What is Printing of Money?
Money Printing Model
Therefore, the real printing of money is the decision of the central bank on the time and the amount of new money to be released to the economy. It can release money in currency out of the stock already available in its big vaults as well as in electronic form in its computers depending on the demand by its customers, i.e., banks and government. The limit of such printing of money is the discretion of the central bank as the license does not stipulate a limit.
However, the license stipulates the types of transactions that the central bank can engage in to print money. Those transactions are involved in the creation of assets for the central bank in exchange of money being its liabilities payable to its authorized customers. Those assets are mainly created by lending money by way of advances, purchase of securities and purchase of foreign currency. The purchase of foreign currency is also tantamount to a loan/advance as the central bank is obliged to sell foreign currency to its customers when they demand it.
Assets and Liabilities Created on Money Printing
Accordingly, like in any business company or bank, the central bank also has a balance sheet. Assets are those amounts of assets created to print money and liabilities are the categories of money so printed, i.e., currency and electronic money credited to its customers’ accounts. Although those are called liabilities, the central bank is not obliged to repay them in any assets or value in financial/accounting terms, other than the exchange of currencies in different denominations when those customers demand.
The balance sheet also contains few assets such as land, building and furniture that the central bank has acquired by paying out from printed money to carry on its operations. Only central banks can purchase assets by printing money legally in the country. Therefore, the total value of the balance sheet of the central bank is generally treated as the total amount of money printed by it. Accordingly, the central bank holds assets matched by the currency and reserves held by its customers as liabilities of the central bank.
Profit on Money Printing
As the central bank can print money to pay for buying what it is authorized, the total amount of money so printed is its profit, known as seigniorage, given the financial cost of printing operations being negligible compared to total printing value. The profit in financial terms, i.e., income less expenses, is also guaranteed as its assets earn interest income with no interest paid on currency liabilities.
As the government is the owner of the central bank, financial profit goes to the government as dividend. Therefore, the balance sheet and profit of the central bank are simple operations in financial terms. Therefore, there is no need of business/financial experts to manage money printing operation in a modern financial management environment.
However, central banks may struggle in complex business accounting methods and report unusual numbers of profit or loss which have no real importance to the public or the economy.
Money Printing of the US Central Bank
The world’s most popular money, i.e., the dollar, is printed by the US Federal Reserve System (Fed), the US Central Bank. Its summarized balance sheet as of 28 July 2021 is as follows.
|
Fed Balance Sheet, US$ Bn |
|
|
Assets |
|
|
Securities |
8,022 |
|
Loans |
120 |
|
Foreign
Currency |
21 |
|
Other
Assets |
58 |
|
Total |
8,221 |
|
Liabilities
and Capital |
|
|
Currency |
2,137 |
|
Deposits |
4,775 |
|
Securities
under Repurchase |
1,220 |
|
Other
Liabilities |
49 |
|
Capital
|
40 |
|
Total |
8,221 |
The Fed’s balance sheet as at end of 2019 at the onset of the global Corona pandemic was US$ 4,174 bn. This is the accumulated total of money printing by the Fed since its establishment in 1913. Therefore, the increase in money printing by the US central bank so far since the end of 2019 alone is 97%. This historic increase is the result of the Fed’s monetary policy to facilitate the recovery of the US economy from the Corona-hit recession. The position is similar in many central banks in the world.
Money Printing Decision
Therefore, the decision to print money by a central bank is not a business decision to make profit, but it relates to macroeconomic management of the country, given the role of money in modern economies with money. This decision is one of the tools in the monetary policy vested by the government in the central bank.
Therefore, the central bank must be managed by macroeconomists as its money printing decisions are essentially macroeconomic growth and stabilization decisions that have no involvement in business or profit-motive on money printing. A such, getting the central bank into the hands of business-minded persons is disastrous to the economy as they will misuse money printing to their benefit.
However, there is no economic formula for central banks to decide money printing, i.e., the time, amount, assets to be created and duration. Central bank economists are not divine to make the decision 100% error-free. It is just another human decision that has various consequences to the public. For example, some economists complain that the present level of Corona-induced money printing will sooner cause a high inflation wave in the world. However, central banks led by the Fed respond that the present trend of inflation is transitory caused by supply chain disruptions by the Corona pandemic and will disappear over the medium-term when the global economy recovers from the pandemic.
Former Deputy Governor, Central Bank of Sri Lanka
Comments
Post a Comment