For those who all of this sounds like Greek to, the fed's balance sheet represents the monetary base in our fake money system. This is the amount of currency that the fed has conjured into existence by fiat, or by decree. The fed has been selling itself as an economic shock-absorber. When "unexpected" bad things happen, the fed conjures up more fake currency and then uses it to buy (usually) treasuries from banks in the federal reserve system with the notion that when things get better they can sell those treasuries off again and retire the currency, thus reducing or "deleveraging" its balance sheet. The notion of this expansion-contraction story is that the fed is not feeding the economy with free money. That would simply be monetizing the debt. Instead, they are essentially lending money to the economy which will be paid back to the fed and then destroyed back into the ether from whence it came. No harm, no foul, all set to handle the next "unexpected" event. Just like the shock-absorber on a car.
So what's wrong with monetizing the debt? Well, a lot. But it all boils down to confidence in the system because without that, the con game is over and massive inflation will turn into hyperinflation unless something is done (forced austerity, rationing, riots, martial law, etc.) to save the currency.
But to lay it out more plainly, when the government spends money it either has to tax or it has to borrow or it has to print to get that money to spend. Taxation is hated but it is the honest way because the people are each presented with a bill. There is no sneakiness to taxation and that throws the door open to push back, anger, etc. These feedback mechanisms result in better control of government spending.
Borrowing is easier for government (in fact the easiest) because many of the citizens are stupid and most of the rest are amoral. The stupid ones don't understand, really, that borrowing is consuming today while leaving the bill for someone else in the future. The amoral ones completely understand this and are 150% onboard with it. They know its a scam but its working in their favor. Borrowing has the temporary advantage that others outside the US help provide the loans. So it increases the pool of suckers that the scam is played upon and thus reduces the impact to Americans.
Printing is also easier for government than taxation but sooner or later inflation (increasing money supply in the face of flat production) results in higher prices. If the people can't feel it today, they don't care today which is why debt is so easy. But inflation is felt today and soon enough the poorest classes can't even afford what we consider the minimum American lifestyle.
Debt monetization is inflation. It simply means the treasury creates debt but the federal reserve buys it by creating more currency from thin air. We keep score on this by the size of the federal reserve balance sheet. Debt monetization is effectively a taxation mechanism for everyone holding the currency. The US is special in this regard because the dollar is held worldwide still. They are working to un-do this but they are still not quite there. But soon. So for now debt monetization burdens everyone with the needs of American consumers.
But non-Americans know this and when they see debt monetization they know that the fed has been lying about the balance sheet expansion being temporary. They then come to the realization that by holding dollars they are voluntarily signing up to being taxed in order to support America. It is the signal that they need to get out of greenbacks ASAP. So the real threat of debt monetization is that it accelerates the loss of confidence in the dollar by ROW (Rest Of World, i.e. everyone but the USA). And as that happens, they work very hard to stop holding that paper. But the only way to get rid of it is to trade it for something else which is another way of saying "spend it". And if everyone is spending their dollars at the same time, that is a run on the dollar which is the basis of hyperinflation.
A non-Elliottician can be forgiven for not knowing in advance that after the peak of the balance sheet expansion we just encountered in 5 waves that we would get a pullback to the level of the prior 4th and this pullback would look like the fed was going to achieve its goal of balance sheet contraction/de-leveraging during good times, just like a shock-absorber works on a pothole. Thus, as the fed reduced the balance sheet, many people actually fell for the notion that it was going to work. Not wise people of course. Money-wise people like Peter Schiff always said the deleveraging was going to fail and eventually it would have to be reversed and then expanded. But to the eyes of foolish people it seemed that the fed could be trusted and so, they trusted. During wave 3 up everyone will figure it out. That's why Prechter calls 3rd waves "the point of recognition".
Of course, if the only reason something got better is because of the cash infusion and then that cash is taken back, then its pretty obvious that the problems will return. In fact, while the cash has been getting drawn out of the system by treasury sales/balance sheet deleveraging, the problems have still been getting worse at the same rate as before, or faster. And so, very soon, the balance sheet will have to play catch up. This is how wave purple 3 up will take off. It is unclear at this point whether this pullback to the level of the prior 4th is all of purple 2 or just wave A of purple 2. But if the balance sheet moves higher than purple 1 from here (and the odds are high that it will) then game over. Purple 3 will be upon us and the US economy will certainly be feeling the pain of strong and sudden inflation, mostly evidenced by higher prices. These prices will shoot higher before salaries have a chance to keep up.
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