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You're probably understanding it wrong. Central banks have little or no debt, and they can "print" reserves at no cost. Reserves is the stuff they pay their d

by lottin 4y ago

You're probably understanding it wrong. Central banks have little or no debt, and they can "print" reserves at no cost. Reserves is the stuff they pay their debts off with. As a result it's virtually impossible for a central bank to go bankrupt.

bjornsing 4y ago
I think your understanding is a bit off. Sure, central banks can “print” money by buying stuff. But they still have a balance sheet. If the stuff they buy falls in value and they sell it for less then they incur a loss. If they lose more money than the equity on their balance sheet then they will have negative equity. Theoretically a central bank can keep operating with negative equity, but it doesn’t look good. The Swedish central bank probably won’t. It will ask for a tax payer bailout instead.
- lottin 4y ago
  I think my understanding of central banking is quite correct. They don't incur a loss because the money they paid those assets with came out of nowhere. If you buy a car with $1000 that you printed with your money printer, and then sell the car for $800, you're still making a profit.
  - loftil 4y ago
    No, your understanding isn't quite correct. Many western central banks hold long dated bonds on their balance sheet which they are marking down due to increasing interest rates. Different central banks are dealing with this differently. In the US they are writing IOU s that essentially mean future surpluses will be used to pay back negative equity. The UK Treasury recently wired the BoE a large sum for much the same reason. Essentially, the bonds which were profitable during decreasing interest rates and resulted in central banks paying treasuries are now moving the opposite way.
    - lottin 4y ago
      You're repeating the same nonsense. How can a bond that the central bank got for free make the central bank lose money? Please explain.
      - cormacrelf 4y ago
        Central banks care a lot about money supply. They do not want to have to print money to account for a debt on the balance sheet, because that (eventually) devalues the currency they operate, and causes deflation which they regard as bad for the economy. They wish to use the money printer when they choose (and provide maximum effect for its valid use cases), not because they are forced. There is a money printing capacity they do not wish to exhaust. If you printed money to buy a car, but it was only because you had to make a big trip and you had actually been intending to wait for the new model, then that’s a suboptimal use of your money printer. So basically the money printer is not free. There is an opportunity loss that they’ve found a way to measure as a real loss to make it easier.
        lottin 4y ago
        You got it the other way around. The only reason they buy bonds to increase the money supply. So if they do buy a bond, they will pay with newly created reserves. That's the whole point. And it's impossible to lose money by purchasing an asset that it cost you nothing to buy.
      - manholio 4y ago
        The coin the central bank issues is a liability in its balance sheet. If it prints 1 trillion, uses it to buy 1 trillion worth of commercial paper and those assets lose 10%, then the bank has liabilities worth 1 trillion (outstanding currency) but only 900 billion in assets to cover them. Technically in default, but also in a very special economic position, because no body expects the central bank to ever cover its full liabilities.
        lottin 4y ago
rvba 4y ago
A central bank can go bankrupt - it cannot keep printing money forever. When we look at places with hyper-inflation, at some point people lose all their "faith" in a currency (and in the central bank). People no longer want to receive a currency that can be printed at 'no cost', because this currency will only keep losing value due to constant printing. They demand other, "hard" currency, or just use barter. Of course it is illegal, but in case of hyper-inflation the fabric of the society is rapidly dissolving - those who had some savings were effectively robbed by the central bank/government, those who sold some physical good - are now "bagholding" some coin that will become worthless fast.. The spiral of inflation can become so tough that noone will accept banknotes or electronic money, since it is better to hold physical goods. As far as I remember in places with real hyper-inflation (Zimbawbe?) the central banks introduced so many new banknotes that they couldnt even afford to print them -> the paper-mills didnt accept the banknotes, since they knew those would not be worth anything in few days. Other example is how after people would use stacks of paper currency to buy basics like bread. Paper currency is a very useful invention because it really facilitates trade, same can be said about credit cards - but in times of hyper-inflation often the credit cards stop working - due to no electricity. So people jump to another hard currency (e.g. in Yugoslavia or Africa they only accepted US dollars or euros and basically gave up on own currencies, even if it was illegal). [on a side note, I bought few of those '100 trillion' Zimbabwean dollar banknotes and this was one my my best investments ever - bought them for something like 2 USD each and now they seem to be worth 150-300 USD each. The value here is that it is a 'novelty' item - that can be used as an example of hyper-inflation; all the economy 101 books show it as an example]
- landemva 4y ago
  > Zimbabwean ... banknotes and this was one my my best investments ever Great example of scarcity and price rising via collector demand. They are not making any more of those notes, and collectors are interested similar to collecting scarce baseball cards. Neither have intrinsic use nor utility, but they are scarce and people like to collect them.
  - rvba 4y ago
    I bought few of those "100 trillion dollar" banknotes since I find them cool and perhaps a bit to show off (I made an "in case of emergency break glass" type of thing to be hung on the wall). Those banknotes are unique - unless some other country gets even higher inflation, those will always be shown in every "economy 101" book, so they arent just a thing only for banknote collectors (whom I am not), but also a novelty item for general public (or at least economy students). It seems only the highest denominated bills skyrocketed in price, other bills are relatively cheap. Supposedly there is a guy who bought a whole briefcase of those 100 trillion banknotes and makes a living by selling them on ebay.
funstuff007 4y ago
True, if self-denominated debt there is no risk of bankruptcy. There is only risk of hyperinflation. That being said, default and hyperinflation are two sides of the same coin.

by lottin 4y ago

bjornsing 4y ago

I think your understanding is a bit off. Sure, central banks can “print” money by buying stuff. But they still have a balance sheet. If the stuff they buy falls in value and they sell it for less then they incur a loss. If they lose more money than the equity on their balance sheet then they will have negative equity. Theoretically a central bank can keep operating with negative equity, but it doesn’t look good. The Swedish central bank probably won’t. It will ask for a tax payer bailout instead.

lottin 4y ago
I think my understanding of central banking is quite correct. They don't incur a loss because the money they paid those assets with came out of nowhere. If you buy a car with $1000 that you printed with your money printer, and then sell the car for $800, you're still making a profit.
- loftil 4y ago
  No, your understanding isn't quite correct. Many western central banks hold long dated bonds on their balance sheet which they are marking down due to increasing interest rates. Different central banks are dealing with this differently. In the US they are writing IOU s that essentially mean future surpluses will be used to pay back negative equity. The UK Treasury recently wired the BoE a large sum for much the same reason. Essentially, the bonds which were profitable during decreasing interest rates and resulted in central banks paying treasuries are now moving the opposite way.
  - lottin 4y ago
    You're repeating the same nonsense. How can a bond that the central bank got for free make the central bank lose money? Please explain.
    - cormacrelf 4y ago
      Central banks care a lot about money supply. They do not want to have to print money to account for a debt on the balance sheet, because that (eventually) devalues the currency they operate, and causes deflation which they regard as bad for the economy. They wish to use the money printer when they choose (and provide maximum effect for its valid use cases), not because they are forced. There is a money printing capacity they do not wish to exhaust. If you printed money to buy a car, but it was only because you had to make a big trip and you had actually been intending to wait for the new model, then that’s a suboptimal use of your money printer. So basically the money printer is not free. There is an opportunity loss that they’ve found a way to measure as a real loss to make it easier.
      - lottin 4y ago
        You got it the other way around. The only reason they buy bonds to increase the money supply. So if they do buy a bond, they will pay with newly created reserves. That's the whole point. And it's impossible to lose money by purchasing an asset that it cost you nothing to buy.
    - manholio 4y ago
      The coin the central bank issues is a liability in its balance sheet. If it prints 1 trillion, uses it to buy 1 trillion worth of commercial paper and those assets lose 10%, then the bank has liabilities worth 1 trillion (outstanding currency) but only 900 billion in assets to cover them. Technically in default, but also in a very special economic position, because no body expects the central bank to ever cover its full liabilities.
      - lottin 4y ago

rvba 4y ago

A central bank can go bankrupt - it cannot keep printing money forever. When we look at places with hyper-inflation, at some point people lose all their "faith" in a currency (and in the central bank). People no longer want to receive a currency that can be printed at 'no cost', because this currency will only keep losing value due to constant printing. They demand other, "hard" currency, or just use barter. Of course it is illegal, but in case of hyper-inflation the fabric of the society is rapidly dissolving - those who had some savings were effectively robbed by the central bank/government, those who sold some physical good - are now "bagholding" some coin that will become worthless fast.. The spiral of inflation can become so tough that noone will accept banknotes or electronic money, since it is better to hold physical goods. As far as I remember in places with real hyper-inflation (Zimbawbe?) the central banks introduced so many new banknotes that they couldnt even afford to print them -> the paper-mills didnt accept the banknotes, since they knew those would not be worth anything in few days. Other example is how after people would use stacks of paper currency to buy basics like bread. Paper currency is a very useful invention because it really facilitates trade, same can be said about credit cards - but in times of hyper-inflation often the credit cards stop working - due to no electricity. So people jump to another hard currency (e.g. in Yugoslavia or Africa they only accepted US dollars or euros and basically gave up on own currencies, even if it was illegal). [on a side note, I bought few of those '100 trillion' Zimbabwean dollar banknotes and this was one my my best investments ever - bought them for something like 2 USD each and now they seem to be worth 150-300 USD each. The value here is that it is a 'novelty' item - that can be used as an example of hyper-inflation; all the economy 101 books show it as an example]

landemva 4y ago
> Zimbabwean ... banknotes and this was one my my best investments ever Great example of scarcity and price rising via collector demand. They are not making any more of those notes, and collectors are interested similar to collecting scarce baseball cards. Neither have intrinsic use nor utility, but they are scarce and people like to collect them.
- rvba 4y ago
  I bought few of those "100 trillion dollar" banknotes since I find them cool and perhaps a bit to show off (I made an "in case of emergency break glass" type of thing to be hung on the wall). Those banknotes are unique - unless some other country gets even higher inflation, those will always be shown in every "economy 101" book, so they arent just a thing only for banknote collectors (whom I am not), but also a novelty item for general public (or at least economy students). It seems only the highest denominated bills skyrocketed in price, other bills are relatively cheap. Supposedly there is a guy who bought a whole briefcase of those 100 trillion banknotes and makes a living by selling them on ebay.

funstuff007 4y ago

True, if self-denominated debt there is no risk of bankruptcy. There is only risk of hyperinflation. That being said, default and hyperinflation are two sides of the same coin.