How Likely Is the Fed to Go Bust & What Would it Mean For YOU?

At this point, thanks to a long-standing policy of wanton money printing, the Fed has more liabilities than ever before in its history – by an enormous margin – and this precarious balance sheet is dangerous, because if the Fed goes bust, everyone loses [- including YOU. Let me explain why that is the case]. Words: 398

So writes Simon Black (sovereignman.com) in edited excerpts from his original article* entitled Think those are dollars in your wallet? Think again.

[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Black goes on to say in further edited, and in some cases paraphrased, excerpts:

Is it even possible for a central bank to go bust?

Definitely. Zimbabwe and Tajikistan are infamous examples. In the case of Iceland, the government bailed out its central bank. Iceland’s government went from being essentially debt free to having debts in excess of 100% of the country’s GDP, just to bail out the bank.

In its most recently published balance sheet,

• the Fed listed assets valued at $3.5 trillion. Most of this is US Treasuries and ‘agency’ debt securities. You probably remember those– the toxic mortgage debt that blew up a few years ago like Fannie Mae and Freddie Mac. Not exactly low risk.
• Meanwhile, the Fed has become one of the biggest creditors of the United States government which has managed to accumulate more debt than any government in the history of the world.

The only way the U.S. government can pay interest to the Fed is by going into even more debt (which the Fed then has to buy). Every time this happens, the Fed’s already razor-thin capital gets smaller and smaller, and the Fed’s balance sheet becomes riskier and riskier. In fact, the Fed’s capital ratio (1.53%) is lower than Lehman Brothers when they went bankrupt in 2008.

What happens if the Fed becomes insolvent?

The U.S., Japan, and Europe are already too indebted to bail out their central banks. An insolvent government cannot bail out an insolvent central bank. The IMF is not an option either. The U.S., EU, Japan, etc. make up roughly half of the IMF capital quota– these are the countries who fund the IMF, not the other way around.

There really is no backstop for the Fed. The buck, so to speak, stops here and, with a capital ratio of just 1.53%, the Fed’s balance sheet is already in precarious financial condition.

Given that the Fed’s assets are so closely tied to the finances of the U.S. government, the outlook should concern independent, thinking people. If they go bust, the value of Federal Reserve notes (i.e. ‘dollars’) is going to plummet along with the paper wealth of anyone holding them.

[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

* http://www.sovereignman.com/finance/think-those-are-dollars-in-your-wallet-think-again-12453/ (© Copyright 2012 Sovereign Man, All rights reserved)

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