E The Federal Reserve Massive Buying Of Government Debt

“In its boldest effort to protect the U.S. economy from the coronavirus, the Federal Reserve says it will buy as much government debt as it deems necessary and will also begin lending to small and large businesses and local governments to help them weather the crisis….The Fed’s announcement Monday removes any dollar limits from its plans to support the flow of credit through an economy that has been ravaged by the viral outbreak. The central bank’s all-out effort has now gone beyond even the extraordinary drive it made to rescue the economy from the 2008 financial crisis.” (The Associated Press, March 23, 2020)

The current US Fed policy of quantitative easing is really in fact a version of monetizing the public debt.

The idea of monetizing the debt is usually scary for the financial markets, since it is often associated with the thinking that government spending is out of control, and as well, with the expectation that a future wave of inflation on the way.

Monetizing debt is a simple process where the government issues bonds to cover its new spending. The central bank purchases the bonds from the secondary markets, and perpetually rolls them over. Thus, debt monetization leads to an increase in the money supply. In fact, there is no theoretical limit up to which the Fed can expand its balance sheet.

Massive purchases by the Fed may make it seem as if the Treasuries it bought don't exist, but they exist on the Fed's balance sheet, and technically, the US Treasury must pay the Fed back one day.

Until then, the Fed has given the federal government more money to spend, increasing the money supply, and monetizing the debt.

As already noted above, because of the Covid-19 crisis and the effective lockdown of most of the US economy, the US Government and the Fed both intervened massively to support the economy in this period of near suspended animation.

As well, because of the pandemic, most other advanced economies have also provided exceptionally large fiscal support programs, with the central banks, on their side, conducting similarly large purchases of government securities.

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Norman Mogil 5 days ago Contributor's comment

A very good overview of the issue of monetizing debt. As you well explained it it is not a cardinal sin but sensible monetary policy at a time of enormous financial stress.