Like so many things in economics, context makes all the difference. I've been hearing the term "monetization" a lot lately. The term applies to the process of the Fed buying debt, which increases the money supply, which usually leads to inflation. Although most would disagree, Bernanke is not inflating, and he is not monetizing the debt.


Monetarism and the quantity theory of money are flawed. The subjective theory of value developed by Ludwig von Mises is the correct way of looking at money and its effect on prices. His distinction explains the low amount of inflation we see despite huge increases in money created (For more detail see Why Prices Are Not Skyrocketing).


Likewise, there is a distinction between monetizing debt and what the government is doing now-buying government paper. In the 60's and 70's the Fed increased the money supply to help finance the Vietnam War and to pay for the "Great Society" programs of Lyndon Johnson. The money created went directly into spending. Spending increased in both the defense sector and as welfare given directly to the poor. The money was then immediately spent on goods and services which led to an inflationary spiral that took inflation from about 2% to over 14% at its peak. All prices rose, including wages.


That is not the case today. Inflation has been tame and no one mentions the terrible deflation in housing prices when they speak of the inflation the Fed is creating. The Fed is increasing the money supply, but...


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