Money Printing In An Economy Simply Explained


By now, we have all heard of the “money printing” idea and have heard about the money printing of central banks. But what is money printing and how does it work? Hint: it rarely involves a physical money printer.

Up to the 1930s, nations pegged their currencies to a gold standard, the gold standard was a monetary system, a monetary system is a system by which a government provides money in a country's economy, backed by the value of physical gold in place. Gold coins, as well as paper notes backed by or which could be redeemed for gold, were used as currency under this system.

 After the 1930s, central banks could increase the amount of money in circulation by simply printing it. They can print as much money as they want, though there are consequences for doing so. 

Merely printing more money doesn’t affect the economic output or production levels, so the money itself becomes less valuable( More money, with the same amount of goods available leading to inflation, like the Zimbabwe case).

In the digital age, where the money is more often just numbers on a screen vs. true cash tender, Central Banks generally “print” money (i.e. increase money supply) in one of two primary ways.
Debt Monetization and Quantitative easing
Let’s hit the basics of each one,
"Debt Monetization” is just a fancy way of referring to the conversion of debt into money - think of it as you “money-tize” the debt. The government issues a new bond (a debt issued by a country's government, promising to repay borrowed money at a fixed rate of interest at a specified time), the Central Bank buys it. This gives the government new money supply to finance deficit spending, deficit financing means generating funds to finance the deficit which results from excess of expenditure over revenue.

Quantitative Easing” is just a big name of referring to the Central Bank buying financial assets from non-government entities in the open market,a financial asset is a non-physical asset whose value is derived from a contractual claim, such as bank deposits, bonds, and stocks. Financial assets are usually more liquid than other tangible assets, such as commodities or real estate.
When the Central Bank buys, this has the effect of increasing money supply, as it gives money to the sellers of these assets.
So while both Debt Monetization and Quantitative Easing increase the money supply, neither one of them involves a physical money printer like for example printing a document. More accurately, they print money digitally by buying assets from sellers either government bonds or from companies on the stock market. So that’s Money Printing Simply.

END.

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