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Here's What Happens When A Central Bank Goes Bust

Imnukingfutz

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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?

We may be about to find out. let's remember that the Fed balance sheet has not only grown in size, but also duration. That means as interest rates rise, the value of the assets held, including MBS falls. Also the assets of the Fed are longer duration, while most of the liabilities are short term, again exactly like Lehman. The Fed really can't afford to have banks loan more, which would mean pulling excess reserves. So one way to finance the Fed's spending spree is to make banks hold higher reserves, which has the effect of constraning the economy.

It will be interesting to see what happens when the Fed is not able to help finance the deficit with it's earning, but needs to replenish their balance sheet. I am sure many (including those on this site) who will call for having banks pick up the tab.
 
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."
 
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?
 
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?




All over this planet the financial pages are full of gloom and doom scenarios.

Anyone who wants to buy into that BS has my permission to do so, but I don't believe that the end of the world is right around the corner.



If anyone is upset by my comment, excuse me, very ****ing much.
 
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 economy has been running and growing on credit for so long that it can't be balanced or even reeled back for awhile, if ever. That's what happened in 2008 when the mortgages began to default and investment banking and their insurers took a hit. All fiat money and market valuation is supported by investor confidence. They tried to right the global ship of credit/debt by allowing Lehman to sink and it set off a market panic.

The Markets are always a gnats ass from panic sell offs but it usually doesn't happen because nobody wins in that scenario and governments and central banks are poised to make huge purchases to backup bonds, stocks and debt tools. Currently central banks are loading up on equities looking for yields because of falling bonds. This is one of the reasons the stock market is booming.

Central Banks Load Up on Equities - Bloomberg

The only problem with central banks continually printing money by buying assets is that it throws balance sheets into "whacky nu nu land" and if that doesn't upset markets too much all's good, especially since these purchases are creating asset inflation.

Shadow Banking and Financial Fraud: Massive Asset Inflation, Who Really Benefits? | Global Research

But constantly juggling such large and complicated, global financial forces can eventually lead to another disastrous situation. It will take a concerted worldwide effort to prevent another crisis. The world's economy is becoming top heavy with too much wealth concentrated into too few hands, eventually there's going to be some redistribution from the natural flow of things. How hard or soft that comes depends on a future that we can't predict.
 
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.
 
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.

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.
 
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.

How much money would they have to print before the money is as worthless as Confederate money? The Reserve can keep printing money but the more it prints the less valuable it becomes.
 
The world may not end (that would take a solar flare, asteroid strike, or some other natural catastrophe) but societies do, often as a result of financial instablity and collapse.

Saying that a central bank can "always print more money to cover its debts" is like saying I can always borrow from others because I can always keep making promises to pay it back. Eventually someone goes, "promises, promises; sorry it's time to pay your tab."

That's the same with fiat money, once people lose faith it it's value the fact you can print more becomes meaningless. It's why I argue so passionately against "economists and statisticians" who claim their theories are based on "hard scientific facts." IMO they are spouting political theories supported by skewed graphical constructs in order to bolster continued faith in this fiat money system.

The fact that nation after nation is defaulting on debt, and borrowing more to maintain internal stability, yet our economists keep telling us that the sky is not falling, it's just a normal and minor meteor shower amuses (and concerns) me.
 
Last edited:
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?
 
News flash:
We have been in a condition of QE going on 5 years now. What has happened to inflation?

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?
 
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?
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.
 
News flash:
We have been in a condition of QE going on 5 years now. What has happened to inflation?

Not sure he mentioned inflation so what is your point. 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.
 
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.

This is not about QE, this is about the consistent comments by liberals that the debt is inconsequential, that we can sustain any debt and print any amount of money. Strangely enough these are the same people that want more taxation. If you are going to put forth the absurd idea that we can in fact sustain infinite debt and print infinite money then it is not a tangent to ask the question of why we need taxes. We are already in enough debt that we could not pay taxes at all for 7 years and you liberals see no problem with the debt. So why not just eliminate taxes for the next 7 years? That would stimulate the economy and so what if we are $34T in debt because you obviously see nothing wrong with being $17T in debt.
 
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?
 
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?

Don't want to answer the question I see. What's wrong, does it expose the absurdity of the liberal infinite print and borrow philosophy? I am going off topic, you can't handle that? Just answer the question, since it is the liberal mantra that we can sustain infinite debt and print infinite money without consequence why do we need to pay taxes?
 
Not sure he mentioned inflation so what is your point.
Really? The bolded section I highlighted in his quote is not a description of inflation?

You sure about that?


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.
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?
 
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 am ignoring what you are posting in response to my quotes, galactic non-sequitur rhetorical tangents just don't interest me.

No you can't answer the question because it exposes the absurdity of liberal economics.
 
I see little understanding of any macro-economic concepts.

If we can sustain infinite debt and print infinite money why do we need taxes? It's not that complicated, no understanding of economics is required.

You liberals have established two things in every argument.

1. The debt is of no consequence and we can print all the money we need without consequence.

2. We need more tax revenue.

The two points are contradictory.
 
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?

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.
 
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.
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.
Did you get to the point of recognizing that the discussion was about inflation?
 
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