Why is quantitative easing compared to "money printing"?

Question

Context

Some questions on this site ask about the difference between "money printing" and "quantitative easing". I am experiencing some difficulties to understand what some of the answers practically mean. Hence, I thought I would try to interpret the definition given by Wikipedia, and ask where my misunderstanding comes from.

Assumptions

1. The total amount of a currency is the sum of the physical money (e.g. coins and paper), and the amount of digital money of that currency.
2. Everything of value that is not a currency (neither physical nor digital), is referred to as objects. (So objects include bonds, houses, art, sentiment, feelings etc.).
3. The total quantifiable value of an entity consists of: the total amount of currency + (the value of) objects.
4. "Money printing" implies that the total amount of a currency, e.g. the dollar, increases.

Quantitative Easing interpretation

This Wikipedia page can be evaluated with 3 entities with in brackets their total amount of currency:

• Central Bank ($ 300.000) and 200.000 in objects

• Government ($ 600.000) and 100.000 in objects

• All other beings ($ 100.000) and 300.000 in objects

Suppose they in total have a total amount of currency of $ 1.000.000,-

Then the definition says:

Quantitative easing (QE) is a monetary policy action whereby a central bank purchases government bonds or other financial assets in order to inject monetary reserves into the economy to stimulate economic activity.

So Central Bank buys for $ 20.000 of government bonds from Government. The total amount of currency now is:

• Central Bank ($ 280.000) and 220.000 in objects

• Government ($ 620.000) and 80.000 in objects

• All other beings ($ 100.000) and 300.000 in objects

The example on the government bonds then follows with:

For example, a bondholder invests $ 20.000 (called face value) into a 10-year government bond with a 10% annual coupon; the government would pay the bondholder 10% of the $ 20,000 each year. At the maturity date the government would give back the original $ 20,000.

From what I understand that after 1 year, the total amount of currency then is:

• Central Bank ($ 282.000) and 220.000 in objects

• Government ($ 618.000) and 80.000 in objects

• All other beings ($ 100.000) and 300.000 in objects

and after 10 years of paying 10% interest, the government also pays off the debt, leading to:

• Central Bank ($ 300.000+20.000 = 320.000) and 200.000 in objects

• Government ($ 580.000) and 100.000 in objects

• All other beings ($ 100.000) and 300.000 in objects

Notes

Even if the government gives out "apples worth \$ 10/kg" and sells it to the central bank for "\$ 20/kg", the central bank would only have a limited amount of money that they can spend on the apples, which would not increase the total amount of money. Since that is contradictory with the presented narratives/comparison to "money printing", I wondered: is the central bank able to "go in debt indefinitely"?.

Question

Based on what I have read I think I am forgetting something, or am misinterpreting this meaning, because otherwise, I do not see where the "extra money" comes from.

Where does the extra money come from in the above example of "quantitative easing"?/What is the mistake in this interpretation?

Answer 1

I agree with @1muflon1, I just want to add some clarification I feel needed that from there the misunderstand stems:

The misunderstanding is that the CB does not hold any currency. So your example of $ $300.000 of CB currency holding is wrong. When the CB buys a bond from the government it holds the "object" against the money it has created out of thin air that transferred to the government. So in your numbers all stays the same except that CB has 0 and yet transferred 20.000 to the government. so the amount of money increased by 20.000. In other words the CB start with 0 and always stays with 0 curreny.

When the bond matures, the reverse happens - the government repays the loan to the CB and the created money is destroyed. This is called QT. Thus a program of QE implies that the CB needs to buy more bonds than the bonds he currently holds and set to expire.

The fact the the CB must hold an asset (bonds) against the liability of the new money created, this fact means that the CB can't "print money" (or do QE for that matter) without theoretical limit.

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Edit: As of the coupon (interest) payment, I deliberately chose to leave it from the main answer because I felt this is not the crux of the matter. But since it was asked in comment here is what happens (at least in the US CB, other CBs might have act differently):

unlike the principal payment, the interest payment of treasury securities is not destroyed. According to the Fed:

The Federal Reserve does not receive funding through the congressional budgetary process. The Fed's income comes primarily from the interest on government securities that it has acquired through open market operations. After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.

It should be noted that the Fed also pays interest (IORB) on deposits of some commercial banks and pays interest to some parties under Reverse Repo operations (RRP).

So the Fed has both interest income and expense. Usually the case has been that the Fed is profitable (and was able to return some to the treasury), but just last months the Fed has expectedly turned into losing money monthly, due the the rising interest rates it pays, while it is "stuck" with government securities whose interest coupon is lower.

Answer 2

This is because at central bank (CB) reserves are created ex nihilo. Your example is not valid example, because the central bank does not go from 300.000 dollars to 280.000 dollars after purchasing for 20.000 worth of bonds, instead, they stay at 300.000 after the transaction. They can do this by creating the 20.000 money out of thin air (ex nihilo) just before the transaction. So they go from 300.000 to 320.000, then purchace 20.000 dollars worth of bonds, and then they are back at 300.000 dollars and they have the bonds.

For example suppose that in land Neutopia there are 100 dollars in circulation and CB wants to implement QE to help either private banks or government. QE is just massive open market operation (OMO). When CB conducts OMO it creates reserves ex nihilo - literally from nothing.

Simply some employee at central bank types into excel sheet (or whatewer program CB uses for accounting purposes) central bank now has 50 reserves, just like that. To put it bit crudely CB is an institution that can edit the amount of money on its bank account at will. Then CB uses those 50 reserves to purchase either government bond (or other debt of private institution). So government issues 50 dollar bond and central bank transfers reserves that were created ex nihilo to government account.

At the beginning there were 100 dollars in the economy, now there are 150 dollars in the economy. Hence, while admittedly it is very crude analogy, it is a valid analogy to say QE is like money printing as it creates new money (albeit it is all done electronically no new money is physically created).