1. Follow the money
Investments
10/13/2017

2. What do we know about...

3. And about this?

4. What about this?

5. 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?

6. Basic answers on money
How much cash is outstanding now? 1,401 billion USD (Sept 2016)
What percentage is in bank notes? %
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): billion HUF -> ~ 10%
USA: b USD 8.3%
How much cash is outstanding in USD & EUR? See next slides

7. USD currency

8. Europe – Currency in circulation

9. 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!

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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 (!!)

19. 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

20. Money creation

21. 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

22. 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