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TheBlueCat

Mechanism Of Cash Creation

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All these arguments about money creation prompted me to go and dig out my economics text books to try and find out a bit more about it. One point that I was confused on was how governments could get more cash into circulation if the only way to do it was to literally print the stuff - maybe in the days of people being paid mostly in coins and notes that would have worked, now I just can't see it (unless the helicopter drop was a literal event of course).

I found this passage in an ancient book by John Craven (the economist, not the newsround guy):

Creation of cash

The government's account at the central bank is increased whenever it decides to increase the amount of cash as a way of financing its deficit. When it creates cash, the central bank lends to the government by crediting the government's account with the amount of cash created; effectively, the central bank allows the government to overdraw on its account up to the extent of the cash created.

(Note that, in practise, the government's account at the central bank is kept to a very low level in comparison with the total of government expenditure, taxation and borrowing. This is done by using any surplus in the account to buy back government bonds, which reduces the amount of interest that the government must pay to bondholders.)

The total amount of cash created differs from the total of notes and coins in circulation. Cash is created when the government's account at the central bank is increased by borrowing from the central bank. Some of this may be withdrawn by the government in the form of notes and coins, particularly to make transfer payments through post offices and social security offices. However, most government expenditure is by cheque or other bank transfer, and this involves an increase in bank's accounts at the central bank, and a reduction in the government's account. The central bank needs to supply notes and coins only when the banks require them to meet the needs of their customers. If banks do not withdraw notes and coins, the cash remains in the form of a bookkeeping entry recording the size of the banks' accounts at the central bank.

So, of course now I've seen it written down, cash is actually created when the government goes overdrawn at the BoE, not when the bank prints money. Some of that overdraft gets turned into notes and coins but most doesn't. The road to hyperinflation is now much clearer to me and I can't help thinking it would be a good thing if Mervyn were to call in GB and tell him that he was going to withdraw his overdraft facility and that he should find someone else to bank with thankyou very much.

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All these arguments about money creation prompted me to go and dig out my economics text books to try and find out a bit more about it. One point that I was confused on was how governments could get more cash into circulation if the only way to do it was to literally print the stuff - maybe in the days of people being paid mostly in coins and notes that would have worked, now I just can't see it (unless the helicopter drop was a literal event of course).

I found this passage in an ancient book by John Craven (the economist, not the newsround guy):

So, of course now I've seen it written down, cash is actually created when the government goes overdrawn at the BoE, not when the bank prints money. Some of that overdraft gets turned into notes and coins but most doesn't. The road to hyperinflation is now much clearer to me and I can't help thinking it would be a good thing if Mervyn were to call in GB and tell him that he was going to withdraw his overdraft facility and that he should find someone else to bank with thankyou very much.

this little cabal is quite easy to see through.

you just need to know the hierarchy.

in pole position is the Bank of international settlements in BASLE.

...close second is the WORLD BANK.

..third place goes to the IMF.

..the second tier belongs to the global central banks...this includes the BoE/ECB/Fed/BoJ etc.

Now if the Bank of international settlements say's "pay up",all the global CB's will hike rates and the party is over!!

the present modus operandi is much like an arable farm,with crops sown in different seasons to reap harvest at different times(k-wave thing),but this could be changed.

all the farmer needs to do is put in ONE type of seed at the same time to gain a BIG harvest...but one hell of a fallow period after....not exactly sustainable is it?

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this little cabal is quite easy to see through.

you just need to know the hierarchy.

in pole position is the Bank of international settlements in BASLE.

...close second is the WORLD BANK.

..third place goes to the IMF.

You forgot the space aliens.

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this little cabal is quite easy to see through.

you just need to know the hierarchy.

in pole position is the Bank of international settlements in BASLE.

...close second is the WORLD BANK.

..third place goes to the IMF.

..the second tier belongs to the global central banks...this includes the BoE/ECB/Fed/BoJ etc.

Now if the Bank of international settlements say's "pay up",all the global CB's will hike rates and the party is over!!

the present modus operandi is much like an arable farm,with crops sown in different seasons to reap harvest at different times(k-wave thing),but this could be changed.

all the farmer needs to do is put in ONE type of seed at the same time to gain a BIG harvest...but one hell of a fallow period after....not exactly sustainable is it?

Yep!

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So, of course now I've seen it written down, cash is actually created when the government goes overdrawn at the BoE, not when the bank prints money.

This is not the whole story either, though. The banknotes have to get into circulation somehow. To achieve this, the Bank of England does indeed print money and then uses it to purchase securities (e.g. government bonds) on the open market.

These days "printing money" is just a perjorative term for deliberate inflation by the central bank. I don't think anyone seriously believes that it's the printing presses that are responsible! :)

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