The Fed monetizes some of the debt whenever it buys Treasury securities, regardless of whom it buys them from.
I confess, this is kind of a “Eureka!” moment for me, as I’d heard about twenty years ago that some 10-15% of the national debt is monetized and couldn’t understand just how. I heard that in a lecture by Nobel Prize-winning economist James Tobin and figured he knew what he was talking about. He explained it in The Concise Encyclopedia of Economics:
‘At year-end 1990, federal debt outstanding was $2,569 billion, of which only 12 percent, or $314 billion, was monetized. That is, the Federal Reserve banks owned $314 billion of claims on the Treasury, against which they had incurred liabilities in currency (Federal Reserve notes) or in deposits convertible into currency on demand.’
So, then, how much of the national debt is being monetized today? As Casey Stengel said, you could look it up. As of 3 June 2009:
Federal Reserve holdings of U.S. Treasury debt: $606.2 billion
U.S. Treasury debt held by the public: $7.1 trillion
The Fed’s holdings of Treasuries, divided by the total amount held by the public, equals .085. So only 8.5% of the current national debt is being monetized, a smaller amount than in 1990. The possibility that mounting national debt might someday bring pressure on the Fed to monetize a lot more of it should not be dismissed, but to charge that either the government or the Fed is already printing vast sums of money to pay off the debt is mendacious, ignorant, or both. I’ll leave the last word to my former student who wrote on an exam:
‘Monetizing the debt is when the Fed prints money to cover the government’s defecates.’