Question of the Week

Why does a government with a deficit borrow rather than monetize their way out of the deficit? Explain your answer both in terms of the private sector's balance sheet and the currency's power.

A. Monetization shifts a:
+currency and a -debt government balance sheet LIABILITY to a,
+currency and a -debt private sector balance sheet ASSET.

The government borrows instead, because monetization reduces the currency's purchasing power through the inflationary impact on the private sector.

As a side note, in the 60s, a recession was deepened when the government slowed spending, tightened money, and raised taxes. The current wisdom is to "spend your way out" of recession with lower interest rates and reduced taxes. If the private sector responds with confidence (spends), growth and productivity resume. If consumers retrench and save, the recession deepens.

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