(James Saft is a Reuters columnist. The opinions expressed are his own)
By James Saft
(Reuters) – The issue isn’t whether the Federal Reserve and European Central Bank are monetizing debt now, it is instead whether their actions make them more likely to later.
For both institutions the game is to get the benefit out of buying up government debt, with all the very considerable benefits that brings in current circumstances, while retaining the market’s faith that when things get too wild they will unwind their purchases.
It isn’t that the Fed, or ECB, is monetizing the debt, but rather that they are putting themselves in a situation where reasonable people might expect that they possibly would later. Not will, but might, but that is a big risk to introduce into events in and of itself.
Fed Chairman Ben Bernanke battled against this view in a speech this week in Indianapolis in which he attempted to dispel doubts about the U.S. central bank’s policies, including the belief that it is monetizing debt – printing money for the government’s use – which will fan inflation.
“Monetizing the debt means using money creation as a permanent source of financing for government spending,” Bernanke said. here