Do central banks’ mounting losses actually matter? • Hacker News Board

Re: Do central banks’ mounting losses actually matter?

#61

Post by armchairhacker » Mon, Oct 10, 2022, 10:02 PM UTC

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?

ELI5 is that governments can produce money out of thin air (paper), but can’t produce resources. So when they produce more money, each “dollar” of their currency becomes worth less - inflation.

When governments produce a lot of money, their dollar becomes substantially less. This causes them to need to produce even more money (because money which used to be enough is no longer), creating a cycle and a desperate attempt to produce something out of nothing, where eventually what used to cost one dollar literally costs trillions of dollars - hyperinflation.

Banks manage a lot of money, so if they go bankrupt the government needs to bail them out by printing a lot of money, causing massive inflation. And if the government needs to pay off foreign creditors (they do), and tries to address the resulting poverty caused by the inflation, it leads to printing more money and hyperinflation.

EDIT: Relating to the Turkish Lira and why that isn’t hyperinflating: I don’t know where exactly the line is where “high inflation” triggers the cycle and becomes hyperinflation. I suppose they still have resources, so their currency still has some worth. Just, either they don’t have as many resources as before, or the government is printing money which it spends on itself in order to drain money from the average person without explicit taxation.

Re: Do central banks’ mounting losses actually matter?

#62

Post by legitster » Mon, Oct 10, 2022, 10:04 PM UTC

The two examples were the UK and the USA. I would argue that two points do not make a straight line:

- For the US central bank, it seems like the story is just as described. They are taking lumps now as interest rates rise, but the dollar has only grown in strength (relatively) and losses will more than likely be offset (arguably have been already by decades of profitability).

- I would assume the UK case is entirely different. They are finally seeing the other shoe drop on Brexit. The last foreign Pounds have all been cashed out as a result of the war and there is no demand for them. So all their assets have permanently been devalued.

Re: Do central banks’ mounting losses actually matter?

#63

Post by scottiebarnes » Mon, Oct 10, 2022, 10:04 PM UTC

SevenNation wrote: post #46

guiomie wrote: post #39

Earlier quoted context omitted.

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.

> No net money is created.

Interesting that you're separating the responsibility of money creation to "banks within the banking system", and not the Fed, despite the Fed being the only power here who can buy unlimited assets.

Re: Do central banks’ mounting losses actually matter?

#64

Post by rr888 » Mon, Oct 10, 2022, 10:05 PM UTC

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.

There is literally one definition of bankrupt, and hyper inflation has nothing to do with it.

Plus, in general hyper inflation means people in debt get relief, its the lenders who lose the purchasing power of the money they lent.

Re: Do central banks’ mounting losses actually matter?

#65

Post by kodyo » Mon, Oct 10, 2022, 10:09 PM UTC

lxgr wrote: post #49

kodyo wrote: post #27

Earlier quoted context omitted.

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.

When the state can no longer function because it has allowed its currency to be debased, who gives a shit if the central bank is solvent or not? It’s worse than bankrupt, it’s irrelevant.

Re: Do central banks’ mounting losses actually matter?

#66

Post by brutusborn » Mon, Oct 10, 2022, 10:11 PM UTC

SevenNation wrote: post #53

brutusborn wrote: post #44

Earlier quoted context omitted.

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.

You can pay for a vacation with US currency. You can't do that with reserve assets.

But don't the reserve assets just result in a bank using those assets as collateral for something else that can be used? I.e. you don't pay for a vacation with reserve assets directly, but your bank uses them to pad it's fed account so that your vacation fees are accepted by other banks?

Without the reserve assets, other banks wouldn't do business with your account, and you couldn't pay for that vacation.

Re: Do central banks’ mounting losses actually matter?

#67

Post by rr888 » Mon, Oct 10, 2022, 10:11 PM UTC

SevenNation wrote: post #41

legitster wrote: post #36

Earlier quoted context omitted.

> 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.

I think you need to go back to your text books. Treasuries aren't money. They are are super liquid and with repos you can very easily turn them into money but they aren't money as measured by m1, m2, mb etc. Treasury bills (<12m) are included in m4.

Re: Do central banks’ mounting losses actually matter?

#68

Post by legitster » Mon, Oct 10, 2022, 10:12 PM UTC

incrudible wrote: post #54

legitster wrote: post #31

Earlier quoted context omitted.

I mean, sure, you could print enough money to cover all outstanding debt. But try setting any meaningful monetary policy after that. Ain't no one going to buy a T-bill from you ever again once you do that.

No need to cover all the outstanding debt at once. The expectation of future debt monetization is already priced into the interest rate in much the same way as the risk of default would be. In fact, it is preferable that way. If you were a bond holder, would you prefer default over dilution?

I mean, maybe? If in default I get 75 cents on the dollar, or with inflation my bond loses 25% of it's value through inflation isn't it the same to me?

I am skeptical of the infinite money thing though. Sure - theoretically people will buy up bonds at 1000% interest rates. But would they really though?

Re: Do central banks’ mounting losses actually matter?

#69

Post by dragonwriter » Mon, Oct 10, 2022, 10:12 PM UTC

rr888 wrote: post #64

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.

There is literally one definition of bankrupt, and hyper inflation has nothing to do with it. Plus, in general hyper inflation means people in debt get relief, its the lenders who lose the purchasing power of the money they lent.

> There is literally one definition of bankrupt

There are at least two, the legal definition of “under administration under bankruptcy laws“, and the less formal but still common “insolvent”.

With a representational commodity currency (e.g., silver certificates) rather than fiat currency, insolvency (the inability of the issuer to redeem outstanding currency at face value) is at least reasonably connected to the risk of hyperinflation.

OTOH, neither definition even applies to fiat currency issuers, who literally cannot be insolvent in their own currency, and usually aren’t subject to bankruptcy law.

Re: Do central banks’ mounting losses actually matter?

#70

Post by legitster » Mon, Oct 10, 2022, 10:25 PM UTC

brutusborn wrote: post #44

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.

> I thought currency and reserve assets were essentially the same because there is no basis (e.g. gold) for the currency.

Reserve assets always have a separate source of value. Usually this means other currencies. And often it can even be gold reserves!