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To: JF Quinnelly who wrote (7754)	8/15/1999 8:19:00 AM
From: Boca_PETE	Read Replies (2) \| Respond to of 15132

JFQ: RE:< Gov't Monetizing Debt vs. Paying Off Gross Public Debt > Thanks for your outstanding and educational explanation for the differences and effects of monetizing debt vs. paying off the national debt. I think we can agree that any move to pay down the national debt would need to occur gradually in order to avoid an inflationary effect on the economy and to avoid overheating the economy. The explanation assumes that if debt were immediately converted to cash, you would have the same quantity of goods to be purchased, but a new dollars in the amount of debt paid off chasing these goods. While I'd say some of this new high powered money would chase those existing goods, I'd think some portion of the new money would find its way into equity and fixed income investments. The effect of these new investments (new money chasing an existing supply of equity securities) would drive stock prices up and would also surely overstimulate the economy (new investments would increase the supply of goods and services). It would also increase prices of fixed income securities and lower interest income on those securities. P

To: JF Quinnelly who wrote (7754)	8/15/1999 9:16:00 AM
From: Oblomov	Read Replies (2) \| Respond to of 15132

Interesting points... but if the debt were paid off, wouldn't there simply be less money in the system? That is, M3 would shrink even though M1 grew. Although some of the new M1 money would be spent, at least some (if not most) of it would go into other financial instruments. Why would a temporary increase in M1 necessarily generate an increase in demand for goods? In any case, this would be a short-term effect. The new M1 would be redistributed by the economy to more efficient holders (savers). A new equilibrium M1 would be found, and it would probably be smaller than before. I claim that paying off the debt would be deflationary rather than inflationary. The short term effect may be mildly inflationary, but once the quantities of money re-established equilibrium, the fact that less money exists in the system would have its effect on prices - a deflationary effect. On monetizing the debt: I remember a few years ago, one of the third party Presidential candidates suggested a novel method of paying off the debt. He said that he would order the Treasury to mint a $5.5 trillion coin, and would then have it delivered to the Fed as payment in full of the debt. Once I stopped laughing, I thought it provided an excellent example of why Treasuries are not "risk-free" securities. AA

To: JF Quinnelly who wrote (7754)	8/15/1999 4:56:00 PM
From: Investor2	Read Replies (1) \| Respond to of 15132

Thanks for the very thought-provoking post. Re: "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." Your use of the terms "high-powered money" and "they get spent" somewhat implies that people will take their T-Note sale proceeds directly to K-Mart and Best Buy to do some high-powered shopping. I agree that this would result in an upward pressure on the prices of goods. However, most of the T-Note sales proceeds would probably be invested in corporate or municipal bonds or in equities. This would tend to result in "asset inflation," rather than "product inflation." Best wishes, I2