money-supply, central-bankLike the title says, I’d like to know who is paying the deficit (or winnings) of a central bank.
For example, if the central bank buys some securities with the money it has printed, and those securities lose all of their value, who pays this loss?
I suppose it is the state’s treasury, i.e. the tax payer, who has to pay the loss, but how does this work? I cannot imagine the central bank sending an invoice to the treasury?
Edit: Of course, a deficit of the central bank means an inflation of the money supply. But I think it must be more than that. Imagine a mismanaged central bank which constantly buys the worst securities, and sells them after they hav lost most of their value. Now compare this to a central bank which makes always the best decisions in their quantitative easing, selling their bought securities with huge profits.
Where do these profits and losses go? They cannot just disappear.
A central bank is not comparable to any business; just as the government budget is not comparable to a household budget.
For a Central Bank, a nominal loss made (for example) on the bonds it had bought as part of quantitative easing, would just mean that it had injected more money into the economy than it had withdrawn.
Similarly, if it makes a nominal profit, that simply means that it has made a net withdrawal of money from the economy.
But there’s no reason why a loss-making transaction has to have any knock-on negative consequences for the economy. The transactions don’t involve any tangible wealth or intellectual assets. The inflationary stimulus may be positive, neutral or negative for the economy. Similarly, profit-making transactions simply reduce the money supply: a deflationary impact.
When a central bank buys securities with money it printed. The losses come to all holders of dollars (or what ever currency was printed), when the bank the securities were purchased from spends the money into the economy (the printed money it received from the central bank).
The loses come in the form of price increases that will result from the increase of the money supply.
Think about it this way. Supposed all prices double due to an increase in the money supply. Now, anyone who holds currency has lost half the value of their currency since the purchasing power of currency is necessarily half of what it was before the inflation. The people who got the printed money before the inflation gained, and everyone else lost. When a central bank gives millions of dollars to a private bank in exchange for some securities, it is a transfer of wealth from all holders of currency to the private bank that got the new printed money.
The private banks get free money from the central bank and everyone else loses monetary value through the inflation the private banks will cause when they try to spend the money.
I don’t mean to be rude, but EnergyNumbers’ answer is simply nonsense.
At least in the UK, the government has promised to indemnify the Bank of England for any losses from QE. I take this to mean that the government would fund any losses out of taxation, rather than them having an inflationary impact by ending up on the balance sheet of the Bank itself long-term.
I don't know what would happen to any profits.
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