As some of the responses indicate, it depends very much on the government in question. The true deciding factor is how much faith the markets have in the currency issued by the particular government or in the case of more advanced economies, by their central banks.In the United States, the government cannot just print money. What happens, or at least what has been happening is that our central bank, the Federal Reserve, has been purchasing Federal bonds with printed money, thus monetizing the debt. So far, the market has not panicked at the level of Federal debt. The surest sign that they have panicked is if the price of bonds drops precipitously (thus increasing the effective interest rate.) Thus in the case of the U.S. Federal government, it cannot run out of money per se. It will just have to offer such a high interest rate on its bonds to make borrowing too expensive.For smaller governments, the problem is entirely different. And it is different still for a country like Greece which is in the Euro zone. In some ways, the Euro zone countries have the worst of both worlds, having all of the problems and few of the benefits of sovereignty. A small, independent country, say Peru, Uganda or Maylasia to name but three, can issue its own currency, which can trade against other currencies. If their native currency weakens, it makes exports from those countries cheaper to foreign markets. At least in theory, this has a corrective effect on their economies.In Greece's case, however, they are like a U.S. State when it comes to currency, but still have the problems of being a sovereign nation. Thus they cannot "float" their currency.In the U.S., recently, the city of Detroit went bankrupt, and in essence, it was taken over by the State of Michigan. You could bet as certain that if a state went completely bankrupt that the Federal government would step in. Greece, however, is more or less trapped. It has neither the advantages of a small, independent country, nor the advantages of a U.S. state. Thus it can completely run out of money. This will result in a total collapse of the Greek economy.I hope that provides enough color and texture.
Is America monetizing our debt? What is the result of monetizing debt?
We actually did something similar last year, it was called QE (quantitative easing, you should look it up). The Fed bought up mortgage backed securities. Now in order to do that they had to expand their books (add a few more numbers to the figures it already had in there). They then placed all that extra money they WROTE into their books into the bank reserves. The idea behind it was to have the banks start massive lending. Unfortunately the banks did not lend like the Fed expected them to. So that money has not actually been printed yet. Instead the 'money' is sitting there collecting 0.25 interest. In comes QE2, this time buying TIPS. Again, the feds are expanding their books. Normally you would not do so until you made those banks lend by penalizing them in some way to get that money out into circulation to ease the DEFLATION. Problem is we don't know how that money from last year is going to effect the US dollar inflation wise now. And here they are going to be putting 18 billion out AGAIN. They SAY that the mortgage backed securities from last year are maturing now and will be able to pay for some of these TIPS. Eventually they will have to make good on these figures and print this money. Both last year's and what's coming now. Problem is we don't know how much and when it will hit us because the books are all closed now in the Fed and we can't look at it. Probably because they don't want to scare the public causing us to slow down the economy even more by not investing or spending. Point is inflation is around the corner. Once you look up QUANTITATIVE EASING you will see the link between America today and the Weimar Republic. They ARE monetizing the debt. The NY reserve starts on the 17th. http://www.newyorkfed.org/markets/tot_op... The result is the dollar being worth more to whipe your own a** with. US citizens aren't paying attention at all. Watch bond rates, watchdog the Fed, and pay attention to the GDP. I want to add that what the guy said above about just sucking up the funny money with interest rates has NEVER BEEN done successfully before. And TIPS are VERY risky with that game. Japan tried to apply QE recently and it failed. They didn't have HALF the economic problems we have right now and we have healthcare looming over businesses that is also playing a big role as far as the slowdown.
It’s when the central bank buys up government debt, putting more dollars into the private sector, and holding the debt themselves. Both dollars and debt are government liabilities, so they are freely exchangeable without altering the net financial position of either the government or the private sector.
Why is the Federal's actions known as "monetizing the debt"?
The federal reserve has a program to buy mortgages from banks for appr. 80 bn $ per month. A mortgage is: a buyer of a house takes a mortgage - seen from him: a debt - and the bank/mortgage company gives him money for it - which they get from savings of private people or hedge funds/organizations. Usually the bank will get paid back every month with interest and a small amount reducing the outstanding debt. The concept of the fed is: if they buy the mortgages the debt is removed and they pay money to the bank immediately which they can use to lend for additional mortgages. The debt is removed from the market and money is pushed into the market: the debt is monetized. The intended consequence is: if there is more money available in the market and no shortage the interest for mortgages should go down and more mortgages should be taken by private homeowners therefore the oversupply in the market should go down and the with increased demand for houses should go up which means house prices should increase, new home construction should increase and in general the house values of all houses should go up. If people see there house values increase they should be more willing to spend from their disposable income. The same concept works if the Federal Reserve buys bonds: debt is removed from the market and money is pushed in. The risk is: with this policy the Fed pumps huge amounts of money into the market and the money supply growth faster then the supply of goods/houses etc. which will lead to inflation and the question is how the Fed can remove this "free" money short term to balance demand and supply. It creates a "money supply bubble" and bubbles usually burst with a bang .......and do not deflate slowly.
Today the Fed is monetizing the debt which Bernanki told Congress he wouldn't do, is it time to toss the fed?
Our real enemies own the fed, our only real enemies. They buy our politicians & take our prosperity, sucking millions out of our hard work because we pay a % for ever dollar they print. A monitization is a windfall, a boon, to the fed's holders. They won't allow the government to audit them, who do you think is in charge? Isn't it time to route out that den of vipers? As Andrew Jackson said ... the president they didn't succeed in assassinating? Obama won't do it because they will kill him like they did Kennedy, who warned us about them in his speech to Columbia University, his warning words they won't allow to be put up on Yahoo answers. You put them in, and they have a script that won't let it post, but anyway here: http://www.jesus-is-savior.com/Evils%20i... if they don't allow the link then google this: Kennedy killed by bankers ... then go to the first link on the search probably, it should have Kennedy's words 10 days before he died & the Executive Order No. 11110 that returned to the U.S. government the power to issue currency, without going through the Federal Reserve. I think it's time to get rid of the Fed. Nothing in government can work with those people plotting against the US & buying our leaders & agencies officials who are supposed to be protecting us, as well as controlling most of our media & entertainment industry. Wikipedia Fabian Society, read it all, then Wikipedia Cecil Rhodes, read all that too, it's not long & when you are done you will have more understanding of what is going on in the US with the Progressive movement.
The answer is complicated. A government is not a household, they create and destroy currency in the economy through spending and taxation, they balance the inflation rate, they control to a large degree how well the economy can do. For more information, look up "modern monetary theory" which postulates that infinite debt is fine, government creates and destroys currency, etc. It goes into great depth on this and you can find a lot of information on google on it. While technically correct in some ways, the deeper the deficit, the steeper inflation is, as the government is putting far more into the economy than it takes out. Inflation is largely a harm to those on minimum wage, which becomes worth less, and as a tax on accumulated dollars. As long as it is below 5-10% annually, it doesn't seem to impact any part of the economy of regular people.That said, a high debt is largely achieved by borrowing from the wealthy, and making payments to them. The debt becomes a way for the rich in our society to collect income off of the tax payers, instead of a way for the government to create money to eliminate poverty and grow the economy at the bottom, it does nothing for society or the economy as it is retained by the hoarders at the top. So we could benefit from paying off the debt and changing how we create it in the future, but doing so isn't important in the same way it is for a household. Especially in the US, where our currency is an international reserve
If the US gutted the government and started to pay on the debt while cutting taxes which would happen?
1. Beside that it would never happen, unless all people unite and throw the current government out. 2. Governments are very smart in keeping power, just divide the nation, you will never have a problem. 3. The debt problem is not solved, just because the government is gutted. That don't make $14,5 Trillion go away, which increases by sheer interest every day by 5 Billion. 4. The right way would be, to: a. Cut Military spending, it could be cut by 1 Trillion a year, which leaves it with 200 Billion, more then China and Russia spend combined (Our military spending is combined with war and spy agencies over 1,2 Trillion. Even Nasa gets most its money for military stuff). b. Cut all departments, like Department of Education, which do nothing but duplicate the work of the states, save a cool 800 Billion, you are already in the clear and have you budget balanced. c. Tax all products from Cheap Labor Countries with an equalizer tax. Another Trillion and you protect US workplaces. d. Overhaul Health care without catering to the Health care lobby, another 1,5 Trillion. And all that just in one year. We would have in 5 years the debt paid, would have a budget surplus like under Clinton and Government still would be intact.
Federal Reserve is said to "monetize the debt" when it purchases government issued securities with newly created currency (Quantitative Easing, or QE programs). The newly created currency has no backing in other assets, apart from government debt and this is why this operation is referred to, by some, as "printing of money". There is no actual printing of physical bills and coins, all transaction are carried out electronically, by the Fed crediting accounts of banks held with them.By doing such transactions, the Fed increases the size of their balance sheet. One may think of the Fed balance sheet as the backing of monetary base (monies in circulation) which itself backs the total economic output of the country.The goal of such programs is to increase the level of economic activity and induce growth which would warrant the increase in the monetary base. Upon reaching growth, the Fed intends to reduce the size of the balance sheet, by selling government securities from its portfolio.The fear of such programs is based on what happens if there is no growth induced and the end result is simply inflation i.e. dilution of units of output backed by units of currency.Because monetization of debt is carried out by purchases of government securities, portions, or in the worst case even entire debt, may be directly bought by the Federal Reserve for a period of time. The worst possible outcome is when a central bank starts systematically and permanently funding the government directly through issues of unbacked currency. Such activities were behind all hyper-inflationary episodes throughout history e.. Zimbabwe, Weimar Germany etc.In summary, the key is whether the newly created currency induces real growth.Note that Fed (directors) are well aware and (openly) fearful of these issues - http://www.dallasfed.org/news/sp...