I'm reading Ray Dalio's "How the Economic Machine Works", and he says that there are four factors contributing to deleveragings in economies:

1) Debt Reduction

2) Austerity

3) Transferring wealth from the haves to have-nots

4) Debt Monetization

However, to me it seems like debt monetization is equivalent to transferring wealth from the haves to have-nots -- am I correct in my assumption?

Debt monetization leads to inflation which means that cash and Accounts Receivable get cheaper. That would mean that cash holders and creditors would get punished. Since creditors are wealthy people, aren't we basically reducing the dollars received by wealthy people and giving that money back to poor people through job creation?

Just want to make sure I'm understanding correctly.


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    $\begingroup$ A lot of poor people either cannot or do not borrow. Suppose you proposed transferring wealth from renters to those with mortgages? $\endgroup$ – Henry Jul 31 '18 at 19:26

In the US, broad debt monetization would produce the following losers: owners of cash, bonds or equivalent fixed income securities- notably, China, Japan, and the other foreign US creditors, and entitlement holders such as pensioners. The winners would be: anyone who owns a real asset on a leveraged basis, such as property owners who have a mortgage, corporations who have borrowed a lot versus their cash flows. This isn't really rich->poor, it's lender-> borrower. This seems like an attractive policy for the US, although there's a very strong argument that the US dollar will permanently lose its reputation as a store of value if it were ever implemented.

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Despite that transfer can happen for a limited period of time (since eventually a new balance will be reached and the situation will be the same again, in relative terms), the main reason for a debt monetization is increasing exports. This is commonly used when the balance of payments has a negative balance (so the country is importing more than exporting).

As you noticed, debt monetization will produce inflation (in a standard situation) and the consequence of inflation is usually a devaluation of the national currency. Like this, exports will be cheaper for foreigners and the national economy will probably grow (thanks to that money which is entering into the country), creating employment and increasing national consumption. Also, the devaluation will cause a decrease of national imports, since buying international goods will be more expensive for national people. The combined effect of these two side of the same situation will lead to a balance of the balance of payments, or even to a positive balance (exports > imports) of the balance of payments.

Finally, it is nice to remark that unless the political decisions mess everything up (we can see some examples in recent history in several countries), a new balance will be reached in all cited fields, with maybe a similar distribution to the one at the beginning (different nominal rates, but similar relative/real rates, depending on terminology and case).

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