I discovered this text by Alex J. Pollock and Paul H. Kupiec, “Profligacy in Lockstep,” at our sister web site “Regulation and Liberty,” fascinating. It’s concerning the monetary place of lots of the world’s central banks. A big a part of the Pollock/Kupiek dialogue is about marking belongings to market. I despatched the hyperlink to financial economist Jeff Hummel for his feedback.

Right here’s what he wrote:

As I’ve identified a number of occasions earlier than, together with right here (https://www.econlib.org/is-the-fed-likely-to-go-bankrupt/), marking the Fed’s steadiness sheet to market tells you little, as a result of these days the Fed hardly ever sells belongings earlier than maturity. Even when tapering, the Fed normally simply fails to interchange maturing belongings with new purchases. I don’t know to what extent this is applicable to different central banks.

Again when central banks bought belongings solely by creating cash, as did the Fed earlier than the monetary disaster, any losses have been far much less possible, much less extreme, and non permanent, even when they marked their steadiness sheets to market. Minor losses would possibly end result from dangerous loans to non-public banks or working bills that have been unusually excessive. However solely a authorities default may end in main losses. What has modified that state of affairs is central banks now paying curiosity on reserves and borrowing in different methods (as with Fed reverse repos) to finance their purchases of interest-earning belongings.

On the asset facet, the Fed is in a lot better form than the European Central Financial institution (ECB.) Though the Fed quickly acquired totally personal belongings in the course of the monetary and Covid crises, it will definitely unloaded most of them with few if any losses. It has not even made any vital low cost loans to non-public banks for a very long time. Consequently, its interest-paying belongings consist virtually totally of Treasuries and government-guaranteed mortgage-backed securities (MBS.) Thus solely a Treasury default may actually threaten the Fed’s solvency. The ECB, however, confronted restrictions on shopping for sovereign debt when it was first created and held primarily personal belongings. For the reason that European debt disaster, it has been freer to amass sovereign debt, however it nonetheless holds loads of personal belongings. Furthermore, not all European sovereign debt is equally sound. This makes the ECB’s solvency rather more susceptible to market components.

Pollock and Kupiec are right that the ECB shouldn’t be very clear and significantly much less so than the Fed. My very own efforts to search out out what exact belongings are on the ECB’s steadiness sheet has not been very profitable.

The Pollock/Kupiek article states: “This concept wouldn’t assist the Federal Reserve, as a result of it owns no gold.” That’s technically right as a result of the Fed holds solely gold certificates. However these are demand claims in opposition to the Treasury’s gold. So their assertion is deceptive.

I (DRH) checked the Federal Reserve’s holding of gold certificates, which, within the Fed’s steadiness sheet, it calls “Gold inventory.” It’s valued at $11.041 billion. However a footnote explains that the worth is predicated on a gold value of $42.22 per tremendous troy ounce. In actuality gold presently sells for about $1,778.00. So the true worth of the great holdings by the Federal Reserve shouldn’t be $11 billion however, fairly, $465 billion.

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