Saturday, February 26, 2011

Can a central bank make a loss?

Yves Smith quotes from a Gillian Tett article on central bank losses:
Now as some readers have noticed, the Fed has also institutionalized an accounting dodge so that it will not have to admit to balance sheet losses. Commentators appear to have missed that this finesse does nothing to solve the underlying reality. The Fed can “print” its way out of balance sheet losses only to the extent that it is not constrained by inflation. If it does run into inflationary constraints, it would need an explicit bailout, irrespective of the accounting treatment.
This is nonsense.

The US Federal Reserve bank has a negative equity position. It must, as a matter of accounting, given the operational constraints (currently) governing the Treasury. Therefore, if the CB suffers a loss, then this negative equity position simply becomes more... negative? Do we care?

At a normal bank in normal times, negative equity need not stop a bank from functioning so long as its reserve account still works -- either because the Fed is funding it directly via the discount window or because it can find counterparties in the overnight inter-bank market. Regulators can always step in a shut the bank down (indeed, by law they must, although they ignore this law when they choose) but otherwise the lights can stay on, employees get paid, loans get made, etc.

At the central bank this is true, but even moreso. There is no risk that the central bank will be shut out of the reserve system because it is the serve system. It holds all reserves as liabilities. And it lives in a permanent state of negative equity, so the amount of negative equity does not matter, it simply reflects the amount of positive equity that exists in the non-central bank sector. If there is an inflationary constraint, it's because the Fed paid $1 for assets worth 20 cents, and therefore engaged if excessive fiscal policy.

Friday, February 18, 2011

Then and now

Interesting pictures of Cairo in 1959 vs 2011. You can see the same thing in Pakistan if you compare the buildings made in pre-World War II and after. And in pictures of Harlem in 1950 vs 1970. The list goes on.

Thursday, February 03, 2011

What's the price of a loaf of bread in Cairo?

I was wondering if anyone knew what was happening to the price of goods in Cairo.

The Egyptian Pound is off just a few % from November, and, if the country is experiencing inflation it cannot be because 1) the central bank is flooding the financial system with too many reserves or 2) the deficit is too big.

Either way, I'm probably looking at this incorrectly as it's pegged to the US$ anyway (as are many Arab currencies) so they aren't running a true fiat regime.

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