That has been the fancy catch phrase which describes central banks printing money and using it to purchase government bonds. Just about every text book states that Monetizing Debt will lead to inflationary disaster.
As the global financial crisis caught the US in a liquidity trap, Ben Bernanke decided to fight it by monetizing debt in astonishingly creative fashion. He instructed the US Central Bank not only to monetize the government's debt (to the tune of $1.2 trillion, but also to purchase another $1.25 trillion of toxic mortgage backed securities that where sloshing in the bond market without any buyers in sight.
Those unfamiliar with liquidity traps saw the writing on the wall: After deciding to Monetize Debt at a gigantic scale, the US was in for hyperinflation: an "Inflation Bomb". It turns out that these predictions were not true. Prices are still falling in the US.
Now the same discussion is taking place, since the European Central Bank was forced to buy up toxic Greek Government Debt. The WSJ captures the discussion (from the Journal In Education):
QUESTIONS:
1. What is the main reason that the European Central Bank (ECB) is choosing to purchase Greek bonds in the secondary bond markets?
2. Why are critics opposing the ECB's purchase of Greek bonds in secondary bond markets?
3. By buying Greek bonds, how is the ECB influencing the yields on Greek bonds? How in turn does this affect other countries' bond yields (e.g. Spain's)?
4. Explain how the ECB's decision to keep purchasing bonds of distressed European countries can or cannot lead to a) inflation, and b) perpetual fiscal deficits in the long run.
5. What is the effect of these purchases on the Euro?
Adam Posen, an external member of the Monetary Policy Committee of the Bank of England, has a blunt and impatient piece that counters those worrying about "inflation bombs." He does not mince words… Actually, mincing words would be an understatement. This speech must rank high up among the shrillest speeches anyone associated with a central bank has ever given:
When the instrument nominal interest rate is already at de facto zero bound, and the financial transmission mechanism is damaged, buying bonds is the only means central banks have of trying to deliver price stability against deflationary pressures – some form of quantitative or credit easing is the right thing to do. Getting unduly caught up in protecting the appearance of central bank independence is doubly mistaken: first, it will not do any good because it is not that appearance which delivers desirable results; second, it will prevent pursuing the right policy option.
As I indicated at the start, much of the hue and cry about central bank independence in response to the various sorts of bond purchases is awfully shallow. It is adolescent or worse to be so preoccupied with how someone looks, and her supposed reputation among the self-appointed conformists, than with the substance of her actions and values. This holds true whether that someone is a high school student or a monetary policy committee. That has not stopped such preoccupations and nasty name calling from spreading of late regarding central banks. In imagery typical of the preening machismo of financial markets participants and those who report on them, a number of people of late have spoken about the ECB losing its ‘political virginity’ or purity last month.
One is tempted to ignore or dismiss such idle chatter, but let us take it at its vulgar face value to show just how empty these characterizations are. Cultures which make a public fixation of virginal purity, of a stylized maiden’s reputation, tend to be backward superstitious cultures that impede people exercising autonomy and making responsible choices. For society, and arguably for the young persons themselves, what matters is not a young person’s ‘virtue,’ let alone any reputation for such. What matters for society and for the young person is whether they are promiscuous, engaging in unsafe behavior, or getting pregnant casually, that is whether they behave responsibly.