This term, "monetizing the debt" has been thrown around a lot recently and it's unfortunate, because it is being used completely in error. When misinformed people talk about monetizing the debt they are claiming that the Fed is buying Treasury securities from the U.S. Treaury--in essence, writing a check to the Treasury because the Treasury is out of money so the Fed is "giving it money" by buying its securities.
That is patent nonsense.
First of all the Treasury can NEVER be out of money as long as the United States government is the issuer of its own, sovereign currency. The Treasury "spends" by merely crediting bank accounts and does not need checks written to it from the Fed in order to spend.
Below are two, very clear explanations from the New York Fed, which is the bank charged with the responsibility of conducting monetary operations.
First statement, on who the Fed conducts business with:
|"The Federal Reserve conducts open market operations with primary dealers—government securities dealers who have an established trading relationship with the Federal Reserve..."|
So...this explains that the Fed buys securities FROM THE PUBLIC AND NOT THE TREASURY!!
The second statement explains why the Fed conducts monetary operations:
|"The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserves balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC)."|
Thus, the act of buying and selling securities is solely to MAINTAIN AN INTEREST RATE!!!