I’ve always wondered this. Sure, it goes “out into the economy”, but where are the first few transactions between institutions? And how much is it? Does it all end up in funding for megaprojects in the fiance industry or something?
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When we say the central bank loans money, this is not entirely correct. The central bank in the US, which is called the Federal Reserve (or Fed, for short), actually buys US government bonds. This is not a whole lot different from what you would do in your Robinhood account (if you liked boring investments!).
The Fed buys bonds from the banks in the Federal Reserve system (which is basically all the banks in the US). It is important to understand, the government has created strong incentives for banks to hold US government bonds because they are very easy to sell during bad times, and are also very safe. A bank with lots of safe bonds is a safe bank!
The Fed regularly buys bonds from banks AND sells them back, depending on whether the economy needs more money or less. Right now, the Fed is in the process of reducing how many bonds it owns, so it is selling bonds to banks. These bonds they still have pay interest, and the Fed pay that interest back to the Treasury.
Does this help / answer your question?
Other banks. Bank of America, Wells Fargo, Chase Bank, etc. Those banks then get to decide who to loan it out to. Small businesses and large corporations, home buyers and credit cards. Anywhere the banks think they can make a profit, they’ll loan out the money.
That’s America though. In other countries, they might skip that extra step and the central bank loans directly to whomever asks for it.
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