Follow the money Investments 10/13/2017

What do we know about...

And about this?

What about this?

Basic questions on money How much cash is outstanding now? What percentage is in bank notes? Which denomination is the most frequent? What percentage is denominated in Ft 20,000 bills? What percentage of the yearly GDP is the total outstanding cash? How much cash is outstanding in USD & EUR?

Basic answers on money How much cash is outstanding now? 1,401 billion USD (Sept 2016) What percentage is in bank notes? 98.27 % Which denomination is the most frequent? The smallest! In Hungary, 5 Ft coin!! 427 million pieces What percentage is denominated in the largest bills? 55.5 % What percentage of the yearly GDP is the total outstanding cash? GDP (2012): 28 276 billion HUF -> ~ 10% USA: 16770 b USD 8.3% How much cash is outstanding in USD & EUR? See next slides

USD currency

Europe – Currency in circulation

Money creation Who makes cash? But only cash is money? If not, what else is also money? And how is that created? Let’s see!

Small (closed) economy Csh: 1000 B Csh: 1000 C Csh: 1000 D Csh: 1000 Bank 1 A account: 0 B account: 0 Csh: 0 Bank 2 C account: 0 D account: 0 Csh: 0 Central bank Bank 1 account: 0 Bank 2 account: 0 Csh: 0

Deposits A Csh: 100 B Csh: 100 C Csh: 100 D Csh: 100 Bank 1 A account: 900 B account: 900 Csh: 1800 Bank 2 C account: 900 D account: 900 Csh: 1800 Central bank Bank 1 account: 0 Bank 2 account: 0 Bank 1 reserves: 0 Bank 2 reserves: 0 Csh: 0

Central bank reserves A Csh: 100 B Csh: 100 C Csh: 100 D Csh: 100 A account: 900 B account: 900 Csh: 100 Bank 2 C account: 900 D account: 900 Csh: 100 Central bank Bank 1 account: 1520 Bank 2 account: 1520 Bank 1 reserves: 180 Bank 2 reserves: 180 Csh: 3400

Personal loan A Csh: 100 B Csh: 100 C Csh: 100 D Csh: 100 Bank 1 A account: 1700 (loan: 800) B account: 900 Csh: 100 Bank 2 C account: 900 D account: 900 Csh: 100 Central bank Bank 1 account: 1700 Bank 2 account: 1700 Csh: 3400

Buy/sell transaction A Csh: 100 B Csh: 100 C Csh: 100 D Csh: 100 Bank 1 A account: 200 (credit: 800) B account: 900 Csh: 100 Bank 2 C account: 2400 D account: 900 Csh: 100 Central bank Bank 1 account: 200 Bank 2 account: 3200 Csh: 3400

Bank 1 account: -500 (credit!) Second transaction A Csh: 100 B Csh: 100 C Csh: 100 D Csh: 100 Bank 1 A account: 200 (loan: 800) B account: 200 Csh: 100 Bank 2 C account: 2400 D account: 1600 Csh: 100 Central bank Bank 1 account: -500 (credit!) Bank 2 account: 3900 Csh: 3400

C account: 3900 (mortgage: 1500) Csh: 100 B Csh: 100 C Csh: 100 D Csh: 100 Bank 1 A account: 200 (loan: 800) B account: 200 Csh: 100 Bank 2 C account: 3900 (mortgage: 1500) D account: 1600 Csh: 100 Central bank Bank 1 account: -500 Bank 2 account: 3900 Csh: 3400

Buying a house with mortgage Csh: 100 B Csh: 100 C Csh: 100 D Csh: 100 Bank 1 A account: 200 (loan: 800) B account: 200 Csh: 100 Bank 2 C account: 400 (mortgage: 1500) D account: 5100 Csh: 100 Central bank Bank 1 account: -500 Bank 2 account: 3900 Csh: 3400

C account: 400 (mortgage: 1500) D cash withdrawal A Csh: 100 B Csh: 100 C Csh: 100 D Csh: 5100 Bank 1 A account: 200 (loan: 800) B account: 200 Csh: 100 Bank 2 C account: 400 (mortgage: 1500) D account: 100 Csh: 100 Central bank Bank 1 account: -500 Bank 2 account: -1100 Csh: 0 (!!)

Conclusion Money is mostly created by commercial bank extending credit “Most of what people think of as money is actually credit” The central bank can influence this mechanism Interest rates Reserve rates Monetary base (different definition everywhere) All cash in circulation and deposits with the Central Bank M1 (also different!) Cash in circulation Deposits + some other stuff

Money creation

Case-study: Hungary borrows in USD Govt. account ↑ HCB bond ↓ Borrowing in HUF: In the end, liability structure changes temporary, but remains the same on the long run. Govt. spending: Govt. account ↓ HCB bond ↑ If borrowing in HUF: (HCB: Hungarian Central Bank) Central bank balance sheet Central bank balance sheet Govt. account ↑ Borrowing in USD: Central bank’s balance sheet expands, both the foreign reserves and the outstanding HCB bonds increase. Govt. account ↓ HCB bond ↑ Borrowing in USD: HCB bonds outstanding grows Central bank balance sheet Foreign reserves↑ Govt. spending: Central bank balance sheet Forrás: MNB

Costs of borrowing in USD The Central Bank bears some of the costs of borrowing, this will translate to losses In the end, the government will pay this anyway Costs realized by HCB Treasury costs Costs of funding the goverment Cost of USD debt Interest on reserves Source: HCB