With all the political discussion right now about the National Debt and the battle concerning the Debt Ceiling, it provides a good time to reflect on a few thoughts regarding deficit spending outlined by the following questions:

Q: What is it called when the Government borrows money to cover the excess spending versus the revenue raised?

A: Issuing public debt – This takes the form of Treasury securities and has been the preferred path in recent decades. However, these securities are supposed to be paid off when they mature, but in reality they are perpetually rolled into new debt offerings, thus actual full payment never occurs. New debt pays for the old debt.

Q: What is it called when the Government issues new money to cover the excess spending desired versus the revenue raised?

A: Printing money – This direct approach tends to be perceived negatively by the public because it cheapens the money they hold and creates an inflationary environment. Overtly printing money in this fashion is not politically popular because of the backlash that it creates.

Q: What is it called when the Government borrows money by issuing public debt and the Federal Reserve Bank subsequently purchases that debt from the market with printed money?

A: Laundering printed money – This has the effect of providing cover for the Government while money is being printed, it gives them plausible deniability by claiming that they simply issued public debt and that the Federal Reserve is independently buying that debt for monetary policy purposes. This activity is being pursued as a normal monetary policy tool for the Federal Reserve to help ease the economy through this difficult downturn by providing plenty of cash. Upon successfully lifting the economy, the debt purchased is supposed to be resold back into the market thereby absorbing the excess cash before inflation appears. Quantitative easing is the policy name given for this buying of debt securities and its recent completion provides a good time to ponder a possible subsequent plan that would conveniently suit the Government’s inclination for expediency.

Being that Congress is currently in a heated battle over raising the debt ceiling in opposition to a reduction in spending, plus the Federal Reserve is simply printing the money needed to purchase the trillions of dollars worth of Government debt securities, then what prevents the Federal Reserve from just deleting the debt securities it purchases? This action will effectively erase the debt as if it never existed therefore permanently sealing the excess printed money into the economy and forever eroding the value of dollars held by the public. Alternatively, the Federal Reserve can accomplish this same thing by holding the securities and allowing them to expire without demanding interest or principal settlement from the Government upon maturity. Opting to delete the securities should be particularly appealing to politicians. Suddenly, the debt ceiling becomes a non-issue as trillions of dollars worth of debt vanishes having been replaced by printed money thereby allowing the reckless spending to continue unabated. The Federal Reserve should be indifferent because they just simply created the money needed to buy the debt anyway. This would be an ideal result in the minds of our elected officials; effectively deficit spending will have been paid for by laundering printed money through the Federal Reserve. The Government gets what it desires in usual fashion, and the public is once again the patsy that suffers the consequences of deceitful politicians who will then spin the message of “it is not what you think-we are not printing money” explanation. This will likely prove too great of a temptation for a Government that does what it wants for its own purposes while lying to its people. It will be interesting to see if any indications of this ploy begin to develop as the future unfolds.