- Joined
- Dec 3, 2011
- Messages
- 1,154
- Reaction score
- 432
- Location
- Kingdom of Nigh
- Gender
- Undisclosed
- Political Leaning
- Libertarian
Over the past several decades, people around the world have become so brainwashed that few people really give much thought anymore to the safety of their currency.
It’s not something people really understand... there’s apparently some Wizard of Oz type figure at the top of the hill pulling all the levers of the monetary system. And we just trust them to be good guys.
This is partially true. Today’s financial system is dominated by central bankers who have been awarded nearly dictatorial control of global money supply.
In allowing them to set interest rates, they are able to control the ‘price’ of money, thus controlling the price of... well, everything.
This power rests primarily in the hands of four men who control roughly 75% of the entire world money supply:
Zhou Xiaochuan, People’s Bank of China
Mario Draghi, European Central Bank
Haruhiko Kuroda, Bank of Japan
Ben Bernanke, US Federal Reserve
Four guys. And they control the livelihoods of billions of people around the world.
So, how are they doing?
We could wax philosophically about the dangers of fiat currency. Or the dangers of the rapid expansion of their balance sheets. Or the profligacy of wanton debasement through quantitative easing.
But let’s just look at the numbers.
In theory, a central bank is like any other bank. It has income and expenses, assets and liabilities.
For a central bank, assets are typically securities or commodities which have value in the international marketplace, such as gold or US Treasuries.
Central bank liabilities are all the trillions of currency units floating around… dollars, euros, yen, etc.
The difference between assets and liabilities is the bank’s equity (or capital). And this is an important figure, because the higher the capital, the healthier the bank.
Lehman Brothers famously went under in 2008 because they had insufficient capital. They had assets of $691 billion, and equity of just $22 billion… about 3%.
This meant that if Lehman’s assets lost more than 3% of their value, the company wouldn’t have sufficient cushion, and they would go under.
This is exactly what happened. Their assets tanked and the company failed.
So let’s apply the same yardstick to central banks and see how ‘safe’ they really are:
US Federal Reserve: $54 billion in capital on $3.57 trillion in assets, roughly 1.53%. This is actually less than the 1.875% capital they had in December. So the trend is getting worse.
European Central Bank: 3.69%
Bank of Japan: 1.92%
Bank of England: 0.843%
Bank of Canada: 0.532%
Each of these major central banks in ‘rich’ Western countries is essentially at, or below, the level of capital that Lehman Brothers had when they went under.
What does this mean?
Think about Lehman again. When Lehman’s equity was wiped out, it caused a huge crisis. The company’s liabilities instantly lost value, and almost everyone who was a counterparty to Lehman Brothers lost a lot of money because the company could no longer pay its debts.
Accordingly, if the US Federal Reserve’s assets unexpectedly lose more than 1.5% of their value, the Fed’s equity would be wiped out. This means that any counterparty holding the Fed’s liabilities (i.e. Federal reserve notes) would lose.
More specifically, that means everyone holding dollars will loose.
Theoretically if a central bank becomes insolvent, it can be bailed out. It happened in Iceland a few years ago.
There’s just one problem with that thinking.
Iceland’s government wasn’t in debt at the time. So they were able to borrow money in order to bail out their central bank. Today the government is in debt over 100% of GDP, but the central bank is solvent.
But governments in the US, Europe, Japan, England, etc. are all too broke to bail out their central banks. These governments are already insolvent. So if the central bank becomes insolvent, there won’t be anyone to bail them out.
This is one of the strongest indicators of all that the financial system as we know it is finished. When central banks can no longer credibly issue liabilities, and their home government are too broke to bail them out, this paper currency standard can no longer function....in other words -the money isn't worth the paper it is printed on.
With governments overspending, borrowing to no end and taxation (not just income taxes) at all time highs leaving little to no money to tap the populace for additional revenue....what happens?
Over the past several decades, people around the world have become so brainwashed that few people really give much thought anymore to the safety of their currency.
It’s not something people really understand... there’s apparently some Wizard of Oz type figure at the top of the hill pulling all the levers of the monetary system. And we just trust them to be good guys.
This is partially true. Today’s financial system is dominated by central bankers who have been awarded nearly dictatorial control of global money supply.
In allowing them to set interest rates, they are able to control the ‘price’ of money, thus controlling the price of... well, everything.
This power rests primarily in the hands of four men who control roughly 75% of the entire world money supply:
Zhou Xiaochuan, People’s Bank of China
Mario Draghi, European Central Bank
Haruhiko Kuroda, Bank of Japan
Ben Bernanke, US Federal Reserve
Four guys. And they control the livelihoods of billions of people around the world.
So, how are they doing?
We could wax philosophically about the dangers of fiat currency. Or the dangers of the rapid expansion of their balance sheets. Or the profligacy of wanton debasement through quantitative easing.
But let’s just look at the numbers.
In theory, a central bank is like any other bank. It has income and expenses, assets and liabilities.
For a central bank, assets are typically securities or commodities which have value in the international marketplace, such as gold or US Treasuries.
Central bank liabilities are all the trillions of currency units floating around… dollars, euros, yen, etc.
The difference between assets and liabilities is the bank’s equity (or capital). And this is an important figure, because the higher the capital, the healthier the bank.
Lehman Brothers famously went under in 2008 because they had insufficient capital. They had assets of $691 billion, and equity of just $22 billion… about 3%.
This meant that if Lehman’s assets lost more than 3% of their value, the company wouldn’t have sufficient cushion, and they would go under.
This is exactly what happened. Their assets tanked and the company failed.
So let’s apply the same yardstick to central banks and see how ‘safe’ they really are:
US Federal Reserve: $54 billion in capital on $3.57 trillion in assets, roughly 1.53%. This is actually less than the 1.875% capital they had in December. So the trend is getting worse.
European Central Bank: 3.69%
Bank of Japan: 1.92%
Bank of England: 0.843%
Bank of Canada: 0.532%
Each of these major central banks in ‘rich’ Western countries is essentially at, or below, the level of capital that Lehman Brothers had when they went under.
What does this mean?
Think about Lehman again. When Lehman’s equity was wiped out, it caused a huge crisis. The company’s liabilities instantly lost value, and almost everyone who was a counterparty to Lehman Brothers lost a lot of money because the company could no longer pay its debts.
Accordingly, if the US Federal Reserve’s assets unexpectedly lose more than 1.5% of their value, the Fed’s equity would be wiped out. This means that any counterparty holding the Fed’s liabilities (i.e. Federal reserve notes) would lose.
More specifically, that means everyone holding dollars will loose.
Theoretically if a central bank becomes insolvent, it can be bailed out. It happened in Iceland a few years ago.
There’s just one problem with that thinking.
Iceland’s government wasn’t in debt at the time. So they were able to borrow money in order to bail out their central bank. Today the government is in debt over 100% of GDP, but the central bank is solvent.
But governments in the US, Europe, Japan, England, etc. are all too broke to bail out their central banks. These governments are already insolvent. So if the central bank becomes insolvent, there won’t be anyone to bail them out.
This is one of the strongest indicators of all that the financial system as we know it is finished. When central banks can no longer credibly issue liabilities, and their home government are too broke to bail them out, this paper currency standard can no longer function....in other words -the money isn't worth the paper it is printed on.
With governments overspending, borrowing to no end and taxation (not just income taxes) at all time highs leaving little to no money to tap the populace for additional revenue....what happens?
I'll tell you what's not going to happen:There is not going to be a worldwide bankruptcy.
The End Of The World isn't right around the corner.
If you don't agree, let's wait and see, eh?
"Due to a shortage of trained trumpeters, the end of the world has been postponed."
Wish this site was not filled with trolls who kill threads. No one said the world is coming to an end. If people are worried about too much leverage at banks, then why wouldn't leverage at central banks equally be a concern?
Bzzzz....wrong. You cannot compare a corporation (private bank) to a central bank.So let’s apply the same yardstick to central banks and see how ‘safe’ they really are
Bzzzz....wrong. You cannot compare a corporation (private bank) to a central bank.
Private banks CANNOT "print" money, central banks can and do.
Thanks for playing. Be sure to visit our gift shop at the exit.
The Fed will never become "insolvent" because it prints the currency which it owes to its creditors.
That's not to say there isn't a risk of economic catastrophe - there is, rampant inflation. But, if it so chooses, the Fed will never be unable to pay its debts.
News flash:Yes, there are differences between private banks & the Reserve but the question is the same....what happens when the balance sheet hits negative numbers like Lehman Brothers did?
Look at Europe having to bail out their central banks...If it werent for Germany, Europe would be in deeper trouble than it is.
The Fed wont go under like Lehman Brothers, the Fed will just print more money...but that devalues all the money out there already. Less value to the existing currency means it will buy less in the worlds market place. Things cost more - we have less buying power.
If necessities cost more that means peoples budgets have less money for discretionary spending which in turn slows down...if not eliminate completely...any economic growth. With no economic growth there are no new jobs...do you see the natural progression here?
The Reserve and our Government arent too big to fail, they are too big to keep going the way they have been.
News flash:
We have been in a condition of QE going on 5 years now. What has happened to inflation?
A responder always has the choice of taking off on a tangent, shooting out into the deepest regions of the space. If that is what the responder believes is QE, how it works....so be it. Nothing I say will help.So it is your position that we can sustain infinite debt and print infinite amounts of money without consequence?
If that is the case why do we need to pay taxes at all?
News flash:
We have been in a condition of QE going on 5 years now. What has happened to inflation?
A responder always has the choice of taking off on a tangent, shooting out into the deepest regions of the space. If that is what the responder believes is QE, how it works....so be it. Nothing I say will help.
See now, before you ignored all previous postings in other threads discussing this topic.....now you have ignored what I posted that you directly quoted in this thread. You have decided to go futher into deep space on your rhetorical ride. I don't know why you continue to quote me if you are not going to engage in what I am speaking about.This is not about QE,
See now, before you ignored all previous postings in other threads discussing this topic.....now you have ignored what I posted that you directly quoted in this thread. You have decided to go futher into deep space on your rhetorical ride. I don't know why you continue to quote me if you are not going to engage in what I am speaking about.
Hint: There is no need to quote, just froth away on your own time....mkay?
Really? The bolded section I highlighted in his quote is not a description of inflation?Not sure he mentioned inflation so what is your point.
Um, a central bank operating on fiat currency will not show "negative equity", it has a monopoly on money supply.It seems the question is what happens when the Fed's balance sheet shows negative equity. Will the Treasury fund the Fed to fill in the hole, what happens to public opinion in that case.
I am ignoring what you are posting in response to my quotes, galactic non-sequitur rhetorical tangents just don't interest me.Don't want to answer the question I see.
I am ignoring what you are posting in response to my quotes, galactic non-sequitur rhetorical tangents just don't interest me.
I see little understanding of any macro-economic concepts.No you can't answer the question because it exposes the absurdity of liberal economics.
I see little understanding of any macro-economic concepts.
Really? The bolded section I highlighted in his quote is not a description of inflation?
You sure about that?
Um, a central bank operating on fiat currency will not show "negative equity", it has a monopoly on money supply.
You do understand that over the period of the last 5 years of QE, the treasury has been doing exactly that? What has "public" (or for that matter "world") opinion been towards the US dollar?
Um, the discussion I was having was not about whether the FED is returning a profit, the discussion was whether the FED was pumping dollars into the US money supply (QE) over the last 5 years....and what the effect has been on inflation.While I do not agree with you most of the time, I thought you brought some intelligence to the site. Not so much this time. First, you are wrong about what has been happening the last 5 years. The Fed has made big profits and returned those to the Treasury, lowering the deficit. This is the opposite of what happens as interest rates rise and lowers the value of their assets, but has little impact on their liabilities.
On the negative equity point, yes they can fall into this position, they may have a better remedy than private banks but they will still have to fill in that hole somehow.
We use cookies and similar technologies for the following purposes:
Do you accept cookies and these technologies?
We use cookies and similar technologies for the following purposes:
Do you accept cookies and these technologies?