1. Investments 10/03/2014 FOLLOW THE MONEY

2. WHAT DO WE KNOW ABOUT...

3. AND ABOUT THIS?

4. WHAT ABOUT THIS?

5. 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? 5 BASIC QUESTIONS ON MONEY

6. How much cash is outstanding now? 2,855,569,534,000 Ft (Aug 2013) What percentage is in bank notes? 98.27 % Which denomination is the most frequent? 5 Ft coin!! 427 million pieces What percentage is denominated in Ft 20,000 bills? 55.5 % What percentage of the yearly GDP is the total outstanding cash? GDP (2012): 28 276 billion HUF -> ~ 10% How much cash is outstanding in USD & EUR? See next slides 6 BASIC ANSWERS ON MONEY

7. 7 USD CURRENCY

8. 8 EUROPE – CURRENCY IN CIRCULATION

9. Let’s do it! Central banks, commercial banks + individuals 1.Individuals put their money to bank accounts 2.Banks deposit some in the central bank as reserves 3.Banks lend the rest, thus creating new money (the money does not disappear from the depositors bank account) 4.Individuals spend their loans and the money ends up in someone else’s bank account again 5.The process continues... (see next slide) 9 MONEY CREATION

10. 10 MONEY CREATION II.

11. If borrowing in HUF: (HCB: Hungarian Central Bank) CASE-STUDY: HUNGARY BORROWS IN USD Borrowing in USD: HCB bonds outstanding grows Central bank balance sheet 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 ↑ 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 ↑ Foreign reserves ↑ Forrás: MNB Central bank balance sheet Govt. spending:

12. 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 of borrowing in USD Treasury costs Costs realized by HCB Interest on reserves Costs of funding the goverment Cost of USD debt Source: HCB