COMMENT: Higher interest rates are an antidote to inflation | Chroniclers

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Deficit spending is always paid for using borrowed money, and none of this necessarily causes inflation. Remember that inflation is a monetary phenomenon. Inflation occurs when the Federal Reserve monetizes the federal government’s deficit spending. That is, the Fed, as it is called, adapts to Treasury borrowing, even by buying some of the bonds (IOU) that the Treasury sells. This is how the federal government borrows money. He sells IOUs (bonds and other types of securities).

When the Fed buys government debt (bonds, notes, etc.), the dollars it uses to pay for those government securities are deposited in banks, creating excess liquidity reserves in those banks. These “Fed dollars”, unlike our dollars, are very powerful. If you or I buy or sell something, we have absolutely no impact on the money supply. But, when the Fed does, it has a huge impact on the money supply. When the Fed buys government securities, the Fed dollars are deposited into the sellers’ bank accounts. Banks now have excess liquidity (Fed dollars), which they use to make more loans. The loan proceeds are deposited in other banks which repeat the process. This is what happened in Vietnam. The government borrowed money to pay for the war, and the Fed monetized that debt by buying a large chunk of federal IOUs (bonds, notes, etc.). Banks have loaned the Fed dollars over and over again, increasing the money supply, and the result has been year after year of inflation. Too many dollars for too few goods.

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