What does printing money mean?

Answer 1

The term 'printing money' was coined many years ago. In the old times, it referred to the printing press at the mint factory where literally, the press would run overnight and more bills would be printed.

But now, the electronic credit system allows everything to happen instantaneously. Thus the term 'printing money' is now also referred to as 'quantitative easing' or 'increasing the money supply'.

So how, and why is this done? We'll cut to the chase here. To increase the money supply in the market, the Central Bank of a country will sell off it's Treasury Bills (or assets) to the public. Think of it as releasing money from the Central Bank and into the country.


If you try to look around the internet, you'll probably get stopped right here because most 'generalists' do not have a clue how this is done. Any first year university macro-economics course will teach you this. In order to get these assets sold to the market, the Central Bank will push sales by offering relatively higher interest rates than what it currently available on the market.

In many countries (for example Australia, Canada, New Zealand), the Central Bank will simply credit the Exchange Settlement Funds (i.e. the Central Bank accounts of the major financial Banks with-in the country) with higher interest rates. Instead of 5%, for example, they might offer 6% in their account (we're keeping it simple here).



Let's say, for example, a Bank has $100 billion dollars sitting inside this Exchange Settlement Fund with the Central Bank. And let's say, to increase the money supply, the Central Bank says that instead of receiving $5 billion dollars in interest this year, we are going to give you guys $6 billion dollars.


The theory of 'printing money' now says that because the Bank has more money in their account, this will sift into the economy because the Bank will now lend more money out to people.


Now you might ask, how is this going to happen? Well, Banks offer credit cards as well as send out mortgage loans. So what this means is that Banks are now going to be able to offer more money to people of the country. And, in theory, everyone will spend this money immediately and as a result, inflation will rise immediately because of all this extra spending.


Further, you might ask the question about 'Where did this extra money from the Central Bank come from?' and that would be a good question. The fundamentals of Earth's major economies from the 20th century have institutionalized Central Banks to be independent from the Government. Central Banks theoretically have an 'unlimited money supply'.

Now what about the opposite of all these cases? It's not that hard. In order to 'reduce the money supply', the Federal Reserve will simply buy assets off the big financial Banks of the countries or with-in the open markets. Let's say you have a massive Bank with an asset package worth $1 billion dollars but not for sale. The Federal Reserve will offer these guys $1.1 billion dollars for these assets to 'decrease the money supply'.

In theory, this means the Bank is going to re-visit it's balance sheet, realise that it's own cash supply is not as high, and it will restrict how much credit and mortgages it sends out to the public. People won't have this extra money to spend, and hence inflation will decrease in the economy (hopefully).


As a reader of this article, it is now your job to research on your own. Today, no economy in the world targets the money supply. It is out-dated and simply did not work efficiently as an economic stabilizer. The replacement was 'inflation-targeting'.


So for most economies of the world, the Central Bank will not be studying the Money Supply counts with-in the economy, but instead they will look at inflation. Fundamentally, if inflation is too high, the Central Bank will increase the official interest rate. This will force spending to slow down because of the cost of borrowing will increase, many banks and businesses will also cut down spending and be more tight, and with-in time the economy's output will slowly fall. In the opposite case, as with the GFC, inflation is lowering and economy GDP is mostly negative. The Central Bank's will lower interest rates to get people spending again.


However, the interest rate has a minimum value of 0%. Banks can't charge negative interest rates, because you would pay them money just to keep your money in their basements!

This is a contrasting view. It's now up to you to look up what happens in an economy with hyper-inflation which is typically a side effect of printing money. A good reference would be World-War 2, as Adolf Hitler did this to finance the war in Germany.