: What is the Federal Open Market...15 Views

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finance a la shmoop what is the Federal Open Market Committee... FOMC! come say it

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with me FOMC yeah that's the noise of meatball makes when it hits the floor it [Meatball lands on the floor]

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also happens to be the acronym for the Federal Open Market Committee and part

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of its purpose in life is to manage financial outcomes through monetary

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policy all right well the Federal Reserve pulls three levers of monetary [3 Levers appear]

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policy discount rates open market operations and bank reserve requirements

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those are the big three the big three monetary policies used to try and [Monetary policies appear]

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control the economy well the font is responsible for the open market

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operations part of that equation it tries to fight the twin evils of [Person pulls open market lever]

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unemployment and inflation and among other things if unemployment is high

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well in general the FOMC will seek to increase the supply of money by holding

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back on sales of government paper like t-bills bonds notes and all that good

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stuff leaving more cash sloshing around in the [Dollar bills appear]

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marketplace and hopefully encouraging the cost of renting money or interest

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rates to decline like encouraging people to borrow because rates are cheap well

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when people can borrow more cheaply yes they're incentivized to spend more at [Person picks up stack of cash]

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the mall on earrings and rings for other places well it works in the opposite

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direction as well with the FOMC fearing inflation while they'll issue

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lots of government paper sucking out the excess cash that was previously in the [Money supply meter declines]

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marketplace and likely causing interest rates to rise right so cash will be less

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available and people want more to rent their precious dollars as interest got

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it okay well the key issue remains that the FOMC is making money more expensive

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when it does that when an issues paper sucking cash out of the system it's hard

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concept for most people including me to understand here

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well the FOMC called eight secret very dan Brown like meetings a year to look [Months of year appear on calendar]

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through reams of data and decide what policy should be note that they're

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applying monetary policy here to do their bidding not fiscal policy the gist

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is that the committee is the one sitting atop monetary policy in the US and it's

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the committee who makes the decisions on the big three dials they can turn one [Committee standing by 3 dials]

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two and three they can sift through data on the economy jobs inflation bang

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fear surveys etc and then make decisions about what to do or you know what not to

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do I remember that Soup Nazi from Seinfeld no bonds for you [Nazi holding a bond]

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