Hacker News Reader

Comment by bjornsing | Hacker News Reader

If my understanding is correct the Swedish central bank, Riksbanken (which happens to be the oldest in the world), has said that whey do not want to hold their QE assets to maturity and that they are essentially bankrupt. They will be bailed out by the tax payers of course.

View on HN

You're probably understanding it wrong. Central banks have little or no debt, and they can "print" reserves at no cost. Reserves is the stuff they pay their debts off with. As a result it's virtually impossible for a central bank to go bankrupt.

A central bank can go bankrupt - it cannot keep printing money forever.

When we look at places with hyper-inflation, at some point people lose all their "faith" in a currency (and in the central bank). People no longer want to receive a currency that can be printed at 'no cost', because this currency will only keep losing value due to constant printing. They demand other, "hard" currency, or just use barter. Of course it is illegal, but in case of hyper-inflation the fabric of the society is rapidly dissolving - those who had some savings were effectively robbed by the central bank/government, those who sold some physical good - are now "bagholding" some coin that will become worthless fast.. The spiral of inflation can become so tough that noone will accept banknotes or electronic money, since it is better to hold physical goods.

As far as I remember in places with real hyper-inflation (Zimbawbe?) the central banks introduced so many new banknotes that they couldnt even afford to print them -> the paper-mills didnt accept the banknotes, since they knew those would not be worth anything in few days.

Other example is how after people would use stacks of paper currency to buy basics like bread.

Paper currency is a very useful invention because it really facilitates trade, same can be said about credit cards - but in times of hyper-inflation often the credit cards stop working - due to no electricity. So people jump to another hard currency (e.g. in Yugoslavia or Africa they only accepted US dollars or euros and basically gave up on own currencies, even if it was illegal).

[on a side note, I bought few of those '100 trillion' Zimbabwean dollar banknotes and this was one my my best investments ever - bought them for something like 2 USD each and now they seem to be worth 150-300 USD each. The value here is that it is a 'novelty' item - that can be used as an example of hyper-inflation; all the economy 101 books show it as an example]

> Zimbabwean ... banknotes and this was one my my best investments ever

Great example of scarcity and price rising via collector demand. They are not making any more of those notes, and collectors are interested similar to collecting scarce baseball cards. Neither have intrinsic use nor utility, but they are scarce and people like to collect them.

I bought few of those "100 trillion dollar" banknotes since I find them cool and perhaps a bit to show off (I made an "in case of emergency break glass" type of thing to be hung on the wall). Those banknotes are unique - unless some other country gets even higher inflation, those will always be shown in every "economy 101" book, so they arent just a thing only for banknote collectors (whom I am not), but also a novelty item for general public (or at least economy students). It seems only the highest denominated bills skyrocketed in price, other bills are relatively cheap.

Supposedly there is a guy who bought a whole briefcase of those 100 trillion banknotes and makes a living by selling them on ebay.

I think your understanding is a bit off. Sure, central banks can “print” money by buying stuff. But they still have a balance sheet. If the stuff they buy falls in value and they sell it for less then they incur a loss. If they lose more money than the equity on their balance sheet then they will have negative equity. Theoretically a central bank can keep operating with negative equity, but it doesn’t look good. The Swedish central bank probably won’t. It will ask for a tax payer bailout instead.

I think my understanding of central banking is quite correct. They don't incur a loss because the money they paid those assets with came out of nowhere. If you buy a car with $1000 that you printed with your money printer, and then sell the car for $800, you're still making a profit.

No, your understanding isn't quite correct. Many western central banks hold long dated bonds on their balance sheet which they are marking down due to increasing interest rates. Different central banks are dealing with this differently. In the US they are writing IOU s that essentially mean future surpluses will be used to pay back negative equity. The UK Treasury recently wired the BoE a large sum for much the same reason. Essentially, the bonds which were profitable during decreasing interest rates and resulted in central banks paying treasuries are now moving the opposite way.

You're repeating the same nonsense. How can a bond that the central bank got for free make the central bank lose money? Please explain.

The coin the central bank issues is a liability in its balance sheet. If it prints 1 trillion, uses it to buy 1 trillion worth of commercial paper and those assets lose 10%, then the bank has liabilities worth 1 trillion (outstanding currency) but only 900 billion in assets to cover them. Technically in default, but also in a very special economic position, because no body expects the central bank to ever cover its full liabilities.

Central bank reserves are not a liability because they don't entail a financial obligation. They're only listed as a liability on the balance sheet because it's convenient from an accounting perspective. When a central bank buys a bond, they use reserves, which are not a liability in a financial sense, therefore the central bank makes an instant profit. Even if the bond were to lose 80% of its value, the central bank would still make a 20% profit. Bankrupting a central bank is a lot harder than you think.

It's not just "accounting convenience" it's literally the way the profit vs loss of the central bank is defined. The central bank typically has a legal obligation to maintain stable prices, so while outstanding currency is not a liability in the conventional sense with a certain maturity date, interest etc., it's undoubtedly a debt towards society at large, which could presumably need to be redeemed and sterilized in the course of monetary policy, at least in part. Outstanding currency is a perpetual zero interest loan towards the central bank by the holders of currency.

If a central bank loses 80% of its real reserves, and financial circumstances arise where it must repurchase more than 20% of it's issued currency, for example to defend the exchange rate against a capital flight, than the bank is effectively "bankrupt" - it can no longer fulfill its legal role and regulate the value of the national currency. It's not a traditional bankruptcy, but it's a de-facto failure which many central banks experienced.

You're stretching the meaning of 'debt' and 'bankruptcy' beyond what these words are generally accepted to mean.

Since the central bank controls the unit of account value and can always devalue and print itself out of any sticky situation, the only meaningful way it can go "bankrupt" is to lose the ability to appreciate the currency. I agree it's a stretch.

The notion that the central bank can conjure pure profits out of thin air and has no liability against its issued currency is fantastical, it would suggest a perpetual profit machine. In reality, any issued currency comes with a strong liability to buy it back in inflationary times, so it's clearly an external debt from the CB's perspective, this is a well established notion.

This has origin in the pre-modern, free banking era, where competing private banks issued "bank notes" attesting their demand deposits, and which in time became widely accepted. This is basically the exact thing a central bank does, with a state granted monopoly, and no link to the gold and silver the bank "owes" for the notes.

Sorry, I can't agree that there's some unspoken promise, or even a faint expectation, that that the central bank will buy its own currency back. This is simply not true.

Buy back is implicit in the price stability mission any central bank has; it cannot be fulfilled without controlling the supply of currency in the economy, i.e (at least) limited buyback. Without that, what you get is something very much like a cryptocurrency in terms of volatility.

There is no implicit promise of buying back their own coins. This is ridiculous.

Central banks care a lot about money supply. They do not want to have to print money to account for a debt on the balance sheet, because that (eventually) devalues the currency they operate, and causes deflation which they regard as bad for the economy. They wish to use the money printer when they choose (and provide maximum effect for its valid use cases), not because they are forced. There is a money printing capacity they do not wish to exhaust. If you printed money to buy a car, but it was only because you had to make a big trip and you had actually been intending to wait for the new model, then that’s a suboptimal use of your money printer.

So basically the money printer is not free. There is an opportunity loss that they’ve found a way to measure as a real loss to make it easier.

You got it the other way around. The only reason they buy bonds to increase the money supply. So if they do buy a bond, they will pay with newly created reserves. That's the whole point. And it's impossible to lose money by purchasing an asset that it cost you nothing to buy.

True, if self-denominated debt there is no risk of bankruptcy. There is only risk of hyperinflation. That being said, default and hyperinflation are two sides of the same coin.

Reply on news.ycombinator.com