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I am talking about M2 money supply shrinking when borrowers default and/or banks fail, as in the great depression -- right?

http://en.wikipedia.org/wiki/Money_supply#United_States

Also I am not sure what mechanism you are describing when you say that central banks pay dividends to their governments. On the contrary, governments like the US use their central banking system to do open market operations on bonds they issue to finance their operations, and usually have to pay interest on that debt. No?




> Also I am not sure what mechanism you are describing when you say that central banks pay dividends to their governments.

Please see e.g. https://en.wikipedia.org/wiki/Central_bank#Currency_issuance:

"The European Central Bank remits its interest income to the central banks of the member countries of the European Union. The US Federal Reserve remits all its profits to the U.S. Treasury."

https://de.wikipedia.org/wiki/Deutsche_Bundesbank#Gewinn has some more information, but you have to speak German (or use Google Translate). Lower than expected profits of the Bundesbank have been in the news in 2011.




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