Re: When you government pumps billions of pounds (or dollars) into the market....

On Mar 14, 10:17 am, "onlyme" <onlyme_sitt...@xxxxxxxx> wrote:

I strongly suspect that I'm in the majority by not really having a clue what
they mean when they say "the government/the fed/the BOE..whatever....has
pumped xxx billion pounds/dollars into the market.

For once I agree!

It saddens me that educational inititives come and go like the phases
of the moon yet, by and large, we allow the products of our education
system to leave it without even the basic idea or how something that
will effect them all their lives - basic economics and how monetary
systems work.

OK, because I find the subject interesting and the present situation
fascinating I'll bite but I'm not getting incolved in any pointless
circular arguments.

First, who takes the decision to pump in more money?
Does this involve the Royal Mint...ie...does the order go out to "fire up
the presses"?..or does the government use funds that it has on hold at the
BOE?

The decisions are made by central bankers. Central bankers these days,
by and large hold a loose brief from governments. This varies form
country to country. In this country the BoE is "instructed" to conduct
monetary policies that wil restrain inflation and keep it within a set
target (2% as measured by CPI) In the US the Fed is tasked more
broadly to conduct policy to improve the US economy.

Or is it all 'virtual' - numbers zipping across computers - without any
actual paper money being created.

Paper money (and coin) is created only out of expediency. Some people
prefer to use cash for all transactions. All people use cash for some
transactions. The extent to which people want to use and hold cash
determines how much is provided. In fact since an increasing number of
tranactions are carried out electronically, the amount of notes and
coin in existance at any particular time is actually going down.

All monetary systems a "virtual" in the sense that no money has
intrinsic value regardless of physical or non-physical form. The
important thing to remember is that the difference between sound and
unsound money is that the former like energy cannot be created or
destroyed. It simply moves from place to place, from holder to holder.

Whatever the method - where exactly does this 'money' go?

From holder to holder!

Every £ you have ever had came directly or indirectly from the banking
system. Every £ you have ever spent has found its way back there.

Banks make money these days by attracting depositors by offering
interest and lending a goodly proportion of these deposits at a higher
rate determined by perceived risk. Clearly any money not loaned
represents a loss to a bank since the depositors interest still has to
be met. Thus banks will place any surplus deposits with other banks or
with the central bank. They do this by buying bills that carry a rate
of interest.

If the central bank buys more bills back than it sells then clearly it
is injecting money (from its deposit reserve) into the banking system.
This extra money has to be accomodated hopefully by improving the
liquidity of the system and thus making loans more readily available.


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