“As an alternative, the government can “monetize its debt” by borrowing from the US Federal Reserve system, which is nominally under private control but is really just another part of the government. In this case, the government sells its bonds to the Federal Reserve, which creates new bank deposits out of thin air and uses them to pay for the bonds. This process creates new money and expands the money supply: hence it is called “monetizing” the government’s debt.
The process of debt monetization is too complicated to summarize in a 10-second sound bite on the TV news, so most people don’t understand it. However, it’s essentially no different from the historic practice of “coin clipping,” whereby kings would reduce the amount of gold or silver in a country’s coins and keep the extra gold or silver for themselves. When that happened, the coins were worth less, so the people lost purchasing power and it was transferred to the king.”
