Government Buying It’s Own Bonds?

Not that they can’t, but why would it be bad policy to raise government revenues by issuing bonds that are then sold to the monetary authority? Here are some thoughts in relation to a fixed exchange system and a floating exchange rate system.


There is an inherent problem with financing government deficit spending by issuing domestic bonds. Under a fixed exchange rate one may discover the central bank (CB) purchasing domestic bonds at the expense of dwindling the foreign reserve (FR). One cannot simply print money to expand the supply, thus FR are depleted. However, if this continues, the CB will eventually find itself unable to support a fixed E. Speculation for collapse of fixed E (exchange) and increase domestic exchange rate will cause an abandonment of the fixed E when FR are gone. If the CB decides to simply print money to meet expanding money supply, there will be a subsequent increase in inflation which will have a depreciating pressure on the exchange rate. Under floating you could then be forced to devaluate your currency under this pressure.

One comment

  1. It is worse than that! Now, the treasury is changing tax laws:

    They added an amendment to a tax laws to encourage banks in good standing to by banks in bad standing. This way they would get bailout money AND get a tax break.

    The Treasury is an un-Constitutional organization. The last one we had nearly ran us into the ground. If we print money, it should be backed by something, like gold. The idea of trading bonds for money is dumb.

    There is a video on the home page of EconomyInCrisis.org that breaks down how this works, and how it de-values our money. It is the second one on the list called “US Economy collapsing” It does a great job of explaining why our money system is not working and why is hurts our economy.

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