Monetizing the Debt

In many countries the government has assigned exclusive power to issue or print its national currency to a central bank. For example, in the USA, The Federal Reserve Bank does this.

The government treasury must pay off government debt either with money it already holds or by financing it by issuing new bonds which are sold to either the public directly or the central bank, in order to raise the funds required to satisfy the debt. In this latter case where bonds are placed with the central bank, the central bank will create the needed money by conducting an open market purchase, i.e. by increasing the monetary base through the money creation process. This process of financing government spending is called monetizing the debt.

Monetizing debt is thus a two-step process where the government issues debt to finance its spending and the central bank purchases the debt, leaving the system with an increased supply of base money.

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