Monetizing the Debt

To monetize the debt, a nations Central Bank purchases treasury securities on the open market. This creates invisible money, because the Nation is essentially borrowing money from itself. From an economics point of view, the nation is creating money from nothing. The United States has been following this practice for years. The nation has not had a balanced budget in 25 years, and each year the country spends more money than it takes in taxes and revenue.

Open market operations are complex on the Macro Economic scale, but in the United States all interest rates are controlled by the Federal Reserve performing Open Market Operations.

An open market purchase is when the Fed buys bonds on the open market. Money is then injected into the economy and interest rates fall. This policy was practiced from the late 2000’s till around the early 2020’s. The US economy was so weak that the Fed was forced to keep interest rates at a target rate of .0 – .25%.

The current Federal Reserve Chair Jerome Powell took a different approach in order to fight inflation. He rapidly implemented the open market operation known as an Open Market Sale. In this strategy, the Fed sells bonds on the open market, therefore taking cash out of the market, and raising interest rates. This will reduce inflation by cutting consumer spending; however reduced consumer spending can lead to a recession. The current Federal Funds Rate Target is 4.25-4.5%.

Interest rates are quite complex, and the Fed has difficult decisions to make. The central banks objective is to keep year over year inflation at around 2.5-3% and to keep Unemployment low. Sometimes it is difficult to achieve both goals, but how to achieve these goals are highly debated in the business world.