How the Fed Could Become Insolvent

By Terry Coxon, Editor, The Casey Report

You’ve seen the proof in real time. Once-dominant industrial companies, e.g., General Motors, can run out of money. The biggest banks, e.g., Bank of America, can run out of money. Even sovereign governments, e.g., Greece, can run out of money. Yes, all those organizations are still limping along, but only after being rescued by other giant institutions, such as the U.S. government, the less unhealthy European governments, the European Central Bank, and the International Monetary Fund.

So far, it’s been easy to get rescued. The people who run giant institutions seem to shudder at the thought of other giant institutions being shown up as anything less than indestructible. Of course, the rescues weaken the rescuers and push them toward the day when they, too, may join the ranks of the desperate.

By now it’s clear that neither big, Bigger, nor BIGGEST implies unlimited resources. But how about central banks? In a world of fiat money, a central bank can always print more of its own currency. So unless it takes on debt or other obligations denominated in something other than its own currency, it’s impossible for a central bank to become formally insolvent. Nonetheless, it can become functionally insolvent, void of any ability to command resources or influence markets. That’s what happened in Zimbabwe, with a hyperinflation.

As of today, we’re nowhere near such a catastrophe. But there is another way, long before hyperinflation destroys its currency, for a central bank to become functionally insolvent. It’s a trap into which our own Federal Reserve System has already stuck its foot and now seems to be getting ready to stick its neck. (more)