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printing money- please explain!
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I have been reading about how printing money causes inflation. I am confused, surely that's how the existing banknotes were made! Or is 'printing money' a different process?
Can somebody please explain it to me in layman's terms?
Thank you.
Can somebody please explain it to me in layman's terms?
Thank you.
Answers
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Yes bank notes are printed but you can think that in normal circumstances as just replacing old notes.
Printing money in the current economic situation is meant to mean increasing the money supply- quantitative easing- in order to boost the economy.
Printing money means there is more money available to spend on the same amount of goods as before so it normally leads to inflation and the real value of money falls so the economy does't benefit. But at present there are signs of deflation so an increase in the money supply is much less likely to lead to inflation at present.
Printing money in the current economic situation is meant to mean increasing the money supply- quantitative easing- in order to boost the economy.
Printing money means there is more money available to spend on the same amount of goods as before so it normally leads to inflation and the real value of money falls so the economy does't benefit. But at present there are signs of deflation so an increase in the money supply is much less likely to lead to inflation at present.
I meant to add that 'printing money' in this sense doesn't mean printing extra notes. The money is created electronically and then injected into the economy via the rather indirect route of buying paper assets. So it's not literally printing money, but it comes to much the same thing.
Here's how the Telegraph summarised how it works
Where, one might ask, does the central bank get the money to buy all these securities? The answer is that it just waves a magic wand and creates it. It doesn�t even need to turn on the printing presses. It simply increases the size of banks� accounts at the central bank. These accounts held by ordinary banks at the central bank go by the name of �reserves�. All banks have to hold some reserves at the central bank. But when there is quantitative easing, they build up �excess reserves�.
If banks swap their securities for reserves, the size of their own balance sheets shrinks just as the central bank�s balance sheet expands. Assuming they want to keep their own balance sheets static � admittedly a big assumption in the current climate � they will then start lending to end-borrowers and so start putting more liquidity into the economy.
Here's how the Telegraph summarised how it works
Where, one might ask, does the central bank get the money to buy all these securities? The answer is that it just waves a magic wand and creates it. It doesn�t even need to turn on the printing presses. It simply increases the size of banks� accounts at the central bank. These accounts held by ordinary banks at the central bank go by the name of �reserves�. All banks have to hold some reserves at the central bank. But when there is quantitative easing, they build up �excess reserves�.
If banks swap their securities for reserves, the size of their own balance sheets shrinks just as the central bank�s balance sheet expands. Assuming they want to keep their own balance sheets static � admittedly a big assumption in the current climate � they will then start lending to end-borrowers and so start putting more liquidity into the economy.
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