"The Bank of Canada's money creation for the Government of Canada is an internal government process. This means that external factors, such as financial markets dysfunction, cannot cause the federal government to run out of money."
Modern Central Bank Operations – The General Principles
Debt Monitisation - Deficit spending 101 – Part 3
Third, on debt monetisation. This is a process where the central bank buys government debt from treasury. So the government borrows from itself rather than the public. The neo-liberals construct this as “printing money” but that is a misnomer as I have argued before. But the intent of the terminology is to infer that this practice increases the money supply and ultimately causes inflation (for Austrian economists it means the value of money drops immediately).
But, in fact, the central bank doesn’t really have this option if they are running a non-zero interest rate policy. In that situation, the central bank’s sales or purchases of government debt are beyond its control. By setting the interest rate target, the central bank’s public debt transactions are then determined (beyond its discretion), because they support that target. There is no possibility of “monetisation”.
For example, say the central bank arm of government purchased debt from the treasury arm of government, which was running a deficit. The deficits adds to reserves and so the central bank would then have to conduct open market operations and sell bonds to drain the reserves to avoid downward pressure on the overnight interest rate.
The only way the central bank can really “monetise” (that is convert something that isn’t money into money) is to buy foreign exchange. But then they still have to sell public debt to drain the reserves that are added to maintain their control of the target interest rate (we call that second transaction – sterilisation – the foreign exchange transaction is sterilised to avoid its impact on domestic policy settings).
The Millennials’ Money is Published
“The potential power of ‘fiat money’—which has yet to be fully realized and managed by any modern society—can be summarized as follows: While it remains true that the number of dollars any individual can spend is ultimately limited to what he or she can “earn,” the number of dollars individuals can spend collectively—as a sovereign nation—is (with one cautionary rule) unlimited.”
The book’s webpage includes a downloadable slide-show presentation of the Diagrams & Dollars chapter........ this slide-show is licensed to the Creative Commons which enables anyone in the world to adapt and utilize the materials.