First, the explanation. The US and most developed country governments are going to be running deficits for the foreseeable future (for example, they collect $9k in revenue and spend $10k). The $1k deficit needs to be ”found” through lower spending, raising taxes or borrowing money. Our government has decided to borrow the money to fund the deficit by issuing new debt. Treasury generally sells that $1k government bond to private investors. If the Treasury did that in massive quantities, it would be inflationary at some point. Let’s say the Federal Reserve bought the $1k Treasury bond. The Fed puts the $1k bond purchased from the Treasury on its books and gets it off Treasury’s books. It’s really an accounting gimmick. The Fed created another electronic zero in the US dollar currency to purchase the bond. Government debt goes down by $1k and an extra $1k is available for the multiple deposit expansion. Government debt is moved from the Treasury to the Fed, on which the Fed pays remittances back to Treasury. That’s called Debt Monetization. On the other hand, quantitative easing happens when short-term rates are at or close to zero, and the Fed creates money out of thin air to purchase financial assets from banks. Those banks are meant to use the new cash to lend out. Debt Monetization is about printing money while Quantitative Easing is not about printing money, which can be confusing. Debt monetization is meant to finance budget deficits while tax revenues are falling in order to create demand as consumers/corporations are retrenching so as to avoid a deflationary death spiral. Quantitative Easing is meant to put cash back in the hands of lenders.
Second, the effect on savings. At some point, and nobody knows at what level of debt, the interest rate demanded on US debt will increase. There are competing forces, such as low demand from consumers who are saving, output slack in the US economy, deleveraging by the financial sector, etc., which could dampen the effect. However, economic theory tells us that there will be a debasement in your savings through devaluation of the US dollar and an increase in the cost of capital (your long-term fixed interest payments will buy less “stuff”).
Bottom line: There are many variations to printing money in this current environment. Planning for deflation and inflation concurrently allows a portfolio manager to mitigate a heads you win, tails you lose, scenario. This all assumes fiat currencies remain in place.
Always Asking, Never Assuming™
Christopher Holtby