Yesterday Chris Matthews said to Jim Cramer, "We are monetizing debt."

[lindashaw]

Jim said, Yes, that we are. Will someone PLEASE explain to me in 25 words what it means that we are monetizing the debt.

[phaseolus]

1. inflation comes roaring back

so, $5,000,000,000,000 becomes $1,000,000,000,000 in real terms. My wild guess is this would be put into effect an hour or two after Greenspan offically retires.

I'm not an economist so feel free to correct or expand on this, people...

[ramblin_dave]

2. Definition

http://www.investorwords.com/cgi-bin/getword.cgi?3099

Paying off government debt by printing more money. Leads to inflation.

[pasadenaboy]

3. good link

it basically means they are devaluing the dollar by printing more currency to pay for this. This in turn causes inflation.

[TahitiNut]

5. It won't cause inflation as long as ...

... the bottom 90% don't have the money. "Inflation" is typically the result of "too much money chasing too few (consumer) goods and services" ... and, right now, the money isn't in the hands of folks who're consumers. This is also why deflation is the spectre. Where this really hurts is in dollar-denominated pensions and trusts, IMHO, funds that're already in precarious straits.

[rucky]

14. So I 'supose the latest war on the poor...

...is considered "inflationary control" by the administration. And if we did spread the tax burden evenly... create jobs... unionize overseas labor, etc etc... watch inflation go up UP UP!!

we are screwed

[TahitiNut]

17. Ever has it been ...

... with advocates of plantation economics.

[KG]

4. when you push your cashed paycheck home in a wheel-barrow,

and nobody would bother to rob you.

ya think the freep-tards will get a clue then?

[JohnyCanuck]

6. Not a chance. When they don't get robbed

of their wheelbarrow's worth of cash, the freep-tards will think it must be because the crime rate is down and credit Dim Son's policies for crime reduction.

[salin]

7. LOL

funniest darn thing I have read this morning!

[LoneStarLiberal]

18. Or If They Are Robbed

Because someone needs some greeback toilet paper, it will obviously be the work of ungrateful minorities, Bill Clinton, and FDR.

[Resistance Is Futile]

11. Free clues

The freepers would blame the disloyal `enemy combatants` who dared to question Shrub`s policies.


(let`s ignore the fact that wages don`t keep up with inflation--anyone who cashed their paycheque would get the usual handful of bills while they`d need a wheelbarrow full of cash to buy food or pay the rent...)

[Robin Hood]

8. Inflation is already kicking in.

Go to the store and you will notice that prices on groceries have risen substantially. High unemploynent, rising prices, mix with two parts war and you have a recipe for disaster.

[janekat]

10. wasn't that how the BIG DEPRESSION happened? n/t

[grasswire]

12. grocery prices are not up where I live...

....in fact I often marvel at the low prices of some items.

Yes, beef is up. But other than that, I think groceries have remained the same for a good six years or so.

[soupkitchen]

15. A lot of products have maintained price stability by reducing the quantity

in their packages.

[rock]

9. Fiscally, it's the most irresponsible thing a govenment can do

Luckily, even the idiots in Washington realise this. It means printing money to pay off the debt, or if you prefer it means inflation rates of 250% a month or so (like in Argentina).

[RainDog]

13. what does this mean for the dollar v. other currencies?

in other words, if you want to buy euros for a trip, would you do it now, or wait till inflation goes up?

inflation devalues the dollar against other currencies, right?

so that if you buy another currency now, you'd get more of that other currency for your dollar?

This week's New Yorker has a review of Krugman and Stiglitz's new books.

Krugman writes that he thinks we are being set up for a Latin American-style financial crisis.

the author of the article is also saying that if Bush is re-elected, the likely consequences aren't pleasant to contemplate (assuming his continues his bad deficit rather than good deficit policy...and the worst of his bad deficit policy will not even kick in for another five years.

Stiglitz's new book criticizes the Clinton administration for enacting (though it seems to me Clinton just extended, in milder form, the Reagan deregulatory insanity) deregulation and by shifting tax policy to regressive, rather than progressive terms.

So what happens to savings in a Latin-American economy? What happens to stocks?

[skeptic9]

19. INTEREST RATES are one important element that hasn't yet been ...

... introduced into this discussion.

If the trip you're planning is this year or next, most likely you need not worry about sudden changes in the value of the dollar. Ultimately, whether your dollars will buy fewer or more euros or yen depends on which ill effect of Dubya's handiwork is stronger. Inflation tends to weaken the dollar, while higher REAL interest rates (interest rates minus inflation) tend to strengthen it.

"Monetizing debt" is more complicated than just printing money. Most "money" is in the form of bank account deposits payable by check or by wire. When the Fed wants to finance increased government spending, say for missiles or infrastructure development in Iraq, it auctions bonds. With the auction proceeds, Treasury's balances rise to cover checks for Raytheon, Halliburton, and other contractors. Meanwhile, the increase in supply of bonds drives down the price of bonds, raising the interest rates businesses must pay and lowering their investment in job-producing projects.

The rise in interest rates may actually attract foreigners to buy US debt, tending to strengthen the dollar against the euro or the yen. But that rise in the dollar makes US exports more expensive, further weakening job prospects here.

The bottom line is that monetizing debt destroys the economy's ability to create new jobs fast enough to employ everybody who has to enter or re-enter the job market. Further, a larger and larger proportion of the US budget has to be devoted to paying interest to creditors who increasingly are foreigners, not Americans.

If money-supply expansion is overdone, inflation follows in about two years time. What Dubya is doing well may bring the economy back into the era of the "inflationary recession" we had during the 70s, when inflation and nominal interest rates went through the roof. Neither "coupon-clippers" nor people who must have jobs to survive will be happy with the inevitable result of what the idiots currently controlling our government are doing.

But the process takes time to develop, and even more time is needed to reverse the forces Dumbya has set in motion.

[TahitiNut]

20. Theoretically ...

... when the dollar is devalued (inflated) against other currencies, it will increase the foreign purchases of US goods and services. (It can also increase the purchase of US assets, including equities, putting upward pressure on stock market prices.) Since oil is dollar-denominated, it also lowers the price of oil for other countries. When OPEC sells oil for dollars, then the OPEC countries must use those dollars to (eventually) buy American goods and services. At the same time, it reduces the purchasing power of dollars for foreign goods and services, which theoretically reduces US purchases of foreign goods and services. The combined effect is to 'improve' the balance of trade.

This is, like I say, 'theoretical' since it's premised on viable choices - the notion that for the majority of goods and services there's a choice between a foreign and US producer and such choices can be exercised with a certain immediacy. This choice exists less and less at the consumer level. Such choices, to the degree they exist, are becoming more and more the choices of multinational corporations - choices in labor, components, and raw materials. The problem here is that the economics of such corporate choices are based on other economic factors rather than mere direct cost. Various indirect costs that're a function of the regulatory environment have a significant role in such choices. (If, for example, the Bhopal disaster had occured in the US, Union Carbide would probably be toast, even assuming the codes and regulations in the US would've been lax enough to permit the conditions for that disaster to exist.)

Another effect of dollar devaluation is on dollar-denominated US debt (e.g. T-bills) held offshore. Prospective inflation offsets prospective interest/yield, reducing the 'attractiveness' of such investments and putting upwards pressure on interest rates. In other words, it increases the cost of borrowing which, in turn, increases the amount taxpayers are paying to subsidize the debt.


Notice that all this is, in effect, turning to offshore purchasers. Since the "lower 90%" in the US (economic cannon fodder) is increasingly impoverished, both by unemployment and a shift in the total tax burden, it makes a perverse kind of sense to look elsewhere for consumers. :shrug:

[RainDog]

16. kick- can someone answer my questions, please n/t

.