Monetizing the debt is a two-step government process—but in the end it’s the equivalent of printing money.
An example of monetizing the debt can be seen in U.S. federal budget deficits. The government issues government debt (bonds). Then the U.S. Federal Reserve buys the bonds. That leaves an increased money supply.
Excess debt monetization could eventually bring on some kind of crisis. Nobody knows when the crisis will come, but inflation is one significant possibility.
Still, when Japan’s great post-war boom ended in the early 1990s, it turned to deficit spending to buoy its economy. Japan has had a budget deficit ever since, and has not had a problem with inflation. In fact, it has had periods of mild deflation.
The fact is that monetizing the debt (also known as expansion of the monetary base) only provides the raw material of inflation. This raw material needs a speedup in monetary velocity to translate it into inflation. To spur inflation, the money has to change hands faster.
Monetary velocity stays low for the same reason that consumer confidence, economic growth and bank lending stays low; Consumers are afraid to borrow, despite low interest rates.
At TSI Network, we recommend using our three-part Successful Investor philosophy:
Invest mainly in well-established companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
Here’s the text of the quarterly letter I recently sent to our Portfolio Management clients:
“Many investors today feel uneasy about the future value of the U.S. dollar. The dollar is the key to the world monetary system. But its value is at the mercy of… Read More
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