Historical Example

• In March of 2009, the U.S. Federal Reserve announced a $300 billion plan to purchase Treasury bills and mortgage-backed securities. Fed officials believed this would help support a distressed mortgage market, drive down mortgage rates and provide the United States government with much-needed funding. This program ended one year later, although, as of 2010, the Fed still holds most of the securities it purchased during this time and is currently creating a sustainable plan for selling these securities.
  
  

Benefits

• Debt monetization can have immediate benefits when it comes to financing a country's activities or relieving the economic stress created when investor demand does not provide the liquidity needed to finance government activity. Proponents of this technique generally subscribe to the Keynesian economic school of thought, which believes monetization is a beneficial technique with "trickle down" effects throughout the economy.
  
  

Criticisms

• Critics of debt monetization argue that it is not the responsibility of the central bank to provide funding via monetization for government operations. Some economists slam monetization as a desperate and inappropriate attempt to keep failing systems afloat. As monetization of debt is rarely used except in cases of extreme economic distress or political interference in the central bank's activities, critics are few when monetization is used in moderation. The primary concern of critics is that monetization is a tempting but potentially devastating solution that is difficult to stop once begun.
  
  

Negative Effects

• When used transitionally as an emergency measure, monetization of debt does not normally cause rampant inflation. When used for an extended period, however, monetization can lead to politicization of monetary authorities and increased prices. Without a solid exit plan in place, monetary authorities can get caught on a kind of debt treadmill that keeps them buying more government securities once the expectation of continued support has been put in place.
  
  

Political Influences

• As a general rule, central banks function independently of political influences within the country, to keep monetary policy isolated from politics. Without safeguards in place, politicians have been known to use central banks' ability to print money (monetization) to keep inflation low or manipulate markets into providing favorable results that reflect well on the current regime, especially during election years. Because these influences are generally known, most central banks are insulated from these pressures and choose to monetize debt only when it is deemed absolutely necessary (as was the case with the Federal Reserve's decision to purchase Treasury bills in 2009).