system
Given the following post, respond as if you're commenting on Reddit:
human
[ELI5]: When governments print more new money, who gets it first (and gets to spend it before inflation kicks in)?

To make it more clear. This is not regarding government printing money to replace decaying bills. I'm curious about how new money is introduced in the economy (someone must be getting it for free, right?)
gpt
This is a very complicated question, so I'll have to go through from the beginning.

First, I'll explain how the money supply can increase without the government's intervention.

Let's say you go to the bank and deposit $100. The bank then lends $80 to your friend Bob because he's taking out a mortgage on *Assassin's Creed* or something. Now you have your $100 in the bank, and Bob has his $80 in hand, even though he owes it to the bank. The bank only actually has $20, but Bob owes them $80. Bob goes and buys *Assassin's Creed* from Carly for $80. Now Carly has $80 and no debt, and you have $100 and no debt. So effectively, there is more money around (even though it all gets cancelled out if all the debts were paid back).

This is often a good thing in reality, especially in the business world. If you're a business owner and you take out a loan to start your business, if you make enough money to pay it back, you may not actually want to. You may want to continue to spend the money to improve your business. While you have that loan in the background, you are making money with your business faster than you would be without it, so you actually want to maintain the debt because you make more money that way.

Next, I'll explain bonds.

A bond is a fixed-term loan *to* someone by someone else. In our case, we care about government bonds, which are loans from the government. We will assume they always get paid out---the government always has enough money to pay for them. For instance, you might buy a $100 bond from the government that will pay you 2% each year. You pay the government $100, and the government will send you $2 a year for ten years, and then at the end of the ten years, it gives you back your $100.

Bonds can be traded, and they're usually traded based on their interest rate. If you sold your $100 bond to someone for $200, then they are getting a 1% interest rate on the bond. So when you trade bonds, you care about the interest rate on the bond. You might say "I'll sell $100 worth of bond at 4%". Note that you want to be selling a bond at a lower interest rate and buying at a higher one.*

Now, the central bank is the organization that "prints" money. They don't actually print money to change the supply, they just change numbers and their policies. Because things are mostly digital anyways, you can just think of them as having a limitless supply of money, but they can only use this for a few things, like buying bonds. Since they have limitless money, they also gain nothing from getting money---if you give them $100, it doesn't matter to them, since they already have infinite money.

The central bank's role is to use their infinite amount of money to control how much money supply is available. There are a number of ways that they can do this, but the most important (arguably) one is called *open market operations*, where the central bank participates on the bond market.

How it works is that the central bank decides that there is too much money or too little money, and they buy or sell bonds to move the bond price, which affects how investments get made.

An example is the best way to show this.

Suppose that the bond rate is 2%---people are buying and selling government bonds at 2%. The central bank decides there is too much money lying around, so they want to decrease the money supply. They set a new target rate, say 3%. Then they announce to the world that they'll sell government bonds at 3%. Suddenly, nobody can sell a bond for anything less than 3% because the central bank is providing a better deal. So the bond rate on the market goes to 3%.

Now, if you're a banker, and you have a bunch of cash lying around, you want to invest it. Never leave cash lying around. So you want to invest, and you look for people to loan money to. You see some guy looking to get a loan of 2.5%. You are considering making the loan, when suddenly the central bank moves the target rate to 3%. Now you can get a better deal from the bond market, since bonds have zero risk.** You're guaranteed to get paid your 3% if you buy a bond, but you might not see the money again if you make the 2.5% loan to this guy. There's no reason for you to make that loan, so you buy bonds instead.

This means more people want bonds, and there needs to be a place for those bonds to come from. That's the central bank again. People buy bonds from the central bank, instead of lending it out to the world or investing in stocks. The bonds don't get spent like money does, and the central government doesn't have anything to do with the money (remember, it has infinite money so it doesn't actually care that you just paid it millions of dollars). So the money supply goes down as money leaves the economy.

If the central bank wants to increase the money supply, they do the opposite. They announce that they'll buy bonds at 1%, and suddenly the banks are more inclined to lend money out because it's probably better for them than buying bonds. In fact, they'll sell their bonds to get more money that they can use to buy things. They'll sell them to the central bank, and then use the money they get to lend out to people and to invest, and bam! money goes back into the system.

There are other tricks that the central banks can use, but they generally all hinge on the idea of controlling how much money the banks keep and how much they lend out or invest, rather than actually just printing money and giving it away.

-* Yes, this doesn't quite make sense. There's some papering over the actual principal amount of the bond, but this is fundamentally how it works.
-** If the bonds aren't actually at zero risk, then you have problems like what's happening in Greece right now. If the government can't pay back its debts, it's a game of hot potato where there's billions of dollars worth of potatoes and everybody loses.