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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club
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To: Boca_PETE who wrote (7747)8/15/1999 2:40:00 AM
From: JF Quinnelly  Read Replies (3) of 15132
 
Paying off the debt isn't exactly the same as monetizing the debt, but it almost surely would be inflationary. The Treasury would be exchanging currency, "high-powered money", for Treasury bills, bonds, and notes. When assets are held in the form of Treasury debt they are tied up and don't get spent. When assets are held in the form of currency and checking deposits, "high powered money", they get spent.

Imagine if a trillion dollars of Treasury debt was immediately converted to cash: you would have the same quantity of goods to be purchased, but a trillion new dollars chasing these goods. You can guess what that would do to prices.

"Monetizing the debt" happens when the Fed purchases Treasury debt directly from the Treasury. The M1 money supply increases by the amount of the purchase, the new cash is deposited into the banking system, and it is multiplied through fractional reserve lending by the banks. When the Fed buys Treasury debt in the ssecondary market it is changing the form of the money supply rather than increasing it, converting it from M3 debt instruments into M1 high powered money. In the broadest sense Treasury instruments are part of the money supply, albeit an illiquid form.
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