Debt Monetization Goes Public

For the first time in its near-100 year history, the Federal Reserve publicly announced its monetary policy objectives Wednesday .  Not astonishingly, the Fed will continue to inject “stimulus” (i.e., newly created fiat money) into the economy via its typical finance-lending practices until the unemployment rate falls below 6.5% or the likely inflation rate rises to 2.5%.  Additional to these goals, the Fed has stated it will purchase $45 billion a month worth of Treasury bonds, thereby increasing its debt monetization assets (the Fed is already the largest individual holder of United States public debt, not China as many believe).  Of course, debt monetization itself, either here or abroad, is not new but brazenly declaring it as policy publicly certainly is, at least where the Federal Reserve is concerned.  At least there is some degree of transparency to speak of in this approach, I suppose.

Consider this for a moment.  Debt monetization necessarily and disproportionately causes the given monetary unit’s purchasing power to decline via direct inflation, which in turn has the effect of rendering savings and investments worth less than when the it was allocated to them.  Economist Charles Calomiris observes that “[debt monetization] is at the core of every exchange rate collapse of the recent and distant past.”  And because of this undeniably inflationary effect – some might say even purposefully so – debt monetization functions as a decidedly undemocratic form of regressive taxation that unequally impacts those who cannot generally afford to exchange what cash they have on hand for commodities, namely the poor and to a lesser extent the middle class.  Economist Dr. Jerry Jordan points out that “there are some explicit taxes that would be more harmful than the implicit tax of inflation, but few are more regressive, devisive [sic], or dishonest.”


Dr. Jordan further observes that


debasing the national currency has been a common method of financing government since the time of the Romans, and has long been recognized as simply another way of taxing people.  …Inflation has been viewed as one of the most efficient methods by which the government gains command over resources.   …  …deficit financing by government leads to expectations that either future explicit taxes must go up, or the future inflation rate will go up.  Bonds that are issued to finance current expenditures require that interest and principal be paid out of future tax revenue.  …  Even with the indexation of the personal tax structure to eliminate ‘bracket creep,’ the government still benefits from inflation.


Inflating the money supply as a means of combating unemployment is a time-honored theoretical goal for Keynesian subscribers but at some point you would think that, with the financial crises of the early 1980s and the last few years and the bursting of the housing and internet bubbles, that these alleged economists would acknowledge such policies never deliver long term.  There is no credible correlation between simply “printing” fiat currency and correspondingly increasing actual economic demand and/or productivity.  In fact, the overwhelming historical evidence supports the conclusion that such simulative efforts typically have the effect of temporarily catalyzing output that pointedly does not reflect a commensurate increase in demand, which ultimately results in an artificially inflated bubble – such as the recent housing bubble – that must eventually burst in order to reset to actual market conditions.  In short, and as Nobel Laureate F. A. Hayek described, inflationary monetary and fiscal policies almost always drive the misallocation of resources in an unsustainable and many times catastrophic fashion.  But then, Lord John Maynard Keynes was not himself especially known for his attention to long-term third-, fourth-, or fifth-order effects, as he is somewhat famous for noting that “in the long run we are all dead.”


Eventually, large-scale debt monetization leads to either outright default or hyperinflation; “…such [debt monetization] policies serve only to worsen these problems and, unless reversed, will destroy the currency and much of the economy with it (emphasis in original).”  Once either of these eventualities occurs, the monetary unit in question must be abandoned and a new one established, with considerable economic strife and devastation along the way.


To summarize briefly, an unelected body of technocrats – seven individuals in terms of a simple majority of the Federal Open Market Committee – effectively devises and implements future tax policy for American citizens in direct violation of both the Constitution and basic democratic principles.  And to this point, I have just one question for the Keynesians at the Fed and the New York Times: if debt monetization is so harmless (or in fact helpful and/or necessary), and anti-fiat cooks like myself are just radical naysayers, why then is it so important to raise taxes on the wealthiest 2% of the nation to help address our ballooning deficits and debt?  Better still, why is it necessary for anyone to pay taxes in America at all if the Fed can discretionarily, and without negative consequences, print promissory notes at its leisure to “stimulate” the economy and eradicate unemployment?  I have yet to see any Keynesian (or other) economic theory reconcile the fundamental disconnect between these two practices.  This is very likely because the Keynesian subscribers know that despite their best efforts and ideology it simply cannot be done.





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