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Central Banks: Moneylenders, Santa Clauses or Vampires?

By Hak Choi (Former) Advisor, Chung-Hua Institution for Economic Research. Correspondence: Abstract This paper proves that central banks are not moneylenders, they are perhaps Santa Clauses, but in reality they are vampires sucking our blood. The bigger they grow, the hungrier they are. (JEL: E41, E58) Keywords: Central Banks, Vampires, Slavery

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If there are people or companies dying. while the supply job is performed by central banks. According to Keynes (1936. as depicted in Figure 1. 15). Consider first the negative demand function. However. The image that central banks are moneylenders is coined by Keynes. Central banks are the best moneylenders. should lead to a drop of bank deposit by the same amount. there is a demand for money and a supply of money. Suppose the increase of cash holding is entirely financed by new money. and they print like manias. people will sell bonds and possess more liquidity. as a result of a decrease in interest .I. arrive with bags of money. Moneylenders? No They say money is powerful. Hence. Ch. central banks. like supermen or Santa Clauses. bond price is high. lenders of last resort. There is no change of money supply. Through the deposit multiplier. which means money. some suggest using helicopters to sprinkle the money. such picture. This phenomenon is called the speculative demand. Ceteris paribus. According to him. the speculative demand must be a positive function of interest rate. is illusionary. It looks as if there were a 2 Electronic copy available at: http://ssrn. but eventually they always give in and give away the money. They even say the more money the better. there should be an even larger drop in money supply. for it eliminates the double coincidence of wants. like money itself. the negative effect on the money supply is neutralized. so they say. an increase in cash holding. This is the first pitfall of the Keynesian reasoning. except by exactly the same amount of the new money. However. The demand is derived from households and business consideration. If the action proves too slow or selective. which is the major component of the “demand for money”. such relation can as well be positive. when interest rate is low. They may attach string of austerity condition.

in a negative relation with interest rate. but printing money does not have any limit. Such line represents fixed supply. using money to buy money is tautological enough. Had I only known the price is sure to rise! There is only one way to know it for sure: to place the order after the market is already closed. such operation is illegal. This is the second pitfall. Hence. there is no demand for money. for other things were not held constant. Figure 1 is simply illusionary.negative relation between interest rate and money. The perpendicular line standing for money supply is also non-economics. Thirdly. the investment strategy Keynes employed is a posthumous operation: if the price is high I sell. It violates ceteris paribus. After all. The Keynesian Money Theory 3 . i M L M Figure 1. One cannot claim a relation between two variables by changing a third one. but this is not a meaningful relation. Hence. But.

"has made it clear that it does not want to pursue its role of lender of last resort" (Grauwe 2011. Ireland. Alas. that of ECB. I know I should not print money emptyhanded. They are just not moneylenders. But. first from Portugal. starting from my own government. I kick back some of the profit to my government. Greece. I still know that I am not a moneylender. the more the better. which is so candid? The European Central Bank. Eventually. Spain. for one. I just print money and save some shipwrecked souls. thank to Mundell (1961). I help them. but they may never know my tricks (I hope). I buy their bonds. 11). If my government will be unable to redeem the bonds upon expiry. the general public have to pay more tax for the interest and for the debt. I know I am not a moneylender. does it keep its promise? II. To avoid being caught for usurping other people's money for profit. central banks lose their premises for conducting the money lending business. but there are people desperately in need of it. then Italy. Vampires? Yes Further confession. I will print more money and buy more bonds. Is there any central bank. and that I should not print money empty-handed. Suddenly I find myself becoming a bigger central banker. Indeed. I print money to buy government bonds. Never mind economics. and now from Cyprus (PIGSC). and they also happily pay me 4 .When there is no money market as per Keynesian setting. but there are "pressures" and "requests" that force me to do so. Alright. III. Santa Clauses? Maybe Below is the confession of a central banker. I earn interest and claim that government owes me debt.

When I ask them to come to Brussels. We have become slaves. they waste no time. I still kick it back to the bigger ones. And. but most are afraid that their economies are too fragile to such shock therapy. They look stupid. the present author. non-tradable currency. The new money "will become in a matter of days if not hours. Hu. I don't have to allot the profit to these governments. I disagree with this pessimistic view. I tell them that they have been prodigal.interest. that a great part of their income has to pay me as interest due. have communicated with some PIGSC economists. Dreaming for Moses PIGSC: " We are locked in the debt bondage." one said. to have given up such lucrative business! The PIGSC are very obedient too. When I lecture. representing PIGSC. my colleagues the smaller central bankers. prey of the vampires. when we could at least keep our own interest payment? Should we stay put and continue to be exploited? Is there a Moses who will lead us out of this bondage?" V. and now they have to work more and spend less. IV. a valueless. Below is the dialogue I held with my friend. they listen." 5 . This time. to whom would you turn it?" Hu: "To my central bank. Wasn't the old time better. An Exodus I. I: "If I can help you get back your seigniorage. End of the confession. and have urged them to join me to advocate breaking away from the Euro system.

I: "If you turn it to any third party. How can I print money without the backup?" I: "If your people live happily and earn enough profit." I: "Congratulation! Now you understand my points." I: "You get the point!" Hu: "But I don't have gold. upon which you print money. you will have gold from their deposit. you don't bear national debt!" Hu: "Wow! I feel so lightened. but at least it would not turn around and ask you to pay interest and repay the debt. then?" I: "To yourself." Hu: "That way the new money would not become worthless paper." 6 ." Hu: "To whom should I hand it. does it make any difference from turning it to Germany?" Hu: "You mean my central bank is also a third party?" I: "Yes." Hu: "Would my treasury overprint?" I: "It would." I: "The way you control your son or your wife from splurging too much. You will be the custodian of the gold." Hu: "What is the advantage of printing money myself?" I: "You don't have to pay interest." Hu: "Is there a way to prevent the treasury from printing too much?" I: "You mean: Is there a way to prevent Berlusconi from squandering too much?" Hu: "Yes. You print your own money." Hu: "Can you be more specific? How can I print money?" I: "Your treasury does.

P." American Economic Review.Hu: "How about the debt I owe to the ECB?" I: "Sue the ECB. (2011): "The European Central Bank: Lender of Last Resort in the Government Bond Markets?. KEYNES. J. (1936): The General Theory of Employment. and ask it to write off the debt. (1961): "A Theory of Optimum Currency Areas. 3569. A." References GRAUWE." CESifo Working Papers. I don't have internal debt." Hu: "Wow! That is great. Here is the reason: Originally. but the money you borrowed actually was your own money. When your central bank transferred the debt to the ECB. you owed your own central bank." I: "Will you dare to borrow any more?" Hu: "No. and Money. 657-665. M. Interest. 7 . D. R. MUNDELL. it is still your own money. and I don't have external debt. London: Harcourt Brace.