From the horses mouth: How we print money to finance deficits

Daniel L. Thornton, chief MOPE-er of St Louis Fed

Just in case you thought we make this stuff up, here is an article by US Federal Reserve Bank of St Louis’ Vice Chairman Daniel Thornton explaining how easy it is for the central bank to print money to finance government deficit spending. In fact he argues they are doing it every day as they undertake open market operations, their main monetary policy operation.  He claims people are uninteresting when they refer to the “idea that the Fed monetizes government debt by the simple act of exchanging money for government debt”.

Sure, maybe it is uninteresting to most, as the process may seem technical and filled with incomprehensible jargon. But it becomes more interesting when you realise this process steals wealth out of the pocket of every single holder of US dollars. This counts for holders of Rands when the SARB inflates its own balance sheet and reduces interest rates lower than the market rate.

What you might pick up from this document is that even as the Fed’s official QE (quantitative easing/money printing) programme came to an end in March, through open market operations it continues to increase the size of its balance sheet, increasing liquidity in financial markets (the monetary base/high powered money) which helps absorb government debt issuance while at the same time reducing the real debt burden of the government or any other major debtors.

Thornton argues that to know whether the Fed is really monetising government debt, we must analyse its intentions.  Who cares what they intended to do?  We are here interested to know the effects caused by what’s been done.

This is such central banker MOPE it is frightening, yet it does state pretty definitively and categorically that the Fed is today, as we speak monetising the federal deficit by the most insidious process known to economic man: inflation.

Thornton Monetizing the Debt ES1014