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Do central banks’ mounting losses actually matter?

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Re: Do central banks’ mounting losses actually matter?

#41

Post by SevenNation »

legitster wrote: post #36
SevenNation wrote: post #30

> On the other hand, central banks are constructs of sovereign states and can literally create money out of thin air, which makes the whole bankruptcy question take on a different dimension. This is not true, at least in the US. The Treasury issues currency. What the Federal Reserve can do (and has done under QE) is perform an asset swap. An asset held by a bank (such as a treasury bond) is purchased by the Fed and h…

> Reserve assets are not money, therefore, the US Federal Reserve does not print money. Isn't this only half-true though? While they are not physically printing money, in a fractional reserve banking system they can certainly add to the money supply by exchanging illiquid assets for liquid ones. Agreed though that this is not infinite nor out of thin air.

Treasuries are one of the most liquid form of money there is. Reserve assets are not very liquid at all.

If anything QE sucks liquid money out of the economy, elevating the price of that money (somewhat, according to central banks) in the process.

Re: Do central banks’ mounting losses actually matter?

#42

Post by SevenNation »

danielmarkbruce wrote: post #37
SevenNation wrote: post #30

> On the other hand, central banks are constructs of sovereign states and can literally create money out of thin air, which makes the whole bankruptcy question take on a different dimension. This is not true, at least in the US. The Treasury issues currency. What the Federal Reserve can do (and has done under QE) is perform an asset swap. An asset held by a bank (such as a treasury bond) is purchased by the Fed and h…

It say's "create money out of thin air". For a reasonable definition of money (something you use to buy stuff) they are in fact creating money out of thin air. "Money" isn't a term that has an agreed upon definition.

What kind of stuff do you think a bank can use reserve assets to buy?

Re: Do central banks’ mounting losses actually matter?

#43

Post by danielmarkbruce »

isthisthingon99 wrote: post #34
SevenNation wrote: post #30

> On the other hand, central banks are constructs of sovereign states and can literally create money out of thin air, which makes the whole bankruptcy question take on a different dimension. This is not true, at least in the US. The Treasury issues currency. What the Federal Reserve can do (and has done under QE) is perform an asset swap. An asset held by a bank (such as a treasury bond) is purchased by the Fed and h…

Why isn't there a simple freaking flowchart somewhere.

Because it's so simple it doesn't need one:

Bank A sends the central bank a real asset worth $1 million (say, a 10 year government bond). The central bank says "you have a balance with us of $1 million now", and updates their SQL database.

"Everyone" agrees the balance with the central bank has real value. Everyone = creditors of the bank, regulators of the bank, accounting standards bodies, auditors, the SEC, trade partners, and probably 10 other groups I can't think of.

Re: Do central banks’ mounting losses actually matter?

#44

Post by brutusborn »

SevenNation wrote: post #30

> On the other hand, central banks are constructs of sovereign states and can literally create money out of thin air, which makes the whole bankruptcy question take on a different dimension. This is not true, at least in the US. The Treasury issues currency. What the Federal Reserve can do (and has done under QE) is perform an asset swap. An asset held by a bank (such as a treasury bond) is purchased by the Fed and h…

I thought currency and reserve assets were essentially the same because there is no basis (e.g. gold) for the currency. It's like your right hand printing currency to give to your left hand to distribute. The left isn't making anything, but it's irrelevant.

If the currency was gold backed, the right hand would be tied until the treasury deposited gold; now they can do it whenever the left hand looks empty.

Re: Do central banks’ mounting losses actually matter?

#45

Post by danielmarkbruce »

SevenNation wrote: post #42
danielmarkbruce wrote: post #37

Earlier quoted context omitted.

It say's "create money out of thin air". For a reasonable definition of money (something you use to buy stuff) they are in fact creating money out of thin air. "Money" isn't a term that has an agreed upon definition.

What kind of stuff do you think a bank can use reserve assets to buy?

Treasuries, back from the central bank, or all manner of assets from other banks. It's done every day.

Re: Do central banks’ mounting losses actually matter?

#46

Post by SevenNation »

guiomie wrote: post #39
SevenNation wrote: post #30

> On the other hand, central banks are constructs of sovereign states and can literally create money out of thin air, which makes the whole bankruptcy question take on a different dimension. This is not true, at least in the US. The Treasury issues currency. What the Federal Reserve can do (and has done under QE) is perform an asset swap. An asset held by a bank (such as a treasury bond) is purchased by the Fed and h…

I thought the Fed bought treasury bonds straight from the government, are you saying they only buy these bond owned by banks intially?

Yes. The Fed buys its treasuries under QE from banks. To pay for it, a reserve asset is credited to the bank within the banking system.

No net money is created.

Re: Do central banks’ mounting losses actually matter?

#47

Post by dragonwriter »

luckylion wrote: post #25
lotharcable wrote: post #16

They don't go bankrupt in the conventional sense. When they go bankrupt economists like to use the term "Hyper Inflation". This means that the currency they produce becomes worthless.

Maybe you can explain it to me like I'm five. I've been occasionally watching the Turkish Lira this past year. The rates against the USD are still sinking. Against the EUR it's pretty stable. Yet allegedly they have something like 80-150% inflation in Turkey, while the EUR-zone has 10%. How does this work, why isn't the Lira becoming "worthless" with that amount of inflation?

Inflation in a particular country is about prices of consumer good innthqt country (usually measured in the official local currency.) Foreign exchange is about trading different currencies for each other. Because of shipping, transaction costs, import/export restrictions, and other deviations from the abstract ideal of a single frictionless global market, there is no necessary fixed relationship between consumer prices in Country X, the X:Y currency exchange rate, and consumer prices in Country Y.

Re: Do central banks’ mounting losses actually matter?

#48

Post by miohtama »

unyttigfjelltol wrote: post #23
lotharcable wrote: post #16

They don't go bankrupt in the conventional sense. When they go bankrupt economists like to use the term "Hyper Inflation". This means that the currency they produce becomes worthless.

In the context of a past generation of government sponsored entities, the answer was 'yes', they could go bankrupt but the political branches will bail them out. The issue here is that the political branches are in the middle of being bailed out themselves by the central banks, and it's been going on for a decade or two, so conceptually there is a serious problem with politicians bailing the bailer. The fact that hea…

When the can meets the end of the road the ways out include

- Hyperinflation

- Great reset

Likely effects may include

- Revolution

- War

- Famine

Here is a nice BBC article how hyperinflation has been solved in the past

https://www.bbc.com/news/business-45523636

Usually there is a period, or permanent, “dollarisation” of the economy https://en.wikipedia.org/wiki/Hyperinflation#Aftermath but not sure if this is an option for the something of the scale of the UK or the EU.

Re: Do central banks’ mounting losses actually matter?

#49

Post by lxgr »

kodyo wrote: post #27
lxgr wrote: post #21

Earlier quoted context omitted.

No, it's just a trajectory towards inflation (all other things being equal; it can be the right choice in certain economic environments). A central bank (that issues a sovereign fiat currency) can definitionally not go bankrupt, since its liability is the issued currency itself.

It can go bankrupt if people stop trusting the currency.

The currency can become worthless, sure, but that does not make the central bank bankrupt. The concept simply does not make sense for a (fiat) currency‘s issuer.

Re: Do central banks’ mounting losses actually matter?

#50

Post by smegsicle »

luckylion wrote: post #25
lotharcable wrote: post #16

They don't go bankrupt in the conventional sense. When they go bankrupt economists like to use the term "Hyper Inflation". This means that the currency they produce becomes worthless.

Maybe you can explain it to me like I'm five. I've been occasionally watching the Turkish Lira this past year. The rates against the USD are still sinking. Against the EUR it's pretty stable. Yet allegedly they have something like 80-150% inflation in Turkey, while the EUR-zone has 10%. How does this work, why isn't the Lira becoming "worthless" with that amount of inflation?

the expectation is that if people assume that kind of inflation will continue, they would convert their wealth to another currency/form of wealth, and vendors would also prefer these other currencies, which would drive the inflation even further, right?

so i also wonder what they're doing to curb the spiral

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