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Comment by lottin | Hacker News Reader

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.

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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.

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