How does government central bank work?

Masomnia

Loughton_Monkey wrote: »

Even quantitative easing has very little to do with the number of notes and coins in circulation. I believe they keep notes in circulation up to whatever the 'demand' for notes is. I expect it has diminished significantly since the use of plastic.

As far as I know, QE does not involve the physical printing of notes. It is simply a form of putting extra 'electronic' money into the system.

So it's very much akin to us individuals really. I can come and look inside your wallet and pocket and find exactly £53.42. But that is not your true wealth. If you draw £1,000 out of your bank and put it in your wallet, your wealth has not changed by a single penny.

The things that 'determine' the economy have generally been mentioned.... Money supply, circulation rate, confidence, interest rates, inflation........

You're exactly right. QE means electronic creation of money and nothing more, nothing physically printed. Not that there's any difference.

frothy-coffee_2

Regarding QE

I believe the idea is: The B of E create more money electronically. Use it to buy back it's own bonds from the banks. The banks then have to do something with the cash (hopefully lend to small businesses, first time buyers, etc). But on the downside, they can just as easily stick it in commodities, like gold, which doesn't help much, except for thoses already invested in gold!

darkpool

frothy-coffee wrote: »

Hi,

Reading a £10 note it just says, " The bank promises to pay the bearer £10"

it's a historical thing. upto about say 200 years ago british currency was made of gold/ silver/ copper etc. then banknotes were introduced, the "promise to pay" meant that you could go into a bank and swap your notes for gold sovereigns. Then in the 1920's the UK left the gold standard and you could no longer swap your notes for sovereigns.

a gold sovereign is worth about 200 pounds now - i think you can draw your own conclusions about fiat money.

darkpool

talexuser wrote: »

How does the central bank work? - well Government sets an inflation target, and they fail to meet it month after month after month after month - and still keep their jobs and bonuses ... good work if you can find it!

i also think they consider unemployment. i'd rather have high inflation than another few million unemployed.

frothy-coffee_2

I think I,ve got my head round it now.

For example,

You could go into your local store and buy £10 worth of flour. Then walk to the bakers to buy £10 worth of bread. The baker (who uses flour) will except either £10 cash OR the £10 worth of flour for the bread. As both have the SAME VALUE to him.

NB
I know I've ignored, profit margins, depreciation, wholesale prices, overheads, etc,

CLAPTON

well part of it works this way

the BoE lends banks money at 0.5% interest rate

the banks then invests that money by lending to other countries at a higher interest rate

the banks make billions in profit

obviously because it extremely difficult to make money borrowed at 0.5% then they must reward themselves by paying massive bonuses and call themselves the masters of the universe (because they have skills that the rest of us don't have)

now I wonder how many of us could make money if we could borrow at 0.5% ?

if you want more info then search for 'carry trade'

cepheus

frothy-coffee wrote: »

I think I,ve got my head round it now.

For example,

You could go into your local store and buy £10 worth of flour. Then walk to the bakers to buy £10 worth of bread. The baker (who uses flour) will except either £10 cash OR the £10 worth of flour for the bread. As both have the SAME VALUE to him.

NB
I know I've ignored, profit margins, depreciation, wholesale prices, overheads, etc,

Well, yes but this is just the simple concept of using bits of paper without any intrinsic value as a means of exchange. Since we can't carry sacks of flour around or easily find anyone to wan'ts that flour we use paper money as a flexible method of exchange.

However, what the Bank of England can do is just generate money out of nothing either by printing more paper or more commonly electronic money.

Since neither electronic digits or paper have any real value this might devalue the currency since there is more money circulating chasing the same amount of real physical assets. The BoE is in a similar situation to a forger who swamps an economy with fake banknotes which can't be identified! It becomes a disguised tax on everyone who owns assets in that currency.

frothy-coffee_2

cepheus wrote: »

The government is in a similar situation to a forger who swamps an economy with fake banknotes which can't be identified! It becomes a disguised tax on everyone who owns assets in thar currency.

Hi,
I understand what you say and it's right.

BUT if the forged notes are 'undentifiable' how would anyone know they are in the system. The 'total cash in circulation' is never all in one place, to be counted by Ebanezer!

Aegis

frothy-coffee wrote: »

I think I,ve got my head round it now.

For example,

You could go into your local store and buy £10 worth of flour. Then walk to the bakers to buy £10 worth of bread. The baker (who uses flour) will except either £10 cash OR the £10 worth of flour for the bread. As both have the SAME VALUE to him.

NB
I know I've ignored, profit margins, depreciation, wholesale prices, overheads, etc,

Effectively yes. Cash, whether electronic or paper, is effectively just designed to be a temporary store of value that stops you from having to use physical assets to barter with (including the gold that used to back our our currency).

The fact that a fiat currency devalues over time isn't in itself a bad thing. Apparently a small amount of inflation within an economy is considered a good thing in amny economic models because it promotes both the faster transfer of money between the constituent parts of that economy and investment of some of that money into riskier investments with better long term returns.

Without a doubt, inflation is higher than desired at the moment, however a lot of this is down to 2 successive years of VAT increasing by 2.5%, which is also not ideal for us consumers but isn't something the Bank of England have any control over when it comes to controlling the money supply.

frothy-coffee_2

Aegis wrote: »

Effectively yes. Cash, whether electronic or paper, is effectively just designed to be a temporary store of value that stops you from having to use physical assets to barter with

Apparently, before we had a universal paper currency, stores, etc would issue there own 'notes'. And two greengrocer notes might equal one butchers note.

Well something like that anyway