Do Liabilities Exceeding Assets Matter for the Central Bank?
What do you mean by "The central bank might not care if it suffers large amount of losses, or it even might intend to suffer losses."?
I mean what that sentence literally says.
. . . Even the central bank will get to have liabilities exceeding assets if it suffers a large amount of losses, won't it?
It certainly will. That's mathematically inevitable.
Doesn't that matter?
I don't understand how that matters. . . . If an entity can pay debts by the appointed days, it doesn't default, and nobody will be troubled. For a private company, excessive liabilities are deadly because nobody will probably lend it money any more.
So, it will default.
On the other hand, the central bank never defaults because it can lend itself any amount of money by issuing new banknotes.
Well, so, excessive liabilities don't matter at all if the entity can borrow money as necessary?
I don't understand why they matter.
Hmm . . .
Don't misunderstand. As banknotes are debts for the central bank, issuing banknotes doesn't distinguish the central bank's liabilities at all, but anyway, the central bank will never default.
I understand that it will never default, but does that mean that nobody will be troubled?
I just don't understand why somebody has to be troubled. If somebody has to be troubled, please teach me the mechanism.
Hmm . . .
Let's Think of Helicopter Money
You have heard of helicopter money, don't you?
Yes, I do. It really just scatters money.
Let's suppose that the central bank really scatters banknotes. As considering interactions between countries complicates things, let's suppose that our country is completely isolated from the rest of the world. We understand that things can be different for open countries, but that supposition will be a meaningful base for discussion.
OK.
Suppose that those banknotes are scattered so that the proportion of money possessed by each entity in the country to the whole amount of money in the country doesn't change.
Well, for example, when there are only three entities, EA, EB, and EC, and they had 100 dollars, 50 dollars, and 10 dollars, respectively, the central bank gives away 100 dollars, 50 dollars, and 10 dollars to them, respectively.
Yes. Supposing that the central bank's previous net worth was 0 dollars, now, the central bank has 160 dollars of excessive liabilities.
So it seems.
Then, who is being troubled?
Well, . . . doesn't an inflation happen?
It may or may not. It isn't simple as that as the whole amount of money doubled, the money will be devalued half. However, let's suppose that the money has been devalued half for the sake of argument. Then, who is being troubled?
Well, although the value of the monetary unit has become half, as everyone has a double amount of money, nobody seems to have any profit or loss. Just the monetary unit has changed.
So, nobody is troubled although the central bank is in excessive liabilities.
As helicopter money is intrinsically a policy that causes losses to the central bank, if the central bank scatters helicopter money, it is certainly intentionally suffering losses.
What Does the Net Worth of the Central Bank Mean?
Well, I heard somebody say that the money of the central bank is the money of the people of the country, and losses of the central bank are losses of the people. Is that incorrect?
In the isolated country model, the central bank lost the money to the rest of the country, which is the people of the country.
Hmm, that is, the people lost the money in the balance sheet of the central bank, but they got the same amount of money in the balance sheets of individuals. As a whole, the people didn't suffer losses or gain profits at all.
In the isolated country model, the excessive liabilities of the central bank just mean that that money has been transferred to the accounts of individuals.
So, they aren't particularly problems?
In the isolated country model, as a loss of the central bank is a gain of the people, as a whole, I think, they aren't problems. However, how the money is distributed is important. We supposed that the proportion of money possessed by each entity in the country to the whole amount of money in the country doesn't change in the previous example. Otherwise, some people will suffer losses in inflation.
If we simplify that doubling the whole amount of money directly devalues the money half (I know that isn't the case), the whole amount of money doesn't matter, but the distribution of the money does.
And in a open country model, if the central bank lost money to people of foreign countries, that's another story.
At least, it seems that the central bank's excessive liabilities themselves don't particularly matter although they may be manifestation of some underlying problems.
What Would Be Done to the Central Bank's Excessive Liabilities?
So, would the central bank's excessive liabilities be left as they are?
According to this document, that doesn't seem the case. That document says that as excessive liabilities harm the central bank's reputation and credibility, the government would fill the losses.
'Harming reputation and credibility' is a vague concept. . . . In short, people are just ignorant enough not to understand that the central bank's liabilities exceeding assets don't matter, aren't they?
I couldn't find any theory that demonstrates that the central bank's excessive liabilities matter beyond just vaguely harming the central bank's reputation and credibility.
The Central Bank Is Already Scattering Helicopter Money
I noticed that the central bank's losses in QE is very helicopter money in effect. For example, suppose that the central bank buys an asset at 100 dollars and sells the asset at 50 dollars. The central bank did a complicated thing, but in short, it just gave away 50 dollars!
There is a difference between openly giving away and being forced to give away, but the result seems the same. Anyway, the fairness of the distribution of money is the issue.
Or distributing proportionally may be ineffective just devaluing money. Rather handing money to only people who are willing to buy things seems effective.
That may be so. As far as I see, QE isn't thought to have been very effective, and not handing money to right people seems the cause.
