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Monetize the Debt?

September 17, 2009 - 5:47pm
Jim Iannuzo by Jim Iannuzo


The Federal Reserve enables out of control government spending by buying up U.S. debt obligations like the proverbial drunken sailor.

Suppose a drug dealer was pushing crack cocaine on your kids, telling them it was a new formulation of life extension medicine. According to the dealer, they would live much healthier lives by taking daily doses. Transpose this ridiculous lie to the Federal Reserve and you see pretty much the same argument. The Federal Reserve in a push to keep interest rates near zero is buying up U.S. Treasury debt at an alarming rate. This enables Congress to spend money beyond tax revenues. The additional spending is covered by debt and then monetized. In essence the Federal Reserve is feeding off our current standard of living. Our children will someday enjoy a lifestyle perhaps no better than that currently in Pakistan.


1) The government decides to bailout Citigroup, AIG, General Motors or pay for a new socialized health care program but does not have enough money.

2) The Treasury Department is instructed to sell bonds (IOU) for the additional funds to someone in the private market. You as an American citizen are now responsible to payback this borrowed money over some time period usually 2, 3, 5, 7, 10 or 30 years. In fact someone holds a note on your future earnings.

3) Congress could raise taxes to cover their additional spending (“pay as your go”) but that’s not an easy thing to accomplish, so they look for creative alternatives.

4) The Federal Reserve issues an open market directive to increase the money supply. This is equivalent to turning on the printing press and popping out as many $100 bills as needed.

5) The Federal Reserve uses these fresh $100 bills to buy back bonds from the private market thereby decreasing the total U.S. debt.

6) The new money has in fact reduced the value of our savings by increasing the inflation rate and reducing the value of the dollar. It will now take more dollars to buy food, electronics and all of our necessities including automobiles purchased from the bailed out manufacturers.

7) The debt has simply morphed into a lower standard of living. It was nefariously transferred from Treasury to the Federal Reserve to reducing your standard of living without raising the tax rate. Since it is subtle like cooking a frog by slowly raising the water temperature, you are not aware of the harm.

Watch the price of commodities and the value of the dollar to understand the implications of monetizing the debt. With the current recession we continue to see increases in the cost of oil, copper and steel even with low factory utilization rates and high unemployment.


A Decrease in government spending would result in the reallocation of productive resources. Increased spending is a Ponzi scheme that relies on expansion to cover future obligations. One election cycle is sufficient to throw out every member of the House of Representative. The consequences are too important to get fooled again.

Related Content:

Government Doesn't Invest, They Waste - Nick Coons
Financial Bailout - Nick Coons
GM Shows America that Bankruptcy is a New Beginning to the End - Jim Iannuzo

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