PJZ

Monetizing the Debt: Explanation For Non-Economists, Bankers and Other Laymen

Nice piece. But I think that you have to include "velocity" in your explanation. The money that the Fed creates by buying up bonds until now by and large sits in the reserve accounts of the financial institutions with the Fed and is so far not lent into the economy. The banks so far do not want and/or cannot lend the money because the economy is so sluggish. As soon as the eonomy picks up and the banks start to lend, if nothing else happens, a tsunami of liquidity would flood the economy creating inflation. Now comes Helicopter Ben and says: at the right moment, I'll undo what I have done before, sell the bonds and suck up the additional liquidity within the central bank. Theoretically, he can do that. But unfortunately, there are three problems with Ben's strategy whose helicopter flies over uncharted territory: 1: If the resale of the bonds and the undoing of the liquidity creation works on time, he might kill the recovery of the economy, if he comes too late, massive inflation will result. 2: Long term interest rates will likely surge and the owner of the helicopter, Barack Obama, can't finance all his other stuff. 3: And who is going to be the buyer of all these bonds in the first place? The Chinese won't, and everybody else in the world by then will know that America since long has been and still is living beyond its means.

PJZ