Friday, July 26, 2013

Simon Black — Here's What Happens When A Central Bank Goes Bust


Apparently the gold bugs over at ZH haven't heard that the Fed is allowed to operate with negative equity, or Karl Whelan's argument that central bank operations are not contingent upon solvency in a non-convertible floating rate system. 

You don't even need MMT to understand this. Gold standard thinking is a zombie that refuses to die.

Zero Hedge
Here's What Happens When A Central Bank Goes Bust
Submitted by Simon Black of Sovereign Man

38 comments:

Dan Kervick said...

Total silliness. Hard to no even where to begin with that stuff.

Consider the dumb comparison with Lehman. Lehman's liabilities were liabilities for dollars, that is obligations to make payments with a payment asset it does not control. Lehman could get dollars from the cash flows on their financial assets, or by liquidating fixed assets. When Lehman had negative equity that meant its assets were insufficient to cover its payment obligations, and so obviously those obligations can't all be met and lose value.

Now suppose the Fed has negative "equity". That means the dollar flows from its financial assets combined with the value of its other real, fixed assets are insufficient to cover its payment obligations.

Does this mean that the Fed will be unable to make its payment obligations? Of course not. The Fed is the ultimate source of dollars. It can always meet any obligation incurred in dollars.

Does this mean that the holders of Fed liabilities now hold an obligation that is in jeopardy of not being redeemed, like those old Lehman IOUs? Of course not, a Lehman IOU is an obligation to pay dollars, but a Fed IOU in your hand - a dollar - is only an obligation to pay .... the same thing you already have in your hand!!

Does this mean you can't pay as much of your taxes as you could before with your dollars? Nope. Nothing changes. If you owed $1000 in taxes and had $100 in Fed notes in your wallet the day before the Fed crossed the negative equity line, then the day after the line is crossed you can pay your tax bill with the $1000 same as before.

Does this mean that there will now be crazy hyperinflation? Nope. Some economist and central bankers claim that there is a connection between the central bank balance sheet and inflation, but the alleged formulas are complicated ones, and none of them predict hyperinflation kicks in suddenly when you cross the "negative equity" line.

Anonymous said...

Silliness. US$ lost only 97% of its purchasing power since the foundation of the Fed. We still have a full 3% before entering the twilight zone. Way to go!

Anonymous said...
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Unknown said...

Bacco,

Which is greater?

$714 x 1 (average real income 1913 with 1913 dollars)
or
$49,300 x .03 ? (average real income 2006 assuming dollar has lost 97% of its purchasing power since 1913)

I wish I could find median incomes for those years but still you get the point, eh?

That said, price inflation should only be temporary as real growth catches up to money supply growth. By that standard our money system FAILS!

Unknown said...

And if real incomes have only doubled in 93 years that means real growth has only averaged 0.75%, no?

Rather shameful, no? Is this a money system to be defended?

What am I missing or is the reality this bad?

Dan Kervick said...

US$ lost only 97% of its purchasing power since the foundation of the Fed. We still have a full 3% before entering the twilight zone.

You moron. The purchasing power of an hour of labor has risen over that time. If the purchasing price of a dollar falls, but the dollar wage per hour of work rises even more, we're better off.

Ron Paul's minions are the dumbest fucks on the planet.

Dan Kervick said...

Beard, if you think working people in 1913 were actually richer than working people today, you are a blithering idiot.

Unknown said...

Just running the numbers, Dan. And you're talking about industrial workers when many others still owned their owns farms and could raise their own food.

But what Dan? Money can be issued as Equity as well as Liabilities. So what do you have against "sharing" that you support government subsidies for debt-creation? Hmmm?

Unknown said...

And I never said workers in 1913 were better off than those today.

Unknown said...

As for Ron Paul, he's a fascist posing as a libertarian as so many of them do.

Dan Kervick said...

Beard I am not going to discuss your repetitive religious nutbaggery any more. It didn't convince me the last 762 times you repeated the same stupid slogans.

You know who has lots of equity? The stockholders in Goldman Sachs and General Electric. Of the inspiring sharing!

Unknown said...
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Unknown said...
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Unknown said...

Of course the rich have lots of Equity and the rest of us little! And your point is?

religious nutbaggery Dan K

That's relevant to this discussion how, except to reveal your bigotry?

Dan Kervick said...

It reveals that you are incapable of defending positions with reasoned argument and can only repeat slogans that you think have been revealed to you. You have been repeating these same slogans for a couple of years now and you never once bothered to develop a deeper analysis or more cogent argument or proposal. You're just a guy standing on a soapbox yelling "usery!" "repent!" "Jesus!" "equity!" over and over.

I'm sorry if this sounds bigoted, but you are spamming every internet discussion everywhere with your repetitious nonsense. You have been challenged to develop and defend your views about the "theft of purchasing power" and the rest multiple times. You either can't or wont. In fact, I don't think you ever read anything other than other people who repeat the same drivel ad nauseum.

Unknown said...

Well gee wiz Danny, I've at least silenced the "money must be debt" crowd. That's an accomplishment, though objectively, it shouldn't be much of one.

No, I won't do all the work or even much of it except at my own admittedly slow pace. If Progressives and liberals don't really believe in sharing and thus democracy then they're revealed as hypocrites just as many so-called libertarians are.

As for "theft of purchasing power", that is self-evident if purchasing power is defined to include assets. Or is the cost of pottage and a few other necessities all the non or less creditworthy should be concerned about?

Dan Kervick said...

Equity .... isn't ....sharing.

Whether a society has a lot of sharing or doesn't have a lot of sharing has little to do with the specific form of money they use.

We can use money that is bank "debt" and share it a lot, or share only it a little.

We could use your equity money and share it a lot, or share a little.

We could have a society that used you equity money, but that was an oppressive plutocracy overwhelmed by usurious debt peonage. Your precious equity has nothing to do with it.

We could use bank debt money, but have very little lending and borrowing; we could use equity money and have lots of borrowing or lending. Or vice versa.

You're barking completely up the wrong tree. You are attached to a fixed idea that you have convinced yourself is of cosmic significance, and so you repeat it over and over like a Nepalese Buddhist spinning a prayer wheel with mantra on it.

And your theft of purchasing power theory is not at all clear. You have never done a single thing to clarify or defend that theory. You just repeat it over and over.

You haven't silenced the money is debt crowd. You have only succeeded it getting them to stop arguing with you because there is no point in discussing things with a fool.

I have almost given up on discussing things on this blog because it is nearly impossible to carry on a regular discussion over the endless din of your repetitive spamming.

Unknown said...

Equity .... isn't ....sharing. Danny K

True. So I should have said "Money can be issued as shares in Equity." Of course that may dilute the value of existing shares (hopefully only temporarily until the new assets come on line) but the dilution is ethical because only the share owners are affected by it. And if the existing share owners are unhappy with the dilution they can sell their shares or use them to vote out the Board of Directors.

In contrast, the government-backed credit cartel dilutes everyone's purchasing power, at least temporarily, but without their permission. That's clearly NOT ethical.

Dan Kervick said...
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Dan Kervick said...
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Dan Kervick said...

Your analysis makes no logical sense. Whatever is used as money, its value to the people who hold it is determined by what people will give for it in exchange. Suppose people are using shares of Pepsico as the main form of money, and then the number of Pepsico shares is doubled and the new ones are somehow distributed into the economy. Then not only will the value of the shares to the "shareowners" be diluted, but the value of Pepsico shares for everyone will decline. There will be inflation. If the price of a gallon of milk in Pepsico shares was 3 1/2 shares before the doubling of shares, it will almost certainly be something greater than that after the doubling.

Also, I used "shareowners" in scare quotes because in your system there is no difference between a Pepsico shareowner and any random person who has a share of Pepsico in their wallets. If a kid sells a cup of lemonade on the street for one Pepsico share, then that kid becomes a shareholder in Pepsico.

In any monetary system, if new units of the money are introduced into the economy at a rate that exceeds the rate at which the economy is growing, then there will probably be inflation, and the purchasing power of the monetary units will decrease. That has nothing at all to do with whether the money used is credit money, equity money, commodity money, tax-driven money or anything else.

Also there is no way of drawing a simple and clear line between what is ethical in the area of monetary policy and simple rules of thumb about the form of the money that is used. Suppose a government that has the power to issue the common medium of exchange expands the currency supply in such a way as to increase the prices of consumer goods by 3%. But suppose the policies that cause this increase are part of a broader package of policies that increase everyone's wages by 10% and cause 7% real economic economic growth. Would this be an unethical policy? No.

Unknown said...

Also, I used "shareowners" in scare quotes because in your system there is no difference between a Pepsico shareowner and any random person who has a share of Pepsico in their wallets Dan K

That any random person is a co-owner of Pepsico too and therefor has a say, at least indirectly, in its policies. So the new shares are ethical.

Suppose a government that has the power to issue the common medium of exchange expands the currency supply in such a way as to increase the prices of consumer goods by 3%. But suppose the policies that cause this increase are part of a broader package of policies that increase everyone's wages by 10% and cause 7% real economic economic growth. Would this be an unethical policy? No. Dan K

Agreed. But why should a so-called creditworthy private individual have more purchasing power than another private individual with equal assets but who is deemed less so-called credit worthy? And since credit creation is subsidized by government, isn't that a violation of equal protection under the law?

Unknown said...

And suppose another individual has no assets except $100,000 in cash. He goes to an auction and bids against someone who has no cash but does have a credit line for $110,000 (since he has that much equity in his home, for example). Is it just that the bank will create purchasing power so the latter can outbid the former? And since credit creation is subsidized by government, isn't that a violation of equal protection under the law too?

Dan Kervick said...

Again, what you are talking about are the institutions of credit, debt, investment and risk themselves, which has nothing to with the type of money we use. Even if we lived in a society that used your equity money, and even if we lived in a society in which lending institutions were required to hold 100% reserves and did not create money via lending, it would still be the case that people will lend and people will borrow. Lenders will rationally judge some potential borrowers to be at high risk of default, and other potential borrowers at low risk of default. And the richer you are, i.e. the more assets you have, the more likely it is that a lender will find the risk of loaning you $100,000 to be low and acceptable. Any lender, even one that doesn't have the ability to create money, will be willing to lend against strong collateral. You are confusing completely different issues.

Also, even among people equivalent means, if a person has a demonstrated history of failing to repay loans and behaving irresponsibly, then other will deem them less worthy of credit than people who behave responsibly and do repay their loans. I see nothing unethical in that act all.

The rich get richer. If you think society is unfair, try to do something about fundamental inequality. Moving to equity money would do nothing to address that fundamental problem.

Unknown said...
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Unknown said...

Lenders will rationally judge some potential borrowers to be at high risk of default, and other potential borrowers at low risk of default. Dan K

Redlining might have been rational but was it just? No, it wasn't because credit creation is subsidized by government and government is supposed to promote the general welfare, not that of whites only.

Any lender, even one that doesn't have the ability to create money, will be willing to lend against strong collateral. Dan K

Of course, but since that lender can't create money (or borrow it from those who can, including the monetary sovereign) then he must pay honest interest rates for savings and ANYONE with an income can save, including redlined blacks. So a system where banks can lend only existing money balances the interests of savers and borrowers.

Not that banks must necessarily be compelled to hold 100% reserves but if they don't then only they and their completely voluntary creditors, including simple depositors*, should bear all the risk.

*This implies that the monetary sovereign itself should provide a risk-free storage and transaction service (i.e. Postal Savings Service) for its fiat that makes no loans and pays no interest for all its citizens so that bank deposits are entirely voluntary.

Dan Kervick said...

None of what you are saying makes sense. You are confusing multiple distinct issues. There is no reason to think that 100% reserves or equity money would create lower interest rates, make it easier for low-income people to borrow, promote justice in lending or do do anything about the structural inequalities and injustices in our system. For the life of me I can't understand why you have tangles up these legitimate concerns with a bunch of Austrian-ish stuff about fractional reserve lending and credit money.

The problem in our society is not that those at the bottom aren't getting enough credit. There is already too much debt and debt peonage in our society. It's that they are not getting enough income. Now ask yourself why that is. It has almost nothing to do with the specific form of money we use.

Of course someone who has a million dollars in assets is going to have an easier time getting people to lend him money than someone with a hundred dollars in assets. This will be the case whether the lender is a bank or just an acquaintance. The issue here isn't the evil money lender. The issue is the fact that the two candidates have such a large disparity in personal wealth in the first place. Work on that problem.

Unknown said...

There is no reason to think that 100% reserves or equity money would create lower interest rates, Dan K

I never said they would; but an ethical money system would create honest interest rates.

And don't forget that monetary reform should include an equal, universal bailout*, including non-debtors, with new fiat, at least until all deposits are 100% backed by reserves. That should create enough new reserves for 100% reserve lending without increasing interest rates.

As for the Austrians, I used to be one till I started reading the Old Testament. Of course exposure to non-Austrian sites helped too.

* This is actually RESTITUTION since government subsidized credit creation cheats both borrowers and savers.

Dan Kervick said...

No reason to think 100% reserves will help anything, or have any bearing on all of your other concerns about creditworthiness, usery etc.

You have a strange mashup of views on a bunch of topics that you are attached to for some reason, but there is no logical coherence to the whole picture. And yet you repeat them incessantly. It's very frustrating.

Unknown said...

I'm not arguing for 100% reserves except during the universal bailout period. Otherwise, deposits can never become fully backed by reserves and thus we can never abolish government deposit insurance without causing massive bank failures.

After banks have become purely private businesses then let them leverage as much as they wish but let them also, along with their now voluntary creditors, including simple depositors, bear all the risk.

but there is no logical coherence to the whole picture. Dan K

Part of that is my fault (e.g. saying that money can be issued as Equity instead of saying that money can be issued as shares in Equity) and part of it is the inherent difficulty of overthrowing a centuries old money scheme peacefully.

What I propose is coherent though because it conforms to generally accepted ideas of what is ethical, at least in the US.

Unknown said...

Of course the 100% reserve requirement would apply only to new lending. As old loans were paid off with the new fiat, the demand deposits would automatically become fully backed by the new reserves.

The Rombach Report said...

""As for Ron Paul, he's a fascist posing as a libertarian as so many of them do."

F. Beard - Can you elaborate some on how Ron Paul is a fasicist?

Unknown said...
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Unknown said...

Ron Paul advocates a gold backed dollar. Why not a Ron Paul's toenail clipping backed dollar instead?

The only ethical form for government money is inexpensive fiat otherwise private interests are allowed to free ride on the taxation authority and power of government. But that's fascism.

The Rombach Report said...

"The only ethical form for government money is inexpensive fiat otherwise private interests are allowed to free ride on the taxation authority and power of government."

Seems to me that what we have now is fascism and last time I checked the US dollar was still a fiat currency.

Unknown said...

Of course our current system is fascist too since debt-creation is subsidized by government.

What's it called when the only choices offered to you are bad?

Anonymous said...

Tom Bacco: "US$ lost only 97% of its purchasing power since the foundation of the Fed. . . . Way to go!"

A few years ago I read about a pension from the French gov't that traced back to one bestowed by one of the medieval Louis's to some guy in recognition and appreciation for services to the king, which guaranteed a comfortable living to the man, and which he could leave to his heirs. The pension was lost sight of for many years, with all the French regime changes, but was recently rediscovered. After inflation, it is now worth less than one Euro per year.

But that is how we want things to work. We do not want to give someone a comfortable living just because one of his ancestors helped out a long dead king. Inflation is one way that we put the ghosts of the past to rest. :)

Calgacus said...

F. Beard: I've at least silenced the "money must be debt" crowd.

Dunno if I make up a crowd, but, no.

One can call whatever you want "money", or call your money "equity" if you want, but if it to serve as or resemble anything the human race has meant by "money" before, it will be credit=debt. (And "to" as in "debt to" is the important preposition, not an at best superfluous, at worst confused, confusing and misleading "debt for", which is not MMT.)

It may be of interest to analyze money a la equity, to envision when Beardian equity money might or does really exist (e.g. when everybody has robot armies to serve their needs - today you might see it when one megacorp buys another with its stock, usually at the height of bubble.)

But a state's fiat money "as equity"? No. That is the deepest, fondest dream of the bad guys, a step backwards of centuries and millennia. That they can own Uncle Sam merely by being his creditor. Equity in a modern state is given by citizenship, not mere debt-holding.