Also why, exactly, are they buying the exact assets that they are buying (govt. debt, high-yield bonds, etc..) and why not others (e.g. stocks or put money into startups)? And then, what happens if a debtor pays back its debt? Is that money consequently getting "erased" again (just like it's been created)? What happens if a debtor defaults on its debt? Does that money then just stay in the economy, impossible to drain out? What is the general expectation of the central banks? What percentage of the debt is expected to default and how much is expected to be paid back?
And specifically in the case of central banks buying govt. debt: Are central banks considered "easier" creditors than the public? What would happen if a country defaults on a loan given by a central bank? Would the central bank then go ahead and seize and liquidate assets of the country under a bankruptcy procedure to pay off the debt (like it would be standard procedure for individuals and companies)?
> Macroeconomics. Central banks are "creating" a trillion here, a trillion there, like nobody's business. What is the thought process that central bankers have gone through to make these decisions?
The general consensus is that central banks should stay passive and keep prices stable. However, in periods of crisis, like the one we live in, the central bank could support economy. In ordinary times, creating trillions would lead to inflation. But here the idea is more to save the economy in the short term because it's always cheaper than reparing it. Central bankers agreed to create trillions such that banks do not go bankrupt like they did in 1929. By creating trillions, they also keep interest rates low for government such that they can still borrow.
> But what are the consequences?
Some inflation. Another consequence is that investors will invest in riskier assets afterward to keep their profitability target. (Again, because lending trillions will lower the interest rates)
> Also why, exactly, are they buying the exact assets that they are buying (govt. debt, high-yield bonds, etc..)?
They usually buy low risk, higly liquid assets. Putting trillions in startups is infinitely infinitely complicated for a central bank because it implies high monitoring costs, and it also takes a lot of time to create those kind of contracts. Remind that the goal is to provide lot of liquidity to the economy as fast as possible. There is also an academic debate about giving money directly to the general public (known as "helicopter money"), but with little attention from central bankers.
> And then, what happens if a debtor pays back its debt? Is that money consequently getting "erased" again ?
Yep, pretty much... Appart from fiat money, money is constantly created and destroyed. It is mostly created by private banks when they grant loans. And it is destroyed when you repay it. Of course they cannot do whatever they like and create at will, but remember that "Deposits DO NOT make the credits (but in some way it defines how much you could create)"
> What percentage of the debt is expected to default and how much is expected to be paid back? What would happen if a country defaults on a loan given by a central bank?
Central banks buy bonds, and bonds are pretty much always paid back. And if not, the central bank will not suffer much. Cases of countries not reimbursing are very scarce and exceptional (I can just think of Argentina). Anyway, a country CANNOT go bankrupt like a person. And in general, comparing countries with individuals or companies is not a good idea. Countries are here pretty much forever (in a financial sense), you don't. Countries can waive taxes, individuals cannot.
>Yep, pretty much...
I would add that if the system is fractional reserve then it increases the proportion of the bank's reserve allowing more money to be created. So while it's technically true that it's destroyed you could see the next loan as its reincarnation, no..?
I didn't go here in my response above because my vague understanding is that we're not strictly a fractional reserve system any more, though I don't understand how.
At least for non private companies ...asset prices go up....auctions clear at values with maximum leverage...recession....monetary stimulus....repeat.