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Monetization is the process of converting or establishing something into legal tender. When the U.S. federal government monetizes the debt which it has incurred as a result of its deficit spending, the Treasury Department sells that debt (in the form of treasury bonds) to the Federal Reserve, in exchange for cash. In short, the Federal Reserve prints paper money to "purchase" the government's debt. The government, in turn, uses the freshly printed money to pay wages, salaries, operating expenses, etc. 

When the Federal Reserve simply prints money in this fashion, it injects many more dollars into circulation than there previously were, meaning that each dollar has lost some of its value. Consequently, hyperinflation occurs; i.e., more of these devalued dollars are required in order to purchase goods and services.

Between 2008 and 2010, the Federal Reserve monetized more than $2.5 trillion in U.S. government debt. Prior to this, the entire cash flow of dollars worldwide equalled approximately $829 billion. Thus, within the space of two years the Federal Reserve printed enough money to quadruple the number of dollars in circulation across the globe.



The Shell Game: How the Federal Reserve is Monetizing Debt
By Chris Martenson
August 2, 2009


Federal Reserve Debt Monetization Explained
By Inflation.us
August 13, 2010


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