Debt: Part III...What if no one purchases our debt?

In the second part of this series on Debt, we talked about the National Debt versus the true level of unfunded liabilities of the United States.

We also asked the question: what if people no longer want to buy our debt because they look at the unfunded liabilities and decide we may get to the point where we can't buy back our debt (ie, pay it off) and so the paper creditors hold is worthless?

If no one buys our debt, does that mean we quit spending? Of course not! There is this little mechanism we can use called "monetizing our debt". What is that?

Let's say the government wants to spend $10,000 today on a program but it only has $9,000 in the Treasury to spend. It doesn't want to wait for new tax collections next week, we want to spend it today! What to do? Well the Treasury can print a bond for $1,000. Then the Federal Reserve Bank can print a new $1,000 bill and purchase the bond from the Treasury. The Treasury now has $10,0000 to spend on the program and the Fed is holding the bond (which theoretically has to be repurchased by Treasury some day).

See what happened? New money was created by going into debt. But the debt is not owned by some "person" who expects to get paid back. It is owned by the Fed who is a nice lender who never requires repayment.

No value, no assets, no wealth created this money, it just appeared out of thin air. This is called Monetizing the debt.

What if we do a lot of this? Well, lots a new money is floating around to buy goods and services. What happens if too much money chases too few goods and services? Inflation!

What if lots and lots and lots of money is floating around chasing way too few goods and services? Hyperinflation.

Can we say Zimbabwe? Remember post-WWII Germany?

Folks, history is not kind to people that do this.