Jim Sinclair Commentary
August 12, 2010
Bloomberg announced the Fed is buying Treasuries on the open market today.
The process of a central bank buying the debt of the nation it represents is called "Debt Monetization."
The following is a reasonable review of what the process is and the results thereof. This time the form of the result will be "Currency Induced Cost Push Inflation."
Gold will trade at $1650 and above.
In many countries the government has assigned exclusive power to issue or print its national currency to independently operated central banks. For example, in the USA the independently owned and operated Federal Reserve banks do this. Such governments thereby disavow the overly convenient 'slippery slope' option of paying their bills by printing new currency. They must instead pay with currency already in circulation, else finance deficits by issuing new bonds, and selling them to the public or to their central bank so as to acquire the necessary money. For the bonds to end up in the central bank it must conduct an open market purchase. This action increases the monetary base through the money creation process. This process of financing government spending is called monetizing the debt. Monetizing debt is thus a two step process where the government issues debt to finance its spending and the central bank purchases the debt from the public. The public is left with an increased supply of high powered money.
Effects on inflation
When government deficits are financed through this method of debt monetization the outcome is an increase in the monetary base, or the money supply. If a budget deficit persists for a substantial period of time then the monetary base will also increase, shifting the aggregate demand curve to the right leading to a rise in the price level.
To summarize: a deficit can be the source of sustained inflation only if it is persistent rather than temporary and if the government finances it by creating money (through monetizing the debt), rather than leaving bonds in the hands of the public.
Monetizing the debt can be used as a component of quantitative easing strategies, which involve the creation of new currency by the central bank, which may be used to purchase government debt, or can be used in other ways.
However, there can be an insidious effect. As one observer noted:
When governments reach the point where they are borrowing to pay the interest on their borrowing they are coming dangerously close to running a sovereign Ponzi scheme. Ponzi schemes have a way of ending unhappily. To get out of the Ponzi trap, governments will have to increase tax revenues, or cut spending, or monetize the debt-or most likely do some combination of all three. 
SGS Notes: This is what many of the experts (NIA and others) have been saying for a long time will happen. This monetization will spark hyper-inflation…