Economic Monitor – Weekly Commentary
by Eugenio Alemán

Monetizing federal assets? A potentially bad idea!

February 28, 2025

Chief Economist Eugenio J. Alemán discusses current economic conditions.

We understand that in the business world the word ‘monetization’ of a service a company provides has become one of the most important words as, if successful, this monetization increases the valuation of that company’s stock price. That is, this word indicates the ability of a company that has been providing a service for free to be able to charge for its services successfully. Lately, we have been hearing a lot about proposals to monetize the gold at Fort Knox, or to monetize Federal Government assets, etc. But there is a problem with this word, as it is different in business parlance than in economics.

In economics, the meaning of the word monetization is very different and is, typically, a bad idea. Argentina, Brazil, Venezuela, Israel (back in the hyperinflation days), etc., knew/know very well of what monetizing the fiscal deficit did/still does, to their economies. Monetization is creating money from nothing, that is, printing money and thus debasing the currency.

The Federal Reserve has gone the extra mile with its new policies to help stabilize the U.S. economy to avoid monetizing the fiscal deficits. The U.S. still has the privilege that it can borrow money in order to finance the fiscal deficit. The countries above did not have that privilege and opted, at some point in time, to monetize fiscal deficits by printing money out of thin air.

During the Covid Pandemic the U.S. engaged on a massive transfer of income financed with debt. These transfers filled the pockets of U.S. households and businesses at a precarious time and was reflected in a surge in bank deposits, a surge in money supply and, consequently, an increase in inflation.

That is, the increase in inflation in 2021 was not the fault of the Federal Reserve (Fed)! We would say that 50% of the responsibility fell on the pandemic and the break of supply chains and 50% was due to the increase in the fiscal deficit due to the massive transfer of income from the federal government to households and firms! Of course, the Fed should have increased interest rates at the same time when fiscal policy started to become so expansive, but it was probably going to make little difference on the inflation outcome. Furthermore, that would have meant ‘political suicide’ for an institution that should not be influenced by politics but many times it is! And this was one of those times!

Difference between fiscal and monetary policy: Taking out the punch bowl!

Monetary policy’s punch bowl, that is, lowering interest rates in order to increase lending and incentivize economic growth can be taken out very fast if the economy overheats. That is, the Fed can increase interest rates very fast and take the punch bowl of increased lending, typically generating a recession. However, the fiscal policy bowl is something we have to live with, without almost any possibility for that bowl to be taken out! That is, the fiscal policy bowl was out there for everybody to see and there was nothing done to take it out. The consequence was an increase in inflation but also higher economic growth coming out of the Pandemic recession compared to other countries in the world.

If this was a monetary policy issue, the monetary authorities would have taken back that ~$5 trillion dollar in federal income transfers to households, which increased our U.S. debt by that same amount, by asking households to return the monies once the economy was back on track. But imagine if politicians had done that! It would have been suicidal for their political careers, but it was probably the right thing to do… in monetary policy terms. If that had occurred, we would probably have gone into a recession. On the other hand, the debt would not have been a serious issue as it is today!

What about a sovereign wealth fund (SWF)?

It is not that the creation of a SWF is a bad idea per se, but countries, and states in the U.S., that have instituted SWF have done it from ‘real’ resources, not by tweaking accounting rules in order to ‘create’ excess government income from those accounting tweaks. When countries or states have excess revenues, let’s say, from a discovery of natural resources, etc., they create these funds to invest and help fiscal coffers. Sometimes these funds work as countercyclical mechanisms to help stabilize fiscal accounts, etc.

Eleven states in the U.S. have created sovereign wealth funds, with Alaska and Texas being the largest ones. Many times, countries that discover and exploit new natural resources suffer from what has been called “Dutch disease,” which is an appreciation of the currency that hurts the ability of the country to remain competitive in the global economy. The creation of SWF by these countries has helped them minimize the negative consequences of these discoveries.

The creation of a SWF in the U.S. should be done with utmost seriousness and has to require real income sources! As we said before, we have even heard that the administration wants to create excess income from the revalorization (i.e., the act of reassessing and increasing the value of something) of Fort Knox gold or the U.S. government’s gold reserves, ideas that are worrisome because nobody knows what the potential impact could be on monetary policy, on fiscal policy, on interest rates, on the value of the U.S. dollar, etc.

But our biggest concern in our current environment is the possibility of creating a SWF without sourcing it with real resources and putting it in the hands of politicians. What could go wrong?

Economic and market conditions are subject to change.

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