Generating money prerogative of Central Banks
Generating money prerogative of Central Banks
Generating money is inherently the prerogative of all Central Banks. When the Central Banks pump money to buy government bonds or corporate bonds during a period of serious financial crisis or a pandemic such as the Covid-19, you can say that the Central Banks are actually generating vast masses of money which then very easily flows into the economy.
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Commercial Banks also have the ability to generate their own cash flow to support their many activities. For instance, when any Commercial Bank extends a loan to a particular business, it also simultaneously generates money for itself, even though this may not show immediately in additional deposits. If both the Central Banks and the Commercial Banks combine together, their ongoing operations will generate vast masses of money from all their activities, which can then be put into the economy.
However, manufacturing and business enterprises, as well as non-financial companies such as securities and insurance, collectively referred to as enterprises, do not have this capability of self-generating money. This can be explained with a simple example. For instance, Company A buys a lot of bonds worth VND 1 bn in cash from Company B which is issuing the bonds. In this case, the assets of Company A increase by VND 1 bn, but its cash decreases by VND 1 bn. The total net assets of Company A do not change. This is why we say that businesses and non-financial companies are only able to make money when they create their own wealth.
For example, if Company A has no cash, it can create an ecosystem of parent companies and subsidiaries for the purpose of mortgages, guarantees, and debt extension transactions, just like in a bank. With just a few entries and without any cash flow actually moving, the total assets and liabilities in the Company ecosystem can grow out of nowhere. All the money flow into the securities and land assets goes into this ecosystem. The ecosystem then just sells the securities and the land assets at sky-high prices to pay off old debts.
The process of generating money outside the banking system occurred in a few places about five years ago, but at that time it did not attract the attention of authorities. Seeing that it is all too easy to work within this loophole, there must be many ecosystems simulating many businesses. It is likely that most of our economy today is a money-generating ecosystem as well.
On April 5, during an online conference of the Government Standing Committee with the Chairman of the People's Committees of provinces, Prime Minister Pham Minh Chinh said that huge cash flows will eventually find refuge in real estate assets, which in reality is creating a situation of violation of the law related to securities and corporate bond issuance. On the other hand, real estate businesses, industrial parks, and investments in important national infrastructure, do not and cannot generate money in violation of the law in the way of the aforementioned ecosystems.
