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Wikipedia: If a central bank purchases a government security, such as a bond or treasury bill, it increases the money supply, in effect creating money.

My question is: what is the difference between this (government issues bonds and the central bank buys them) and directly printing money? If any. If there is no difference, then why would a government chose one way or the other?

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The difference is that in buying the bond, the central bank now owns a bond, and a fiscal deficit has not been directly monetised.

That means that:

  1. the government will have to keep paying interest on the bond, to the central bank, and will have to redeem it if it's not a perpetual. Remember, some governments are completely distinct entities from central banks, with no guaranteed way to move money between them in a consequence-free manner: the Eurozone governments are a good example.

  2. The central bank can sell that bond when it wants to, giving it an extra means of contracting the money supply.

  3. Currency speculators are less likely to start circulating around the currency like vultures that have spotted dying prey.

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It's a great question that I know has bothered many people for years. Indeed there is currently a case in the courts against the Canadian government, requesting that they allow interest free money creation.

A possible explanation for borrowing via bonds is that it acts as a kind of self discipline to deter governments from creating too much money and hyperinflation. Though in my opinion a government has to be very incompetent to do such a thing.

In my years of being interested in this question I have never come across a document which says words to the effect of "we, the government of ..., have just decided that instead of printing money, we shall instead borrow it from now on... because of reasons xyz".

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Question 1: What is the difference between this (government issues bonds and the central bank buys them) and directly printing money?

Answer 1: Same as EnergyNumbers pointed, the difference is that in buying the bond, the central bank now owns a bond, but when the central bank printed the money, they just printed and inject the money to the economy.

One of the purpose of the central bank is, they control the amount of printed money in the economy, to create a stable economy.

If there are too much printed money in the economy, then, the value of the printed money is fall. They call it "Inflation", and hyperinflation if the inflation is too much. When inflation happen, the price of goods and services is rise high. When the goods and services are rise high, the goods and services are too expensive. There will be many protester in the street.

If there are too little printed money in the economy, then, the value of the printed money is raise. So the same money can buy more goods and services, but the companies don't like it, because the goods they have produced now are low in value, so they decrease the production of goods. When they decrease the production of goods, the want to lay off the workers, when they lay off many workers, the situation is bad, many demonstration in the street. They call this phenomena as "Recession".

When they are too much printed money in the economy, the economy is unstable. So to make it stable again, we must decrease the printed money in the economy. How? Well, one of the three methods used is:

  1. The central bank sell a new bonds to the citizen, and when the citizens or companies or banks buy the bonds, they give the money to the central bank. Now, the central bank can keep the printed money in their vault, thus, decreasing the printed money in the economy.

When they are too little printed money in the economy, the economy is unstable. So to make it stable again, we must increase the printed money in the economy. How? Well, one of the three methods used is:

  1. The central bank buy back the bonds from the citizens, companies, banks. The central bank give the money to them, thus, increasing the printed money in the economy (in effect creating money).

Source: http://www.investopedia.com/ask/answers/07/central-banks.asp , https://www.youtube.com/watch?v=y1OJlJ9COg0

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  • $\begingroup$ This is incorrect. The amount of printed money in modern economies no longer plays a regulatory role. Moreover, its inflationary effect is dwarfed by the multiplexing relationship between printed money and liability deposits. $\endgroup$ – Lumi Aug 6 '15 at 14:23
  • $\begingroup$ Why my comment is incorrect? What's your reference fact to back your statement? $\endgroup$ – reinardhz Sep 24 '15 at 7:50
  • $\begingroup$ federalreserve.gov/monetarypolicy/reservereq.htm For example. Notice that reserve requirements only cover a subset of all deposit accounts. Only if the central bank reserve requirement applies to all deposit accounts can it act in the way you describe. Essentially, what you are describing is a mechanism that may have applied in the 1930's which is when it was first written, but the banking system has substantially changed since then. $\endgroup$ – Lumi Sep 25 '15 at 9:04
  • $\begingroup$ yes, I know, but there are another 2 method that the FED use to control the ammount of money in the economy: by changing short-term interest rates, and Finally, the Fed can affect the money supply by conducting open market operations, which affects the federal funds rate. Now, on 25 September 2015, The value of USD dollar in emerging market country is rise like crazy, because the fed wants to increase the federal funds rate, and that create an effect that removing money from the economy, less USD in the economy = value of USD rises. $\endgroup$ – reinardhz Sep 25 '15 at 10:33
  • $\begingroup$ There is no empirical evidence that the Federal Reserve exerts much if any control over the quantity of money in its economy. Under the Basel Regulatory framework, the dominant control is bank capital, not reserve requirements. The most probably explanation for the rise in the US dollar is the shift the US has gone from a major oil importer, to an energy exporter due to shale oil. $\endgroup$ – Lumi Sep 26 '15 at 18:22
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New theory here, all that economic jargon i studied is inccorrect, There is no initial difference between printing money and building a bridge instead of using the issue of bonds and hence giving the central bank duty over the money supply, which now has less control due to fractional banking. The banks can now print money backed by debt and with this newly created debt they can loan more money and hence fractional banking. The bank only needs a deposit for the first loan, the second and so on are created through digitally created money that will last until the original loan is paid off. This is why boom bust cycles are out of hand, as loans backed by loans can grow rapidly, but if the original loan or a large enough fraction default the whole printed money is no longer backed, making all the loans subject to a liquidity crisis, the money that secured them is no longer there.

Instead if the governent had a limit on printing at 25%, it could create bridges and pay itself back increasing and decreasing the money base at different times. Otherwise issue of bonds create interest payments that are not subject to tax. So the government is moving parts of the economy out of it reach, creating a super upper class. On top of that the interest payments will be more then the tax revenue collected from the government project as government is not a profitable company and its tax revenue is generally well under 5% growth. SO effectively the government is using tax money to pay no benits or debt all the tax paid for interest does not help the public. SO the government needs to have no debt or it will slowly loose buying power and become ever more reliant on debt. Fractional banking needs to be disbanded as every time the bank creates more money it does it at the expense of dissolving normal peoples income and if a crisis happens the banks are at great advantage in buying power over the population. Why because they were making money of printed money and hence have decreased everyone's income proportionally accept their own and even if loans default, what money did the bank loose, just the money they printed. The only money that is theirs was the deposit which generally is average peoples savings so even if the original deposit is affected its people that loose. SO when everything is going up banks earn money from decreasing your income through inflating the money supply and when everything goes down, banks will be the last person to loose money and hence have more buying power when things are cheap. Lastly while this is all happening the government is loosing tax dollars to interest payments and hence loosing its effectiveness to benefit the public and at the same time creating a super class who own the debt, collecting tax free payments from paying for a share in your tax money. Effectively the government is selling their future tax income your money to build something now and if you know anything about debt you will know unless you can earn more off that debt than the interest rate there was no point getting it, not to mention the bigger the debt gets the bigger the tax free economy of the super rich becomes making governments tax revenue potential shrink. And hence the greatest con in the world is a lack of education, so people dont understand whats actually happening.

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